Enough to Retire, but not old enough to touch it....

[jazz4cash]

Quote:

Originally Posted by USGrant1962 Tax diversification is important, especially for an early retiree. I was putting a huge fraction of my savings into tax deferred accounts for most of my career, and when ER became a reality I realized that I overdid it by a little bit. For example, I was putting after tax money into my 401(k), for which I now need to bite the bullet and convert to Roth 401(k). I would be more comfortable right now if I had a little more in taxable compared to tax deferred. I retired at 55 and was about 75% tax deferred (with the house paid off). My suggestion: 1. Cut your 401(k) contribution back to make sure you get the match, but no more. Never give up a match for tax purposes - you can't beat the return. 2. Put whatever you are eligible for into Roth 401(k)/IRA. 3. Put the rest into taxable accounts - low cost index funds recommended. Ideally at ER in your early-50s you will have a good mix of taxable, tax-deferred, and tax-free accounts so you can actively manage your AGI for tax bracket, 0% capital gains, and ACA purposes. Then you will have a choice on Rule of 55/72t withdrawals, regular taxable account withdrawlas (much of which is return of principal and tax free), tax-free Roth withdrawals.

Well put.

[UnrealizedPotential]

If you get desperate to retire and still do not have enough after tax money, you could sell the house and get to the equity. No, I am not saying you should do this, as there are too many variables at play. Maybe you like it where you are and plan to stay long term. Still, selling the house is another option for you, although admittedly, maybe an unattractive one.

FWIW , I sold my condo to get more after tax money to be able to quit my job. But I was more than willing to relocate.

[armor99]

Quote:

Originally Posted by SecondCor521 Ah, I see. You are correct in that Roth conversions create ordinary taxable income. I retired two years ago at the age of 46 and am utilizing a Roth conversion ladder. The way I did it was to save a bunch first in 401(k)'s and IRA's. I then started saving in a taxable account as my income and savings rate grew. I reasonably quickly saved up 5 years worth of expenses in a combination of taxable accounts and Roth IRA contribution amounts. Then I retired and started my Roth conversion ladder. In general, each year I Roth convert what I expect my expenses to be 5 years down the road. I then spend one year's expenses from my 5 years of after-tax savings. After five years, I'll have my Roth pipeline full and can continue on that indefinitely. Doing it this way does require saving up that 5 year taxable nut before retiring. On the other hand, it also means that those Roth conversions are done at a time when one's taxable income is quite low, so the taxes on the Roth conversions are negligible. As a real world example, last year I Roth converted a modest five-figure sum and paid federal taxes of $0 and state taxes of $10. In fact, after a few refundable credits, I received a small four-figure sum back from the federal and state taxing authorities, so I actually had a negative tax rate on my Roth conversion last year. I expect that situation to continue over the next several years. In fact, my biggest tax problem is realizing enough income to take advantage of all of the nonrefundable credits I'll be entitled to over the next several years as my kids go through college. ... As an aside, I've been interested in early retirement since the late 1990s, and until a few years ago I was planning on doing the 72(t) route. I recently learned about the Roth conversion ladder and for my situation I like it better. A previous poster mentioned the lack of flexibility with 72(t), which is a relatively big drawback for retirees around 50 years old, because you'll have to stay with the program for almost 20 years. Yes, there are ways around this, but they require extra steps and complexity I'd rather avoid. With the Roth conversion ladder, one can vary the conversion amounts annually as needed. But again, I think the biggest trick to the Roth ladder is getting that initial 5 year nut saved up so you can prime the ladder when you're retired.

Thanks for your insight. I have looked at this. And I can see the advantages. But I would have to save a really large sum of money. Guessing around 250k for that five years to live on. I am assuming the way it works is to stop working once you have the 250k saved up, and then Roth convert 50k from your IRA (assuming you have at least 250k in there as well) each year. That should have little to no taxes at that time, as you have little to no income( you stopped working) In five years, you can now take back what you put in tax and penalty free. Am I thinking about this correctly?

