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When to stop putting money into tax deferred accounts
Old 04-11-2010, 08:58 AM   #1
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When to stop putting money into tax deferred accounts

Good morning,

Beginning to think a little more about having a large sum in tax deffered accounts. Curious to get your thoughts about when putting money into these accounts are not a good idea. Looks like we will be in our early 40s when we hang it up here in the next little bit. Assuming I can get to the 15% Tax bracket do I still want to continue to put money in these type of accounts? I am sure I will pull a little funds out of investments each year with a small SWR?

Tomcat98
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Old 04-11-2010, 09:14 AM   #2
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Good morning,

Beginning to think a little more about having a large sum in tax deffered accounts. Curious to get your thoughts about when putting money into these accounts are not a good idea. Looks like we will be in our early 40s when we hang it up here in the next little bit. Assuming I can get to the 15% Tax bracket do I still want to continue to put money in these type of accounts? I am sure I will pull a little funds out of investments each year with a small SWR?

Tomcat98
What other assets do you have? Yes, you will probably want to wait to withdraw from your retirement accounts until you are old enough to do so without being penalized. But you will want enough in your retirement accounts so that you don't have to worry about living expenses after that.

I didn't retire until age 61. However, I would think that to retire in one's early 40's, you'd have to contribute the maximum to your retirement accounts AND build a substantial taxable portfolio at the same time.

Try tackling this as two separate problems: funding retirement before you can access your retirement accounts, and funding retirement after you can access them. At your age, I wouldn't count on SS (unfortunately and I think it's awful that you can't).
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Old 04-11-2010, 11:05 AM   #3
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Assuming I can get to the 15% Tax bracket do I still want to continue to put money in these type of accounts? I am sure I will pull a little funds out of investments each year with a small SWR?

Tomcat98
I would consider a Roth for any retirement account investments that you make with money that would only be taxed at 15%. If you are eligible and will be OK with the withdrawal rules there would seem to be no downside to a Roth for low-taxed money.

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Old 04-11-2010, 02:25 PM   #4
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If you believe you'll be in the 15%, or lower bracket when you begin IRA withdrawals, I feel it makes sense to contribute - before or after tax - because your returns grow tax free for the duration. Why pay 15% on your income in taxes now when you can defer it & gain the returns on the deferred portion?
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Old 04-11-2010, 03:48 PM   #5
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I think the biggest attraction of a Roth is tax-free compounding with some early-withdrawal options and no requirement to take RMDs. About the only way to duplicate that in a taxable account would be individual stocks that don't pay dividends, or highly tax-efficient index funds.

Another issue is that "pension" or "retirement" accounts may offer greater protection during liability, bankruptcy, and divorce proceedings. But I'd need to add a bunch of weasel-worded disclaimers to that statement.

Aside from those issues, I don't know the answer to what the % split should be between taxable and tax-deferred. It's also possible that "tax-free" would join the allocation controversy.
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Old 04-11-2010, 05:04 PM   #6
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Agree with the Roth suggestions. In addition there may come a time where you stop tax-deferring income because you need that income for living expenses.

When I no longer have earned income, I'll be living off my after-tax dollars first (wish I had a Roth), and I'll need substantially less of them than I will my pre-tax dollars which come pre-equipped with a tax obligation. Just something to think about when planning things out.
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Old 04-11-2010, 05:25 PM   #7
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What other assets do you have?
Like a few here on the board I will have military retirement which will cover most if not all of our spending needs as I have tried to reduce fixed costs as I am moving closer to retiring. Notice I said spending needs not spending wants. Although I am not sure really how I would increase spending.

We always do Roths, my TSP, and my wifes Keogh. The TSP and Keogh really helped this year even though we were in the 25% bracket.

I can see continuing to do this if I think we are going to be in a higher than 15% bracket at least while I finish up. However if I get back in the 15% bracekt I am not sure the benefit as I do think tax rates are going to rise.

Even as far out as I am from having to take RMD from retirement accounts I can see this as a possibility.

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Old 04-11-2010, 06:13 PM   #8
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The military pension covering all your needs (if not wants) is great! In my opinion this makes all the difference. Now, all you need to do is to figure out what stages of your life will have more "wants" than others.

From what I have heard here on the board, ER's in their 40's and 50's spend more (and want to spend more) than they will when they get to their 70's and 80's. So, you probably *will* want to have a good part of your portfolio arranged so that you can get to it at those younger ages, such as in your Roths and probably some in taxable investments too.

Sounds like time for you to sit back and think about how you envision your retirement. That will help you determine how much you want to have available at various ages for non-essential expenses.

It is a truism here on the message board that for tax efficiency, one should keep one's bond funds in tax sheltered accounts (like your TSP), and that equity index funds are more efficient for taxable accounts. If you do not end up with enough room in your tax sheltered accounts for all your bonds, you will have to put some bonds in taxable accounts, where their yields are unfortunately taxed. That is another factor to consider.
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Old 04-12-2010, 04:06 PM   #9
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I am still saving for FIRE (hope to go at 52 in 11 years). I save in both tax deferred and taxable accounts (low cost index funds, some stocks), with the plan of having enough taxable account money to get me to 59 1/2 or longer, so that I don't have to worry about touching the tax deferred until then. I save about 1/2 and 1/2 right now.
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