Most early retirees follow sequential drawdown. Drain one account, then move on to the next. It’s simple, it’s popular, and according to today’s guest, it might be leaving serious money on the table. So, is there a better way? Should you be thinking about your retirement withdrawals differently? And what could a smarter strategy actually save you over 30 or 40 years of retirement? Let’s find out.
As a quick disclaimer, this episode features a PowerPoint presentation. You will be able to follow along on audio, but if you want to see any of the visuals, head on over to our YouTube channel, which is found at youtube.com/biggerpocketsmoney.
Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my not yet drawing down co-host, Scott Trench.
Scott:
Thanks, Mindy. It’s great to be here cash flowing to and through early retirement with you here. That’s a a reference to the great book written by Cody Garrett and Sean Moliney um, called Tax Planning To and Through Early Retirement. Mindy, I’m super excited to talk about this today. Um, there’s a lot of new and improving work on how to invest portfolios across different asset classes in different uh tax-advantaged retirement accounts. There’s a lot of discussion about the right order of to withdraw in there and there’s a lot of nuance to this subject.
And Mark um, listened to the episode with Sean and Cody that we had a few weeks ago and said, “Hey, there’s a couple of additional considerations I’d like to bring to the table here, um, to discuss this.” I’m going to Mark is an accountant and um uh skilled in this in this topic. And so he put together a presentation for us and we’re super excited to hear it. So Mark, thank you so much for responding and uh providing even more depth on this really important subject.
Mark:
Thanks so much, Scott and Mindy. I’m I’m super excited to be here with you guys and, and to share what I’ve got put together. Uh, I’m hoping that uh listeners find it helpful. So without further ado, let me share my screen and we can take a look at those slides.
Scott:
Just as a quick disclaimer while Mark is bringing up the presentation here. Mark is an enrolled agent, an EA. He is a tax expert, but he is not your tax expert. Uh, neither are Mindy nor I. This episode is for entertainment purposes only and is not tax, legal or financial advice.
Mindy:
All right. Mark, let’s jump into this and start nerding out on numbers.
Mark:
All right, guys. Uh, so tentatively I’ve got the title of this presentation as alternatives to sequential drawdown. And so before we get any of the details about this, I really kind of want to set the stage and and make some initial definitions. So, first I want to define what I call a sequential drawdown. So I think the sequential drawdown is what most people in the community uh think of when they talk about drawdown order or uh drawdown. The standard advice for this is start with your taxable brokerage accounts and then once those are depleted, moved on to your tax deferred accounts, such as 401(k)s and traditional IRAs. And then finally, take distributions from your Roth accounts.
You know, I think that this particular type of drawdown order might work for some type of retirees, especially a traditional retiree where maybe they’re retiring uh at age 60 or 62 and they just have a a handful of years before they hit Medicare at 65 and, you know, they want to try to minimize what their healthcare costs are before that time period. But I think for early retirees, if you’re looking at, you know, a much longer horizon, if you’re retiring in your your 30s or your 40s or your 50s, some of these other approaches might make more sense to you and and might present tax savings.
So the primary approach that I’m going to present here is what I call a blended drawdown. So instead of sequentially going through and, you know, emptying each bucket, with the blended drawdown, it’s more like, well, you sort of take some from each bucket. So if I were to compare this to, like let’s say let’s compare this to baking, you know, a sequential drawdown would be like, all right, on day one, I’m going to have a cup of flour, day two, I’m going to have a half a cup of sugar and then day three, I’m going to have some eggs. Well, a blended drawdown looks at that and says, well, hey, this is what we’ve got for the ingredients. How can we blend these together and get something where the sum is greater than the whole?
The last idea I have on on drawdown is what I call a cyclical drawdown. This is where maybe you’ve got a sequence or a set of years and for whatever reason, they might not all be the same. So, you know, maybe in year one, you might have primarily tax deferred, in year two, it might be tax deferred, and then maybe in year three, it might be a combination of tax deferred and taxable. Uh, and then you can kind of repeat that.
Something that’s sort of similar or analogous to this in the tax world, there’s a concept called bunching as it relates to making charitable donations. Let’s say every year you donate $5,000, but, you know, you’re you’re just a couple thousand dollars short each year of itemizing. So from a tax perspective, those charitable donations aren’t having a tax impact. With bunching, instead of donating $5,000 each year, you would bunch them together to a single year. So maybe you would be donating $10,000 in a year or 15,000. And then in, you know, the next couple of years, you wouldn’t have donations. So that’s kind of an illustration for the cyclical drawdown, but other ways that that might actually manifest could be something like you might have higher income in certain years and then have a lower income year or uh as presented initially, you know, the the composition of it might change.
I want to say when looking at drawdown, there are a lot of different considerations. And as an enrolled agent, I’m a tax guy. I primarily see this stuff through the lens of the tax professional. Uh, but there are other considerations. You know, probably the chief of which or one of the big ones is portfolio makeup and accessibility. So to go back to the baking analogy, we could kind of think of this as what sort of ingredients you have. So, you know, if you’ve only got flour and water, uh maybe you’re not making a cake. To get back into the financial example, you know, if you’ve if you’ve only got your investments in tax deferred accounts, then it’s it’s kind of moot to be considering, you know, what the the makeup of your drawdown’s going to be because you’re going to be constrained by what your portfolio makeup is.
Another big consideration is healthcare. So Medicare premiums and Affordable Care Act subsidies are based on your modified adjusted gross income. Basically, the lower your income is for a given year, the the more beneficial it’s going to be from a healthcare standpoint. Uh another consideration is asset protection. So there are legal and credit concerns regarding where your money is parked. Typically, the highest level of protection is going to be in a qualified plan like a 401(k). The next level of protection is going to be in IRAs and with the least amount of protection is going to be stuff that’s sitting around in a brokerage account.
Then we’ve got estate planning. So, and I guess more specifically when I say estate planning, maybe in this context it would be sort of tax planning for the beneficiaries. What kind of tax burden are you going to leave behind for those who inherit your assets? And last but not least, we’ve got tax optimization, which is going to be our chief concern during this presentation.
Mindy:
Mark, when you talk about asset protection, the legal and credit concerns, are you meaning that the 401(k) is essentially protected from legal issues against you, like your creditors and like if somebody sues me, they can’t take my 401(k), but they could get access to my taxable brokerage to satisfy the any judgment against me. Is that what you’re saying?
Mark:
Yeah, great question. And I do want to hedge my response with, uh, I would make sure to check with uh a legal professional to get a a more definitive answer on this and to make sure to do your own research. But uh my understanding is that is essentially the case depending on, you know, what kind of creditor situation there is or or what kind of uh legal lawsuit there is against you, you are afforded a greater degree of protection with those types of accounts than a standard brokerage account.
Mindy:
Okay. I hope that that never applies to anybody listening. However, if you know that there’s a big lawsuit coming down the pipeline or, you know, potential judgment against you, maybe, and again, I’m not an attorney, but maybe you want to start drawing down from those uh taxable brokerage accounts instead of the 401(k)s.
