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How To Draw Down Your Retirement Accounts-735x1102-PTImagine you’ve worked hard and saved for retirement. You have assets in taxable accounts, traditional retirement accounts, and Roth retirement accounts. When you retire, which accounts should you withdraw from first?

That’s the question I posed to Stuart Ritter of T. Rowe Price. In the interview that follows, Stuart does a great job of discussing the approach most should follow. He then goes into more details and exceptions that may apply to some individuals.

He also talks about why the sequence of drawing down your retirement assets is so important. In addition to significant tax advantages, taking the right approach can give retirees more options later in life.

Here’s an audio of the interview, followed by a transcript.

Rob: Stuart, welcome to the show.Stuart Ritter: Thank you for having me.

Rob: We were just chatting. T Rowe Price is headquartered in Baltimore?

Stuart Ritter: It is.

Rob: And you’ve got the Orioles playing the Tigers right behind you right now?

Stuart Ritter: Yes. As we are speaking. The Orioles won the first game and at this very moment they’re a little bit behind but I’m hoping they pull ahead. So, if in the middle of the recording you hear a big giant roar, that’s because we’ve moved ahead.

Rob: Did you go to the game last night or yesterday?

Stuart Ritter: Unfortunately, I did not get that chance.

Rob: You know, the nationals play today at 3:00 pm.

Stuart Ritter: Yes.

Rob: I’m not able to go to that. Although, I am going tomorrow to see the Ohio State Buckeye’s play Maryland, so…

Stuart Ritter: There you go! I graduated from Maryland so we might have to stop this recording right now.

Rob: We might because as you’ve probably guessed, I’m a Buckeye fan so, yeah. Although, you know, Virginian Tech beat them so, I don’t know. The prognosticators think that Maryland will lose but you never know. Virginian Tech beat us in Columbus and that’s not good. Anyways, I appreciate your time today. Why don’t we just start off with— well obviously you’re with T Rowe Price but why don’t you just give us a bit of background about who you are and what you do?

Stuart Ritter: Sure. I’m a senior financial planner here. I have the certified financial planner designation. The way I describe my role here at T Rowe Price is to talk about the fact that, in the health industry there are clinical physicians that meet with patients everyday and then there are research physicians that work in a lab. My role here is to be a research financial planner. My role is to understand what issues people are facing, what questions they have and then do the research to come up with new and better ways for them to answer those questions. Obviously, I then share that with the folks at T Rowe that are meeting with people every day as well as talk to people like yourself, who are also trying to help people understand the issues they are facing and make good decisions so they can achieve the goals they are trying to achieve.

Rob: Okay, so do the results of your research ever get published anywhere?

Stuart Ritter: All the time. Everything from media like Money Magazine and The Wall Street Journal to articles that we, here at T Rowe Price, put on our website or our own publications so that is very much one of the ways we try to share that information with people.

Rob: Okay. Good. Forgive me. As people know, who have been listening to this podcast, I’ve been fighting a cold that seems like it’s gone on forever so I’ll try to keep my coughing to a minimum.

Stuart Ritter: No problem.

Rob: I was doing a little research on you. I like to research my guests. And I noticed you teach a personal finance course at John Hopkins University. How did that come about?

Stuart Ritter: I did. I was teaching at Howard Community College which is one of the local colleges’ personal finance course and the folks in one of the programs at Johns Hopkins University wanted to start up a personal finance course for their undergraduates and I knew somebody, who knew somebody there and was asked to put that class together. It was myself and two other professors. I had this fabulous opportunity for three years to teach personal finance to undergraduates— mostly seniors with a couple of juniors in there. This was a couple of years ago when my wife and I had our third child. I had to be home a little bit more so I stopped doing that. But for a couple of years I had the opportunity to do what I was describing earlier, to take a lot of this complicated personal finance stuff and figure out ways to communicate it to people who are not as steeped in the topic as you and I are and help them understand it well enough so they can make good decisions.

Rob: Do they still have that course there today at Johns Hopkins?