[SecondCor521]

Quote:

Originally Posted by armor99 Thanks for your insight. I have looked at this. And I can see the advantages. But I would have to save a really large sum of money. Guessing around 250k for that five years to live on. I am assuming the way it works is to stop working once you have the 250k saved up, and then Roth convert 50k from your IRA (assuming you have at least 250k in there as well) each year. That should have little to no taxes at that time, as you have little to no income( you stopped working) In five years, you can now take back what you put in tax and penalty free. Am I thinking about this correctly?

Yup, that's the basic idea.

I'll just point out that if you're spending $50K per year, you should have ~25 times that in savings, or ~$1.25M. If you have $250K in cash, that would imply 401(k)'s and IRA's of ~$1M.

In that scenario, I'm not sure why you say $250K is a lot of money - you'd have 4x that in your IRA's...

[ponyboy]

Quote:

Originally Posted by 97guns I have voiced my opinion several times on the drawbacks of having your funds tied up in retirement accounts and basically having to work until withdrawal age and I’ve been chastised for it, viewed as some kind of simpleton or even a troll by golly. My stance remains the same and I asked myself the question: why would you want a fund to dictate when I retire, sure “there are ways“ to get at your money but I asked again: why do I need to jump through hoops to get my money. Would I have retired at 39 if my funds were tied up in retirement accounts, I can definitely say no!

You are trolling. You didnt even attempt to answer OP's question. You're simply looking for a response.

If I were OP...I would back off 401k (at least get the match) and start hammering taxable accounts. Like others said...72t is an option when you reach 55.

[RunningBum]

Quote:

Originally Posted by armor99 So say I need 50k a year for the ladder to work. While I am working I believe I am in the 28% tax bracket. So that would mean a 14k tax bill? Or am I not thinking about this correctly. Might not be....

There is no 28% tax bracket under the current system, so I guess you mean 24% now.

EDIT: removed the rest. I was using MFJ tax tables, but maybe you are single as I see no ref to a spouse. In that case the numbers probably make sense.

[ncbill]

Quote:

Originally Posted by 97guns I have voiced my opinion several times on the drawbacks of having your funds tied up in retirement accounts and basically having to work until withdrawal age and I’ve been chastised for it, viewed as some kind of simpleton or even a troll by golly. My stance remains the same and I asked myself the question: why would you want a fund to dictate when I retire, sure “there are ways“ to get at your money but I asked again: why do I need to jump through hoops to get my money. Would I have retired at 39 if my funds were tied up in retirement accounts, I can definitely say no!

You're ignoring the creditor protection that comes with tax-deferred accounts, e.g. 401k, traditional IRA.

Taxable accounts are more flexible but usually have no protection from creditor claims.

Asset exposure is a huge area of discussion over on bogleheads, with many favoring irrevocable asset protection trusts over multi-million dollar umbrella policies.

[NgineER]

Quote:

Originally Posted by SecondCor521 Ah, I see. You are correct in that Roth conversions create ordinary taxable income. I retired two years ago at the age of 46 and am utilizing a Roth conversion ladder. The way I did it was to save a bunch first in 401(k)'s and IRA's. I then started saving in a taxable account as my income and savings rate grew. I reasonably quickly saved up 5 years worth of expenses in a combination of taxable accounts and Roth IRA contribution amounts. Then I retired and started my Roth conversion ladder. In general, each year I Roth convert what I expect my expenses to be 5 years down the road. I then spend one year's expenses from my 5 years of after-tax savings. After five years, I'll have my Roth pipeline full and can continue on that indefinitely. Doing it this way does require saving up that 5 year taxable nut before retiring. On the other hand, it also means that those Roth conversions are done at a time when one's taxable income is quite low, so the taxes on the Roth conversions are negligible. As a real world example, last year I Roth converted a modest five-figure sum and paid federal taxes of $0 and state taxes of $10. In fact, after a few refundable credits, I received a small four-figure sum back from the federal and state taxing authorities, so I actually had a negative tax rate on my Roth conversion last year. I expect that situation to continue over the next several years. In fact, my biggest tax problem is realizing enough income to take advantage of all of the nonrefundable credits I'll be entitled to over the next several years as my kids go through college. ... As an aside, I've been interested in early retirement since the late 1990s, and until a few years ago I was planning on doing the 72(t) route. I recently learned about the Roth conversion ladder and for my situation I like it better. A previous poster mentioned the lack of flexibility with 72(t), which is a relatively big drawback for retirees around 50 years old, because you'll have to stay with the program for almost 20 years. Yes, there are ways around this, but they require extra steps and complexity I'd rather avoid. With the Roth conversion ladder, one can vary the conversion amounts annually as needed. But again, I think the biggest trick to the Roth ladder is getting that initial 5 year nut saved up so you can prime the ladder when you're retired.

