Scott43 wrote the following post at 05-10-2008 9:26 AM:

I retired just two months ago. Next year I plan to sell a stock I have owned for some time, (Borg-Warner/BWA) it pays low dividends but has had good growth. I will have CG taxes to pay which is OK by me, it will be below the tax rate on my pension. In 2010 I may want to convert some of my IRA to a Roth, which would raise my taxable income at that time.

 

I like the idea of not drawing on deferred income until necessary but there are a couple issues that are hard to forecast; one is whether RMDs will be a problem in raising income and therefore tax levels and the other is that there is a good possibility that taxes will go up and negate the advantages of deferring taxes.

"I like the idea of not drawing on deferred income until necessary but there are a couple issues that are hard to forecast; one is whether RMDs will be a problem in raising income and therefore tax levels and the other is that there is a good possibility that taxes will go up and negate the advantages of deferring taxes."

The best answer to both those problems is to convert to Roth if possible while you have taxable income that may well be only partially taxable.  For example, you sell stock you have owned for a long time;  You pay 15% CG tax on the gain, but nothing on the return of your principal.

As to the OPs question, if you had 50% in taxable and 50% in IRA,  and all the taxable was equities and all the deferred was tax inefficient, then as you sell the taxable equities, you would convert some of your deferred account to equities in order to maintain your desired AA.

After you have exhausted all your taxable, you could still have a 50/50 AA in your deferred and Roth.

best,

Bill

alpha28 wrote:

Hi Roberta-

First, to all you Ladies, who are Mothers...Happy Moter's Day!!!

Now, back to today's entertainment...

"....How do you reconcile these two correct maxims when you're withdrawing money and your assets are about equally split?  You don't need to take RMD's yet but you need income to live on and your income producing assets are in the sheltered accounts?

Roberta"

Never being known to be totally conventional, and I speak mostly for myself...I feel that one should not "reconcile these two correct maxims" when withdrawing money. If you can invest your money in a tax efficient way, fine, do so. But, investing to me has never been defined, or better stated, dependent on whether the monies, or end returns/profits, should be subject or not to to tax having to be paid.

I do agree with the first of Roberta's premises..."Conventional wisdom says that you spend down taxable assets first in retirement, leaving sheltered assets to grow tax free or deferred as long as possible and the numbers support this view."

But, I do not agree that investing should be dependent, or solely dependent, on placing investments which may or may not be tax-efficient, in tax-sheltered accounts.  When one is younger, one places your monies in investments which are likely to be successful, and give you a larger capital, and ultimately enough wealth that you feel secure as you reach your targetted age of retirement.  Many of us did not, and still do not have the luxury of being able to place/or have placed our capital in tax-sheltered accounts.  Most important to me, is to be able to live comfortably, and securely as you make your necessary WDs to meet your retirement needs...and that these be realistic and able to give each individual a long and satisfying retirement, whether you have to pay taxes or not...Again, this is just another opinion...and might not sound as sophisticated or educated as those who ponder the question, and try to save, or at least, have fun trying to beat the taxman.

Regards, Curanderotk

Well? It seems to me all we have to do to put this Retirement business to Bed is?

1. Increase SS taxes to equal whatever it takes to provide the same income to someone as their last Yr of working.. Be it the current % ( 7.5%? ) or more?

2. Privatize it, but The Gov't Invest it in Index Funds, that include Energy, Reits that supoort US Business and The Growth of getting more People able to own a Home

this comes not from my Nible Thinking but that from 'Think Tank" PBS show

And it says it's very doable.. as being done in other Countries..

Of course, Our Spending economy would suffer for a few yrs, since it would provide Less $ for People to Blow on Big screen Tv's and SUV's.....and be forced to live more moderately and use less Energy from Gasoline, Nat. Gas  to Electric ...

Now wouldn't that be a shame...

