Withdraw From Regular Account or Roth IRA First?

We already know from the OP, but why does "frequent rebalancing" imply "substantial unrealized gains"? I'd read it as the exact opposite, that the only gains might be those since the last rebalance.

Regardless, OP has been clear, and the "Leave Roth to the beneficiaries" is the way to go.

Rebalance does not mean sell everything and start anew. You can keep lots of unrealized gains, selling off some to rebalance into other asset classes.

On 24-Nov-17 9:02 AM, njoracle wrote: ...

The difference then may be what is LT vis a vis ST CG from the conventional -- obviously, for current income the lower rate is advantageous if do wish to try to maximize benefit to heirs and hence use it prior to Roth as others have noted.

OTOH, how much an issue it may be from a practical standpoint will be dependent upon the size of the estate and amongst how many potential heirs it may be divided--dividing by N _can_ bring the net amount to any given individual down pretty quickly.

Doesn't negate the actuality of the choices in terms of what can do to benefit as much as possible; just that the net impact may not be all that much either way; depending.

Classic re-balancing strategies involve selling a portion of the assets that have become over-weighted in the portfolio and using the proceeds to buy assets that have become under-weighted. No more assets are sold (and Capital Gains tax incurred) than is absolutely necessary to achieve the targeted asset allocation. With this strategy, unrealized Capital Gains tend to increase over time.

The OP has clarified that he used the term re-balance to mean selling the entire portfolio and moving to an entirely different asset allocation for the portfolio. We now know the level of unrealized capital gains is low.

Given the options of leaving a given amount to Heirs/Beneficiaries in either a Roth account or directly, I see several things to consider.

- The Heirs/Beneficiaries start with the same amount of assets in both case. As a first approximation, it doesn't matter much which choice you make.

- There is some potential future value due to tax free growth in the Roth. The net, incremental Roth value may end up as zero, positive or negative. A positive value will be realized if and only if a beneficiary concludes a) they do not want the money immediately, and b) the extra amount of administration required to keep the Roth is worth the time/effort/cost, and c) the beneficiary doesn't botch the administration of the inherited Roth. Since the general public seems to 'know" Roths don't require RMDs, I see the significant costs associated with missed RMDs on inherited Roths as a non-trivial risk. The OP may want to look at the intended Beneficiaries and assess whether leaving them money in a Roth is likely to leave them individually better off/worse off/no difference than the option of just leaving them the same amount of money directly.

The answer to whether the OP should withdraw money from the regular account or the Roth doesn't have an unambiguously correct answer. The OP is going to have to make some assessments and decisions. The good news is a sub-optimal decision is unlikely to make much difference.

I agree with your conclusion. On the other hand tax will always be paid on money coming out of the traditional IRA, and the best that can be done is to have that money taxed to someone who is in a lower tax bracket.

But the Roth gets tax free internal build-up but it's also tax free when the money comes out. So in general the benefit will go to keeping the Roth going for as long as possible.

In reading through this thread, I found almost no discussion of the OP's tax bracket.

Taken in isolation, an heir would rather receive money in a Roth IRA. The Roth has the potential for tax-free future growth, and can be withdrawn at any time. There are RMD's but it's still better to allow some (most actually) of the money grow tax-free. So you'd rather take money from the taxable account.

But what tax rate will you pay? It can literally be from 0% to over 50%. You will pay capital gains tax on the gains of the assets you sell, plus it may affect the portion of your income that is subject to social security tax. If your heirs inherit the money, there will be no capital gains tax.

It would be clearly better to sell depreciated securities, if you have any, than to withdraw from the Roth. However, most people don't have much in that bucket these days.

If you could take $1000 from a brokerage account with $0 capital gain, vs. $1000 from the Roth, I'd take it from the brokerage account. Even not considering heirs, YOU will retain the tax-free growth. But if the $1000 had a cost basis of $100, and the combined effect of capital gains tax and increased social security tax had you in a tax bracket in the 30's (not hard at all to get to), and your heirs would get it on a stepped-up basis, I'd take from the Roth.

I'm 60 and retired, so I have a long time to live off my assets and no heirs I'm particularly worried about, and my own strategy is to draw down the brokerage account. The tax rate on the capital gains is 0-15%, it doesn't affect social security tax, and it slowly reduces the amount of taxable dividends. I also have a traditional IRA but I likewise don't touch that, to preserve the tax-free accumulation.

Nov 21, 8:13 PM (EST)

IRAs are shielded from lawsuits in case you are involved in an accident, personal injury claim type of thing. THINK OJ!

BW

Qualified pension plan funds are shielded from lawsuits. IRA funds are only shielded on a state by state basis.

In OJ's case much of not most of his funds went into real estate in Florida, which (along with Texas) has an unlimited homestead exemption under state law, shielding any amount of equity in a homestead from creditors.