Factoring 401k plans in FIRE calculations
 08-06-2012, 04:37 PM #1 Thinks s/he gets paid by the post   Join Date: Sep 2010 Location: midwestern city Posts: 4,061 Factoring 401k plans in FIRE calculations Hello everyone Just wanted to ask how people have been factoring their 401k plans in their calculations. How did you calculate the impact of taxes for example ? How did you calculate the increase in value in your 401(k) between this year and when you plan to use your plan (in my case, at age 60) ? This is the Excel formula I use in the row corresponding to year 2025, when I turn 60: +(178000*1.015^13*0.78)*0.05*0.78 Explanation of the formula: \$178,000 = present value of my 401(k) plan (I have worked less than 10 years in the US and I only use the most conservative investments, hence the low balance) * 1.015^13 = the performance of my 401(k) plan over the next 13 years (I will continue being conservative) * 0.78 = taxes when I take all the money out of my 401(k) plan *.05*0.78 = if I decide to buy an SPIA with this money at age 60, I may get a 5% annual rate, which I guess will be taxed again as income... Result : \$6,571 per annum Any flaw with this approach ? (I am sure there is ) Looking forward to comments. Thank you. __________________ __________________ Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
 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! Join Early-Retirment.org For Free - Click Here
 08-06-2012, 08:07 PM #2 Give me a museum and I'll fill it. (Picasso)Give me a forum ...   Join Date: Jun 2005 Posts: 8,944 I don't intend to pay any taxes on my 401(k) withdrawals in retirement. I've used www.i-orp.com and TurboTax that confirm that I will not need to pay any taxes on those withdrawals. __________________
 08-06-2012, 08:36 PM #3 Give me a museum and I'll fill it. (Picasso)Give me a forum ...   Join Date: Nov 2010 Location: Vermont & Sarasota, FL Posts: 17,841 The smart play would be to convert the 401k to an IRA and have the IRA buy the SPIA so while there would be no upfront tax if done correctly, the SPIA payments would be taxable income. However, a 22% tax rate in retirement seems high to me. Would be a nice problem to have I guess. 5% payout rate seems too low. Have you check out immediateannuities.com?
 08-06-2012, 09:22 PM #4 Thinks s/he gets paid by the post   Join Date: Jul 2005 Posts: 3,877 Very heavy on taxes. Only some of the SPIA payments should be taxable if you've paid for it with taxed money.
08-07-2012, 03:23 AM   #5
Thinks s/he gets paid by the post

Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
Thank you, I will have a look at i-orp.

Quote:
 Originally Posted by LOL! I don't intend to pay any taxes on my 401(k) withdrawals in retirement. I've used www.i-orp.com and TurboTax that confirm that I will not need to pay any taxes on those withdrawals.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.

08-07-2012, 04:12 AM   #6
Thinks s/he gets paid by the post

Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
Hello pb4uski - do you have a reliable internet reference about the exact process to follow to convert the 401k to IRA and have the IRA buy the SPIA to minimize taxes ? Thank you.

Yes I did check immediateannuities and I assume the rates are going to continue to fall in the next 13 years.

Quote:
 Originally Posted by pb4uski The smart play would be to convert the 401k to an IRA and have the IRA buy the SPIA so while there would be no upfront tax if done correctly, the SPIA payments would be taxable income. However, a 22% tax rate in retirement seems high to me. Would be a nice problem to have I guess. 5% payout rate seems too low. Have you check out immediateannuities.com?
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.

08-07-2012, 04:17 AM   #7
Thinks s/he gets paid by the post

Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
Animorph - it seems you are correct. I just found this website :
https://personal.vanguard.com/us/wha...ome-comparison
Quote : "withdrawals and payments from annuities are taxed differently based on the type of assets used to purchase the annuity (qualified versus nonqualified)."

I would like to know how this works out concretely but could not find more details. Do you know ?

Quote:
 Originally Posted by Animorph Very heavy on taxes. Only some of the SPIA payments should be taxable if you've paid for it with taxed money.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.

 08-07-2012, 04:34 AM #8 Thinks s/he gets paid by the post   Join Date: Sep 2010 Location: midwestern city Posts: 4,061 Actually I was just looking at this page : 401(k) IRA matrix - Wikipedia, the free encyclopedia and it seems that all the distributions from traditional IRAs are taxed as ordinary income (except any non-deducted principal). What is non deducted principal ? This is confusing to me. __________________ Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
08-07-2012, 05:48 AM   #9

Join Date: Jan 2008
Location: Gone fishing
Posts: 25,770
Quote:
 Originally Posted by obgyn65 Actually I was just looking at this page : 401(k) IRA matrix - Wikipedia, the free encyclopedia and it seems that all the distributions from traditional IRAs are taxed as ordinary income (except any non-deducted principal). What is non deducted principal ? This is confusing to me.
Oby, if the deposits made into the 401k were With pretax income, 100% of withdrawals will be taxed. If some of the contributions were after tax, that is called non-deductable and that amount would not be taxed again when withdrawn.