+1

This is my plan as well.

Look into after-tax 401k contributions. Some companies allows these and they can be rolled over into a Roth IRA. This allows me to contribute $14k a year and on top of that I could contribute $5.5k into a Roth IRA. In ten years that is about $200k of contributions that can be withdrawn tax free.
All these contributions will server as a basis for my Roth rollover ladder.

[SecondCor521]

Quote:

Originally Posted by ponyboy 72t is an option when you reach 55.

72(t) programs can be started at any age. One does not have to wait until age 55.

[97guns]

Quote:

Originally Posted by ncbill You're ignoring the creditor protection that comes with tax-deferred accounts, e.g. 401k, traditional IRA. Taxable accounts are more flexible but usually have no protection from creditor claims. Asset exposure is a huge area of discussion over on bogleheads, with many favoring irrevocable asset protection trusts over multi-million dollar umbrella policies.

I don’t really care about creditor protection, I care about liquidity of my own money, money that’s useable before they tell me when I can start drawing on it.

I do like the company matching with 401k’s but I’ve always made the minimum contribution to get the full match, tax savings I could care less.

[exnavynuke]

Quote:

Originally Posted by 97guns I don’t really care about creditor protection, I care about liquidity of my own money, money that’s useable before they tell me when I can start drawing on it. I do like the company matching with 401k’s but I’ve always made the minimum contribution to get the full match, tax savings I could care less.

To each their own. Keeping more of my money was/is important to me so tax savings are something I care a great deal about. Though everyone gets to have their own opinions in life.

[armor99]

Quote:

Originally Posted by NgineER +1 This is my plan as well. Look into after-tax 401k contributions. Some companies allows these and they can be rolled over into a Roth IRA. This allows me to contribute $14k a year and on top of that I could contribute $5.5k into a Roth IRA. In ten years that is about $200k of contributions that can be withdrawn tax free. All these contributions will server as a basis for my Roth rollover ladder.

I was actually thinking about it this morning. I currently invest in a Roth 401k at work. And I have a personal Roth IRA with my contributions over the years, including other rolled over Roth 401ks. So really if I want to punch out by 55... or younger. I just need to make sure I have enough money that I have personally contributed into my Roth IRA, and Roth 401k. ( in theory when I retire, I would roll over the Roth 401k into my Roth IRA). I am thinking that by the time I get there in approx 10 years, I should have enough of my own personal contributions in there to tide me over till 59.5. I am putting in 17.5k a year into my Roth 401k and 5500 into my Roth IRA. So that would mean in 10 years I would have 230k that I can take out tax and penalty free. So all of the 72t or Roth IRA ladder gyrations might not be needed.

[seabourne]

Yes, I think that you have it correct, though you might consider looking at where you fall on the tax bracket bubble. With everything going into Roth accounts, you are paying the marginal rate on some of that. While I wouldn't suggest putting everything into a refular 401k or IRA, you may look at putting the highest tax bracket portion in. It makes it easier to arbitrage your tax conversions and withdrawals when you have options, and it's the most efficient for you today as well.

[NgineER]

Quote:

Originally Posted by armor99 I was actually thinking about it this morning. I currently invest in a Roth 401k at work. And I have a personal Roth IRA with my contributions over the years, including other rolled over Roth 401ks. So really if I want to punch out by 55... or younger. I just need to make sure I have enough money that I have personally contributed into my Roth IRA, and Roth 401k. ( in theory when I retire, I would roll over the Roth 401k into my Roth IRA). I am thinking that by the time I get there in approx 10 years, I should have enough of my own personal contributions in there to tide me over till 59.5. I am putting in 17.5k a year into my Roth 401k and 5500 into my Roth IRA. So that would mean in 10 years I would have 230k that I can take out tax and penalty free. So all of the 72t or Roth IRA ladder gyrations might not be needed.