Scott:
Great point, Mindy. I think that the the kind of main issue, and you’re about to get to it, I think here as well is is is ought I in retirement, in early retirement specifically, to spend down the money in my taxable brokerage account, my 401(k) or my Roth first?
Mark:
Yeah, exactly. And I think to sort of flip it on its head, typically the the question that people ask is, well, which account should I draw down from first? What is the correct order? And I think maybe the the better way of approaching it is is what kind of blend of these different accounts can you use for your drawdown? Uh, that way you can kind of optimize your overall situation by taking the most positive elements of each type of account.
So with the sequential drawdown, the problems that I see as a tax professional, the first of which is that our current tax environment is historically low. Uh, we’ve got very low tax rates right now. And with such low tax rates, it’s beneficial to tax ordinary income while it’s at such low rates. And as we’ll see a little bit later, we’ll we’ll kind of take a look and do a comparison between the ordinary income tax rates and the GAAP gains tax rates.
Another issue with the sequential drawdown is eliminating taxable accounts reduces investment options, tax strategies and the benefit of capital gains tax rates. It wastes the standard deduction when drawing exclusively from taxable and Roth accounts. And the reason why I say it wastes the standard deduction is because long-term cap gains income is already taxed at a beneficial rate. The standard deduction is essentially wiping out that chunk of your income from tax. It’s not exposed to tax at all. So ideally, if we’re going to just wipe out income and it’s going to be completely disregarded for tax, we’d like to do that with ordinary income. And obviously with Roth accounts, because Roth accounts are not taxed when you’re taking distributions, assuming that they’re qualified distributions, there’s also no benefit to the standard deduction. So if you relied on a sequential drawdown, I think that, you know, during the first phase where you’re drawing from taxable brokerage accounts, the standard deduction is being wasted. And then also in the last phase where you’ve moved on to Roth accounts, uh the standard deduction is being wasted.
And my last big point on this is that tax-deferred accounts are the worst to inherit. While some people in the FI community might be looking to to build their legacy to pass on their wealth to future generations and tax deferred accounts aren’t necessarily the best type of accounts to set up the beneficiaries for that.
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All right, welcome back to the show. What I’m gathering here is, okay, this makes perfect sense. It’s too simplistic to say draw down your taxable accounts first, then do your 401(k), then do your Roth. It’s going to be every year, you’re going to look at this and you’re going to do a blended approach to this. But that really your prioritization is for the tax deferred account, the 401(k) or it’s equivalent for many people and to to to draw that down as fast as possible without putting yourself over these income cliffs that then puts you into higher income tax brackets or uh make you ineligible for subsidies like those from the ACA. Is that is that the right way to interpret kind of like like the first rule of thumb with uh this balanced approach to to drawdown?
Mark:
Yeah, I think what when looking at the different considerations, when looking at it from an estate planning uh perspective, I I really think that would be the driver. So if you’re planning to pass with a lot of wealth in your estate and you’ve currently got a lot of money sitting in your 401(k) and your traditional IRAs, um, I would strongly consider that. So, you know, the the rates are historically low, so I would at least probably consider trying to burn through the the 10% and the 12% brackets in addition to at least filling up the standard deduction or the itemized deduction with ordinary income.
Scott:
Let’s talk about that, impact that a little bit. Rates are historically low, right? This is a belief I’ve long had that if you’re going to pay taxes, pay them now here under the the Trump administration because they ain’t going down, especially not for higher income earners or people with more wealth like those in the FI community later on, you know, in in in future years. It’s it’s going to be very hard to imagine that. And that that is that what you’re saying here basically is at least in those 10 to 12% federal uh marginal tax brackets, pay your taxes on that now um and don’t try to overoptimize that because if you have a big pile later, you’re going to be probably paying taxes at a much higher marginal rate on those with distributions.
Mark:
Absolutely. I think that’s what I’m saying. We’re in a historically low tax environment right now. So it does make sense to pay, you know, to to trigger that income that’s going to be taxed as ordinary income while there’s a high standard deduction, while we’ve got the 10% and the 12% and the 22% tax brackets. And and that way too, by drawing a little bit more from the tax referred accounts now, uh it gives our taxable brokerage accounts and our Roth accounts a little more of a runway to to grow in the future.
Scott:
This is a really interesting topic and this is a little bit of a tangent from your presentation here, but can you give us an idea of what you mean when you say historically low tax environment? What is normal and where are we at now?
Mark:
Ooh, I don’t know if I’ve got a a good enough academic answer for this. However, I would say in looking back at the last 30 or 40 years, I think the only time that we’ve had lower tax rates would be under Reagan when they really pushed super low tax rates, and they had to back that off because they realized they weren’t able to fund the government. So when we look at historically low tax rates for the last couple of decades, the Tax Cuts and Jobs Act, which was passed under Trump’s first administration, really slashed taxes. So we went from something where we had a standard deduction uh for a single filer of something like 6,000 and then we had a a $4,000 personal exemption. You know, so for combined about 10,000 to now we’re up to about 16,000.
You know, some of that’s inflation, these figures are adjusted each year for inflation, but some of that’s just beefing up the just the standard deduction and the numbers. Likewise, there’s been a shift with what the income tax brackets are. Historically, the three lowest tax brackets have been the 10%, the 15%, and the 25% bracket. But since the Tax Cuts and Jobs Act, those were adjusted to 10%, which I guess that bracket didn’t change, but then the 12% and 22% brackets. And then if we continue our way upward, all of those additional brackets uh have also been adjusted downwards. So, you know, between what the tax rate on the tax brackets are and the standard deduction, we’re in a really low tax environment.
Scott:
Yeah, I’m looking back and I’m looking at like 1985 here. The tax bracket marginally for income over 170 grand was 50%, right? For 45% for things over 90,000, right? You go back to the, let’s see here, like the 70s, you got your highest marginal tax bracket for income over $200,000 at 70% for your marginal tax bracket, right? And let’s go back, let’s keep doing this. This is fun. I’m looking at the 40s. We have a 78% marginal tax bracket for income over $120,000 a year, right?
So, for the last 40 years, you haven’t seen much over 40% marginal tax bracket for the highest income. But both in the sense of these higher deductions and in the sense of the lower top tier marginal tax brackets, you’re seeing, I think this historically low tax rate environment that Mark’s talking about here. And it’s hard to fathom some of those those tax brackets, but what will they look like in 20, 30 or 40 years? I think there’s a very real risk, um a very real probability that those marginal tax rates come back at very high levels for the top earners over the next 30 to 50 years. Who knows? But those things can change. They were there and they they could go back and that’s a non-zero event.
