How do I balance withdrawals and medical subsidies at age 60 with $2.4 million?

At 60, I recently retired after being a business owner. We have provided health insurance through the marketplace since its inception. Currently, my income comes solely from withdrawals from my taxable portfolio, comprising reported dividends and capital gains totaling less than $60,000 annually. A beneficial result of this approach is that the government covers about half of my health insurance costs.

As for assets, I have $625,000 in my taxable portfolio, $115,000 in a Roth IRA, and $1,500,000 in a traditional IRA. I am a home owner and have no additional dependents. The plan going forward is to withdraw exclusively from the taxable portfolio until age 65 to maintain the current strategy. I’m not sure if this is a prudent approach or if I should consider accessing other assets without being too concerned about the health insurance benefit.

– Kevin

In this case, it makes sense to stick with the plan and withdraw ordinary taxable assets. Drawing from a traditional IRA to have the same amount of available funds would create more taxable income and a higher tax bill.

When you add health insurance subsidies into the mix, you get another benefit by not increasing your taxable income, which would happen simply by switching to another source for your withdrawals. Plus, the more you leave money in a retirement account, the more likely it is to grow without a tax loss. (And if you have additional tax or retirement questions, consider contacting a financial advisor.)

Health insurance Subsidies

The Premium Tax Credit (PTC) helps millions of Americans shoulder the burden of paying for their own health insurance. You can choose to pay lower premiums each month (called the advance premium tax credit) or get a credit for the full amount when you file your taxes. Unfortunately, the improvements made to the PTC as part of the US Bailout and expanded through inflation. The rebate law will expire after 2025. But until then, qualifying for the PTC gives you a bigger discount on your health insurance premiums. Only people who buy coverage through the health insurance marketplace are eligible to receive these credits. PTC amounts previously depended on income and household size and were available only to families earning between 100% and 400% of the federal poverty level. However, those limits won’t go into effect until after 2025, assuming Congress doesn’t extend the PTC enhancements again. Until then, PTC eligibility for households earning more than 400% of the federal poverty level depends on what percentage of their income would be used to purchase the benchmark plan (the second-lowest-cost Silver plan). So if your household will spend more than 8.5% of income on premiums, you may qualify for the PTC. (And if you want extra help finding tax breaks, consider working with a financial advisor.)

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How pension withdrawals affect taxable income

How you take withdrawals from your retirement account affects your total taxable income, and that can affect other parts of your finances, including:

Plus, the more you pay in taxes, the less money you have for yourself. How you take your retirement withdrawals influences how much tax you end up paying. There are three tax categories to draw from: taxable, traditional, and Roth accounts. Here’s a quick look at the tax implications of each once you’re over age 59 ½:

• Taxable accounts: You pay income tax each year on interest and dividend income, whether you withdraw it or not, and capital gains tax – which may have lower tax rates – when you sell assets for a profit.

• Traditional accounts: Withdrawals from tax-deferred or “traditional” accounts like IRAs and 401(k)s go to taxable income, and you pay income tax on 100% of the withdrawals.

• Roth accounts: You don’t pay tax on anything you withdraw, so there’s no effect on your taxable income (as long as the account has been open for at least five years)

While everyone’s situation is different, there are some strategies that can help you get the most out of your money and minimize your annual tax impact. Talk to an experienced financial advisor to help you create a tax-efficient retirement plan that fits your unique situation.

Tax efficient pension withdrawals

Generally, there are two main schools of thought when it comes to retirement withdrawals: managing taxable income with prorated withdrawals and keeping Roth assets intact as long as possible.

For the first strategy, you would withdraw your taxable account until you reach your required minimum distribution (RMD) age. (Assuming you’re currently 60, you won’t be required to take RMDs until age 75.) Then, the withdrawal order changes. You would take your RMDs, to avoid tax penalties, then take withdrawals from all three sources – taxable, traditional and Roth – pro rata. This method focuses more on both leveling and minimizing taxable income and taxes.

For the second approach, you would look to keep your Roth assets as long as possible. This strategy does not worry so much about minimizing taxable income. Rather, it focuses on leaving the Roth account alone until the rest of your assets are depleted. Here, you will deplete your accounts in the following order until each is depleted:

1. Taxable plus RMD

2. Traditional

3. Roth

This method can cause a tax hump in the middle years of retirement, when taxable income and taxes peak as you draw from your traditional retirement account. However, once the traditional IRA has been emptied, you will no longer face RMDs because Roth accounts are not subject to these required withdrawals.

Next steps

The strategy you ultimately choose can affect both your taxable income and how long your funds will last. Additionally, there are more variables to consider, which is why working with an experienced financial planner can help you make the best possible decision for your situation.

Tips for finding a financial advisor

• If you’re considering getting financial advice from a professional, be sure to read our comprehensive guide on how to find and choose a financial advisor.

• Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid—in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

Michele Cagan, CPA, is SmartAsset’s financial planning columnist and answers readers’ questions about personal finance and tax topics. Have a question you’d like answered? Email [email protected]man and your question may be answered in a future column. The question may be edited for length or clarity

Please note that Michele is not a SmartAsset AMP participant, nor is she an employee of SmartAsset. She was compensated for this article.

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