| Estimating taxes on Retirement withdrawals |
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londonlad
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| Estimating taxes on Retirement withdrawals |
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My guess is that for at least the 1st 10 years of my retirement I would be withdrawing funds from NON TAX DEFERRED ACCOUNTS.
I've estimated as best I can what my NET EXPENSES will be but how can I estimate what my GROSS WITHDRAWAL should be? Presumably, I've already paid income tax on these savings and would only be subject to a much lower rate of CAPITAL GAINS TAX.
The GROSS calculation affects how much money I might need to have saved and therefore how much longer I have to put up with the corporate grind!!!!
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Sat Oct 01, 2005 12:42 am |
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efflandt
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A number I heard if you want your money to last is to plan on drawing 4.5% of your balance, assuming that you make more than that on your investments. This will allow an increasing draw to keep up with inflation as your money still grows or for unplanned expenses or emergencies (or dips in the markets).
One thing you do not want to do is have investments that overall average the same amount you are drawing. That would leave you with fixed income that may require draining your principal as the value of a dollar decreases. But it is perfectly acceptable to draw down your taxable principal if your tax deferred balance is growing by a like amount or it reduces your expenses (like paying off your home).
The amount you draw annually, the source, and "unknown" tax rates at the time (if not in a Roth IRA) will determine the tax you pay.
Personally, I am gradually converting IRA funds to Roth IRA and paying the tax now instead of on future gains, since my 401k would likely put me in the same marginal tax bracket I am in now, if not higher (inflation and reduced work force due to retired baby boomers).
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Sat Oct 01, 2005 3:50 pm |
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Rolo
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| Re: Estimating taxes on Retirement withdrawals |
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quote:
Originally posted by londonlad
My guess is that for at least the 1st 10 years of my retirement I would be withdrawing funds from NON TAX DEFERRED ACCOUNTS.
Why? Why pay taxes sooner than required?
"Expect me when you see me."
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Sat Oct 01, 2005 4:56 pm |
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londonlad
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Rolo,
Are you referring to my original post or to Efflandt's response?
If I plan on withdrawing from my NON TAX DEFERRED ACCOUNTS first, I WILL be deferring Taxes as long as possible. (Efflandt's conversion of his IRA's to Roth IRA's seems to be a way of paying taxes sooner rather than later)
Let me rephrase my question:
If income taxes were 30% and I needed $5,000 per month in expenses I would need to withdraw approximately $7,142 from my portfolio.
If I used the 4% Safe Withdrawal Rate I'd need to have a portfolio of approximately $2,142,000.
My NON tax deferred savings should not be subject to income tax (am I right in thinking that? The saving was all done with TAXED income) but only CAPITAL GAINS TAX.
If my assumptions are correct then to get my $5,000 monthly expense check and presumably pay taxes only on the GAINS the effective tax rate should be less than 15% - let's just say 10%. Then I'd only have to withdraw $5,555 from my portfolio and using the same safe withdrawal rate of 4%, I'd only need a portfolio of $1.66M
The difference in portfolio size is about 4 more years of doing stuff I hate!!
So the question is what would the effective tax rate be on withdrawals from regular non deferred savings? Is my assumption of something between 10% & 15% correct?
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Sat Oct 01, 2005 6:59 pm |
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efflandt
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Assuming that you are in the states (despite your name) and you drew $5000/mo from selling long term stocks in a taxable account, it would be taxed at 15% capital gains rate (less standard deduction or itemized deductions). If you are married and sold less than $59,400 stock per year, I believe long term capital gain would be 5%.
Anything you would draw from a tax deferred account (401k, IRA other than Roth, etc.) would be taxed at your normal tax rate (regardless of whether it was stocks).
The best way to be more certain is to get the tax forms and instructions from http://www.irs.gov/ and fill them out with hypothetical figures.
Of course if you are living in London I think you need to contact the Dept. of Inland Revenue (do they have a website?).
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Mon Oct 03, 2005 4:44 am |
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londonlad
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Thanks Efflandt!
Despite the name - very much in the United States!
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Mon Oct 03, 2005 12:47 pm |
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Rolo
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quote:
Originally posted by londonlad
Rolo,
Are you referring to my original post or to Efflandt's response?
Oh, duh...I was referring to your post, but...hehe....I read it backwards. I somehow replaced "NON TAX DEFERRED" with "taxable".  
Withdrawals from your Roth ("NON TAX DEFERRED") are tax-free. Your gains are not taxed unless you withdraw them early.
I don't think there is a "capital gains" rate for IRAs/401k's/etc. I think withdrawals are considered income and subject to income tax rates.
Also, I think we want to withdraw from some taxable accounts...but only a little, so your AGI is low enough that your deductions wipe out any tax liability.
My tentative goal is $2M without going into these fine details...we'll see what inflation does first.
"Expect me when you see me."
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Tue Oct 04, 2005 2:50 am |
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jlee1224
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Rolo has the right strategy. Withdrawals from IRAs/401ks are taxed at regular income rates. Roths withdrawals are free. Withdrawals from personal account is 15% for long term capital, regular income rate if interest (bonds).
So, the strategy is to withdrawal the total amount that you need yearly and gave the lowest tax. This would be done by filling up your tax deductions/exemptions from your IRAs/401ks. This year, you could take out $8200 from your 401k and pay no tax. Next, would be to fill up the 10% bracket. You can take an additional $7300 from your 401k and pay 10% on that. You just took out $15500, and paid $730 in taxes. Not bad.
If you need more, then you have some options. You can take more from your 401k at the 15% income tax rate, or you can take some from your personal account at the 15% long term capital rate. I would go with the personal account to keep your options better next year and years to come.
The strategy is good if you can keep your taxes to a minimum.
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Tue Oct 04, 2005 7:58 pm |
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lyricthedog
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Help!!! I need advice. I have a 401K w/$200,000 fully vested. I am in a financial hardship, and need money. How is the best way to get at my money without paying large penalties and mega taxes. I borrowed from it 4 years ago to buy a house,(currently repaying that loan). Also the company no longer matches my contributions, should I consider rolling into a roth IRA?
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Thu Oct 06, 2005 3:23 pm |
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jlee1224
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Lyric -
Some things need to be known...
How old are you? How much do you need? How much do you make a year?
You can make "hardship" withdrawals from your 401k, but any withdrawals will be taxed as regular income and hit with a 10% penalty.
Rolling it into a ROTH IRA is not an option, but you will pay tax on what you roll over (called a ROTH conversion). It is as if you withdrew it. This may also be not an option if you are still with your company that has your 401k.
Do you have any other options to tap for money? Home equity? Savings?
I would start a new thread, as this does not really pertain the home thread.
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Thu Oct 06, 2005 6:44 pm |
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