And so for that reason, I I generally kind of align with your high-level philosophy, which is unprovable, but of, hey, if there’s a time to pay taxes, it’s now. It’s now under the Trump administration and this extremely favorable tax code. If I can get a lower basis on many of my assets, I will. It probably still doesn’t make sense at the strategic level to get into a very high marginal tax bracket. But at least in these lower tax brackets, paying taxes is I mean, it’s a reduced basis is probably going to pay off, I think over a very long period of time, or at least it lowers your long-term risk of that ever happening in your portfolio. What do you think, Mark?
Mark:
I think exactly. So, you know, none of us have a crystal ball. We don’t know what the tax rates are going to be like tomorrow. Uh, people will, you know, will endlessly debate, you know, the the merits of traditional versus Roth and so on and so forth. But, uh, I think, you know, from a historical perspective, we’re in a pretty great boat right now. So it does make sense whether you’re taking distributions from those tax deferred accounts or whether you’re executing Roth conversions, it’s a great environment to be in. And to speak to some of those historical rates, it’s important to note that there are, you know, geopolitical concerns on these. If we look back to the 40s, the reason why tax rates were so high is, you know, we had World War II. And so, uh World War II had to get funded. And so, you know, as much as I’d like to imagine that our geopolitical future is going to be, you know, without any turbulence and everything will be great, like we we really have no idea what’s going to happen. We could have a great war, tax rates could go sky high. We just don’t know. And and likewise too, on the flip side, it is possible that things could become more beneficial. So we don’t know if like, for example, some states are allow retirees to exclude some of their retirement income. I think it’s probably not impossible that at the federal level, something like that might happen. But I am I’m more inclined to say that tax rates are probably going to go up.
Scott:
By the way, it topped out at 91% for the top marginal tax rate in the 1960s, right? 1943, 45 through 1963, the top marginal tax rate was 91% on income over $400,000 for married couples.
Mindy:
So, I hear people yelling at the radio right now saying that the one big beautiful act permanently extended the seven marginal income tax rates. And I just want to note that yes, they’re permanent until they’re changed. So, just because they’re permanent doesn’t mean they can’t change in the future. And, you know, like you said with Reagan, uh Mark, Reagan had them super low and then we discovered that we couldn’t fund the government. Going forward, we have no idea what’s going to happen, but what is it, there’s two things that are that are predictable, death and taxes, or two things that are constant, death and taxes. And I I think that you’re right, that these will be permanent until they’re not.
Scott:
I think you have to spend some time on this philosophy because I believe, Mark, that this grounds a lot of the, like if it’s a tie, tie goes to paying taxes now, versus decades later in life, right? If you can, because of the because of that that real risk. And I think that guides all of the decision making I make when it comes to my personal tax strategy. It sounds like that is the underlying theme for years. And if you disagree with that, you will disagree with I think many of Mark’s fundamental approaches to drawdown with your retirement accounts. Is that is that fair to say, Mark?
Mark:
I think it’s possible. However, some of the points that I lay out, I do think they’re going to be applicable to to some folks regardless of whether they think the rates are going to go up or uh whether we might stay at a historically low environment that we are in now.
Scott:
Well, let’s keep going. Sorry for the the long tangent here.
Mark:
No, that’s that’s great. Thanks, Scott. So, let’s talk a little bit about what the tax treatment of inherited accounts is. So, I’ve got this accounts laid out in order of of best to worst for a beneficiary to inherit. And I guess it’s worth noting that this is a a non-qualified beneficiary. So, you know, we’re not talking about a spouse who’s inheriting it. You know, we’re talking about maybe children or or grandchildren or or other family members or individuals inheriting.
So, the absolute best type of account to inherit is a Roth account. And the reason is, it’s non-taxable. And there’s 10 years to liquidate the account. The next most beneficial type of account to inherit would be a brokerage account. And I should also add that in addition to a brokerage account, you can also think of assets like homes or vehicles or collectibles or stuff like that that’s not in one of these tax deferred types of accounts. So, the reason why these accounts are great to inherit is because the basis of these accounts is adjusted to fair market value. So, you know, let’s say that someone’s got a bunch of shares that they purchased for $50. They have since appreciated to $100. So, on the date of death, the basis is adjusted to the fair market value of the asset. And so typically because investment assets are going to appreciate over time, this usually results in a step up in basis. So, theoretically, if any beneficiaries inherit assets from these types of accounts, they sell them relatively quickly uh after the decedent state of death, there’s probably going to be minimal gain or loss on that.
And then kind of getting into the territory of the accounts that are not so fun to inherit, tax deferred accounts are not so fun to inherit. And the reason being is that they’re taxed as ordinary income and there’s only 10 years to liquidate. So, if, you know, someone were to inherit a tax deferred account and they’re still in their working years, let’s say they’re a relatively high-income earner, and let’s say that they inherit a huge, you know, 401(k) or traditional IRA. Well, they’re going to have to liquidate that account in 10 years and that’s potentially going to push them into an even higher tax bracket. So, part of the risk of this might be that the initial tax saved when the decedent was contributing to the tax deferred account, it’s possible that that rate might be lower than the beneficiary’s combined rate between, you know, their peak earning years and then having to liquidate these accounts.
And then the the absolute worst type of account for someone to inherit is an HSA. That’s ordinary income and it’s immediately taxable. I guess the best advice that I have is when planning for your date of death, just make sure to, you know, liquidate your HSA and your tax deferred accounts.
Mindy:
We have a lot of listeners who have the high deductible plans who have planned to have their HSA be a retirement account. Essentially, they are cash flowing their healthcare costs right now and then when they retire or in the future, they will use those receipts that they’re keeping to pull that money out tax-free. So at what point in the retirement does that make sense? Does that make sense earlier in the retirement, if assuming they have all of these different kinds of accounts?
Mark:
Yeah, that’s a great question. I wish I would have the crystal ball to know exactly when. I guess theoretically, I guess maybe ideally it could be later in retirement as your health is starting to fail. And that way it gives you a little bit more of a runway for that account to grow. But like I said, you know, you’re realistically not going to be able to plan for when your your death is. You really don’t know. So you’re just going to kind of have to try to balance the two of those things.
Scott:
But I think an answer for the HSA is over the course of your life, you contribute to an HSA, you build it up and hopefully it’s a few hundred grand by the time you hit traditional retirement age. And you keep all your receipts. And so if you’re doing that right, you should have tens of thousands of dollars in cumulative medical receipts. Everybody’s going to break their arm one time or their finger or whatever or go, you know, have some some sort of thing come up. You’re going to have $25, $30,000 of receipts maybe more if you over 30 years if you’re saving them correctly. And then when the market goes down, when you have a bad year and you have this face this the sequence of return risk in your other accounts, that’s when you cash out portions of that, you know, use that as the savings account, right? That’s when you cash out some of those funds in the HSA, I think, right? And and that’s how that that that would be the approach I’d have because it sounds like you don’t want to die with a large HSA if you’re trying to do a uh best practices from a uh estate planning perspective. You want to use that one quickly. Is that right, Mark?
