Special Withdrawals vs. Special Expenditures

I am adding a sunroom to my home this year. Is that a special withdrawal or a special expenditure or both? The special expenditure to detail the expense and the special withdrawal to pay for it?

Comments

There may not be a need to specify the expense either way as it's happening in 2016.

If this is a "large enough" amount, then include it as a special expenditure since this is guaranteed spending over normal consumption.

If you need to withdraw assets from retirement accounts to cover spending for a given year, then use special withdrawals.

You basically have it right, but you may not require a special withdrawal if the spending can come out of "normal" consumption.

Best,
Brian

Thanks Brian. I can't cover the cost from normal consumption. It is a special expenditure in that sense. My main concern is how to best pay for it. The monies must come out of my retirement assets since I'm retired. The tricky part is balancing the tax hit for a large expenditure. Then it seems that I should both enter a special expense and a special withdrawal. Thoughts?

"... The monies must come out of my retirement assets since I'm retired. The tricky part is balancing the tax hit for a large expenditure. Then it seems that I should both enter a special expense and a special withdrawal. ..."

I agree with that approach but beware that a special withdrawal is a substitute, not a supplement, for a smooth withdrawal. So, the amount you record should be the total withdrawal for the year. Future years will be necessarily lower since there will be less available to withdraw evenly over time.

Sounds like you have this right. You may decide to take withdrawals up to a certain amount out of tax-sheltered accounts (perhaps to the next tax bracket) and the rest from savings or Roth or alternatives, if you have them, or you could stagger this over two years (2016-17). By experimenting here you may find a benefit increasing your lifetime consumption / standard of living.

Best,
Brian

Many thanks to Brian and Chris! I really appreciate the help on this. Terry Finazzo

Chris, thanks for the warning re the special withdrawal/smooth withdrawal! It is as you say...

If you're using this to decide if/when to make the withdrawals, watch the taxable income column in the income tax report. Compare that to thresholds for marginal tax brackets to see if your actions cause you to pay tax at a higher rate.

Alternatively, you may be able to manipulate your income down below the next lower rate, in certain years, while not causing other years to break into a higher bracket.

Yes good point. Since I want to pay for 1/2 of the sunroom from my savings and 1/2 from my Rollover IRA, I can vary the withdrawal amounts from the two to account for the tax issues somewhat. Kinda messy though...

It can get messy, but it can also make a real difference to your living standard to experiment with this. In one of the optimization challenges I mentioned, there was a 10+% improvement in standard of living for life and this was for a decent strategy to start with.

This specific area may only be ~1% or less (just a guess), but a more systematic optimization effort including Social Security claiming strategies can definitely be worth the effort.

Personally, I think profile optimization is the #1 biggest opportunity for most people. I've spent thousands of hours doing this and testing every strategy that I can think of along with doing sensitivity testing on these.

Hope this is helpful.

Best,
Brian

Money is fungible. Take it from where results in the highest LSPA after you spend it.

If debt isn't anathema to you, consider borrowing if that preserves invested assets at a higher rate of return than the cost of the loan. Debt involves risk and you're essentially investing on margin, but that's an investment philosophy issue.

If debt is an acceptable option, test the benefits by adding a loan to home it affects. That's different than allowed debt because it's a fixed payment and term. In contrast, allowed debt is basically a line of credit.

You could also borrow some and spend some cash out of one or more accounts.