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Roth IRA versus Traditional IRA – begin withdrawl with WHICH IRA?

MY QUESTION: >>> Should I begin to draw down the ROTH IRA first UNTIL I reach the AGE of 70 1/2 and then begin my required minimum distributions from the TRADITIONAL IRA?

 

I recently retired (Age 64) and have begun to receive Social Security Benefits in 2021


I have BOTH a Roth IRA and a Traditional IRA


Both Accounts have nearly identical balances – and will last my lifetime – based on a 4% annual withdrawal.


I am a RESIDENT of Rhode Island


I understand that my withdrawals from the Roth are "not taxed as income" – but my Traditional IRA would be taxed.


I need to CHOOSE one or the other (ROTH versus Traditional IRA) to withdraw from beginning this year to supplement my SSN income.


I understand I must take out my first required minimum distribution by April 1 of the year after you turn 70.5.

 

MY QUESTION: >>> Should I begin to draw down the ROTH IRA first UNTIL I reach the AGE of 70 1/2 and then begin my required minimum distributions from the TRADITIONAL IRA?

 

This would allow Traditional IRA account to GROW tax-free…


AND I would NOT pay taxes on the ROTH distributions…


I want to maximize and increase the value of my retirement accounts and minimize taxes at both the state and federal levels.


IS this the best strategy? Or, am I missing something here? 


Thanks in advance! 

 

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@chipleak 

First, you have two goals that may be a challenge and difficult to achieve. You indicate that you want to increase the value of your retirement accounts and minimize federal and state taxes. With regard to increasing the value of your accounts, that depends on your asset allocation and if you elect to take distributions from those accounts. The Traditional IRA (TIRA) will require you to take distributions at age 72 which is about 8 years from now. However, you need to supplement your SS benefits currently. You did not indicate how much you need which is critical in determining which account or combination of accounts should be used to minimize your federal and state taxes. Assuming you have no other taxable income, it makes financial sense to withdraw money from your TIRA to equal the Standard Deduction (SD) which for 2021 is $12,550/$25,100 single/married. Upon attainment of age 65, the SD increases by $1,700 for single and $1,350 each if married. Remember, the SD will vary from year to year. Next, withdraw money from your TIRA to equal the maximums for the 10% federal tax bracket which is $9,950/$19,900 single/married. Remember, when working, your contributions to your TIRA were made, at probably, higher tax brackets (i.e. 15%,25% or greater). So, whenever, you can withdraw from your TIRA at tax rates less than 15%, you have a huge win. At this point, as a single you have $22,500 ($12,550 plus $9,950) of TIRA distributions and owe federal taxes of $995.00 (10% X $9,950). If married filing jointly, you have $45,000 ($25,100 plus $19,900) of TIRA distributions and owe federal taxes of $1,990. You are correct to say that distributions from your Roth IRA  are not taxable. So, on the surface, they may appear to be the choice that minimizes your federal taxes. However, you need to address the fact that your Roth contributions were made with after tax dollars, probably when you were working. Those Roth contributions, in effect, were taxed at 15%, 25%, or greater (starting 2018: 12%, 22% or greater) unless your income from working put you in the 10% tax bracket. You can work the math if you need more money to supplement your SS benefits. The 12% federal bracket for single covers taxable income from $9,951 to $40,525. For married filing jointly, the 12% federal tax bracket covers taxable income from $19,901 to $81,050. Without knowing the amount of money you need to supplement your SS benefits, I will venture a guess and say that withdrawing from your TIRA is a financial advantage up to the taxable income maximums of the 12% tax brackets ($40,525/$81,050 single/married). Remember, taxable income starts after your SD of $12,550/$25,100 single/married (under age 65). Using your Roth would not be a financial advantage inasmuch as you paid greater taxes on those contributions. Save the Roth for your surviving spouse since your spouse will be taxed as a single or your heirs if you are not married.

Regular Social Butterfly

Tonster, you are one highly detailed, analytical guy!! Great post!!

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Honored Social Butterfly


@chipleak wrote:

MY QUESTION: >>> Should I begin to draw down the ROTH IRA first UNTIL I reach the AGE of 70 1/2 and then begin my required minimum distributions from the TRADITIONAL IRA?

 

I recently retired (Age 64) and have begun to receive Social Security Benefits in 2021


I have BOTH a Roth IRA and a Traditional IRA


Both Accounts have nearly identical balances – and will last my lifetime – based on a 4% annual withdrawal.


I am a RESIDENT of Rhode Island


I understand that my withdrawals from the Roth are "not taxed as income" – but my Traditional IRA would be taxed.


I need to CHOOSE one or the other (ROTH versus Traditional IRA) to withdraw from beginning this year to supplement my SSN income.


I understand I must take out my first required minimum distribution by April 1 of the year after you turn 70.5.

 

MY QUESTION: >>> Should I begin to draw down the ROTH IRA first UNTIL I reach the AGE of 70 1/2 and then begin my required minimum distributions from the TRADITIONAL IRA?

 

This would allow Traditional IRA account to GROW tax-free…


AND I would NOT pay taxes on the ROTH distributions…


I want to maximize and increase the value of my retirement accounts and minimize taxes at both the state and federal levels.


IS this the best strategy? Or, am I missing something here? 