Stuart Ritter: I don’t think they do. I think they’ve stopped offering it. They were talking about offering it again, but I’m not sure it’s there. Financial education, overall, is getting more attention so you do see more schools picking it up. I think there’s a recognition that helping people understand these topics, helping them make better decisions so there are more initiatives to do exactly that. And certainly more initiatives to get to people younger. Decisions that people are making in their early 20s now are very different that the ones made a generation ago. Retirement was a DB plan. You really didn’t need to know much about it until you were getting ready to retire. Health care was—

Rob: A DB plan… is that a defined benefit plan?

Stuart Ritter: Yes, I’m sorry. It’s a defined benefit pension plan.

Rob: That’s okay.

Stuart Ritter: One of those old world ones!

Rob: I wish I had one of those.

Stuart Ritter: Yes, yes. There’s more effort now to help people understand what’s going on. And of course, that extends to folks who are getting close to retirement too as well. At Hopkins I was lucky enough to be able to stand in front of some wonderful students in a classroom for a number of semesters and that’s just a continuation of what I try to do here at T Rowe which, again, helping people understand the issues they face and make good decisions.

Rob: Do you remember what text book you used in that class, if you used one?

Stuart Ritter: I did, and I must confess, I don’t remember the name of it. It’s probably out of print by now anyways. They change them on a regular basis. One of the things we did use though, were a couple of more popular off-the-shelf Amazon kinds of books. There are a number of them out there that are helpful to folks—

Rob: Which ones were they? Which ones did you use?

Stuart Ritter: Well, it’s probably not something I can share with you in this venue.

Rob: Oh, okay.

Stuart Ritter: My point is, folks can learn a lot from a number sources. It doesn’t necessarily have to be an academic text book. There are a number of books you can read and get more education yourself on a particular topic.

Rob: Did you find any topics (that you were teaching in personal finance) that students seems to struggle with the most?

Stuart Ritter: For younger folks, going through the process of prioritization was somewhat of a new concept for them and something they recognized they needed help to work through. When you’re a student, your expenses are way more than your income because you’re paying tuition. So, having to make tradeoffs based on a set income really isn’t part of the decisions they’re making. A lot of student and parents will set budgets and have to work within that but the idea that when you go out into the working world and now you’re earning $40,000 a year and you have to make your housing and transportation, food and entertainment, retirement savings and all that work within that very defined amount of money, was an experience none of them every had before. So, I took them through a number or exercises to help them go through the process of recognizing that right from the very beginning you’re making those tradeoffs and you’ll continue making those tradeoffs throughout your entire life. It’s not as if you get to 30 years old, get a raise and suddenly you don’t have to worry about money again.

Rob: Right, right.

Stuart Ritter: So you have to recognize it’s something you have to do throughout your lifetime. Getting an early start on making those good decisions was something these students had never dealt with. It was fairly new to them.

Rob: Yes. I get questions about prioritization all the time. Should I pay of my credit card debt first or save for retirement? Should I save in a 529 plan for my child’s education or save for retirement? We’re making those tradeoffs every day when we spend money on everyday things as well. So that is a tough issue, and it’s one of those where there’s just no easy answer. Sometimes we try to make it easier than it is. But, yeah, that’s a tough one.

Stuart Ritter: Yeah, you got it.

Rob: One question I answered recently was whether you should pay off your home or save for retirement? That’s another question that’s always a big one, should they pay off their mortgage early? Talking about prioritization, this is a perfect Segway. For folks who are in retirement or nearing retirement, many of them have multiple account they can draw from for retirement income. They can have their traditional 401k and IRAs. They can have Roth retirement accounts and taxable accounts. Then on top of that different forms of annuities whether it’s social security or whatever. The question is, how should they go about thinking through which accounts to draw down from first? That’s what we need your help with today, Stuart. I know that’s a very broad question, but how should one start to go about thinking through that question? What account types do they draw from first?

Stuart Ritter: Let’s start with the guidelines. I’ll answer the question directly so that people have a starting point and recognize, “Well, for my personal situation I’m going to have to make adjustments.” But, from that starting point, it makes it easier to discuss the pros and cons and whys and when to make a different decision. Generally speaking, for most people it’s reasonable for them to draw from their taxable accounts first, their tax-deferred accounts second— those would be things like traditional IRAs and traditional 401ks. Then from their tax-free accounts, third. That would be Roth 401ks and Roth IRAs. That changes a little bit when you get to 70 and a half where required minimum distributions come into the picture in which case, legally, you have to take a minimum distribution from your tradition accounts— traditional 401ks and IRAs. So when you reach that age, then you would want to take that required minimum distribution out first and then the rest from taxable first, tax-deferred second, and tax-free third.