Mark:
Yeah, absolutely. That’s that’s a great point and that’s a great perspective, Scott. And, you know, the銀 lining on this is, okay, let’s say you do distribute those funds from the HSA to reimburse yourself for those qualified medical expenses. Well, you know, worst-case scenario, if you don’t actually need to spend that money and you’ve distributed too much, well, great. You can put it back in your brokerage accounts and then you’ve got funds in a pretty tax-advantaged account, especially for people to inherit.
Mindy:
Oh, that’s a good point. My HSA is also invested in the stock market, so I might also have a down HSA year if I’ve got a down everything else year.
Scott:
That’s true. and we did talk about having that as a particularly aggressive account. So maybe I have to think about my logic there. And you have to have a different portfolio theory. Maybe I have a more conservative portion of that later in life.
Mindy:
I mean, we’re just barely into this this discussion yet, but I think all of this is saying, look, there is no one answer. It’s going to be a nuanced withdraw strategy. It’s shouldn’t be a one answer. It should be, you know, look at all of the tax implications. If I’ve got money that I’m pulling out that’s 10% tax and then money that I’m pulling out that’s 12% tax and I need a little bit more, maybe I just go to my HSA and not my Roth. I don’t touch my Roth because that’s a great account for my kids to inherit. So I’ll just leave my Roths untouched and pull from the HSA, pull from these tax deferred accounts when I can so that they’re inheriting the good stuff and I am getting rid of the bad stuff. I mean, let’s be real. Inheriting an HSA is still really awesome. Here’s a pile of free money. If your kids don’t want it, you can email Mindy at biggerpocketsmoney.com. I’ll tell you how to get it all to me because you’re still getting a lot of money just you happen to pay taxes. I will pay the taxes on your behalf.
Scott:
Let’s play this out here because this is this is really interesting. So we have our thoughts about we we first are grounding this discussion in tax rates are going to go up over time and you want to put this money in the most taxable locations possible. I think we’re also presuming that the Roth is going to be untouchable. Right? They’re not going to they’re not going to somehow renege on the promise that that those funds will grow tax-free. With that perspective in mind, you know, you’ve got the Roth being the holy grail as the best possible way to pass on assets. For now, those uh fair market, you know, assets are transferred to heirs at a stepped up basis. That could change at some point in the future, but we’ll we’ll take that for granted right now. And the estate tax transfer is like some absurdly high number, like 12 or 13 million bucks, right? Um, right now. And I think it’s almost a given. I would be shocked if that number does not come down adjusted for inflation over the next couple of decades um with new administrations, the pendulum swings in these politics, right? And so there’s there’s I think it’s a bad bet that that’s going to be as high as it is for for the next 20 or 30 years as well.
And so there there is a game of getting this money into the Roth and the taxable brokerage and you know that the um 401(k) and HSA are going to be taxed as ordinary income when they’re withdrawn there. And that should impact your early retirement withdrawal strategy, I think. I think that very few people in the FI community are thinking about just how to spend every last dollar and die with zero. At least very few that have children or families, I think are in that boat. I think there’s a confluence of goals here and having an estate that is probably preserved for inflation, relatively speaking, to pass on to their heirs is a goal that is in the back of people’s minds as part of their FI journey here. That all impacts this.
Mark:
Yeah, those are really excellent points, you guys. Really excellent points. All right, so taxable accounts, friend or foe? So, I really think that taxable accounts have some negative connotations. Uh, and I guess it’s just right there in the name, taxable. Ooh, you know, scary, bad, taxable. Well, I guess it’s kind of important to reframe this. So, most income is taxable. The difference is when it’s recognized. And from the tax jargon standpoint, recognition means that, hey, this is going to be included in income for the year and you’re going to have to pay tax on it.
The big difference between taxable accounts and tax deferred accounts is that in taxable accounts, when you’re paid out interest or dividends, that income is going to be recognized in the year that it’s paid out versus in a tax-deferred account, if you’ve got interest income or dividend income, none of that’s going to be taxed until you actually take distributions from the tax deferred account. And then probably the thing that has an even bigger impact is when you’re selling your positions. In a taxable account, you are going to be recognizing gain or loss every time that you sell positions versus in a tax deferred account, you’re not going to be recognizing any income until you actually take distributions. So you can rebalance your tax deferred accounts every day or every week. I’d certainly wouldn’t advise doing something like that, but from a tax perspective, it’s not going to trigger any kind of income.
So, with taxable accounts, basically, uh you know, don’t sell positions that you’re holding unless you’re prepared to recognize the income. And so once you take that into account, then to some degree, you know, these taxable accounts can grow tax deferred. We’ll be tax deferred. The gain will be tax deferred at least until you then sell it and then you recognize the income. You know, another great thing about taxable accounts is the capital gains tax rates. And we’re going to see a little bit later a comparison between the ordinary income tax rates and the capital gains tax rates, but in a nutshell, the the cap gains tax rates are extremely favorable.
Another great benefit of the taxable accounts is the step-up in basis at death. Another great advantage of the taxable accounts is that there’s a lot of tax strategies available with taxable accounts, including stuff like donating appreciated stock, gain or loss harvesting, qualified business income deduction, qualified small business stock exclusion, like-kind exchanges or 1031 exchanges, qualified opportunity funds, etc., etc. You know, there are some tax strategies that are available with tax deferred accounts such as qualified charitable distribution.
So with the the taxable accounts, uh it’s much easier to give. And so, you think about this, let’s say you want to give your children or your grandchildren some money. Well, you can’t just give them a chunk of your IRA or your 401(k). In order for that to actually make its way over to them, you’re going to have to take a distribution. The distribution is going to be taxable to you, and then you can give them the funds, whereas with a taxable account, you’ve actually got the option to donate appreciated stock to your relatives. So let’s say, let’s say you’ve got a child or a grandchild or someone and they’re in a lower taxable rate than you, potentially they’re in the 0% long-term cap gains tax rate. Well, you can give that appreciated stock to them. They’re going to step into your shoes for their basis, and then when they sell that position, they’re going to recognize the gain and then that gain is going to be taxed at their tax rate, assuming that we’re not in a kitty tax scenario. Maybe we’re talking adult children or whatever.
And another great advantage with the taxable accounts is that you can borrow against the taxable accounts. So, if your brokerage account allows you to, you know, invest in margin, then basically you have an off-book loan. And right now, some of the margin interest rates are extremely favorable. I think some of the rates are potentially even lower than a 30-year mortgage and a mortgage is basically the gold standard for for cheap borrowing. In addition, taxable accounts uh can have more investment options. So think about stuff like purchasing homes, debt financed income such as rental properties, active businesses, publicly traded partnerships, etc., etc.
