We’re eyeing a $6 million nest egg – is it realistic to pull $200k per year and keep our taxes near zero?

The median retirement savings among Americans aged 65 to 74 today is $200,000, reports the Federal Reserve. So if you’re approaching retirement with a $6 million nest egg, you’re clearly in terrific shape, and well ahead of the game compared to your peers.

The problem, though, is that having a lot of money in retirement could subject you to a very large tax bill each year. And after a lifetime of paying taxes, that may not be what you want.

In this Reddit post, we have someone who’s eyeing a $6 million nest egg and wondering if it’s possible to withdraw $200,000 a year virtually tax-free. The answer is, there may be. But it will require careful planning.

Don’t pay the IRS more than you have to

It’s a big myth that retirees automatically see their tax bills go down. Some people end up with more money in retirement than during their working years, and as a result, they’re bumped into higher tax brackets.

Getting back to our post, with a $6 million nest egg, $200,000 in yearly income is more than doable. That amounts to a withdrawal rate of roughly 3.3%, which seems reasonable, especially if the poster will be retiring at a pretty traditional age — meaning, at some point in their early 60s or later.

Of course, the poster has the goal of avoiding taxes on their retirement income. And that’s possible with the right retirement savings account.

It pays to keep money in a Roth retirement plan

It may be that the poster above has a $6 million Roth IRA or 401(k). If that’s the case, I have good news for them. Their withdrawals should be tax-free. So while other income of theirs may be subject to taxes, Roth accounts don’t add to that burden.

However, there can be impediments to higher earners funding a Roth account directly. (I don’t know for sure that the poster was a high earner, but with $6 million in retirement savings, that’s what I would have to assume.)

For one thing, Roth IRAs have income limits that bar higher earners from contributing. Roth 401(k)s don’t have income limits, but not every workplace retirement plan has a Roth option.

If the poster doesn’t have any of their savings in a Roth account, they could look at doing a Roth conversion ahead of retirement. But that could seriously increase their taxes in the years leading up to it. And with a $6 million nest egg, it may not be feasible to move all of that money into a Roth account ahead of retirement if none of it is in a Roth at present.

So what I would suggest that this poster do is sit down with a financial advisor and have them offer guidance on a Roth conversion. It could make sense to move some of their funds into a Roth account but keep some in a traditional IRA or 401(k) to avoid too large a near-term tax hit.

But to be clear, it would probably be a good idea to get some of that $6 million into a Roth. Traditional IRAs and 401(k)s impose required minimum distributions (RMDs), and those could create an automatic tax liability. Roth IRAs and 401(k)s don’t have RMDs, so that money can continue to grow tax-free indefinitely.

It’s important to plan for a large retirement income, because it could not only create tax headaches, but also, make Medicare more expense thanks to the surcharges that are imposed on higher earners. So anyone with $6 million in savings could probably benefit from consulting a professional for financial advice before their retirement begins.

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