Rob: Okay. That’s just the ‘general’ rule of thumb. As you’ve said, there may be exceptions or different results in specific circumstances which we’ll get to, but with the general rule of thumb you just laid out for us it’s taxable accounts, tax-deferred, then Roth. And, of course, factoring in the required minimum distribution. Why is that the general rule of thumb?

Stuart Ritter: Well, the taxable one is fairly easy. The distinction between all these accounts is the tax treatment. Let’s assume I’ve got the exact same investments in all three accounts. So let’s take the investment piece out of the equation for a moment. What it means is, whatever I’m invested in, in my taxable account, every year I pay taxes on some of those earnings— whatever realized gains or short-term distributions that interest are. Essentially, the growth in my taxable account is lower. It’s growing more slowly than the growth I’m getting in my tax-deferred and my tax-free accounts because I have to pay taxes every year in the taxable accounts but I don’t in the other ones. There’s more left in those accounts and therefore the same growth is happening on more money so I earn more. That means, if I’m going to choose where to withdrawal my money from first, it makes sense to withdraw it from the account that’s growing the slowest because, if I leave the other accounts alone, the longer they have to grow, the more money I’d end up with at the other end. If I took my money out of a tax-deferred account instead, then I’d have less money growing without the tax drag on it. I’ve left money in a taxable account but I’m paying taxes on it every years so it’s not growing as fast… better not do that one. Take the money from the taxable account first because it allows the money that’s got the tax benefit to continue growing. And it’s growing at a faster rate.

Rob: Okay. Just thinking this through… the Roth, of course has no tax consequences when you take it out?

Stuart Ritter: Right.

Rob: As between the taxable and the tax-deferred, I guess the tax-deferred would have the most significant tax ramifications because it’s coming out and being taxed at 100 percent ordinary income levels. A lot of it’s going to be long-term gains and not all of it’s going to be taxable. You’re going to have some basis in it, presumably?

Stuart Ritter: Right. And that tradeoff gets into when I’m making the withdrawal… What’s the effect for my personal situation. What tax rate am I in? What other capital gains might I have? Those are the things where, now it makes sense to go to that second level and say, “Okay, I know what the starting point is but now let me look at what my personal situation is to make sure that still makes sense.”

Rob: Right. But sticking with the general rule of thumb for a moment, I guess if I understand it right, by starting with your taxable accounts, you allow your tax-deferred accounts and Roth accounts to continue to grow and enjoy the tax benefits they offer. Then again, on the taxable side, the taxes you’re going to pay often times are long-term, capital gains and it won’t be on 100 percent of what you withdraw because some portion of it’s going to be part of your basis. Is that the rationale behind this general rule of thumb?

Stuart Ritter: That’s part of it. Absolutely.

Rob: Okay. Just playing the devil’s advocate here, I’m curious. You do a lot of research at T Rowe Price. When you read about other strategies, are folks in the industry pretty much in agreement with that as a starting point? There are exceptions, but that’s the starting point. Is that the general rule of thumb or are there some people out there who actually disagree with the sequence you’ve just given and actually propose a different rule of thumb?

Stuart Ritter: Well, both of those can be true at the same time. Most folks agree that it’s the right starting point. But, for any guideline anybody gives, as you know, there’s always somebody who says, “No, no, no, no! That’s not the right one.” But, to a large degree, that is the consensus. The starting point would be taxable first, tax-deferred second and tax-free third.

Rob: Okay. I know we’re going to get to some exceptions but one thing I was curious about is, you mentioned the required minimum distribution that kicks in at age 70 and a half. For folks who are in retirement and not yet to the RMD age— Let’s say they’re in their 60s. Should they be looking at which accounts to draw from? Or should they do a Roth conversion, if need be, to effect what the RMD will be when they hit 70 and a half? Should they take into account, strategies to lower the RMD? Is there ever a time when they should implement strategies to try to lower their eventual required minimum distribution?

