Early Withdraw Question

[geeman]

When you guys retire early, what happens to your 401K and IRA's? Do you withdraw them early or do you have other accounts to hold you over until you reach proper age to withdraw these retirement accounts?

 

[Mr._johngalt]

Re: ER Question

When you guys retire early, what happens to your 401K and IRA's?  Do you withdraw them early or do you have other accounts to hold you over until you reach proper age to withdraw these retirement accounts?

In 1993, when I semiretired on practically nothing, I assumed I would start taking early IRA withdrawals right away. Spent a lot of time figuring out how much I could take (wanted the max, allowed with no penalty). Before I started
withdrawals, I got a lucrative PT gig. When that ended, I cut back to
bare bones spending ($330 per month apt, one small truck, old furniture,
no cable, no cell, meals with the folks, no dog, etc etc). That was in 1998.
Then in 2001 I remarried. Our combined income without dipping into the IRA
was 25K which has proven to be plenty. Except for taking some interest out
(which was being dumped into a MM paying about 1.25%) I have not touched it.
Thinking now maybe I can hold off until SS kicks in (SEPT , 2006), although we have gotten along so well to date I am not sure what I will do with all that income. Anyway,
certainly one of the nice surprises in my ER experience.

JG

 

[geeman]

Re: ER Question

I do realize how important 401K's and IRA's are but it sounds like I need to start working with more mutual fund type accounts (ones that don't penalize based on early withdraw).

 

[brewer12345]

Gman, take a look at the stuff on 72t withdrawals at www.retireearlyhomepage.com Basically, you can withdraw early from IRAs without paying a penalty as long as you take "substantially equal partial payments" over the course of your lifetime. Translation: you have to jump through some hoops, but if you are planning to retire early with the bulk of your assets in 401k/IRA accounts, it isn't a problem to avoid penalties.

 

[geeman]

This question is kind of off topic but I was wondering if there would be any advantage to having a Traditional and a Roth IRA?

 

[brewer12345]

With a Roth, you effectively can't use the 72t exemption. However, you can pull out contributions free of penalties. I have a Roth, but its not close to the size of my traditional IRA. I'd rather have the tax deduction now instead of later. I can always convert traditional to Roth if it makes sense.

 

[geeman]

But if you have both, you can't lose.

 

[maddythebeagle]

I think to retire early you have to have investments over and above just your iras and 401k-type plans-at least in my plan. I guess I am working to "use" the non-deferred assets earlier in my retire life and other assets latter in retirement.

Some might argue this but having more of your assets in non-deferred accounts might make sense in some ways and only contribute to 401k up to a match and to lower your tax bracket. I havent really reviewed the links on early withdrawal of iras.

Note that currently dividend income is taxed lower than ordinary income and you get tax on capital gains only when you sell in your non tax deferred accounts. That is why I like a buy and hold stat. on growth stocks with increasing dividends. I use a lot of drip plans.

 

[cute fuzzy bunny]

I have both roth and regular ira's. I figure theres a chance we'll change from an income tax to a national sales tax or some other kind of flat tax in the next 20-25 years before I tap them.

In the meanwhile, I dont need the money from them today, so I will continue to use them to house tax inefficient funds and simply consider the whole mess as one big portfolio. For example, commodities, reits and tips funds are not very tax efficient.

Maddies points on dividends is worth a second mention. If you're living a low/no debt life you can easily get by on the dividends from a set of funds that pay in the 2-3% range. With the low income level, chances are you might be able to use the 5% tax point for these qualified dividends. In 2007 that tax rate drops to 0 and stays that way unless the current dividend tax plan is repealed or not renewed.

Pretty good deal...

 

[maddythebeagle]

"Pretty good deal... "

yep. I think the momentum is to keep the favorable taxation on dividend income but I am still not putting all my FIRE eggs in one basket, but I am leaning my port to the dividend income side.

 

[cute fuzzy bunny]

I just went whole hog into it. I'm gonna feed at this trough while its still full.

 

[geeman]

So why do they set a maximum of $4,000 if you could just go out and open as many IRA's as you would like?

 

[cute fuzzy bunny]

Total contribution to all IRAs together cant exceed 4000. And that 4000 is split between traditional and roth, so if you put 2000 into one, you can only put 2000 into the other...

 

[geeman]

Total contribution to all IRAs together cant exceed 4000. And that 4000 is split between traditional and roth, so if you put 2000 into one, you can only put 2000 into the other...

Oh, ok. I gotcha.

 

[Nords]

But if you have both, you can't lose.

The conventional wisdom is:
1.  Max out 401(k) contributions to the limit of your employer's match.
1a.  Max out whatever other employer programs that are matched or discounted, like options or buying employee stock or the other 400-series numbers.
2.  Max out your Roth IRA contribution.
3.  If you haven't hit the IRA limits yet, put the rest into a conventional IRA.
4.  Put the rest of your savings into taxable accounts.

When you retire, snatch the 401(k) away from the company's clutching fingers and roll it over to a conventional IRA.  Then start thinking about a Roth conversion, especially if your income is low enough to convert a little each year while remaining with the 15% tax bracket.  This is even more compelling if someday your pension/RMDs/SS would shove you up into 25% tax-bracket territory or put a big tax whack on your SS.

Now that we're in the distribution phase we're drawing down the taxable accounts first and letting the IRAs compound.  And the IRA conversions continue, a little every year.  Not sure what we're gonna do with spouse's TSP when she retires, but that's only about 1% of the retirement portfolio.

