Gene E. Utterback, EA
August 27th 03, 09:59 PM
"FranksPlace2" > wrote in message
om...
> I plan to retire in about a year and start withdrawing my savings and
> retirement money for expenses. I don't expect my tax rate to go down
> as now I will have a lot more time to spend money.
>
> I have always planned to use my aftertax savings first; they will last
> about 18 months. Afterwards I will draw on my tax deferred accounts.
> My rule is always defer taxes.
>
> Recently an advisor suggested I draw on the tax deferred acounts
> first, reserving the aftertax money. I did not understand why.
>
> Why would that be better?
>
> Frank
>
First, you should ask your advisor what his reasoning is, then see if you
agree with it.
Depending on the facts and circumstances of the case at point, it can be
advantageous to draw on the deferred money earlier if doing so will get some
of it taxed at a lower rate. You didn't mention specifics, so I'll make
some up - Let's suppose you need $5,000 per month to live on, will be 69
this year, and are single with no dependents and don't itemize. You have
$90,000 in after tax investments and $500,000 in tax deferred investments.
1st year - you live on the after tax investments of $60K and have no tax
bill.
2nd year - you live half on tax deferred investments of $30K and pay
approximately $2900 in Federal tax. Your marginal bracket is 15%
from the 3rd year on - you live on $60K in deferred investments and pay
approximately $10,150 in Federal tax. Your marginal bracket is 27%
So for a 6 year period you'd have the following taxes:
Year 1 - $0
Year 2 - $2,900
Year 3 - $10,150
Year 4 - $10,150
Year 5 - $10,150
Year 6 - $10,150
Total - $43,500
Had you split your needs between thx deferred and after tax investments you
may have had the following:
6 Years of $15K in after tax money used and $45K in deferred money used -
result is $36,150 in taxable income with tax of $6,100 due in each year.
Times 6 years = $36,600 in total taxes.
OR about $6,900 less than if you followed your rule to always defer taxes.
Of course, this example does not take into account all of the details of
your particular situation and this forum was not intended for such. The
point is this, there can be times when it is better accelerate taxable
income if doing so can keep more of your money in a lower effective tax
bracket.
Good luck,
Gene E. Utterback, EA
om...
> I plan to retire in about a year and start withdrawing my savings and
> retirement money for expenses. I don't expect my tax rate to go down
> as now I will have a lot more time to spend money.
>
> I have always planned to use my aftertax savings first; they will last
> about 18 months. Afterwards I will draw on my tax deferred accounts.
> My rule is always defer taxes.
>
> Recently an advisor suggested I draw on the tax deferred acounts
> first, reserving the aftertax money. I did not understand why.
>
> Why would that be better?
>
> Frank
>
First, you should ask your advisor what his reasoning is, then see if you
agree with it.
Depending on the facts and circumstances of the case at point, it can be
advantageous to draw on the deferred money earlier if doing so will get some
of it taxed at a lower rate. You didn't mention specifics, so I'll make
some up - Let's suppose you need $5,000 per month to live on, will be 69
this year, and are single with no dependents and don't itemize. You have
$90,000 in after tax investments and $500,000 in tax deferred investments.
1st year - you live on the after tax investments of $60K and have no tax
bill.
2nd year - you live half on tax deferred investments of $30K and pay
approximately $2900 in Federal tax. Your marginal bracket is 15%
from the 3rd year on - you live on $60K in deferred investments and pay
approximately $10,150 in Federal tax. Your marginal bracket is 27%
So for a 6 year period you'd have the following taxes:
Year 1 - $0
Year 2 - $2,900
Year 3 - $10,150
Year 4 - $10,150
Year 5 - $10,150
Year 6 - $10,150
Total - $43,500
Had you split your needs between thx deferred and after tax investments you
may have had the following:
6 Years of $15K in after tax money used and $45K in deferred money used -
result is $36,150 in taxable income with tax of $6,100 due in each year.
Times 6 years = $36,600 in total taxes.
OR about $6,900 less than if you followed your rule to always defer taxes.
Of course, this example does not take into account all of the details of
your particular situation and this forum was not intended for such. The
point is this, there can be times when it is better accelerate taxable
income if doing so can keep more of your money in a lower effective tax
bracket.
Good luck,
Gene E. Utterback, EA