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Turning 40 and getting ready
Old 09-09-2004, 05:25 PM   #1
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Turning 40 and getting ready

Hello all,

I'm a long-time lurker who has finally decided to post on the eve of my 40th b-day. I have learned a lot here both from the old-timers and the young people who thought about this way earlier than I did. Thank you.

My question revolves around 401k/IRA savings vs. after-tax savings. The conventional wisdom for people still working seems to be to max out 401k + Roth IRA before even thinking about any after-tax accounts. I can see this as fine for people who intend to work until at least 55. But I am aiming to hang it up (at least semi...) around 47 or 48, and I'm in much better shape right now in 401k (around $250k) than I am in taxable accounts (around $30k).

Currently I'm just putting just enough in 401k to get the full benefit of company match, and DCAing what I can every month (typically $1000/mo right now) in after-tax accounts. No Roth IRA yet. I'd like to hear some comments about whether this basic approach is good/bad/average/idiocy. (What other options would there be when the time comes if I go all tax-deferred? Start SEPP? Accept penalty tax?)

Any comments are appreciated.

G.
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Re: Turning 40 and getting ready
Old 09-09-2004, 05:49 PM   #2
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Re: Turning 40 and getting ready

Even if you will retire before 59 1/2, I think contributing to the Roth IRA before contributing to the after tax account makes sense. Not only will all the earnings from the Roth IRA be tax free, according to Fairmark, the first money you pull out of the Roth IRA is considered is considered contributions, which don't have penalties attached. Assuming I'm reading this correctly, withdrawn contributions aren't subject to the 10% before 59 1/2 rule.

- Alec
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Re: Turning 40 and getting ready
Old 09-09-2004, 07:12 PM   #3
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Re: Turning 40 and getting ready

I believe you're correct, after 5 years, the principal can be removed from the ROTH penalty free.

Read up about some of the private letter rulings the IRS has been handing out about SEPP payment calculations... while you can't use those rulings yourself, you could request your own private letter rueling.
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Re: Turning 40 and getting ready
Old 09-10-2004, 07:05 AM   #4
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Re: Turning 40 and getting ready

You could always keep throwing money into the 401k until you decide to retire, roll that over to a regular IRA and then take 72t distributions from it until you are 59 1/2. At least that's my understanding.
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Re: Turning 40 and getting ready
Old 09-10-2004, 07:45 AM   #5
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Re: Turning 40 and getting ready

Unless you simply CANT live on the after tax nestegg you're building, the IRA/401k and Roth are gifts that are simply too good to pass up.

Besides the up front tax savings, you can allocate desirable but tax inefficient assets into your retirement plans. A big plus.

You can get access to these funds, although sometimes penalties do apply.

Consider that you will need money after 59 1/2 though, distribute your portfolio accordingly and leave that for "later money".
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Re: Turning 40 and getting ready
Old 09-10-2004, 07:47 AM   #6
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Re: Turning 40 and getting ready

I think you would be better off by maxing your 401K and
Roth IRA before DCAing into an after tax account. You
can always withdraw ROTH contributions tax free since
you have already paid tax on them. If you have anything left over to invest, put it into I Bonds with the idea of using them to help fund your ER before age
59.5.

Cheers,

Charlie
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Re: Turning 40 and getting ready
Old 09-10-2004, 10:13 AM   #7
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Re: Turning 40 and getting ready

Thanks all for the replies. Now that I understand the flexibility that Roths give, I'm an instant convert. (I should have done better homework before posting, I guess... ) I will establish and max out Roths for me & the wife.

I still need to do some homework/thinking about beyond the Roths, whether to increase 401k contribution or do after-tax stuff. My company's 401k limit is high (20%) so I could easily make it so that I won't have anything left over for after-tax investing. I still worry about accessibility of enough funds between the goal ER date and 59-1/2, even with Roth contributions there for the taking.

Anyway, that's for another day. For now I'm going to blast out of work a little early, and crack a cold one to celebrate the big four-oh. Thanks again.

G.
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Re: Turning 40 and getting ready
Old 09-10-2004, 10:16 AM   #8
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Re: Turning 40 and getting ready

Arent you allowed one drink for each year on your birthday?
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Re: Turning 40 and getting ready
Old 09-10-2004, 10:32 AM   #9
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Re: Turning 40 and getting ready

Quote:
Arent you allowed one drink for each year on your birthday?
Wait...let me think about that...by golly, YOU'RE RIGHT!

[grabs at aching liver]
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