Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 04-09-2014, 08:46 PM   #21
Confused about dryer sheets
 
Join Date: Apr 2014
Posts: 4
Quote:
Originally Posted by LOL! View Post
Try this thought experiment to show you how your taxes will be lower than 25%:

If you retire in 2014 and then in year 2015, you withdraw $75,000 from your cash in your taxable bank account and spend that $75,000. How much income tax will you need to pay on that $75,000?
I can't thank you enough for sticking with this point; I think I had a big miscalculation in my spreadsheet. My prior thought: while I did take out 75k from my basis with no tax, the after tax investments earn at the same time, and I owe tax on that. So $1.2 in Vanguard/Fidelity/Banks are earning , say 5%, or $60k, and I was calculating a tax due on that earnings.

BUT, from your trying to get this through my head, the issue is that while the AT funds are growing, yes, unless they generate a dividend or capital gain then I don't have a tax on the "growth", just the dividend/capital gains, or ordinary interest. Plus any gain on a sale I might make to withdraw cash. Which should be apparent to me since I do my own taxes. This year my total TAXABLE cap gains/dividends for Vanguard & Fidelity funds of $600k+ was around $9k, not the $30k I get from simply applying a 5% ROI to $600K. THAT's what I'm doing wrong, am I right?

Then, to pile on, you made me look at my spreadsheet again and I mistakenly put the annual return on my after-tax IRA in my "taxable earnings" bucket after I rolled it over, thus doubling the problem!

So since I know I'll have some taxable dividends/gains from my AT funds, I should look at the tax efficiency of the overall funds and use THAT (or some proxy) to estimate my taxable AT earnings, not my ROI.

OK, now I really need to rework this spreadsheet. Let me know if I'm following what you're saying correctly, I really do appreciate it! I honestly don't intend to be this complicated at some point in my life, but apparently I haven't reached it yet. Once I understand what you're teaching me, I'm going to relax. Thank you!
__________________

__________________
AmIReady is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-09-2014, 08:57 PM   #22
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
You are following what I am getting at. Basically, your income tax will be pretty close to 0%. You will even be able to convert some 401(k)/IRA to Roth IRA and pay no taxes or maybe just a little taxes on the conversion.
__________________

__________________
LOL! is offline   Reply With Quote
Old 04-09-2014, 11:06 PM   #23
Thinks s/he gets paid by the post
 
Join Date: Apr 2006
Location: North Bay
Posts: 1,026
AmIReady, you've got it. With your cash holdings, you will be able to live largely off of the tax-free cash for quite a few years and then pick and choose when you want to realize gains, losses, and IRA rollovers in order to manage your cash flow and tax situation. You may want to realize some capital gains in taxable accounts over the first several years of retirement when you can keep the tax rate on those gains at or close to zero. You will probably want to do regular IRA rollovers (to Roth) for 10 years or so, so that IRA MRD's don't hit you too hard when you reach 70-1/2.
__________________
scrinch is offline   Reply With Quote
Old 04-09-2014, 11:16 PM   #24
Thinks s/he gets paid by the post
38Chevy454's Avatar
 
Join Date: Sep 2013
Location: Cincinnati, OH
Posts: 1,581
Welcome, and you are very good shape to stop working now. I concur that you have too much in cash. I would pay off your house, then live off the after-tax cash funds to get you to 59.5 before you touch any of the pre-tax. Your total assets $3.2M means that you can have a lot more spending each year than your projected $75K, even with very safe withdrawal rates on the total amount.

Some good planning by converting to Roth will save taxes later as many have suggested.

Quit work and start enjoying retirement.
__________________
After Monday & Tuesday even the calendar says, W-T-F...

Semi-Retired 7/1/16: working part-time (60%) for now [4/24/16 changed to 80%]
Retired Aug 2, 2017; age 53
38Chevy454 is offline   Reply With Quote
Old 04-09-2014, 11:32 PM   #25
Confused about dryer sheets
 
Join Date: Apr 2014
Posts: 4
You all are great....thank you!
__________________
AmIReady is offline   Reply With Quote
Old 04-09-2014, 11:57 PM   #26
Recycles dryer sheets
 
Join Date: Jan 2014
Posts: 243
It's time to stop working and start living!
__________________
Turboslacker is offline   Reply With Quote
Old 04-10-2014, 06:42 AM   #27
Moderator
Walt34's Avatar
 
Join Date: Dec 2007
Location: Eastern WV Panhandle
Posts: 16,528
Quote:
Originally Posted by AmIReady View Post
I think it IS the transition that was stumping me; how do I go from saving for 30 years to actually taking money out of the sacred savings accounts? More mental than financial, me thinks.
That happens to many people here. After a lifetime of saving it is a huge mental adjustment to switch to spending.
__________________
I heard the call to do nothing. So I answered it.
Walt34 is offline   Reply With Quote
Old 04-10-2014, 09:02 AM   #28
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,418
AmIReady, You ARE ready!!!! At least financially. Change is hard. I have a similar background (but not near as big a nestegg) and have been ER'd for two wonderful years.