+1 @ pb4uski's suggestion to convert the 401k to an IRA and then annuitize.

08-07-2012, 07:19 AM   #10
Thinks s/he gets paid by the post

Join Date: Jan 2006
Posts: 3,067
Quote:
 Originally Posted by MichaelB Oby, if the deposits made into the 401k were With pretax income, 100% of withdrawals will be taxed. If some of the contributions were after tax, that is called non-deductable and that amount would not be taxed again when withdrawn. +1 @ pb4uski's suggestion to convert the 401k to an IRA and then annuitize.
I agree that OP has 1 too many 0.78 in Excel (double-taxing). If OP did have after-tax contributions in 401K (less common), wouldn't OP want to peel those off and put in Roth so earnings would grow tax free........I'm assuming that can be done? The pre-tax contributions could go into TIRA for tax-deferral.

 08-07-2012, 08:04 AM #11 Thinks s/he gets paid by the post   Join Date: Jan 2006 Posts: 1,632 Don't forget to add the yearly contributions to your 401K if you plan to make any while you still can.
Isn't keeping the 401k post-retirement an option?
 08-07-2012, 08:10 AM #12 Recycles dryer sheets   Join Date: Jul 2011 Posts: 374 Isn't keeping the 401k post-retirement an option? Newly-retired as of last December, and I frankly have been taking the lazy-man's approach to 401k distributions. There seems to be a consensus in this thread so far that moving 401k funds to another instrument is the way to go. But I have been keeping the 401k money in the 401k so far, and it's been good to me. Decent (5+%) returns on a moderate/conservative AA, fees of .05%. I have the luxury of a decent pension and still-employed DW. Again, this is admittedly a default approach that works for me, but I am interested in hearing why it may/should be improved. Thanks! __________________ "The future's uncertain, and the end is always near. Let it roll, baby, roll." - The Doors
08-07-2012, 08:27 AM   #13
Thinks s/he gets paid by the post

Join Date: Jan 2006
Posts: 3,067
Quote:
 Originally Posted by Tree-dweller Newly-retired as of last December, and I frankly have been taking the lazy-man's approach to 401k distributions. There seems to be a consensus in this thread so far that moving 401k funds to another instrument is the way to go. But I have been keeping the 401k money in the 401k so far, and it's been good to me. Decent (5+%) returns on a moderate/conservative AA, fees of .05%. I have the luxury of a decent pension and still-employed DW. Again, this is admittedly a default approach that works for me, but I am interested in hearing why it may/should be improved. Thanks!
Some of the usual reasons stated are for greater selection of investments, lower costs, more flexibility of withdrawals. You may already have "sufficient" selection of investments and low fees, and it sounds like you may not need withdrawals........at least for now.........so probably no need to rush to do that move now (or possibly ever). Some 401K plans are not very flexible with respect to withdrawals.....mine is basically withdraw all or nothing...........but if you can hang on till age 70.5, you get the RMDs then.

One advantage of keeping in 401K is creditor protection which is battleship-strength for 401K and, depending on state, may be same or considerably weaker for an IRA.
************************************************** **********

Investing in a 401K

The Employee Retirement Income Security Act (ERISA) provides 401Ks and other ERISA-governed retirement plans with rock-solid protection from creditor judgments. [12] This protection applies to judgments other than bankruptcy, and it applies in all 50 U.S. states.
Individual Retirement Accounts (IRAs) don't receive those federal protections, although some states shield IRA assets from creditor judgments.
The language of the federal law governing rollover of assets from a 401K plan to an IRA is ambiguous. That law, the Bankruptcy Abuse Prevention and Consumer Protection Act, states that \$1 million in IRA assets is protected in bankruptcy without regard to amounts attributable to rollover contributions.
According to the Wall Street Journal, "most experts say that phrase should be interpreted to mean that amounts rolled over from employer plans get creditor protection, as well. But others ... believe it means that the \$1 million is determined 'without regard' to whether the amounts are attributable to rollovers."[13]
In short, maximizing contributions to a 401K plan is an excellent asset protection strategy; investors considering rolling over assets from a 401K plan to an IRA should carefully consider the asset protection implications.

