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ER and Which Accounts to Tap (Penalties & Taxes)
Old 06-11-2007, 04:53 AM   #1
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ER and Which Accounts to Tap (Penalties & Taxes)

I know that have been a number of posts on the subject. Here goes again.

We are a little over 4 years off from ER. I recently rebalanced our portfolio to 70/30. I intend to move 2.5%/year into int bonds (and cash) to fund ER 60/40 target.

When we ER, I will have approx 4 years before 59.5. So I need to fund that 4 years.

Here is where the money resides:

38% - After tax account (all in stock)
2% - After tax account cash (intend to grow this with wage contributions over the next 4 years)
6% - Intermed Bonds in 2 VA DW and I(I know I know bought along time ago)
8% - Int Intermed Bonds in 2 Trad IRA DW and I
1% - Int Bonds in 2 Roth IRA
15% - Stock in 401ks
14% - Intermed Bond in Profit Sharing Trust Account (DW version of Pension)
16% - Stock Mutual Fund in Profit Sharing Trust Account (DW version of Pension)

I will have a pension (non-cola) that covers 12.5% of our expected annual expenses. We need to cover the other 87.5%.

I currently have the bonds in tax deferred accounts.

I suppose that 2.5%/year (total of 10% of total portfolio) should be moved to cash. I am thinking that I should do that in the after tax account. That would give us about 12% of the portfolio in an after tax account to spend. That covers almost 3 years of expenses (with the Pension).

How should we cover the remaining year of expenses (the draw-down could be spread over all 4 years)?

We could use 72t and annuitize the TRAD IRAs to cover some of the expense. I am thinking we should be able to get to our 401k money. I am thinking the same for DW and her 401k and Equivalent of pension.


Does this make sense?

Should I be rejuggling the money (tax deferred & taxable) in a different ways over the next 4.x years?

Please provide your comments and advice.
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Old 06-11-2007, 06:48 AM   #2
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Perhaps the easisest way to cover the rest is to get a job.
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Old 06-11-2007, 07:26 AM   #3
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Quote:
Originally Posted by chinaco View Post

When we ER, I will have approx 4 years before 59.5. So I need to fund that 4 years.

Here is where the money resides:

38% - After tax account (all in stock)
2% - After tax account cash (intend to grow this with wage contributions over the next 4 years)
6% - Intermed Bonds in 2 VA DW and I(I know I know bought along time ago)
8% - Int Intermed Bonds in 2 Trad IRA DW and I
1% - Int Bonds in 2 Roth IRA
15% - Stock in 401ks
14% - Intermed Bond in Profit Sharing Trust Account (DW version of Pension)
16% - Stock Mutual Fund in Profit Sharing Trust Account (DW version of Pension)
Here's my question- you have 40% of assets in taxable accounts... how much is this relative to 4 year expenses needed to bridge to 59.5?

The 8% IRA- how much is this relative to 4 year expenses?

the 2.5% shift per year to cash, how does this relate to gross income needed during next 4 years?

My thought would be 72t the 8% Intermediate bonds. Supplement this by selling some of the stock in the after tax account. Lower taxes this way, and avoids RMD's later in life.
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Old 06-11-2007, 10:28 AM   #4
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Quote:
Should I be rejuggling the money (tax deferred & taxable) in a different ways over the next 4.x years?
Here's a concept that may help in one aspect. It may be obvious, but I think it's useful.

A lot of your after-tax money is in equities (as is mine). You might think "Well, that's a bother, because I might have to use some of that money when the market is down."

But what you can do is this: when you take out money from your after-tax equity fund, you simultaneously convert some of your IRA money from bonds to stock.
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Old 06-11-2007, 09:08 PM   #5
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Originally Posted by TromboneAl View Post
But what you can do is this: when you take out money from your after-tax equity fund, you simultaneously convert some of your IRA money from bonds to stock.
That's a cool concept. I'm in the same boat - most of my after-tax investment is stock, and I'll have 11 years of ER before I can tap my tax-deferred accounts.

I was thinking that I would have to swap the allocations after retirement to put my bond holdings in my taxable accounts. This is a much better way.

Any downsides you can think off?
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Old 06-12-2007, 01:20 AM   #6
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If you leave your job after 55 you can withdraw without penalty. IRA have penalties until 59.5, ROTH has no penalty on contributions only profits.
So leave your money in the 401K instead of converting to IRA then you can draw out of that if you want.
Also you can take substantially equal payments from your 401K for a minimum of 5 years or until you are 59.5
You can start converting IRAs to ROTH paying the tax then in 5 years from now you can get the money without penalty.
I will be 59.5 in October and it doesn't mean anything to me now since I have so many options with ROTH and taxable and 401K.
You could also refinance your mortgage just before retirement taking a lot of cash out and live on that for a few years leaving your investments the way you want them.
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Old 06-12-2007, 10:47 AM   #7
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Please check on wether the 401k can be withdrawn without 10% tax penalty after 55. It will depend on the plan. Do not rely on what HR tells you get it in writing from the source. When I went through a corporate merge my 403b went from a 10% tax penalty to no tax penalty because of a change in fund manager and a new 403b plan.
This moved my FIRE date from May1 2010 to June 30 2007!!

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Old 06-12-2007, 07:18 PM   #8
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Originally Posted by jIMOh View Post
Here's my question- you have 40% of assets in taxable accounts... how much is this relative to 4 year expenses needed to bridge to 59.5?

The 8% IRA- how much is this relative to 4 year expenses?

the 2.5% shift per year to cash, how does this relate to gross income needed during next 4 years?

My thought would be 72t the 8% Intermediate bonds. Supplement this by selling some of the stock in the after tax account. Lower taxes this way, and avoids RMD's later in life.
I have a pension that = 12.5% of our yearly target Ret income. Our current portfolio is 25x the remaining 87.5% or target Ret Income. In other words, Our portfolio supports 87.5% of our yearly expenses (@ 4% WR) today, but the pension is not available to me for another 4.x years.

TromboneAl stated the problem with the after-tax account (Potentially Selling stock in a down market). If the stock market is doing well, I would not have a problem. However, I want to have an approach just in case.

The After-Tax account equals 10 years of expenses (however most is in stock MF). (40% of the portfolio)

We have a target of 40% in fixed securities can cover 10 years of income. 33% of the fixed in in tax deferred accounts 7% of the fixed will be in after-tax Money Market.

The 401k will solve the problem if there is no penalty. I will confirm the rules on the 401k withdrawal.

LOL! is correct... It is fairly difficult to navigate the maze of high expenses, tax traps, etc in these tax deferred accounts. Working might be easier except that is a habit I am trying to break.
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Old 06-12-2007, 08:02 PM   #9
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I retired at 55 and used after tax money to create a ladder of treasuries to make it to 59 /12. Had liquid assets by then, so wasn't vexed by capital gains etc.

Don't have specific advice for your current situation, but I use i-orp.com calculator as a guideline for optimizing taxes during drawn down phase. Includes RMD issues, tax calculation and Roth vs regular IRAish holdings during withdrawal. You may want to check it out.
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