Any guidance on 401k distribution strategies?

I seek guidance on 401k distribution strategies to include Roth conversions.

More specifically, I seek 401k withdrawal tools which model withdrawal strategies that would include Roth conversions or other concepts that consider loss risk, tax liability, inflation, etc.

I get the general "4% + inflation factor" rule of thumb. But seek more detail.

ESPlanner appears to give me a target withdrawal amount. I'd like to take it further to consider smart strategies for what/how to withdraw from where.

Any suggestions?


Well, I apologize for bothering you.

Did a bit more research and hit on the "Convert Your IRA to Roth!" case study. Taught me that I can model Roth conversions in ESPlanner. That at least partially answers my question.

Further, took a look at the MaxFi tool. Looks like it may provide addn'l distribution insight as well. I'll give it a deeper look.

Would appreciate any other guidance you may have.


dan royer's picture

In both ESPlanner and MaxiFi, the Roth conversion strategies are still "manual" in a sense. The software is not going to iterate 50 or 100 or more times and test out different conversion amounts in different time periods etc. and reveal an answer like: convert this much in these years. Instead, you must enter an amount you want to convert as a special withdrawal from your 401K (causing you to incur the tax) and then indicate a contribution to the Roth for that same amount in the same year and then compare the discretionary spending of the two cases.

I don't know of any rule of thumb to guide this decision about amount or timing. It's possible that this conversion can make a significant difference, especially with big sums, but I've also seen it more often I think only increase discretionary spending by a few hundred dollars a year over the lifetime. May still be worth doing.

There seems to be a lot out there on the web with regard to withdraw strategies--bucket strategy and this or that. I probably think too simply about it but wouldn't one just sell what is high and hang on to what has dipped? And isn't it true that there's no way to know what will be high or low a year from now, 10 years from now, 30 years? Thus, I'm sometimes confused by a customer that asks (not you or what you are asking here) if our software addresses withdraw strategies.

Anyway, the Roth conversion is worth looking at.

I use the federal tax detail report to guide decisions about Roth conversion. Look at the taxable income in the years during which you would consider conversion. Can you manipulate your income to get below the nearest tax rate bracket without adversely affecting future years? If so, do so; if not, consider making additional taxable IRA withdrawals up to the next tax bracket. Convert the extra income to Roth.

Alternatively, you may believe your future tax rates will be even higher, justifying taxable withdrawals now. Whatever the case, compare the taxable income report with tax brackets to guide your decisions.

The Bogleheads wiki provides good guidance:

PS: I won't be converting. I have no taxable investment accounts to live on before starting SS at 70. I have to withdraw from my IRAs to eat, kicking me into higher brackets already. I'm confident that my future brackets will be lower. To withdraw enough to convert would result in my paying more taxes now than in the future.

dan royer's picture

Chris is a super saver. :)