Stuart Ritter: I would say you shouldn’t do something just to lower the required minimum distribution, because that is far too narrow of a definition of success. There are a lot of things people do to lower their taxes that leave them with less net worth at the other end because they focused on just one aspect instead of seeing the big picture. Doing something just so your RMD is lower may not be the right thing to do in the long term. What I would say is, if you’re looking at things from a macro-level and you’re thinking about what affect this will have one your cash flow, what affect it will have on your net worth and not just today, but in the long term.

If you’re using that as your definition of success, that’s then how you evaluate whether any particular strategy makes sense. It’s not just, “If I do this, will it lower my RMDs?” It should be, “If I do this, will this give me more money in the long run?” From that perspective, there may be some things you can do that modify that starting point that will end up giving you more money at the other end. For example, there are some folks that say it’s all well and good to take the money from the taxable account, but figure out that perhaps if you take a little bit from your tax-deferred account and fill up the tax bracket you’re in— Forgive me, I don’t know the tops of the tax brackets offhand. But, if you’re in the 25 percent tax bracket maybe you withdraw enough from your tax-deferred accounts to stay in the 25 percent tax bracket. So you’re only paying 25 percent on that required minimum distribution.

That way, when you get to 70 and a half and maybe have to take out a larger amount that otherwise would have had some of it taxed at the 28 percent tax bracket, you’ve avoided having it taxed at 28 percent because you took it out earlier at the 25 percent mark. That could certainly help you out. Now, it requires a lot of calculations such as knowing how far into a tax bracket you are. So, one of the tradeoffs with some of the strategies are the extra complexity and level of effort that it introduces into what’s otherwise a fairly simple approach. You can look at some of these things and say, “Yeah, that may help me out,” but just be aware of what kind of complexity and effort you might be introducing when you’re doing those.

Rob: Yes, that’s very helpful. And you did hit on my thinking which was, if it makes sense, your RMDs might put you into a higher tax bracket, right?

Stuart Ritter: Yes.

Rob: So, if you know that a few years in advance, you might either do through a Roth conversion or by simply withdrawing from 401ks and IRAs, you might be able to pay a lower tax at that time and at the same time reduce your RMDs down the road that would keep you in a lower tax bracket. As you said, that requires a lot of calculations and even some assumptions about future tax rates.

Stuart Ritter: Exactly. Both… what they will be, and where you will be. One of the things you also need to recognize is that withdrawals aren’t steady. We don’t live our lives where we’re spending— we spent a certain amount the first year when we got out of college and our spending is exactly 3 percent higher for inflation for every year after that.

Rob: Right, right.

Stuart Ritter: We spend a certain amount, certain years. One year we’re buying a car. One year there’s a medical event. So, our spending goes up and down with somewhat frequent spikes. The same thing will happen in retirement. You’ll go a couple of years where you’re spending a certain rate, then one year you take that ‘big trip’ you’ve always been thinking of. Or one year you’re buying a new car or you have a major medical event. There are spikes in spending and that’s part of the reason we have Roth decked as the last thing to withdraw from. Because, if I’ve got a $40,000 lifestyle and one year you suddenly have an extra $20,000 of expenses… Maybe it’s that trip. Maybe it’s the car. Maybe it’s the health expense. Maybe it’s all three in the same year. If I have a 50 percent increase in the amount I’m withdrawing, I’m in the higher tax bracket. If I’m pulling it all out of my traditional, tax-deferred accounts, all that money is considered taxable income so it affects the taxability of my social security benefits. It effects my Medicare premium. And as I mentioned, it could push you into a higher tax bracket. All of those things lead us to say, if the year you have this big spike is the year you’ve reserved your Roth money and it’s still available, you can take that extra $20,000 (from my example) out of the Roth and it all comes out tax-free. So you’re not affecting your Medicare premium or your social security benefits. It gives you a lot of flexibility for the real world and for what really happens in terms of the way people spend their money. It’s not this smooth curve that some of us in ‘the ivory tower’ sometimes start with, in our modeling. It’s what goes on in the real world. It’s those spiky expenses. In a way, it gives you flexibility that doesn’t end up costing you more money because you had this had this giant taxable event in one year.

Rob: That’s a fantastic point, Stuart. I hadn’t thought of it that way. The Roth, if you have it, will give you the ability to handle those spikes in your spending. And also the fact that if you’re taxable income does go up it affects a lot more than just what tax bracket you’re in. As you said, it could affect social security, Medicare—

Stuart Ritter: Yes.