Lower taxes will be a big surprise. To see, take your 2013 tax return and zero out your earnings and withholdings and I think you will get a pleasant surprise. A big reasons is that if your income stays in the 15% tax bracket, the tax rate on qualified dividends and LTCGs is 0% - tax free!

Your spending is modest in relation to your nestegg. Even if you withdraw $100k a year your withdrawal rate will only be a tad over 3% and will be even lower once SS comes on line.

While you have a long tome to make a final decision, given your family longevity, assets and potential RMDs, I would plan to delay SS until age 70 which will allow you to do Roth conversions and reduce the tax bite once SS comes online.

Also, I believe that your after-tax 401k can be rolled into a Roth IRA where it will grow tax free. I was unaware of this opportunity when I rolled over my 401k but luckily my after-tax balance was immaterial.

Also, if your 401k has a stable value fund option that offers a decent interest rate, you may want to stay in the 401k as stable value funds are not available in IRAs. Stable value funds are similar to bonds but with no interest rate risk.

You may want to run your situation through Quicken Lifetime Planner which is a simple, easy to use deterministic retirement planner.

What I did to mitigate the emotion associated with withdrawing after accumulating for so many years was to schedule an automated transfer from my investment cash to my checking account that was roughly the same as my net paycheck on the same date's that I got paid while I was working as my new retirement "paycheck".

Finally, you can put some of that cash to better work in some online savings accounts that will earn 0.8-1.0% and keep an eye out here for the December PenFed CD special (2013's was 3% for a 5 year CD).

My withdrawal strategy is first from taxable accounts, then from tax-deferred accounts and then from tax-free accounts and using Roth conversions as I can to reduce taxes later in retirement.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 04-10-2014, 09:33 AM   #29
Recycles dryer sheets
Trooper's Avatar
 
Join Date: Dec 2012
Location: Chandler, AZ
Posts: 214
Thanks for sharing your situation, AmIReady. Many of your concerns resonate with me, and my financial situation is fairly similar to yours, although not as flush :-).

Although I really enjoy my work and my employer likes the work I do, I am starting to feel that I like NOT working more. I'm 56 and sitting at a desk all day makes me feel like crap at the end of the day.

The main differences in our situations is that I am married (wife retired) and we have no mortgage. Like you we get freaked out over whether the money will last after the transition from saving to spending. Our annual income needs are about $90K including health care. I keep asking myself why do we need so much but...

Wondering how much of your $75K spending needs is for health care?

Thanks again...I am now able to benefit from the great responses from others.
__________________
Trooper is offline   Reply With Quote
Old 04-10-2014, 10:09 AM   #30
Thinks s/he gets paid by the post
38Chevy454's Avatar
 
Join Date: Sep 2013
Location: Cincinnati, OH
Posts: 1,581
I should have added in my previous reply, but it has enough to stand on its own. I have stated to others previously: Yours is an emotional decision, not a financial one. It is the transition and change that you need to deal with, but don't be concerned with the financial stress, no need for that!

You have done well with the savings and working for your money, now it is time to let your money work for you.
__________________
After Monday & Tuesday even the calendar says, W-T-F...

Semi-Retired 7/1/16: working part-time (60%) for now [4/24/16 changed to 80%]
Retired Aug 2, 2017; age 53
38Chevy454 is offline   Reply With Quote
Old 04-10-2014, 09:15 PM   #31
Full time employment: Posting here.
Al in Ohio's Avatar
 
Join Date: Jun 2013
Location: Columbus OH
Posts: 688
You should have retired 2 years ago IMO.
__________________
Ohio INTJ ENG ER Hopeful
Al in Ohio is offline   Reply With Quote
Old 04-11-2014, 07:36 AM   #32
Thinks s/he gets paid by the post
Huston55's Avatar
 