Now what would 7.5% of the ave. Median Income of $50,000 yr be worth  by age 66

= $3,750/ yr and invested in such a Index Portfolio for say 45 yrs?

as for what $ goes in what account? Me thinks that is Only a Problem for the Wealthy and Rich.. everyone else has to invest whatever $ they have in the Highest Rtn Investment, if they want to have a chance at not having to Eat Oatmeal their last few Yrs of life...

Telling someone who Doesn't have enough savings to Provide them using that 4-5% WD rate to just invest in some Conservative Port that only gives them Marginal to Below Income is Wrong.. They will end up running out of $ and live in Poverty..& Destitution..and become a financial burden on society..

Eg: Just met with a Disabled 60 yr old Veteran and His Wife.. They have SS Disability income of $17,000 yr.  and live in a Paid for small 2 bedroom home and  $110,000 in savings and needed $6,000/yr from it to 'Pay the Bills and No frills"  and had been told to invest  it in 50% Index Funds & 50% in Bonds and CD's for past 5 yrs... It's made an ave of 5.7% apy.  He's got about the same as he did 5 yrs ago, but it's now worth only about $93,000 after inflation..and will run out of $ in about 10 yrs or Hope they both Die before then.. Alot of good that Investment advice did, now didn't it?

We moved it into Active Mge. Balanced funds instead.. Inorder to have "at least" a chance of it making more and it lasting longer..( that have ave 12% apy for the past 5 & 10 yrs )

He had a #401k plan.. That Co. went Bankrupt and it paid 11 cents on the dollar..So much for #401ks

 

Those above thinking MLPs might want to consider the MLP closed end funds that focus on them.  They usually trade at a discount to theiir portfolio net asset values and the distributions are largely tax deferred.  FMO, for example, pays almost 7% annualized and has been totally tax-deferred  (ROC from depreciation, depletion and amortization, a non-cash charge against earnings).  With these CEF, you get one IRS  Form 1099 instead of a bunch of K-1s and there is no potential  UBTI liability if held in IRAs.  KYE, TYG, FEN,  are among a dozen total

Of course the obvious way would be to switch holdings - tax deferred become taxable and vice-versa assuming the Yield from the tax deferred side was sufficient for your needs. But if that all at once strategy incurred sizable capital gains with no off-setting capital losses the only way I can think of would be to make the switch slowly or whenever capital losses presented themselves.

On the other hand, if the taxable side is comprised wholly of tax efficient funds and you end up leaving things as they are, I guess you have to bite the bullet and be taxed at the ordinary income rate on any qualified dividends you decide to take in addition to the bond fund interest distributions coming from the tax deferred side.

I was faced with your situation during the 2000 Bear and made the switch - or as much as I was able given the dollar value of the portfolio on each side (Taxable/Tax Deferred) at that time.

Billym 

 

Roberta,

"How do you reconcile these two correct maxims when you're withdrawing money and your assets are about equally split?  You don't need to take RMD's yet but you need income to live on and your income producing assets are in the sheltered accounts?"

Whenever I had a significant taxable account balance, I treated my portfolio as one big account.  It produces so much yield, and I spent less then that amount each year.  It made no difference if 100% of the yield was produced in my tax deferred account, while I spent down my taxable account.  I figured I added it all to tax deferred capital, then spent taxable capital.  Does that make sense?

IOW, if I had $50k in taxable and $50k in tax deferred, and had $5k of yield (10%) within tax deferred, no yield in taxable, I will still spend $5k of taxable monies (capital) while adding the $5k yield to my tax deferred capital.  My net portfolio yield was $5k, and I spent $5k, just not from the account that generated the yield.

Thanks all.  All of the suggestions are part of the answer and part of the problem.  We have to play with it and just do some thinking and there are other people with different situations asking advice (My sister retires in June).

At this point, I'm so frustrated that I'm almost willing to buy an annuity :-(.  Well, not quite.  Maybe just sell everything, go to muni's in taxable and bonds in sheltered.  Won't happen.  I'm too greedy.  But it means I need to step away from it for a while and let my back brain mull on it.

Thanks again.  I can find academic studies and learned opinions on the internet but there's nothing like the thoughtful opinions of what you do and why and how you reached your concl