So to kind of set the stage for the mechanics that we’re going to take a little closer look at, you know, why this blended approach might work, I want to lay out the different types of income. So we’ve got ordinary income, capital gains income, and we’ve got non-taxable income. And so in ordinary income, you know, the the first one we have is is earned income. Uh so that would be any type of wage income or like self-employment income. And technically maybe this is even a a fourth type of income because in addition to it being taxed at ordinary income tax rates, it’s also going to be subject to social security and Medicare taxes. So basically earned income is the worst type of income to have and it’s not just because you have to work for it, it’s because you’re taxed the most for it.
Other types of ordinary income that we’ve got would include pension income, tax deferred retirement distributions from 401(k)s or traditional IRAs, social security income, at least to the extent that the social security income is taxed, interest, ordinary dividends, short-term cap gains and net rental income.
Mindy:
So this ordinary income just stacks on top of each other for the different income tax brackets, right? Like, let’s say I make $10,000 in earned income and $10,000 in pensions and $20,000 in tax-deferred retirement distributions. That’s $40,000 that I’m paying taxes on at the traditional tax brackets, like the 10%, the 12%, and so if I do, you know, 100,000 in all of these, then I’m really stacking myself up to all of these tax brackets and really paying a lot of tax on this ordinary income.
Mark:
Yeah, exactly. And and we’ll look at the tax brackets a little bit later, but exactly to your point, the more income that you have, the more ordinary income that you have, the higher that each subsequent amount of income is going to be taxed.
Scott:
I have a question about that um for earned income. One one issue I see with some people in the early retirement community is social security, right? So social security is a tax, but it is also not really a tax because you’re getting that back later in life presumably to some degree based on the amount that you contribute. And so does that factor into your early retirement withdrawal strategy at all to have some kind of contributions to social security or do you just kind of ignore it and say, you know, on the whole, it’s it’s worse math to pay into it and then receive it back later. You might as well just invest and and keep your stuff outside of it and and consider it a tax.
Mark:
I am probably a little bit more in the latter camp of thinking I could probably get a higher rate of return if I were able to just invest those funds that were putting in to social security into, you know, my own portfolio. There’s also folks who are worried that, you know, about the solvency of social security and what’s going to happen in the future. I guess personally, I think it’s going to be really hard for social security to go away completely. Uh if you look at just kind of the numbers on on what the average person or the average household has saved, they really don’t have a whole lot saved. So I I’m imagining that we’re going to continue to find ways to uh fund social security so that people are able to to draw on social security later in life.
Personally, I would probably try to minimize what I can put in social security and maximize what my investment income is over my lifetime. But from a drawdown perspective, the fact that you might be collecting social security in your mid to late 60s is another motivation in my book for you to lower your tax deferred income. And basically, what that does is it potentially lowers the amount of your social security income that might be taxable when you start receiving social security income.
Scott:
Yeah, I thought I’d just ask about it because it’s not a it’s not a complete loss to the social security tax to the individual, the way that all other taxes essentially are, at least from their standpoint.
Mark:
Yeah, that’s a great point. And there, you know, there are diminishing returns on on the benefits that you receive versus what you paid in from social security. So at a real base level, yeah, you would want to be paying in enough social security to get the credits so that you can collect benefits when you get older.
Scott:
That’ll only be an issue for people who work less than like 15, 20 years though before that you before you like really like begin getting really dinged, I think in a hardcore way. There’s a there’s a whole calculator around that where where going to be working on and and you can play around with that at the social security uh calculator there, um on their official site as well. But something to consider. Sorry, keep going.
Mark:
Their website’s great. If if you log in, you can review uh all your years of social security income that have been paid in and and you can look at what attentive benefits might be. So that’s a great point. But continuing on with the different types of income, then the next type of income that we’ve got would be long-term capital gains income. And so, you know, we’ve got long-term capital gains, which is a primary income. And then relatively recently, like I think within the last couple of decades, uh qualified dividends were introduced. And basically, if you hold the underlying position that pays out the dividends long enough and it’s a qualifying uh US corporation or qualifying foreign corporation, then with those dividends, you can get the long-term cap gains tax treatment. Uh, so that’s pretty awesome.
And then for the the non-taxable types of income, we’ve got stuff like qualified Roth distributions, qualified HSA distributions, qualified 529 distributions, we’ve got the return of basis on investments. And I just want to call out on this, you know, if you purchase stock and then, you know, the stock appreciates and you later sell the stock, you know, the entire amount that’s realized from that sale isn’t necessarily income. It’s only the portion that’s gain that’s income. So, typically anytime that you’re selling a an appreciated position, you’re getting a return of basis as well as some gain component on it. And then another great type of non-taxable income is the gain that’s excluded on the sale of a home. So, if you own and live in a home for two of the last five years, uh a single person can exclude up to $250,000 of gain and a married couple can exclude up to half a million in gain.
And now we just have a real quick comparison between the ordinary income tax rates and the cap gains tax rates. And so, I guess maybe to simplify this a little bit for the people who are listening and they’re not looking at the visual right now, you know, when we look at the ordinary income tax rates, we start off with the 10% rate and that’s for your income, and I should qualify, these are the rates for a single taxpayer. The rates for married filing joint taxpayers will be roughly double until you start to get into the higher tax brackets. But for a single taxpayer in 2025, the 10% tax rate applies on ordinary income up to about 12,000. Then the 12% bracket applies between about 12,000 and 48 and 1/2,000, and then the 22 kicks in at 48 and 1/2,000 to about 103,000.
And just looking at those first two tax brackets, the 10% and the 12%, those cover taxable income between 0 and about 48 and 1/2,000. If we shift over to the long-term capital gains tax rates, we see that the first long-term capital gains tax rate is actually 0%. So for taxable income between 0 and 48,350, the tax rate is 0%. So that’s effectively a 10 or a 12% discount on tax for cap gains income versus ordinary income.
Mindy:
And that’s long-term capital gains, right?
Mark:
Exactly. I should clarify, well, typically when I’m referring to cap gains tax rates, it’s just a a shortening of long-term capital gains tax rates. So that means if you’re selling a stock, you need to have held that position for longer than a year, or if you’re receiving qualified dividends, you need to meet the holding requirement for the underlying security. So you can’t just, you know, purchase the security, get the the dividend, and then sell it immediately after. If you do that, it’s it’s not going to be a qualified dividend and it’s not going to be taxed at long-term capital gains rates.
Scott:
All right, this is our final required minimum break. And we’ll be back with more after this.
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Mindy:
Okay, so as I read these two together, I can realize approximately $100,000 worth of income and pay 10% on the first 12,000 and then 12% from 12,000 to 48,000 and then that’s it. The other 48,000, if I’m doing the long-term capital gains sales, I’m paying $0 on. So my effective tax rate is going to be super low.
Mark:
Well, that’s a good question. We’re actually going to see in a later slide about how these two different tax rates interact with each other. So when we are looking at these capital gains tax rates, we’re not looking at them in isolation. The cap gains tax rates actually sit on top of the ordinary income tax rates. Uh and there’s a I’ve got a great visual a little bit later on that will we’ll take a look at and we’ll kind of uh explain that a little bit better ’cause it’s really it’s kind of opaque how the two of these tax rates interact with each other and uh it’s it’s not well understood.
