1. Home
  2. Financial Planning
  3. Roth vs. Traditional Drawdown

Roth vs. Traditional Drawdown

Hypothetical situation: Husband and wife retire at age 59.5 and their retirement assets are equally split between Roth IRAs and traditional IRAs. They will rely on these assets to generate 100% of their retirement income. Should they withdraw from the Roth first or the traditional first? Or split the withdrawals? I can make a case for all three.

If you take the withdrawal from the Roth IRA, you don't have to withdraw extra money to pay for taxes. That leaves more of your money invested. In addition, Roth distributions don't affect the tax on Social Security benefits.

If you take the withdrawal from the traditional IRA, you will be leaving more tax-free money for your heirs. You'll also be lowering your future RMD.

Finally, by splitting the withdrawals between the two IRA types, you'll stay more tax-diversified.

So what do you think, MIFP?

--Bill

Reply to
Bill Woessner
Loading thread data ...

100% implies Social Security doesn't come into the mix. (Your post then talked about Roth not impacting SS benefits)

I look at

formatting link
and see that for 2007, their exemptions and standard deduction add to $17500. Take that out of the traditional IRA and the tax is zero. That seems a no-brainer to me. If they were planning to make any charitable donation (above the amount where the extra paperwork wasn't more effort than the tax savings) they should do that from the traditional IRA, it's only good for this year.

The rest depends on the exact amounts in either account and how much they need to withdraw each year. They can take another $15650 and stay in the 10% bracket for that withdrawal (so total of $33150).

On a side note; I started analyzing the impact of IRA/other income on SS benefits (for an older single woman) and found, with $15000/yr of Social Security, that a 'phantom' tax rate of 27.7% kicks in around $27K IRA withdrawal, and 46.3% at $31K. This for a woman who would otherwise be paying 15%.

So my advice is to look at the Social Security income, pull up Turbo Tax, and review these phantom rates. You may find that if over that rate, and back to 25% it may make sense to 'top off' the 25% bracket with Roth conversion or further traditional IRA withdrawals. Then in the next year, perhaps lower withdrawals to avoid that 46%.

JOE

Reply to
joetaxpayer

is the phantom rate on all income, or just income above the 0% tax bracket?

Reply to
jIM

One should also take in account the effect on one's mAGI, the figure medicare uses to set means-tested premium. Could be very significant in a few years the way medicare charges are skyrocketing.

Reply to
rick++

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.