Tax treatment of Retirement Account withdrawals
The Assets Tab in the Retirement Accounts Folder has six separate entry fields (per person).
I entered three separate amounts, in the "401-k", "IRA", and "Employer Accounts" field.
When I added the three amounts together and entered them in a single (401-k) field, my std of living increased significantly, even though the Total in the retirement accounts did not change. Upon examination, I see that my taxes have lowered significantly late in life.
The only change I made was to enter the account values in a different field - no change to the total amount. This resulted in a change to my taxes.
I thought that all of these accounts (except for the Roths) were treated the same, as tax-deferred. Why would placing the amounts in a different field result in different taxes?
RSS
Because of the order in which the accounts are withdrawn.
By default, Roth's are drawn down last. Since the Roth draw isn't taxable, your taxes go down.
Best,
Dick Munroe
No, I do not have Roth accts.
The original three fields I populated were "401-k", "IRA", and "Employer Accts". I then moved the entire value into one field, "401-k", and saw my taxes go down late in life as a result.
If "Employer Accts" and "Individual Accts" are not treated differently from a tax standpoint, why does ESP give me the option of withdrawal order w.r.t. to these two? Why not just have "Roth" and "All Other" for withdrawal order options?
Or, to put it another way, how does ESP treat the following two scenarios differently?
Scenario A Withdrawal Order
Individual Accts
Employer Accts
Roth Accts
Scenario B Withdrawal Order
Employer Accts
Individual Accts
Roth Accts
Should be the same.
As for the order, it's "because". A historical artifact. I suspect that the original plan was to allow the individual accounts to have different investment portfolios when running Monte Carlo. That didn't happen (although nothing prevents it other than complexity in the code).
Best,
Dick Munroe
Which, of course, leaves my original question - why did my taxes change when I entered these values in a different box?
If it helps, I am entering special withdrawals for some years, but those were exactly the same for each run.
Open a support ticket, upload your database, provide a detailed description of the problem and how to recreate it and we'll take a look.
Best,
Dick Munroe