Mindy:
Okay, then I will let you continue.
Mark:
So this slide demonstrates how the stacking of cap gains tax rates works on top of ordinary income rates. So, uh this image is courtesy of Kitces. Uh it’s from an article navigating the the capital gains bump zone when ordinary income crowds out favorable capital gains rates. It’s worth noting that this image was generated a few years ago. So the figures for the standard deduction and and what the brackets are, it’s a little dated, but the underlying concept still applies here.
So in this particular example, I think this is probably a married filing joint couple where they’ve got uh 60,000 of ordinary income and then they’ve got 60,000 of cap gains income. Figuring out what taxable income is, the first thing that we do here is we reduce our ordinary income by either the standard deduction or the itemized deduction. So in this particular example, which is using older rates, the 60,000 is reduced by 24,400 and we’re left with 35,600 of taxable income that’s going to be taxed at ordinary income rates. On top of that is going to sit the 60,000 of long-term capital gains income. And so when we look at the ordinary income, this chunk’s going to be 10%, the next chunk is going to be 12%. And then looking at the cap gains income, we see that, you know, some of this is going to fall into the 0% capital gains zone and then some of it is going to fall into the 15% capital gains zone.
And so, you know, even though, hey, ideally we’d all have, you know, just income in the 0% cap gains rate, that’s amazing. But even comparatively, the 15% bracket is still great because if we compare that, um, you know, income that’s taxed at the 15% rate, the first couple of brackets, you’re looking at 22% and 24% and then I guess if we go back to these other slides, you know, 32%, 35%. So, uh you know, they’re really the more income that you get, uh there really ends up being a a quite a large discount with the long-term cap gains rate versus the ordinary income tax rate.
Mindy:
So your tax rate here is what, 6.74%? But you’re paying $6,000 on $100,000 of income, $95,600 of income, you’re paying $6,000 in taxes.
Mark:
It’s pretty incredible. The effective tax rate ends up being very low with the the long-term cap gains factored in.
Scott:
Is there like a calculator? I I’ve been into building calculators lately. Is there a calculator that does this for people that that talks about, hey, here’s how to think about these, you you have these buckets. You have the 401(k), you have the Roth, you have your after tax brokerage account. You’re going to be an early retiree, so you’re going to withdraw from your, you know, set up a 72(t) or some sort of distribution from your 401(k) and that’s going to be ordinary income, then you’re going to take the deduction, then you’re going to get cap gains or basis recovery from the other portions of it. Is there is there a calculator that does this for folks that you’re aware of or is it all through CPAs or enrolled agents like yourself?
Mark:
If you want to test a particular composition, I know that there are online calculators out there where you could go in, you can input your filing status, you can input, you know, how much ordinary income you have, how much long-term cap gains income you have. So there are tools out there if you want to DIY it. And if you really want to get into the nitty-gritty, um, I haven’t seen this and I have yet to build it out, but somebody could build out a calculator where uh they’re able to sort of calculate the tax for a series of years so that you can figure out what the lowest tax is over a set, which with the approach that I’m pushing, that’s really what I want people to consider is, you know, over a certain period of time, what’s going to be the lowest amount of tax over that period of time.
Scott:
All right, challenge accepted.
Mark:
All right. Now that we’ve got some of the mechanics out of the way, I want to revisit some of the approaches to drawdown that I mentioned initially. So, the first and kind of the standard is the sequential drawdown. And I think the the standard guidance is for a particular account types is first the taxable brokerage accounts, then the tax deferred accounts, then Roth accounts. As alternatives to that, uh I want to illustrate a blended drawdown approach where in a given year, you’re taking some from each bucket. And then if we’ve got more time, then we might also be able to touch on cyclical drawdowns where the composition of your drawdowns aren’t the same each year, but they might cycle through so that you can take advantage of the most favorable aspects of the tax code.
I know this is a little overwhelming to look at, but uh we’ll talk through it slowly. So, this is a sequential drawdown example where in year one, there’s long-term capital gains and then in year two, the income is just ordinary income. You know, you can extrapolate this. It doesn’t necessarily have to be a two-year set, but this is the most simplified example of this that you could think of compared to, you know, doing let’s say a decade of one and then multiple decades of another.
And this first example in year one, we’ve got $64,000 of long-term cap gains income. And before we get to our taxable income, this single taxpayer is going to be able to reduce their $64,000 of income by $15,750. So that puts the taxable income at 48,250. And if we look at what our long-term cap gains brackets are, long-term cap gains for a single taxpayer are taxed at a rate of 0% up to $48,350 of income. All of that $48,000 and change is going to be taxed at a rate of zero. So for year one, there’s going to be zero income tax, which is phenomenal.
In year two, we’ve got the same setup, except the 64,000 is composed of ordinary income. So if we walk through the same steps to arrive at our taxable income, we reduce it by the standard deduction, which is about 16,000, and then we get about 48,000 and change of taxable income. With this ordinary income, first we’re going to be filling up the 10% bracket and then the rest of it is going to be taxed at the 12% rate. So combined, there’s going to be $5,552 of tax due on that ordinary income. So, let’s just say about 5 and 1/2,000. And what I want to compare this with is with a blended drawdown.
So with a blended drawdown, we’re going to use the same figures for income, except in both years one and year two, it’s going to be comprised of 32,000 of long-term capital gains and 32,000 of ordinary income. So we’ve got the same taxable income, we’ve got 48,250, but if you recall back on the previous slide, the ordinary income is going to be reduced by the standard deduction. So even though there’s $32,000 of ordinary income, the amount that’s taxed as ordinary income is only going to be about $16,000. And so with this slide, we see how much is taxed at the 10%. So we’ve basically filled up the 10% bracket that that yields about $1,200 in tax. And then there’s about 4,300 that’s taxed at the 12% rate, which yields about $500 in tax. So combined the tax on the ordinary income is about $1700. And if we continue down to the long-term cap gains, we see that we’ve got 32,000. Well, because our total taxable income is still less than the 48,350, all of that 32,000 is basically not taxed. It’s taxed at a rate of 0%. So the total tax for the year comes out to about 1700.
And so, when we do this in two years, we have combined tax of 3,423. Now, if we compare that 3400 of tax versus the 5500-ish from the sequential drawdown approach, we see that there’s over $2,000 of tax savings between the two different drawdown approaches. The amount that’s taken out is identical between the two approaches, but because of the timing and composition of the income, we’re able to yield tax savings with a blended approach.
Mindy:
These two examples you used a two-year approach, year one and year two. How far out should somebody be thinking about their tax withdrawal strategy, like the tax advantageousness of the different withdrawal strategies? Because, you know, the market’s going to go up and down, your expenses might change. Is it good to think about it in two-year approaches or more than two-year approaches?
