Taxable vs Tax Advantaged Withdrawal Order

While in retirement the Total Income tab shows concurrent withdrawals from my IRAs as well as my taxable brokerage accounts. I was expecting to see withdrawal order: Taxable first, then withdrawals from tax advantaged. Doesn't it make sense to let tax deferred grow until taxable funds are completely depleted? I can withdraw funds from the tax advantaged accounts for several years to meet the estimated smooth consumption level. So, I do not understand the rationale for pulling from both concurrently.

Comments

Typo above: I can withdraw funds from my taxable accounts for several years to meet the smooth consumption level.

dan royer's picture

No, because you need taxable accounts to smooth discretionary spending.

You can model using more retirement accounts money early on by overriding smooth withdraws with extra special withdraws. So if smooth withdraws has you withdrawing 20K per year try special withdrawals of 30K per year for 5 or ten years and then just see if your discretionary spending goes up. I predict it will not, but models are complicated. When you do that, you'll see that your withdraws from regular assets goes down.

In short: test your theory and see.

Dan

A recent consultation with a CFA and everything I've read about order of withdrawals says to withdraw from the taxable portfolio first, let the tax advantaged portfolio continue to reinvest dividends and grow tax free until I need to tap into it. Can I model ESP to withdraw taxable first until taxable portfolio is exhausted before tapping into tax advantaged?

A recent consultation with a CFA and everything I've read about order of withdrawals says to withdraw from the taxable portfolio first, let the tax advantaged portfolio continue to reinvest dividends and grow tax free until I need to tap into it. Can I model ESP to withdraw taxable first until taxable portfolio is exhausted before tapping into tax advantaged?

dan royer's picture

Of course you can't defer the withdraws on your qualified accounts forever. The IRS will require you to start RMD required withdraws at age 70. So you could set the start date for smooth withdraws to age 70. This will cause the program to use Regular Assets (taxable accounts) to supply liquidity for your discretionary spending. You could also start your qualified smooth withdraw at, say, age 80, and this will cause the program to calculate and impose RMD from age 70-79, in effect using even more taxable account money (regular assets).

I'm skeptical of blanket rules of thumb like you describe. I've seen too many models where the conventional wisdom simply doesn't apply for reasons unique to the model. Maybe someone has a pension, for example, that disrupts the assumed tax advantage or perhaps rental property income interferes, or a spouse is still working that changes things, etc. But this is why you test the theory in the program. The theory sounds good, but you'd need to test it to see if it indeed raises annual discretionary spending. In this case it's easy to test. Just change the state date of smooth withdraws in your Retirement Account setup.

Dan

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