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Let’s say it’s time to retire and I have a $2,000,000 retirement fund. $1,000,000 was accumulated in a Roth IRA and the other $1,000,000 was accumulated in a traditional pre-tax 401(k).

Let’s say I withdraw $50,000 from each account as my income in one year. I understand that all my Roth IRA money is tax free, however, I am wondering if the amount I withdraw from my Roth IRA counts towards what tax bracket my other $50,000 would be taxed under.

For example, let’s use the new 2018 tax brackets (I’m married filing jointly), and for the sake of the exercise let’s say I did not take the standard deduction but also did not itemize anything.

0 to 19050 = 10% 19050 to 77400 = 12%

Would the $50,000 from the traditional pre-tax 401(k) be taxed at 12% because the $50,000 from the Roth IRA put me in that bracket (even though I was not taxed on that)? Or would it follow taxation as if the $50,000 from the pre-tax 401(k) were my only income, so the first $19050 at 10% and then the rest at 12%?

Second question. Is there a best way (best way defined as minimizing the tax bill and maximizing future gains) to decide how much to withdraw from a Roth IRA vs a pre-tax 401(k) if you have about the same amount in both? Thanks in advance.

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Your Qualified Roth IRA withdrawals are NOT treated as income, so they would not bump you into a different tax bracket.

Is there a best way (best way defined as minimizing the tax bill and maximizing future gains) to decide how much to withdraw from a Roth IRA vs a pre-tax 401(k) if you have about the same amount in both?

Withdrawing from the Roth first will minimize current tax (since there is no tax), but will increase future tax assuming that the 401(k) gains in value. Future gains would depend on what each is invested in.

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The best strategy - I’d suggest you take out the exact amount to fill the 12% bracket. $77,400. The rest would come from the Roth. Tax bill $8907 in 2018.

Asking that answers ignore the standard deduction is awkward. It’s $24K that comes out tax free. In effect, a perfect way to stay under the next tax bracket, 22%.

You made no mention of social security, but if you and your wife have a decent benefit, much of it would be taxable, and that’s when you’d need to review this strategy. Mixing in Roth to avoid the tax hit Social Security brings.

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  • Thank you. I would, of course, be taking the standard deduction, just wanted to keep the math simple. I like the idea of taking out just enough to keep everything in the 12%, since the next step up is quite the jump. Since the minimum withdrawals would kick in around 70, it makes sense to take out as much as possible at the cheapest rate possible. My wife and I are 27 so I have no idea what my SS benefit would look like. We're trying to save like SS won't be around anyway. I do not yet have $2,000,000, but that is the goal for when I retire (adjusted for inflation, of course).
    – Tyler
    Sep 27, 2018 at 21:19

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