Mark:
That’s a great question. We’re not just looking at it in isolation in a two-year period. Um what I would probably do is I would model out the number of years that you’re, you know, tentatively planning for a drawdown and then take a look at what the composition of your accounts is and see like how you can kind of boil that down to a simplified model. So your model instead of it having two years, maybe you’ve got five years and each of those five years might, you know, actually represent a much longer period of time. Mindy, does that get at the question or is that helpful in any way or is there a better way I can try to tackle this?
Mindy:
No, I think that’s really helpful to just I mean, this is just again, it depends on your specific situation answer. But no, that gave me something to think about.
Mark:
Okay.
Scott:
How does this this situation play with something like ACA subsidies and modified adjusted gross income?
Mark:
In these particular examples, it’s just assuming that there’s the same amount of income between years. However, it’s worth noting that there’s probably a little bit more nuance to that because as mentioned earlier, anytime that you’re selling a position in a taxable brokerage account, there is going to be some element of uh return of basis on it and there’s going to be some element of gain. So for purposes of uh Affordable Care Act subsidies, uh your goal is to have your your MAGI, your modified adjusted gross income be at least at 400% of the federal poverty level or lower. And actually we’ll see that a little bit later in another slide. But, you know, with the the makeup of your income, you can basically lower the income for the year and have the same amount of income.
So for example, like let’s say you sell $20,000 of positions in a taxable account, well, you know, not all that $20,000 is going to be taxable. So realistically, in that year, if you’re, you know, let’s say you’re just taking 20,000 out of a brokerage account versus 20,000 of a tax-deferred account, you’re going to show lower taxable income from that brokerage account transaction. If we back up a little bit and we look at the different approaches, sometimes a cyclical drawdown approach might be more beneficial to someone if they’re trying to get their their income lower. Let’s say that, you know, you’re you’re not quite at the 400% of the federal poverty level to be able to qualify for premium tax credit. Let’s say you’re 5 or $10,000 above it. Well, what you might do is you might, you know, create a cycle where some years you have less income so that you’re able to qualify for those subsidies, and then other years you have greater income to be able to make up for, you know, what your average spend is over a series of years.
Scott:
That’s a great answer to it and I I had not considered. So some years you just pay full full premium or or you get less subsidies and some years you you can it’s a control of your income and you may pay while the sun shines or take advantage of what you what’s available in the low-income years and the higher-income years, you pay your own way and and realize those gains. I mean it makes perfect sense to me unless there’s an opportunity for you to just stay below that threshold the entire time.
Mark:
Yeah, exactly. I think that’s a good way to look at look at it. I think we kind of get this assumption that like, well, hey, I need 50,000 to live on for the year, so I’m going to have to take 50,000 each year. Well, you know, there are some games that we can kind of play with this stuff to be able to take advantage of it. So maybe you can’t be below it every year, but maybe you can sort of cycle through the income that you take so that some years you can and some years you’re above it and you pay full price.
So here’s the recipe for zero federal income tax on over 128,000 for a married couple.
Scott:
And what is modified adjusted gross income in this situation? Could you let let us know that as you describe this, so we know the ACA…
Mark:
I honestly have to look up exactly what the definition is for modified adjusted gross income for purposes of the ACA. Uh throughout the tax code, they do refer to MAGI and sometimes MAGI is calculated a little bit differently for different things. But essentially your modified adjusted gross income, uh it’s probably your total income before taking into account your standard deduction. So it’s looking at the sum of your capital gains income, the sum of your ordinary income, if you end up having any earned income for the year, it’s taking the sum of your earned income. And I believe it also some types of income that might be non-taxable such as certain types of interest, I do think for sake of the magic calculation that that’s going to be added back in.
Mindy:
So I see the basic formula is MAGI equals AGI plus untaxed foreign income, plus non-taxable Social security benefits, plus tax exempt interest. It seems like if MAGI is going to be a thing in your calculations, you have weird income and you would know it, right? Like I don’t have untaxed foreign income or or non-taxable social security benefits. If I did, then I would know that MAGI would be affecting my ACA subsidies, right?
Mark:
Yeah, exactly. If you’re if you’re taking advantage of the foreign earned income exclusion or if you’ve got certain investments where the interest isn’t going to be taxed, you’ll probably be aware of that. Uh the one that just might be a curveball for some folks is with their social security income. But I think most folks probably assume that all of their social security income is taxable, even though only up to 85% of it’s taxable. So that one’s probably less of a curveball. Um so yeah, I think for for most folks, there’s probably not going to be a big surprise or really much of a difference between their adjusted gross income and their modified adjusted gross income uh for sake of the ACA subsidies.
All right, so the recipe for zero federal income tax on over 128,000 for a married filing joint couple. Step one is to draw from tax deferred retirement accounts until your total ordinary income reaches the standard deduction or your itemized deductions if your itemized deductions exceed the standard deduction. So for 2025, this is 31 and 1/2,000 for a married couple. The next step is to harvest long-term capital gains until your qualified dividends and long-term capital gains hit the 0% cap gains limit, which is 96,700 for 2025. And the last is, you know, if you still need more income, if, you know, 128,000 doesn’t cover you for the year, then consider drawing on non-taxable accounts such as Roth and HSA.
You know, in order to take advantage of of this blended approach, there are some things that you can do to set up your taxable accounts for success. The first thing is that you should allocate portfolio assets to the wrapper based on income type. And I guess I should back up and there’s another assumption at hand here and then this is that you’re looking at all of your different accounts in aggregate when thinking about your portfolio composition. So it’s not saying, hey, I need, you know, this exact 60/40 split on the taxable account, and then the same thing on the tax-deferred account, and then the same thing on the Roth. It’s kind of looking at all of it as one big pie.
And so in doing that, you can put certain investments in certain types of wrappers to take advantage of the beneficial tax aspects of that type of income and that type of wrapper. So with taxable brokerage accounts, ideally you’re going to be holding stocks for long-term capital gains and qualified dividends. You don’t want to be holding things that would pay out ordinary income. So, you know, you don’t want to hold a ton of bonds in a taxable account. Ideally, what you would do is in your tax-deferred account, that’s where you would place stuff like bonds, gold, managed futures, REITs, you know, stuff where you’re it’s not such a slam dunk that you’re going to be able to get long-term cap gains treatment for it. And the reason being is tax deferred accounts, distributions are going to be taxed as ordinary income anyways. So it’s perfect for it to hold these uh types of investments that kick off ordinary income.
And then with uh Roth accounts as well, you know, shoot for the moon with the Roth accounts. Uh typically you’re going to want to have stocks in there for growth. Ideally, you you know, you’re you’re trying to get the biggest values possible in your Roth account because you’re not going to have to pay any tax on it. And the other things to set up your taxable accounts for success is, you know, use the retirement accounts for rebalancing. So, you’re primarily going to want to use the tax-deferred and the Roth accounts when you need to change the composition of your portfolio. And again, a to reiterate the reason why is because anytime in the taxable account that you’re selling a position, you’re going to be recognizing gain or loss. So, really the only time that you’re going to want to be selling positions from the taxable account is when uh you know, you’re you’re taking those funds out to live on or if you’re trying to do some gain or loss harvesting.
