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Income before 59.5?
Old 06-06-2018, 09:07 PM   #1
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Income before 59.5?

I need to spend more time analyzing this scenario, but I'm wondering what others think and I'm hoping to get some ideas on where to focus, especially later in the process when I'd have to take RMDs.

Assume a one million dollar portfolio that is ~75% tax-deferred (401k/IRA), 15% tax sheltered (Roth IRA), and 10% in taxable accounts.

Current age is 45 and retirement is somewhere between 50 and 55, but for this scenario lets assume that I retire at 50. That means the taxable accounts need to provide income for 10 years.

To keep things simple, I'm assuming a 3.5% WR and no portfolio growth. That means I'd need 35k/year from the portfolio, which for 10 years is 350k. The 100k that's currently in taxable accounts lasts a bit under 3 years. I need to figure out how to come up with income for the additional 7 years.

During the next 5 years, I'll be saving about 40k/year. That could add another 200k to taxable accounts.

This is where I start thinking about some of my options, which I've narrowed down to the following three:

1. Put the entire 40k/year into taxable accounts. After 5 years, there'd be 300k in the taxable account, which lasts about 8.5 years. That's probably close enough to 10 years where I wouldn't worry about the extra 1.5 year (I can work an extra year if necessary, take a small chunk out of the Roth, etc).

The problem with this option is that I'd give up 18k/year contribution into my 401k, along with a company match. I'd also pay more in taxes, which I'd prefer to avoid. So this option is unlikely.

2. Contribute the full 18k/year to the 401k and get the company match. Take the remaining 22k/year and invest it in a taxable account. This leaves 6 years of income available in taxable accounts, so I'd have to figure out where to get the remaining 4 years. Working longer is an option, but at this point I might consider a 72t or taking principle out of the Roth.

3. Contribute the full 18k/year to the 401k and get the company match and contribute the remaining 22k/year to a Roth IRA (via a mega-back door). This options means that I'd need to come up with a little more than 7 years of income. If I went this route, I'd most likely have to do a 72t.

My leaning is towards option #3, even though I'd prefer to avoid a 72t. This leaves the most in tax sheltered accounts and the larger amount in the Roth is a big plus. But I'm wondering if anybody sees any downfalls with this option?

I'm also wondering about RMDs. I haven't looked at that part in any detail, but I'd plan to rollover as much as possible into the Roth prior to RMDs. I suspect that I could be in for a shock when RMDs kick-in, but maybe that's a good problem to have?
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Old 06-06-2018, 09:15 PM   #2
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#3 , and when you do the 72t, transfer some of your 401K/IRA to a separate new IRA to do the 72t upon.
That leaves the remaining IRA free, in case you need to tap it in emergency.
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Old 06-06-2018, 10:46 PM   #3
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#3 , and when you do the 72t, transfer some of your 401K/IRA to a separate new IRA to do the 72t upon.
That leaves the remaining IRA free, in case you need to tap it in emergency.
Exactly what I did to make it thru 11 years.
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Old 06-07-2018, 03:12 AM   #4
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I had similar concerns ~ 8 years ago.

I decided to do something similar to #3 (ie the mega back door roth strategy) since my employer allowed after tax contributions to 401k and in-service withdrawals.

With DW and myself both contributing ~$50k each to our 401ks each year and then converting to Roth, it did not take long to build up enough funds in the roth (ie mid 6 figures) to get us to 59 1/2 without the need for any 72t plans.

Note that in our case DW will also get a fairly generous ER pension that will take care of many of our expenses.

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Old 06-07-2018, 07:15 AM   #5
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#4: Get a job for income between retirement age (50-55) and 59.5.
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Old 06-07-2018, 08:55 AM   #6
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I depends on your planned level of spending/withdrawals.

Number 2 will give you the most tax flexibility, which may or may not be important. If your spending is 6 figures then large 72t withdrawals could push you up a tax bracket, out of 0% CGs, cause an ACA cliff problem, or even lose AOC tax credit if you have kids in college. Having flexibility on taxes (choice between ordinary, divs/CGs, and return of principal) will let you manage your tax liability and manage Roth conversions. This is my case - retired last year at 55 with only 25% in taxable. I would have preferred say 30% in taxable.

If your spending/withdrawal is less than around $100K, you can probably comfortably do Option 3 without too many tax implications.
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Old 06-07-2018, 09:39 AM   #7
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I invested $300k in rental properties that provided about 50% of income needed. I used a stash of about $200k cash to provide the rest. I retired at 51, currently 60. It worked for me.
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Old 06-07-2018, 09:57 AM   #8
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Build up enough in taxable and ROTH contributions to get thru the first 5 years. After retirement use the taxable and ROTH contributions while starting ROTH IRA conversion ladder from your 401K. Then live off your conversion ladder the last 5 years.
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Old 06-07-2018, 01:25 PM   #9
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Build up enough in taxable and ROTH contributions to get thru the first 5 years. After retirement use the taxable and ROTH contributions while starting ROTH IRA conversion ladder from your 401K. Then live off your conversion ladder the last 5 years.
^Yes, this.


See https://forum.mrmoneymustache.com/in...fore-age-59-5/ for much discussion.
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Old 06-07-2018, 05:14 PM   #10
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72t at age 50 would provide up to $32k a year.... taxable can provide the rest.
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Old 06-07-2018, 07:12 PM   #11
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Strangely enough, I am exactly your age, had many of the same thoughts, and started a thread here about this a few weeks back. If you continue to contribute as much as you can to a Roth 401k, you still get the match, although that is taxable, and you can take out all of your personal contributions to a Roth IRA (I am assuming you would roll it over after retirement) tax and penalty free at any time. So provided you can sock enough away in there over the next 10 years, to last you till 59.5, all of the 72t, Roth ladder gyrations might not be needed. I think this is what I will be shooting for....
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Old 06-07-2018, 09:30 PM   #12
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But is there a tax cost to that strategy? If you expect your tax rate when retired to be significantly lower than now when you are saving then the Roth is suboptimal.