Rob: That’s terrific. Very helpful. Let’s get to the exceptions. We’ve got our rule of thumb; taxable, tax-deferred, then Roth. Obviously factoring in the RMDs when you reach 70 and a half. Are there times when folks should consider a different approach?

Stuart Ritter: Yes. One of them is what I’ve just described. I’ve got this spiky expense, so theoretically, I could handle it by making my full withdrawal from a tax-deferred account. That would be a situation where you’d go to the Roth bucket and pull the money out from there even if you still have some money in the tax-deferred account. There can also be the opposite. You’ve got a particular year where your tax rate particularly low (for whatever reason). You didn’t spend much that year. You didn’t make many withdrawals that year. Your tax rate is low. That might be the year where you convert some of your traditional money to Roth. Because, if you know you’re going to be in a low tax bracket, paying— when you do the conversion, whatever amount you convert is considered taxable income, so if you pay the taxes then at the lower rate and you expect your rate to be higher later on, then you make the withdrawal from the Roth and avoid that higher rate later on. As you get a sense of what your base lifestyle is and what your situation is, as you start seeing that vary, that’s when you should start thinking about what other things you might do (that I eluded to earlier) that would, over the long term, lower your taxes and expenses and ultimately give you more money to spend.

Rob: Yes. In that latter example, if you’re under 70 and a half, you don’t have RMD and you’re living primarily off taxable accounts, you may have very little ordinary income, right? You’ll have some capital gains and some ordinary income, presumably. But you may have relatively very little and this may be a good time, as you’ve just described, to convert some of your traditional retirement accounts over to a Roth?

Stuart Ritter: Yes. And, you and I have both used a word I want to highlight and that’s the word, thumb. When you do a conversion… When you take some of your tax-deferred money and convert to a Roth, you’re allowed to do whatever amount you want. It’s not as if you have $100,000 in a traditional IRA and you have to convert the entire amount over to a Roth. Boy, if you did that and had $100,000 income, that would have a huge impact on your taxes. You can convert the amount you want so there is flexibility (depending upon your situation) on when you do it, whether or not you do it, and if so, how much you convert.

Rob: Yeah, that’s a great point. I have a few specific questions. I’m wondering— and maybe it’s just a tax analysis, but a lot of folks in retirement are still working part-time. My mom who’s here visiting has hit 70 and a half so she’s got the RMDs and I’m trying to help her with all of that. But she works part-time as a substitute teacher and still has some earned income. I’m wondering, does that effect the equation any way? Again, I suppose you could probably just analyze what tax bracket you’re in and do some analysis there but does the fact that some folks might work part-time in retirement affect the sequencing of which accounts they should draw from?

Stuart Ritter: It may. The way they would play into the discussion we’ve had is, first of all, if you started taking social security benefits and you’re below your full retirement age (you can go to the social security administration website to try and figure out what that age is for you personally) the check you get from the social security administration is affected by how much you’re earning. If you earn over a certain amount they— the language is a little weird here but they don’t give you the full amount. It kind of gets put back into a later paycheck so it’s something you’re going to want to think about if you’re still working in retirement and considering whether or not to start your social security benefits. Make sure you spend some time researching what effect working will have on your social security benefits. Now, let me make this clear. It’s not as if you’re missing on benefits. It’s not as if there’s some kind of dollar-for-dollar elimination that goes on. It’s when you get the benefits. But there is an effect so you’re going to want to do some research on that. The other thing that continuing to work specifically past age 70 and a half does, is, all these required minimum distributions that we’re talking about? You are required to start withdrawing money when you turn age 70 and a half, from whatever traditional IRAs and 401ks, except from the 401k from the employer that you’re actively working for. So, if your mom is eligible for the 401k plan there, when she reaches age 70 and a half, she gets to avoid taking required minimum distributions from that particular 401k. Which also means that if you have money in an old employer’s 401k and your new employer (the one you’re currently working for) allows you to roll that money in, you have the opportunity to take the money from that old 401k and roll it into the new 401k. And, since you’re an active employee there, you now get to avoid RMDs on all of that money rather than if you had left it in the old 401k because once you reached age 70 and a half, since you’re no longer working for that old employer you’d be required to take that money out.