All right, so based on what we’ve covered so far, I have two commandments. So the the first commandment is do not waste the standard deduction or the itemized deduction. So, you know, fill this amount with ordinary income from tax-deferred accounts or execute Roth conversions. And the other commandment is do not waste the 0% long-term cap gains bracket. Harvest gains even if you don’t need to take out the funds. That way, there’s going to be less gain in the future or potentially you’ll have some losses to be able to harvest.
And then um, I think we did want to touch a little bit on healthcare considerations. I know we did just talk about this a little bit, but maybe it’s worth uh reiterating or going into a little bit more detail. So, both Medicare premiums and premium tax credit, which is the uh tax jargon name for the ACA subsidy if you have a marketplace policy, depend on modified adjusted gross income. So for Medicare premiums, you you know, you might hear people talking about IRMA. Well, that that’s short for income-related monthly adjustment amount. Additional Medicare Part B and Part D premiums start to kick in when you’ve got MAGI above 106,000 for a single taxpayer or 212,000 for a married filing joint taxpayer. And it’s interesting to note that IRMA is determined using brackets looking back two years. So your 2023 MAGI is used to determine what the 2025 income related monthly adjustment amount is, or basically the additional premium you’re going to have to pay.
And for early retirees, the the implications for premium tax credit are are going to be more relevant. And you know, this is worth stating that maybe something’s going to change about this. There was a big battle over the the budget about whether they were going to keep the enhanced subsidies in place or not. But tentatively for tax years after 2025, premium tax credit is only available to households between 100% and 400% of the federal poverty level. And so based on what percent of the federal poverty level the household is at, the retired contribution to the premiums is going to be calculated based on that. So basically, the the big thing is, if you can stay below the 400%, there’s a good chance you’re going to get a subsidy and your health insurance costs are going to be capped.
So the way that they calculate the premium tax credit is it starts with what the benchmark plan premium is, and from that they subtract the required contribution, which is calculated based on, you know, what percentage of the federal poverty level your household is at. Basically, for this, we’re we’re kind of getting, you know, one of the the best ways to be able to take advantage of this, if your average income is going to be above the 400% of the federal poverty level would be potentially to cycle through income on years or to cycle through the composition of your income because chances are, if a greater amount of your income is being made up from selling securities in a taxable brokerage account, you’re going to have more of that non-taxable return of basis. That all makes sense, guys? Are there any other questions we’ve got?
Mindy:
That all makes a lot of sense and I am super excited to dive into this again. Um after, you know, I have to pay attention to the conversation when we’re having the conversation. Then I can go back and take notes and be like, oh, what about this? What about this? and start applying this to my own plan, which I had not even thought about yet. But I think the blended drawdown with those potential lower tax years spread out over a longer period of time is something that I’m really going to need to take into consideration. But this is like this is so exciting for me. I I really love this tax nerd stuff. If I knew then what I know now, I would have studied to become a CPA, maybe.
Mark:
Awesome.
Mindy:
All right, Mark, for somebody who is saying, I really like Mark, I really like how he handles this stuff, how can they get in touch with you?
Mark:
Yeah, I would say the best way to get in touch with me is if you could send me an email. Uh so you can email me at markbtaxfi@gmail.com. So m-a-r-k-b-t-a-x-f-i@gmail.com.
Scott:
Like this was really fantastic. Thank you so much for sharing your wisdom here. I think that what this shows is that there’s a lot more nuance to the way that you think about withdrawals and investing in these tax-advantaged accounts than can be simply described with one set of rules, um but the two commandments you have are a great starting point for this. And this concept of cycling, um is really important and and there’s a a lot of thought and research that can go into this to save you those few extra thousand bucks and taxes on withdrawals from these accounts. So thank you so much for sharing this with us. I learned a lot today.
Mark:
Thanks so much, you guys. It was it was great being on the show. Yeah, I guess my favorite tax answer whenever somebody asks me something is is it depends and uh you know, questions of drawdown during retirement, like other tax answers, it’s typically it depends. So it’s it’s good to apply it to your particular circumstances.
Mindy:
Yeah, it seems like ultimately once our listeners have a good grasp of what they think they want, they should have a conversation with a tax professional just to make sure that this is the most advantageous for their tax bill. Uh so I appreciate you introducing all of these concepts to our listeners and uh thank you so much for making this lovely presentation. We appreciate your time, Mark, and we’ll talk to you soon.
Mark:
Thanks so much, you guys. Take care.
Mindy:
All right, Scott, that was Mark and that was a fantastic PowerPoint presentation that he walked us through. What did you think of his strategy?
Scott:
I thought it was great because I think the, you know, Sean Moliney and Cody Garrett talk about, hey, withdraw from the taxable first, then the the 401(k), then the Roth in that order. And I think that this blended approach kind of takes that and maybe gets a gives a uh folks another consideration point in that overall discussion. I am a little bit more of a subscriber to this philosophy personally because of that long-term, you know, projection of tax rates going up. I really hate the idea of having a bunch of my wealth pre-tax and betting implicitly on tax rates staying constant or even going down over the course of my life. That’s probably because I’m young and ambitious and, you know, have a lot of a lot of like time ahead of me for things to compound and a lot of creative ways to add money to the pile even though, you know, I I’ve I’ve hit my financial independence number. So maybe some other people would would not believe that, but I think that’s a real risk. And so I think I like this approach of at least to some degree withdrawing from the pre-tax accounts earlier. And, of course, there are near-term benefits, you know, to a tune of a few thousand bucks. But it’s a small consideration, but why not take every last dollar of tax optimization as an early retiree when that’s the game? So, what do you think, Mindy?
Mindy:
Well, I think that Mark presents an interesting alternative and ultimately, you are going to need to look at your specific situation and see if this makes sense. Obviously, if you don’t have any long-term capital gains available to you, the strategy might not work. But I love presenting differing points of view because it gives people other options that they may not have thought of, but that might work out really advantageously for them. So I just I love that he shared this. Now I have to go in and look at all of my different types of accounts and talk to Carl and see which one would work for us. But I love having options and that’s what this is all about. So I am so thankful that Mark listened to our show, made this amazing PowerPoint presentation for us, which we will feature on our website at biggerpocketsmoney.com/resources in our resource library. And while you’re there, poke around and see what other kind of resources we have available for you. But I think that this is such a great option for our listeners. So I’m so thankful to Mark for joining us and uh sharing his his ideas.
Scott:
Absolutely. Well, should we get out of here, Mindy?
Mindy:
We absolutely should, Scott. That wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench. I am Mindy Jensen saying, cheerio, deario.
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