08-07-2012, 08:44 AM   #14
Recycles dryer sheets

Join Date: Jul 2011
Posts: 374
Quote:
 Originally Posted by kaneohe Some of the usual reasons stated are for greater selection of investments, lower costs, more flexibility of withdrawals. You may already have "sufficient" selection of investments and low fees, and it sounds like you may not need withdrawals........at least for now.........so probably no need to rush to do that move now (or possibly ever). Some 401K plans are not very flexible with respect to withdrawals.....mine is basically withdraw all or nothing...........but if you can hang on till age 70.5, you get the RMDs then.
Thanks for that. Any my apologies to the OP, I don't want to hijack your post.
__________________
"The future's uncertain, and the end is always near. Let it roll, baby, roll." - The Doors

08-07-2012, 11:16 AM   #15
Thinks s/he gets paid by the post

Join Date: Jul 2009
Posts: 3,529
Quote:
 Originally Posted by Tree-dweller Newly-retired as of last December, and I frankly have been taking the lazy-man's approach to 401k distributions. There seems to be a consensus in this thread so far that moving 401k funds to another instrument is the way to go. But I have been keeping the 401k money in the 401k so far, and it's been good to me. Decent (5+%) returns on a moderate/conservative AA, fees of .05%. I have the luxury of a decent pension and still-employed DW. Again, this is admittedly a default approach that works for me, but I am interested in hearing why it may/should be improved. Thanks!
DH retired a couple of years ago and initially left some money in his 401k but the options for withdrawal were very limited. Also, the options for investment were not horrible but very limited.

And, the big thing is that you say you have fees of .05%. (I assume you really mean .50% as fees of .05% would be unusually low). If all fees really are .05% then that is fine. But assuming it is really.50% (one-half of one percent) then you can do much better at Vanguard.

08-07-2012, 11:21 AM   #16
Moderator

Join Date: Oct 2005
Location: Texas
Posts: 15,624
Quote:
 Originally Posted by Katsmeow And, the big thing is that you say you have fees of .05%. (I assume you really mean .50% as fees of .05% would be unusually low). If all fees really are .05% then that is fine. But assuming it is really.50% (one-half of one percent) then you can do much better at Vanguard.
I can't imagine anyone paying only .05% in a 401K type account unless they are federal employees in TSP.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)

08-07-2012, 01:18 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...

Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 17,841
Quote:
 Originally Posted by obgyn65 Hello pb4uski - do you have a reliable internet reference about the exact process to follow to convert the 401k to IRA and have the IRA buy the SPIA to minimize taxes ? Thank you. Yes I did check immediateannuities and I assume the rates are going to continue to fall in the next 13 years.

I think payout rates will increase for two reasons. One, interest rates will increase. Two, you will be older so the payout period will be shorter.

08-07-2012, 02:03 PM   #18
Recycles dryer sheets

Join Date: Oct 2010
Location: Orlando
Posts: 69
Quote:
 Originally Posted by ziggy29 I can't imagine anyone paying only .05% in a 401K type account unless they are federal employees in TSP.
I work for a large megacorp. Just yesterday, it released its USG mandated disclosure on 401K fees. I was pleasantly surprised to discover that the Total Annual Operating Expenses for the index funds ranged from 0.06% to 0.09%. These are lower than the fees for the index funds in my Vanguard account. Most managed fund fees were in range of .4% - .5%.OTOH, the fees for the funds my daughters 401(a) provide via County government were ridiculous. Fees on top of fees. A simple SP500 index fund was .22% + .5% admin. Most fund fees were 1.0% or higher.

08-07-2012, 04:53 PM   #19
Thinks s/he gets paid by the post

Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
Hello Michael. I guess the confusion comes from the fact that 1) I did not mention that my 401(k) is a traditional one 2) pb4uski above wrote "The smart play would be to convert the 401k to an IRA and have the IRA buy the SPIA so while there would be no upfront tax if done correctly, the SPIA payments would be taxable income."

My 401(k) plan is a traditional 401(k) = taxes on contributions have been not paid yet. Therefore my question is : if my withdrawals are taxed when I reach 60, how can I avoid these taxes by converting my 401k to an IRA and then have the IRA buy the SPIA ?

Still not clear to me, sorry.

Quote:
 Originally Posted by MichaelB Oby, if the deposits made into the 401k were With pretax income, 100% of withdrawals will be taxed. If some of the contributions were after tax, that is called non-deductable and that amount would not be taxed again when withdrawn. +1 @ pb4uski's suggestion to convert the 401k to an IRA and then annuitize.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.

08-07-2012, 04:54 PM   #20
Thinks s/he gets paid by the post

Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
No pb, I do it sometimes also.
Quote:
 Originally Posted by Tree-dweller Thanks for that. Any my apologies to the OP, I don't want to hijack your post.
__________________

__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.

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