I have a well documented plan for post retirement risk management, which includes varied accounts, pre-tax, taxable brokerage, and Roth. My plan is to annuitze the pre-tax accounts through RMD after whittling down their present size through Roth conversion to something that won’t force me into higher tax brackets too quickly. It’s a perverse race between taxes and death. My Roth is primarily disaster money, in case of emergency break glass. The Roth is the most valuable money I own since I own it tax free, while the other two are still taxable, as ordinary income in the case of the pre-tax, and as capital gains in the case of the brokerage.
My pre-tax RMD has included a tax discount because a certain percentage of it was funded with post tax money and the government only taxes you once on pre-tax money. As I was working through my taxes it occurred to me there may be a different format for disaster spending, by spending down the pre-tax money first.
This is a picture of a $600K RMD amortized on the government’s schedule over 45 years @ 3% return. The green is the yearly disbursement and blue the remaining portfolio. It occurred to me after the 7.5% “standard write-off deduction” is met, in the case of a medical emergency you could basically extract extra money from the account tax free, never paying taxes once you meet the threshold. This means a 600K @ 3% pretax (mostly bonds) could provide about 8 years of of catastrophic care @ 85K/yr essentially tax free or at a very low rate. That extra 8 years of growth would be tacked onto the Roth and Brokerage. A 1M Roth would be worth 1.5M if it were risked in a portfolio returning 6% for 8 years with no withdrawal.
Let’s say you make 40K/yr on SS of which 85% or 34K is taxable lets say you generate a $50K bill fighting your cancer diagnosis. The 7.5% threshold is $2,550 so you should be able to pull $47K out of your pre-tax account, tax free to pay your medical bills, and leave the Roth to grow and pay your living expense later if you survive. Your married filing jointly tax bill would be less than $1K/yr on $90K of spendable money You can pull 50K/yr from a 3% 600K portfolio for 15 years before the stream runs dry. In the meantime the Roth grows to 2.3M. How do you spell relief? I spell it “well thought plan”.
A nice strategy to have up your sleeve if the time comes.