Rob: That’s a great point. I just did a podcast on when you should consider doing a rollover and I mentioned the 55 rule of, if you leave your employer where in the year you turn 55 of later you can take your withdrawals without the 10 percent penalty. But I neglected to mention the fact that if you continued to work past 70 and a half, it delays the RMDS. So, that’s a great point. It’s very helpful. Stuart, as I listened to your answer, what struck me was just how much you obviously enjoy this stuff!

Stuart Ritter: Well, thanks. I do. It’s— call me a geek, but I find it fascinating. More importantly though, this can make a big difference for people and their lifestyle and what they want to be able to do. You know, we’re talking about terms like retirement and tax-deferrable but what we’re really talking about is people who want to go out for dinner on the weekends, take a trip to see the grandkids and go travel and make sure their roof doesn’t leak and pay for the hip replacement when it’s time to do that. And our opportunity to be more effective in doing that— to make decisions about our money that allow us to do those kinds of things is something I think is really helpful to folks so I’m glad again, that you’ve had me on the show to help people hopefully understand this better and learn from what you’re sharing with them so they can make those better decisions.

Rob: Yeah, it absolutely does effect real life. I do have a few more questions for you if I can keep you for just a few more minutes.

Stuart Ritter: Sure. You bet.

Rob: Okay. Asset allocation. When you’re saving for retirement there are general rules of thumb about what sorts of assets you should have in a taxable account versus a tax-deferred account. For example, they’ll say REITs and bonds should probably be in a tax-deferred account if possible. A muni-bond which has tax breaks should be in a taxable account. I’m wondering though… If you follow those rules of thumb and you get to a point where you’re starting to take assets out and you’re taking assets out of, say, your taxable account to begin with, as you described, any guidance on how to readjust your asset allocation and asset location as you do this? Or do you just kind of leave things where they are and take them out and go from there?

Stuart Ritter: We are doing research on this right now. What I will say is that the asset allocation decision trumps the account decision. It is far more important that you have an appropriate asset allocation, and appropriate diversification than it is that you’re taking money from a taxable account versus a tax-deferred account. What we want to avoid is someone who says, “Okay, I have all of my bonds in a taxable account.” I’m just making something up. “So, I’m going to spend all of my bonds first so I end up with an asset allocation at age 75 that’s 100 percent equity.”

Rob: Right!

Stuart Ritter: That is not where we want it to go.

Rob: Right.

Stuart Ritter: Making sure your asset allocation is appropriate is far more important—

Rob: Is— Sorry, I didn’t mean to cut you off. Is it more important than asset location as well?

Stuart Ritter: Making sure your overall asset allocation is appropriate is more important than asset location. It’s how you can nuance that asset allocation and be more effective in those decisions, but you don’t want to go so far with that, that you’ve violated some more important role. It goes back to the point I was making earlier about people saying they want to lower their taxes but do something that sees them ending up with less money overall. You don’t want to let something that’s farther down the funnel have you make a decision that overrides something at the beginning which will have a bigger impact on your overall livelihood.

Rob: Right. And I suppose a lot of folks who have bonds in a tax-deferred account and equity funds in a taxable account, if they were to start to draw down those equity funds in their taxable account, they could pretty simply go into their retirement account and move some of the bond funds to maintain whatever their asset allocation is— move some of those bond funds over to an equity fund within the retirement account.

Stuart Ritter: There you go. So if I’m doing something and I’m making sure that asset allocation is staying the same, as long as I recognize I need to do that and any additional complexity involved with all that, then it makes sense. I just want to make sure people aren’t just doing one step and not the other where they can get themselves into trouble.

Rob: Okay. One last question for you. Some folks want to design some of this with plans to leave money for their children or others. If that is important to somebody, how does that effect the sequencing from which they draw funds during retirement?