 

[FlowGirl]

The conventional wisdom is:
1. Max out 401(k) contributions to the limit of your employer's match.
1a. Max out whatever other employer programs that are matched or discounted, like options or buying employee stock or the other 400-series numbers.
2. Max out your Roth IRA contribution.
3. If you haven't hit the IRA limits yet, put the rest into a conventional IRA.
4. Put the rest of your savings into taxable accounts.

Nords,

Any opinions on priority of TSP v. Roth contributions when there is no matching? In 2006 the percentage limits for military contributors are removed and we'll be able to contribute the full $15k to husband's TSP regardless of income. Not sure if we'll be able to swing full contributions of $15K to TSP plus $8K to Roth so need to decide how to allocate. My first instinct is to max out TSP first because we'll have until April of the following year to throw money into the Roth if we have it.

BTW, we don't always use Roth. In 2002 and 2003 we put some of our IRA money into a conventional IRA as it lowered our AGI enough to qualify for the 10% saver's tax credit. In 2004 we were back to full Roth as spouse spent half the year in a tax exclusion zone and we qualified for the 50% saver's tax credit regardless. Not sure what will happen this year, because we're in the middle of an overseas move and I'm not sure of how my job prospects look yet. Plus the spouse is getting promoted so am waiting for things to settle before I run the numbers, but I'm keeping a chunk of our IRA money in reserve to throw into whichever (Roth or conventional) is most advantageous.

 

[maddythebeagle]

I think everybody's situation is a little different. I am finding that switching to taxable accounts sooner is a better option since my own accounts are lower fee, buy and hold (little capital gains), and dividend income has lower taxes, now. I use the tax deferred accounts to lower my tax bracket, then go to the taxable savings accounts.

 

[Sheryl]

The conventional wisdom is:
1.  Max out 401(k) contributions to the limit of your employer's match.
1a.  Max out whatever other employer programs that are matched or discounted, like options or buying employee stock or the other 400-series numbers.
2.  Max out your Roth IRA contribution.
3.  If you haven't hit the IRA limits yet, put the rest into a conventional IRA.
4.  Put the rest of your savings into taxable accounts.

Nords, could you explain why it would not be better to max the 401(k) regardless of employer's match? I've been doing that the last two years (since the plan was implemented) and assumed that I would be best off to stash as much of my savings as possible there now, tax free. I have also maxed the Roth, but because of the 401k am not eligible for an IRA.

Thanks!

 

[Nords]

Nords,
    Any opinions on priority of TSP v. Roth contributions when there is no matching?  In 2006 the percentage limits for military contributors are removed and we'll be able to contribute the full $15k to husband's TSP regardless of income.  Not sure if we'll be able to swing full contributions of $15K to TSP plus $8K to Roth so need to decide how to allocate.  My first instinct is to max out TSP first because we'll have until April of the following year to throw money into the Roth if we have it.

   BTW, we don't always use Roth.  In 2002 and 2003 we put some of our IRA money into a conventional IRA as it lowered our AGI enough to qualify for the 10% saver's tax credit.  In 2004 we were back to full Roth as spouse spent half the year in a tax exclusion zone and we qualified for the 50% saver's tax credit regardless.  Not sure what will happen this year, because we're in the middle of an overseas move and I'm not sure of how my job prospects look yet.  Plus the spouse is getting promoted so am waiting for things to settle before I run the numbers, but I'm keeping a chunk of our IRA money in reserve to throw into whichever (Roth or conventional) is most advantageous.

Wotta deal, eh? How ironic that my spouse may never get a pay billet again. Not that she needs it, but the Navy requires Reservists without a pay billet to either drill for free or to go inactive. Considering the hassles of the alternatives it's easier to have a pay billet.

I'd max out the TSP before the Roth. Very few investors can put pre-tax salary in 401(k)s with ERs of 10 basis points. I also think the TSP does a better customer-service job than Vanguard and, with the twin-edged sword of being a large govt organization, the TSP can beat down expense ratios without too much misconduct. So I feel that the organization will stay relatively honest for the next few decades without totally screwing up our records. And you make a very good point about being able to catch up with the Roth contribution.

I'll have to take a look at the conventional vs Roth contributions; I never thought of that credit. I don't think we've qualified for a deductible IRA contribution since about 1986, and some years we couldn't even make Roth IRA contributions. It's been a lot better in ER and now we'd even liquidate taxable accounts to make sure that every penny of earned income hit the TSP & IRA contribution limits.

The TSP came along very late in my career and my total contribution was only $1800. But now spouse has about 1% of our retirement portfolio in the TSP and we've always contributed to the max. $15K is a year's drill pay for her and we'll put it all in the TSP next year. (If she gets a pay billet. The results start going out next Monday; you'll feel the earth move.)

Nords, could you explain why it would not be better to max the 401(k) regardless of employer's match? I've been doing that the last two years (since the plan was implemented) and assumed that I would be best off to stash as much of my savings as possible there now, tax free. I have also maxed the Roth, but because of the 401k am not eligible for an IRA. Thanks!

"It depends." (I hate that answer.) The reason for it being conventional wisdom is that most 401(k)s have high expenses and lousy fund options, so the best thing about most 401(k)s is the employer match.

You have to compare your 401(k) performance (which is already after-tax but should also reflect all expenses) to the performance of your taxable accounts-- which has to be after-tax and after all expenses. A good tax-managed low-expense index fund with Vanguard or Fidelity may beat the pants off a 401(k) charging a 5% ER of fees & loads.

I've read that Fidelity earns more money from running 401(k)s than they do from managing mutual funds (or even from buying low & selling high). So if the only entity profiting from a 401(k) is its management, then it's probably better to stick to the conventional wisdom.