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My husband and I are new retirees, age 63 and 61. Fortunately, we have enough savings to wait until 70 to collect SS, but this means we need to spend from our savings to cover living expenses. Which should be spent first? Taxable accounts or 401Ks (we have about 65% of our assets in tax deferred 401Ks, most of the rest is in regular taxable accounts, and some in Roth accounts. Obviously we are saving the Roths and doing some conversions, but which type of account should we use for living expenses?
I’m also waiting until 70 to collect SS, and have retired at 63. With 50% of my assets in tax deferred accounts, my two primary considerations for living expense withdrawals are minimizing future RMDs and maximizing state tax exemptions for income from retirement account distributions. In my situation (only charities for heirs), Roth conversions don’t make sense. The high-tax state in which I live exempts $35K annually for any combination of income from distributions, pensions, and SS. Thus 60% percent of my annual withdrawals currently come from retirement accounts and 40% come from a taxable account. Additionally, each year I donate greatly appreciated securities in the taxable account to a donor-advised fund.
This is a great question — but also a tricky one. The standard advice is, or perhaps used to be, to spend taxable-account money first, then traditional retirement-account money and then Roth money. Problem is, this often set folks up for big tax bills later in retirement, plus it could trigger hefty Medicare IRMAA premium surcharges. In addition, some early retirees were looking to take advantage of the health-insurance premium tax credit, and strategies like big Roth conversions early in retirement could derail chances of collecting that credit. Here’s an article where I attempted to present all the competing considerations:
https://humbledollar.com/2023/01/juggling-for-retirees/
Thanks Jonathan – very helpful. Its a nice summary of all the considerations. It makes sense not to worry too much about IRMAA considering the tax hit of the RMDs of a bloated account.