Join Date: Jul 2011
Location: The Bay Area
Posts: 1,801
Quote:
Originally Posted by pb4uski View Post

Also, I believe that your after-tax 401k can be rolled into a Roth IRA where it will grow tax free. I was unaware of this opportunity when I rolled over my 401k but luckily my after-tax balance was immaterial.
Is this correct? Even for a normal 401k? What are the tax consequences?
__________________
You may be whatever you resolve to be.
Huston55 is offline   Reply With Quote
Old 04-11-2014, 08:11 AM   #33
Thinks s/he gets paid by the post
gauss's Avatar
 
Join Date: Aug 2011
Posts: 1,708
Quote:
Originally Posted by AmIReady View Post
..
I'm divorced and my ex had significantly less earnings so I'm sure my SSI is the better one. There is no real need in my withdrawal plan to take SSI earlier, and honestly it all came back to my FEAR OF DEPLETING MY SAVINGS ACCOUNTS. That's hard to do! I modeled to live to 90 and still had minimal assets left at a 3% ROI, but jeeze that mental block is hard to overcome.

My grandmother is 94, and her mother died at 102. My grandmother still saves cottage cheese containers and writes dates on her eggs so that she uses them in order. I think they ruined me.
Just to amplify panacea's post - Under current law you can take a Spousal Social Security benefit for a few years that does not effect your own future benefit. That is to say that your deferred benefit will continue to grow on its own. It is not a choice of a Spousal benefit vs your own, but rather a choice of a Spousal benefit vs nothing for the few years when this strategy works. I believe that it works for the years between your full retirement age and 70 years if you fully defer your own benefit. It is kind of a free lunch to the tune of tens of thousands of dollars. That being said, the law is subject to change and the President's budget proposal from a month or two ago had a sentence suggesting that this may be targeted for reform.

-gauss
__________________
gauss is offline   Reply With Quote
Old 04-11-2014, 08:24 AM   #34
Thinks s/he gets paid by the post
 
Join Date: Oct 2012
Location: Colorado Mountains
Posts: 2,136
Quote:
Originally Posted by Huston55 View Post
Is this correct? Even for a normal 401k? What are the tax consequences?
As I understand, yes you can. In my plan, they will do two disbursements any time I withdraw money from the plan. The after-tax is proportional. That means to get my after-tax amount all out I would need to pull all of the money out and place it all in two IRAs, one taxable and one Roth. There are no tax consequences. The after-tax component is only what was put in, not the earnings. The sooner that cash is put in a Roth, the sooner the earnings also become tax free. In my case, the amount of after-tax cash is so small, it isn't worth the hassle.
__________________
Hermit is offline   Reply With Quote
Old 04-11-2014, 08:50 AM   #35
Thinks s/he gets paid by the post
gauss's Avatar
 
Join Date: Aug 2011
Posts: 1,708
Quote:
Originally Posted by Hermit View Post
As I understand, yes you can. In my plan, they will do two disbursements any time I withdraw money from the plan. The after-tax is proportional. That means to get my after-tax amount all out I would need to pull all of the money out and place it all in two IRAs, one taxable and one Roth. There are no tax consequences. The after-tax component is only what was put in, not the earnings. The sooner that cash is put in a Roth, the sooner the earnings also become tax free. In my case, the amount of after-tax cash is so small, it isn't worth the hassle.

There is current discussion about the benefits/issues of after-tax contributions to 401ks for those fortunate enough to have plans that allow it going on at this thread.

-gauss
__________________
gauss is offline   Reply With Quote
Old 04-11-2014, 10:24 AM   #36
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,418
Quote:
Originally Posted by Huston55 View Post
Is this correct? Even for a normal 401k? What are the tax consequences?
Remember I am talking about after-tax 401k money, not pre-tax. IIRC the regs on whether or not you can roll after-tax 401k money to a Roth IRA are unclear and many interpret that it is allowed so just keep in mind that there is some tax risk to doing so but when I researched it I concluded that it was probably ok.

As I recall, you need to pay tax on the excess of the rollover over your after-tax contributions.
__________________

__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
OK, 42 years old over a million ca$h, NOW WHAT? Gurus I need your help please!! RAMBO Hi, I am... 9 01-30-2010 08:00 PM
From 100 million to 4 million rec7 FIRE and Money 19 08-22-2009 12:15 PM
New Place Vs Return To Wonderful Old Place yakers Travel Information 22 09-26-2008 07:00 PM

 

 
All times are GMT -6. The time now is 06:41 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.