If you're saving 22% now and paying 12% later then that is the way to go.
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Old 06-07-2018, 09:59 PM   #13
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Great feedback. Thanks to everyone for responding.

It looks like the best approach is to keep adding to the 401k/Roth as much as possible.

Quote:
Originally Posted by enginerd View Post
Build up enough in taxable and ROTH contributions to get thru the first 5 years. After retirement use the taxable and ROTH contributions while starting ROTH IRA conversion ladder from your 401K. Then live off your conversion ladder the last 5 years.
I didn't fully appreciate the 5-year rule for Roths. I need to double-check, but I think I can start doing this now: contribute after-tax to my 401k and then rollover that contribution into a Roth (mega backdoor Roth). That means that 20k/year added to the Roth can be pulled out in 5 years (assuming I retire then). That still doesn't get me to the full 35k/year, but I know that money is available and that's what counts.

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Strangely enough, I am exactly your age, had many of the same thoughts, and started a thread here about this a few weeks back. If you continue to contribute as much as you can to a Roth 401k, you still get the match, although that is taxable, and you can take out all of your personal contributions to a Roth IRA (I am assuming you would roll it over after retirement) tax and penalty free at any time. So provided you can sock enough away in there over the next 10 years, to last you till 59.5, all of the 72t, Roth ladder gyrations might not be needed. I think this is what I will be shooting for....
I missed that thread and will look for it later. What you're describing is slightly different than what I have available. I can contribute post-tax dollars to my 401k and then roll these over into a Roth IRA. This isn't a Roth 401k. This is relatively new and your plan has to support in-service rollovers to a Roth IRA (which luckily mine does). This is called a mega backdoor Roth and a google search will give you lots of hits on how it works.
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Old 06-08-2018, 07:01 AM   #14
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What tax bracket are you in? If you are in the 12% bracket, then a taxable account invested in equities could be better than a Roth... qualified dividends and LTCG would be tax free and there would be no restrictions on withdrawals (to contributions only).
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Old 06-08-2018, 11:43 AM   #15
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My/our plan, albeit 13 yrs away to retire on 50th bday.



2-3yrs cash + rental income, followed by taxable with Roth conversions if necessary knowing I could tap a small pension at 55, likely will inherit something between now and 60.


Of course I will re-evaluate at 50 to understand if I met plan for my cash targets of 2-3yrs, my taxable balance goal, and am near or exceeding my target IRA balance and factor any remaining life happens things. We might decide to have a third kid, maybe DW retires at 50 and I do the OMY deal who knows I am flexible.



This plan would ensure we do not SWR > 2.5% until SOR risk becomes less of a concern. If I am following a double in 5-10years trajectory I won't worry at all. If I exceed that we blow more dough and/or retire sooner.



We will get raises at 62 (pension) and and 69(SS) ...re-evaluating SSA /tax policy year to year.


Less than 3,100 w*rking days left for me before this happens...(but whose counting)
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Old 06-08-2018, 11:48 AM   #16
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If you are in the 12% bracket, then a taxable account invested in equities could be better than a Roth...
At least until it comes time to take SS benefits. Then the income from a taxable account, even if not taxed itself, may cause more of the SS income to be taxed.
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Old 06-09-2018, 08:52 AM   #17
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This may be the deciding factor on pushing my retirement across the line into the following year.

Things like 72t, or taking a withdrawal in a year with 9-10 months of job income and retirement account contributions, don't seem worth it to retire 3-5 months earlier.
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Old 06-09-2018, 11:11 PM   #18
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While I hesitate to suggest OMY (or several), keep in mind that if you separate from service in the year you turn 55 you should be able to take penalty-free withdrawals from your 401k. You will have to pay the taxes, but having that money accessible would solve your problem. You CANNOT do tax free withdrawals from IRAs at 55, though.


And you don't have to wait until your birthday, in most cases.



Check your plan rules to confirm.
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Old 06-10-2018, 11:29 PM   #19
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What tax bracket are you in? If you are in the 12% bracket, then a taxable account invested in equities could be better than a Roth... qualified dividends and LTCG would be tax free and there would be no restrictions on withdrawals (to contributions only).
I'm in a higher tax bracket and I'm skeptical I'll ever see 12%. Maybe after I retire. I need to run the numbers to know for sure.

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While I hesitate to suggest OMY (or several), keep in mind that if you separate from service in the year you turn 55 you should be able to take penalty-free withdrawals from your 401k. You will have to pay the taxes, but having that money accessible would solve your problem. You CANNOT do tax free withdrawals from IRAs at 55, though.

Check your plan rules to confirm.
I've look at my plan and this isn't an option. I could very well continue to work until 55 though, but if that happens, then I'd have plenty in taxable/Roth accounts to get me to 59.5.

The more I think about my options, the more content I am with the max 401k and then Roth plan. I don't mind the extra paperwork for a 72t in the worst case and in the best case I won't have to worry about it.
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Old 06-11-2018, 07:40 AM   #20
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I'm in a higher tax bracket and I'm skeptical I'll ever see 12%. Maybe after I retire. I need to run the numbers to know for sure. ....
The 12% tax bracket end at $101,400 of income, 0% LTCG end $200 lower, at $101,200, in both cases assuming married filing jointly and standard deduction.... half of those amounts for singles.

You can get a good idea by taking your current tax return, subtracting out your work income and then adding any other appropriate adjustments like pension, 85% of SS or tax-deferre account withdrawals.
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