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Retirement Spending Projections

Since RMD's from IRA'S are designed to deplete the account over time so that the deferred tax will be paid, it makes sense that the value of these accounts will represent an ever decreasing proportion of assets over time. However, if you have converted all your IRA's to Roth IRA's, the retirement projection still assumes that you will spend down the Roth. That makes no sense. The longer you can maintain assets in tax deferred status, the better. Am I missing something in how I have coded my Roth accounts or is this a blind spot in the projection algorithm?

Answers

  • Chris_QPW
    Chris_QPW Member ✭✭✭✭
    I have never liked the order that Quicken chooses as far as when to tap a certain kind of account type.  It is one reason I just use the Life Time Planner as a "rough guess", since you can't control this order, and can certainly disagree on how it should be done.

    Note that the order that one might use might not be to preserve the Roth as long as possible if the goal is to reduce the amount of tax paid in certain periods of time.

    The advantage of the money in a Roth or a regular taxable account is that it isn't considered "income" as far as your taxes go.  So say you need $50,000 for your expenses.  If you took out say $30,000 from traditional IRAs/401K accounts and then covered the rest of the expenses with either Roth of regular taxable account funds then you would be paying tax on $30,000 instead of $50,000.

    The point is that having such different accounts allows different "mixes" that Quicken would never be able to figure out what is best for any given person without having a way for the user to say which accounts they want to tap for what and at what time.
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  • Dubhe
    Dubhe Member
    I agree that for tax management purposes that it could make sense to balance withdrawals among Roth and non-Roth IRA's, but that is not the scenario described. If all of your IRA's are Roth's (as stated in the question), then your only other income source would be taxable accounts and you cannot choose to not recognize income from taxable accounts. So, until your expense needs can no longer be met from taxable accounts, why tap the Roth?
  • Chris_QPW
    Chris_QPW Member ✭✭✭✭
    My example might not line up with exactly what you were asking, but the point is that the user has no control over this the Lifetime Planner has a set of very simple rules, take money from this account type first, then this type, ...

    And it will certainly be wrong for a lot of people, and I can't tell you why they picked the rules they did.  I doubt anyone could.  But even if they could that really wouldn't change much, you would simply have a reason why they do it in a way you don't want.

    But with all that being said yes if all I had was Roth IRAs and taxable accounts I probably would "mostly" tap the Roth IRAs last.

    But note you are wrong about this statement
    "then your only other income source would be taxable accounts and you cannot choose to not recognize income from taxable accounts."

    You don't pay tax on money withdrawn from a taxable account.
    First lets make sure we have our definitions in line.

    Traditional IRA/401K/... tax deferred.
    Roth IRA/Roth401K/ ... tax exempt
    Savings,Checking,CDs,.../ "taxable"

    For "tax deferred" you pay the tax when you withdraw the amount.

    For both of the others types you pay the tax as the money goes into the account.
    And in the case of the "taxable " that includes "interest/dividends", but in the case of the "tax exempt/Roth" accounts you don't pay taxes on the gains.

    But in both cases "tax exempt" and "taxable" you don't pay tax on withdraws.

    If I paid my expenses with $30,000 from my savings account, and $20,000 from my Roth IRA, to the IRS I would have an "income" of zero.

    As I see it the main reasons I would delay withdrawing from a Roth over using my cash on hand would be first off that the gains in the Roth aren't taxed. And the second might be because it might be a bad time to sell off a given security.
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  • JBDubhe
    JBDubhe Member ✭✭
    True, you don't pay tax on withdrawals, per se, from a taxable or a Roth account, but unless you already have the cash you need in a taxable account (a tacit assumption in your comment), you are likely to need to sell assets and incur taxes on the capital gains from a taxable account. If your sole goal is to avoid paying capital gains taxes today, fine, take funds from the Roth account; but, in my opinion, that would be short-sighted.

    The government limits the amount you can put into a Roth and you cannot contribute once you are retired and have no earned income (a tacit assumption in my question is that one has no earned income during a retirement spend down). As I see it, the longer one can hold on to tax exempt funds, the better -- even at the cost of incurring capital gains taxes to get access to funds in the taxable account. Spending down the taxable balance in retirement means fewer dividends and interest to pay tax on each year while the untouched Roth account continues to accumulate interest and dividends without being taxed.

    Also, the tax exempt status of the Roth continues after death (up to 10 years) for the beneficiaries if there are Roth funds left to be inherited; not a trivial benefit for your heirs.
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