Hi there. I'm struggling understand the optimizer's thinking w/r/t spending down my Roth accounts in early retirement.
My understanding that, under age 59 1/2, only previous contributions can be accessed tax-free. However, Pralana seems to be proposing to drain the entire account in the first few years of my retirement, before I or my spouse reach 59 1/2. I think this would be a major tax hit but I don't see any income tax liability in those early years.
My understanding is that these funds would be taxed at withdrawal as regular income (well, at least the gains) but I don't see my income going up or taxes being withheld for these amounts. Am I missing something? Or is my understanding of the taxability not correct? And is it this also subject to an early withdrawal penalty? It's a big chunk of money - $670,000 liquidated over four years.
As a picture is worth 1000 words, attached are some pics (and comments/questions) that might help to explain it better.
Thanks for any ideas or pointers.
@chuckfeee You're young, so the optimizer is seeing all that runway for tax free growth. This can be exacerbated if you have an aggressive asset allocation (mostly equities) in your Roth as well, compared to your IRAs, or even aside from that if they're equal (tax free being the kicker). As well when you anticipate the tax cuts and job acts ending or taxes going up otherwise, it will want you to convert prior to then. Bear in mind this is assuming there are good returns in the future in order for them to be tax free, and that the Roth system stays in place as is. If it's too aggressive for your tastes, you can always dial the optimizer results down as needed, i.e. change the top marginal 24% to 22% etc.
@hines202 Thanks for the info. But I'm a bit confused. The optimizer is spending my roth accounts first (down to zero before I turn 59.5). It's not funding them later or doing regular-->roth conversions. (I just checked and actually have roth conversions turned off.)
I'm mostly concerned because it has me paying no taxes at all in the early years, even in cases where I think there should be a penalty for early withdrawal from the roth.
@chuckfeee it does implement the 10% penalty, I seen it. So not sure why it's spending down other than to keep income low for aca subsidies? Go to the tax tabular results table and use the MRI metric links on the numbers and you should see the penalty.
I poked around in the review section, under "portfolio", "taxes", and "account statements" but still can't find any indication that Pralana is assessing the pre-59.5 early withdrawal penalties in 2027, 2028, and 2029. Given that we're talking about $600k worth of withdrawals I'd expect some big numbers for the 10% penalty or the taxability of the 60% of the Roth IRA proceeds are from account gains. But I don't see anything that would move the needle. Furthermore, the federal tax liability in all three years is zero (?!)
I've taken some screenshots and added commentary in the attached pic, since I can't seem to figure out how to add more than one image inline.
Thanks for any ideas or clarifications. I'm sure the error is on my side but I'm just not sharp enough to figure it out!
