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Taxable vs. Tax Deferred Accounts
Old 06-03-2004, 05:08 PM   #1
 
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Taxable vs. Tax Deferred Accounts

It seems like the majority, or at least many, of those who have ER'd on this board have substantial assets in taxable accounts. A number of you mention that you have been retired for X number of years without touching your IRA's 401(k) etc.

I guess the questions is : given the desire to retire early and what I percieve as a need for flexibility, how much should someone have in taxable accounts?

Is it merely maximize the amount you can save into tax-deferred accounts and then save anything above that in taxable accounts? Or is there some point at which it would make sense to save more in taxable accounts even if you are not maxing out your tax-deferred accounts? Don't the early withdrawal rules make it difficult to live off of just tax deferred account, considering the need for money may vary from budget significantly from year to year? Or is this not the case?

Thanks for any responses.
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Re: Taxable vs. Tax Deferred Accounts
Old 06-03-2004, 07:42 PM   #2
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Re: Taxable vs. Tax Deferred Accounts

Quote:
. . . I guess the questions is : given the desire to retire early and what I percieve as a need for flexibility, how much should someone have in taxable accounts?

Is it merely maximize the amount you can save into tax-deferred accounts and then save anything above that in taxable accounts? *Or is there some point at which it would make sense to save more in taxable accounts even if you are not maxing out your tax-deferred accounts? *Don't the early withdrawal rules make it difficult to live off of just tax deferred account, considering the need for money may vary from budget significantly from year to year? *Or is this not the case?
Hi Theo,

The most important parts of getting to early retirement is establishing a lifestyle that you will be able to support for 30+ years along with a nest egg of sufficient size. What kind of accounts that nest egg is in is usually of secondary importance. A typical strategy is to maximize your available tax sheltered (IRA/401K/403B) investments first. Then make any investments beyond those maximum amounts in taxable accounts. Depending on when you retire and how you've invested, you may or may not end up with enough in taxable accounts to live off of between your retirement date and the date you are allowed to withdraw from the tax sheltered accounts without penalty. But there is a SEPP (substantial equal periodic payment) clause in the law that allows you to get at your tax sheltered investments prior to age 59.5 if you need to do that. Using the SEPP formula, you calculate a minimum value that you need to withdraw from your taxable accounts and lock in a fixed withdrawal amount for a minimum of 5 years (or age 59.5).
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