I have both types of IRAs, like many, and am now in the mandatory-withdrawal phase for traditional IRAs. (I also have some freelance income.) So I am wondering if there are calculators for taxation that help figure whether to move to Roth withdrawal after trad mandated withdrawal is satisfied each year, or to do further traditional withdrawal. Surely there are such calcs, but I am having trouble finding them. Thanks.
Comments
As a rule of thumb, it's better to spend down taxable assets first because that allows for greater (longer) growth in tax-sheltered accounts. But if you've got a lot in tax-deferred accounts, the growing RMDs down the road could kill you; that should affect this year's decisions.
Another rule of thumb is to spend down tax-deferred accounts before Roth accounts (to avoid this problem), but if you're planning to leave money to charity, it's better to leave that in tax-deferred accounts. That way, you never pay taxes on those accounts, and neither to the recipients.
I'm a bigger fan of understanding the tradeoffs and using paper and pencil than using magic eight balls (should I withdraw $10K from my IRA? Ask again later) or calculators.
Here's a good page from Fidelity walking you through a number of considerations and calculations. Though I'm years away from RMDs, I use similar reasoning to determine how large a Roth conversion I should make annually.
https://www.fidelity.com/viewpoints/retirement/tax-savvy-withdrawals
Some considerations:
-If you have a sense of your future income needs (projecting your budget forward) and RMDs satisfy those income needs, just sail along taking RMDs. You could create a spreadsheet to figure this out reasonably well.
-If your annual income needs require additional resources (too much month at the end of the paycheck), I would pull from tax deferred IRAs up to your tax bracket (the brackets will be changing...Trump/Congress...dm/msf...will chime in soon). Again, a spreadsheet could help with this scenario.
-If future RMDs look like they might be significantly higher down the road (5-10 yrs from 70.5) consider a yearly Roth conversion after RMDs have been met. This will effectively allows you to control your future RMDs/tax burden by using Roth conversions. I use a spreadsheet to play around with conversion scenarios.
-If RMDs go unspent, hold the excess in tax managed accounts that invests tax efficiently (whatever that will mean going forward).
Many of us are not well versed in managing tax efficient accounts since most of our excess cash went into tax deferred accounts during the accumulation stage of our lives. Now, after age 70.5, we can't contribute and must liquidate these types of investments (tax deferred accounts).
I use a spreadsheet to run scenarios. It helps me visualize income needs, RMDs, tax burdens, and how one decision effects another. I guess what I am saying is you could make your own calculator using a simple spreadsheet.
Might be a good topic for another Thread...Using Spreadsheets.
Regards,
Ted
Retirement Calculator Center:
Whether just starting to plan for retirement or nearing the age of required minimum distributions, these free retirement calculators are here to help. Choose the appropriate calculator below to compare saving in a 401(k) account vs. a Roth IRA, determine the impact of changing your payroll deductions, estimate your Social Security benefits, and more, as you figure what it takes to save toward a secure retirement.
http://www.bankrate.com/calculators/index-of-retirement-calculators.aspx
The Fido site, which I had used before and revisited thanks to msf suggestion, comes closest to being useful, with some manual labor.
I just thought in this day and age there would be an AARP-type calculator where you put in
'At 70 we need 100k for cashflow; we receive half of that need from SS, we get 5k in freelance income and 5k in divs/int and 0 in cg, and therefore to get the other 40k, we shall look to 500k in trad IRAs and the same in Roths. We have xx in deductions.
So is it the case that we should drain the trad IRAs first and pay the taxes ?'
https://www.i-orp.com/coverORP.html
"The Optimal Retirement Planner (ORP) computes the plan that maximizes your annual retirement spending. Before retirement ORP determines which retirement savings account to contribute to. After retirement ORP spreads your saving withdrawals across the entire term of your retirement. The optimal plan:
• Schedules parallel withdrawals from your IRA, Roth IRA, and taxable accounts,
• Minimizes income taxes on IRA withdrawals,
• Honors the IRA Required Minimum Distribution (RMD),
• Includes Social Security benefits, pensions and post retirement earned income.
• Schedules IRA to Roth IRA partial rollovers,
• Saves excess income in the taxable account,
• Includes income from selling the homestead.
Conventional retirement calculators compute the unique answer that satisfies the parameters (assumptions) specified by the user. This means that the user has to specify all of these elements. Such calculators solve a single problem with a single solution. ORP, with its linear programming optimizer, treats these elements of the optimal plan as open variables. ORP surveys a solution space of thousand of answers and picks the one with the maximum amount of after-tax money available for spending. The combination of these values show what actions need to be taken by the retiree, and when, to achieve this maximum."
Are the type of calculator(s) noted here or online Monte Carlo simulators/calculators retaining personal data at a web site; as one is using a real time mode at the web site?
Using a similar program where we hold our accounts is less worrisome; as our investment vendor obviously already has a lot of our personal data.
Thank you for your thoughts.
Catch
Thanks for the link. It is very data rich.
It seems to favor an early spend down of tax deferred balances maybe as a way of pushing SS out to 70.
I was hoping I could include pension income (DB plan) in lieu of SS (which I do not collect), but I didn't see this as an input.
https://i-orp.com/ORPparms.html
It includes pension inputs.
Thanks, that'll be more helpful. Great find!