Sequence of Withdrawal Strategy, Part 2

| June 25, 2019
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In last week’s post we reviewed the types of accounts you can own and the steps to take to estimate current vs. future income. This week we will review how to use that information to begin making changes to where you save.

Part 2 – 2 Strategies to implement before retirement

Increase after-tax investments

  1. Scenario #1 – You expect to retire before age 59 ½.
    1. Example – Married couple retires at age 55. If they only had money in retirement accounts, they might have to take a penalty or use a 72t payment plan for withdrawals.
  2. Scenario #2 – You expect to make large purchases throughout retirement. If this is the case, taking from only tax-deferred accounts could result in large tax bills
    1. Example – Married with estimated income of $75,000. You expect to buy a car for $25,000 every 5 years. If you only have IRA funds, the distribution would be mostly taxable at higher 22% rates while typically your withdrawals are taxed at only 12%.

Roth Conversion

  1. Scenario #1 – You have a low income year.
    1. Example – Married couple expects to be in 22% tax rate bracket when collecting Social Security and Pensions. This year they are only living on after-tax savings so they expect taxable income to be $10,000. They could convert up to $68,950 at 12% tax rates.
  2. Scenario #2 – You are just below the next higher bracket.
    1. Example – Married couple that is in the 24% tax rate and is $30,000 from 32% tax rates. They could convert $30,000 a year to “fill” up the lower tax bracket.

 

Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.

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