Stuart Ritter: There are two ways it effects it. One is, what we’re talking about is based on a financial goal. The financial goal explicit in this discussion is, me and my retirement; how long I might live, when I’m going to use the money, how my expenses happen and making good decisions to meet the financial goals I’ve set which is my own retirement. The first way it affects it is, now we’re talking about a different financial goal. We’re not talking about me using the money in my own retirement, we’re talking about— for example, my kids or my grandkids using the money after I die. That means it’s a different goal with a different time horizon which implies different investing and so forth. So the first thing to bear in mind is, the way to think about it, “I’m no longer making the decisions based on my own retirement, I’m making the decisions on what would be most helpful for my kids or grandkids.” It’s another reason to withdraw from Roth last because if your heirs get a Roth account, when they make those withdrawals— and there are required withdrawals after your death from those accounts (with some exceptions for your spouse) then they can take that money out without any tax consequences to themselves. On the other hand, if they inherit a traditional account, just like you, when they take the money out, it counts as taxable income. So if they’re in a certain tax bracket and they inherit a traditional account and are required to take money out, now they might be in a higher tax bracket. It also affects other things that are triggered off of adjusted gross income and so forth. But, if they inherit a Roth account, the Roth allows them to take the money and not have it be included in their taxable income. They avoid all that stuff. So the first thing to think about is that this is a different financial goal and you need to be making decisions about it differently. The second one is, I still might need this money. It’s all well and good that I want to give this money to my children or grandchildren but the reality is, if I end up with a major health event I still might need this money to pay for that. If I suddenly need long-term care I might need this money to pay for that. I might even change my mind and decide I might want one last bang-up trip around the world— I might still use that money. So it makes it a little tougher to decide how to do it because we’ve got two different financial goals that might blend into it. It’s important to recognize if that’s the case. If you do, then— as you started the show with, there might not be an easy answer but at least you’re thinking about the right things as you’re coming to the decision.

Rob: If you’re going to hold off on the Roth accounts to give to your heirs that kind of works out nicely in terms of the sequencing with taxable, tax-deferred and Roth anyway. But I wonder about the taxable, particularly if you have assets in a taxable account with significant unrealized gains. Does that effect the ordering? Because you might get that stepped-up basis—

Stuart Ritter: Excellent point.

Rob: How does that affect or factor into it?

Stuart Ritter: If I die, any unrealized gains I have in an investment I have essentially disappears because the basis I had when I bought this thing 30 years ago gets stepped-up to the value on the day I die. Therefore, at that point there is no gain so there’s no tax. Something you definitely want to keep in mind as you’re doing this. And get that balance between, “I want to leave this for my kids but I still might need some money.” And recognize that if you’re not taking the money from a taxable account because that’s your strategy and you’re going to start by taking if from the tax-deferred accounts, then that’s going to have an impact on how much tax you’re paying and affect on your cash flow. Just make sure you’re thinking that all through as you’re deciding what strategy you want to put in place.

Rob: Right, right. Well, this has been terrific. Very informative, even in the midst of the Orioles playing baseball. I can’t believe I was so insensitive to pull you away from that but you’ve been a good sport and I do appreciate it. Particularly on a Friday afternoon. I guess I’ll kind of end it with, are there any questions about this that I should have asked, that I didn’t? Have we missed anything?

Stuart Ritter: I think you’ve covered it all. The one I would go back to though, is thinking about how much complexity you want to introduce. At some point, the distinction between some of these decisions aren’t that bid so it’s not something people necessarily need to lose sleep over. Get the big stuff right. Make sure that in retirement you’re spending a modest amount so you’re not spending so much that you’ll run out of money and that you are making decisions about the accounts you’re drawing from and you do have an asset allocation in place. If you get the big stuff down, then you can improve it with some of the stuff we’ve been talking about. But it’s not as though it’s 50 percent either way so I encourage people not to get so caught up and worried about these things that the concern about making sure it’s perfect stresses them out so much that they don’t realize they’re doing pretty darn well, can enjoy what they have and go with the retirement they want.

Rob: That sounds beautiful. Alright Stuart. Listen, thank you so much for coming on the show today. I appreciate it.

Stuart Ritter: You’re welcome. Thank you for the opportunity.

Author Bio

Total Articles: 1083
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments

Kathleen says:

Rob, is there a way to print out your podcast transcripts. When we see them, we don’t always have time to digest the information on the spot, and is easier to digest and refer back to later when printed. I tried to find a way on the Social Security one recently, but just couldn’t. Thanks, Kathleen

Rob Berger says:

Kathleen, just added a link to a pdf version of the transcript.