Can you explain why it’s better to pay taxes from IRA withdrawals with post-taxed money (i.e. savings accts, CDs, non-IRA mutual funds, stocks, Roth IRAs)? We have $270,000 in post-taxed money combined. This is our first year of being retired (husband 63, wife 61) and most of our investments are in IRAs ($1,180,000). We have no debt. We’re going to live on IRAs and convert some IRAs to Roth before we start collecting our social security in a couple of years. We’re planning to put new Roth accts into mutual funds which are stocks/bonds. By paying IRA taxes with post-taxed money we think our portfoilio will end up being overloaded with mutual funds and not include the cash reserves of post-taxed money. We’re worried about losing diversification.
Terry Says: Wait — you’ve made this unnecessarily complicated! First, you need to realize that you can make almost any investment with either pre-tax (IRA) money or after-tax savings. That is, you can buy mutual funds, stocks, money market accounts, etc) in each category. So being “overloaded” in any one investment is not the issue here.
What IS at issue is the balance between pre- tax and after tax money — and then the diversification of assets within each of those classes. Remember, any gains from stocks or mutual fund in tax-sheltered accounts comes out as ordinary income; you won’t get the lower capital gains rate.
What IS complex is the entire idea of retiring at such a young age and thinking you have enough money to last for nearly 30 years — your life expectancy! I suggest meeting with a certified financial planner — just to discuss whether this is feasible. Go to www.CFPBoard.org or www.PlannerSearch.org — or simply talk to the financial retirement planners at Vanguard, Fidelity or T. Rowe Price. I have no idea of your annual expenses — but I’m thinking you might have underestimated the impact of inflation (which at only 3% would cut the buying power of your money in half in 25 years!) and the amount you will need to cover medical expenses and insurance.
That’s the first issue to consider, along with asset and tax allocation strategies. And it’s not “guesswork” but instead requires the sophisticated modeling programs that the above–named advisors can offer.