 

 


The Secure Act passed in 2019 and effective in 2020 changed, among other things, the age when RMDs are to begin.  Instead of 70.5 being the latest age to begin RMD, it is now 72 for your age group.  

IRS - Required Minimum Distributions changes per the Secure Act 

So you have longer for the traditional IRA funds to grow.  OR if you at least have some money to pay the taxes, you could always CONVERT  some of trad IRA  funds to the ROTH IRA and still do a draw from it .  I assume that you will keep the ROTH draws down as much as possible.

 

Just keep in mind that if you are gonna wait until 72 to begin your RMD - the formula sets the amount that you have to withdraw yearly and depending upon the amount(s) in all of your traditional IRA account(s) and that could be more than the 4% you are forecasting to take out when the time comes.  You are gonna pay ordinary income tax on any amount that you withdraw from the TIRA (trad. IRA) to use or to convert so in that regard it is anybody's guess what tax rates will be in the future.  At least you know what the rates are today - a bird in hand, so to speak.

 

If you are considered a high income senior by Medicare (over $ 85,000 for a single person) then yes, the IRMAA (Medicare Premium Surcharge for higher income seniors) may also be a consideration.

 

Sorry, can't help specifically with the tax rules in Rhode Island.

It's Always Something . . . . Roseanna Roseannadanna
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Honored Social Butterfly

I also don't know about RI but you would be better off liquidating your IRA first because: it could affect how much you pay for Medicare in the future, my feeling is your taxes will be higher in the future (big spending now for the Green Deal of a lifetime), that's something that you can pass along with no taxes owed or NOT.  Be real careful and look up cost of Medicare based on income.  My feeling is if a Roth is offered (pay taxes this year), take that and turn down the tax deffered income.

 

Gorm I totally agree with.

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Regular Social Butterfly

Can only give you my NON RI perspective.  In that you mentioned IRAs I assume there is NO qualified plan $$$. 

Keep in mind that if you defer your first RMD you need to take TWO in that same TY. Whole idea of deferring was to lessen the tax blow from full salary by additionally burdening you with an RMD.  

Cannot imagine WHY I'd ever draw down my Roth IRA as it and the growth thereon is forever TAX FREE.  Roth is NOT used in calculating my RMD, ONLY my Trad IRA prior YE balances.

When in your pre-RMD situation I played "what if" games with tax software to minimize my Fed and State tax hit as I knew eventually me or my heirs would take the tax hit.  As I did NOT need the IRA $$, I transferred whatever I could to a Roth til I max'd out my 12% rate.  Can only assume you NEED the $$$ to supplement your income between age 64 and RMD date.  

Some states treat SSA income differently, may waive income tax liability on some pension, IRA distributions. Some states refund excess paid property taxes above a certain percentage of your income. Again, you play "what ifs" to learn your optimum tax liability, ie minimum tax rate, etc. 

Secure Act forces heirs to withdrawal your entire Trad IRA within 10 years of your death year.  Understand while it was left to the heir WHEN they liquidated the account as long as it was GONE in 10 years, Congress is toying with legislating HOW they liquidate over that 10 year term.

In short, I have NO idea your income, tax rate, RI taxation, but believe AARP affords tax guidance within each state or senior groups afford free tax prep and guidance up to certain income levels.  

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Newbie

@Gorm50 Thanks for your prompt and detailed reply! 2 questions - you said ""max'd out my 12% rate.  Can only assume you NEED the $$$ to supplement your income between age 64 and RMD date."  And correct NO pensions, etc. Only Roth, IRA and a taxable investment account...

 

First - explain "max'd out my 12% rate"? What did you mean by this? Lowest tax bracket?  

Second: Yes, need to supplement beginning this year income and do not plan to have any part-time income - only income from investments (taxable) and retirement accounts.

 

So, I can draw down the ROTH with no income tax consequences VS. IRA....?  

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Regular Social Butterfly

States vary so in what benefits they extend to seniors, but Fed tax rates are uniformly applied.  Yes, the 12% to which I referred is an attempt by me to manage my tax rate below the next 22% tier.

While I have little control NOW as RMDs are mandated I enjoyed that time interval between pre SSA retirement and my RMD date to convert Trad IRAs to Roth without exceeding my 12% max target.  That 12% is just a personal target as I was NOT willing to convert more at the higher tax rate. 

I am blessed that I have zero debt, enjoy great health, terrifically cheap, benefit rich Medicare Advantage plan, am frugal to a fault, and most costly indulgence is my diesel pusher RV.  Have made changes to my home to enable aging in place.  

Have learned everyone needs to develop their retirement plan, fully considering needs, wants, indulgence, against resources.  Area cost of living and taxes complicate life.

Can say I have NO budget and tap savings only when needed.  Never employed any 4% type draw supplement. Expect I will go thru a series of active toward inactive lifestyle, so I fully expect my income needs will change also.  

I fully expect I will outlive my resources so minimizing tax liability to my children was a consideration and influenced my behavior.  You deferred consumption to appropriate $$$ for an enjoyable retirement.  You are wise checking out the alternatives and decide what BEST meets your needs.  Plans change based on circumstances so you can adjust once you get comfortable with your NEW retirement lifestyle.

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