I think you are on the right track here... Add up all your rollovers and contributions to date and see how much you have saved up, you might already have enough to bridge the gap.

Quote:

Originally Posted by seabourne Yes, I think that you have it correct, though you might consider looking at where you fall on the tax bracket bubble. With everything going into Roth accounts, you are paying the marginal rate on some of that. While I wouldn't suggest putting everything into a refular 401k or IRA, you may look at putting the highest tax bracket portion in. It makes it easier to arbitrage your tax conversions and withdrawals when you have options, and it's the most efficient for you today as well.

Some very good points here as well. You want to look at your total tax picture. Socking away Roth 401k while working would most likely put you in a higher tax bracket now that when you are retired. It might be wiser to contribute to a regular 401k and deduct some taxes now and when you are retired and pulling out tax free contributions, convert your traditional 401k and pay less in taxes than you do now. I contribute to a traditional 401k and do after tax contributions on top of that.

[armor99]

Quote:

Originally Posted by NgineER I think you are on the right track here... Add up all your rollovers and contributions to date and see how much you have saved up, you might already have enough to bridge the gap. Some very good points here as well. You want to look at your total tax picture. Socking away Roth 401k while working would most likely put you in a higher tax bracket now that when you are retired. It might be wiser to contribute to a regular 401k and deduct some taxes now and when you are retired and pulling out tax free contributions, convert your traditional 401k and pay less in taxes than you do now. I contribute to a traditional 401k and do after tax contributions on top of that.

One more little wrinkle here.... the Roth 401K roll over into my Roth IRA is not just my personal contribution. Vanguard does not have this info. I called to check. I will have to go back to the previous companies Roth 401k plan admin to get the documentation. Strange.... you would think one 401k plan admin would send on this info to the next admin. But I guess not...

[HI Bill]

Quote:

Originally Posted by SecondCor521 A previous poster mentioned the lack of flexibility with 72(t), which is a relatively big drawback for retirees around 50 years old, because you'll have to stay with the program for almost 20 years.

My understanding is that if you start using 72(t) before 59.5, you have to use it for either AT LEAST 5 years, or until you turn 59.5, whichever is later. So, if you start at age 50, you'd only be locked in for 9.5 years. Is this correct, or am I missing something?

[seabourne]

HNL Bill, that agrees with my understanding. I think that the larger issue is being locked in at a fixed rate that is very low for an early retiree. It's based on prevailing interest rates at the time you start, life expectancy or amotization rate, all of which are (or at least ahve been recent years) lower than might be a SWR, and leaves someone with very little flexibility until 59.5 years old

[armor99]

Quote:

Originally Posted by seabourne HNL Bill, that agrees with my understanding. I think that the larger issue is being locked in at a fixed rate that is very low for an early retiree. It's based on prevailing interest rates at the time you start, life expectancy or amotization rate, all of which are (or at least ahve been recent years) lower than might be a SWR, and leaves someone with very little flexibility until 59.5 years old

That matches up with what I saw... you would have to have a really enormous nest egg to get enough out of it each year....from the calculations I was seeing.

[HI Bill]

Quote:

Originally Posted by armor99 That matches up with what I saw... you would have to have a really enormous nest egg to get enough out of it each year....from the calculations I was seeing.

Yes, that is true...

A SEPP for a 401(k) at $750K for a 52-year old, would throw out about $37K annually, if using the Amortization or Annuity calculation methods, and only about $22K if using the Minimum Distribution Method. Assuming you're following the 4% 'rule', this is not too far out of line. If you are planning to take more than this, and you have no other taxable assets, you'll likely run out of money eventually.

[SecondCor521]

Quote:

Originally Posted by HNL Bill My understanding is that if you start using 72(t) before 59.5, you have to use it for either AT LEAST 5 years, or until you turn 59.5, whichever is later. So, if you start at age 50, you'd only be locked in for 9.5 years. Is this correct, or am I missing something?

You are correct. For some reason when I typed that my brain was thinking about age 70.5, which is for starting RMD's, not for ending 72(t)'s. My bad.