Appropriate mix of investments?

[David1961]

I have a question concerning the allocation between regular, taxable investments and “retirement investments” such as 401(k)s, IRAs, etc.
Here is my specific situation. I am 46 and have about $2M in investments. About $700k of that is in my 401(k) plan at work and my IRAs. The rest ($1.3M) is in taxable investments. Suppose I want to RE at 50. Since I cannot withdraw from any of the “retirement” investments before age 59 ½ without paying a penalty, I will need to live off the other investments until age 59 ½. This got me to wondering if it is actually possible to have too much of your investment portfolio in retirement accounts that you cannot easily access before age 59 ½. For the folks who will work until they are at least 60, it makes sense to put as much in your retirement accounts, but are there any guidelines for folks who want to RE? Am I missing something here?

 

[donheff]

You can withdraw before 59.5 without penalty if you take "substantially equal payments" like an annuity.

 

[Rich_by_the_Bay]

This got me to wondering if it is actually possible to have too much of your investment portfolio in retirement accounts that you cannot easily access before age 59 ½.

If you're maxed out on tax deferral opportunities, your options are limited. Annuity and life insurance salespeople flock around such investors.

And, there's always the 72t option.

I'm in kind of the opposite situation for now - 90% of holdings are in the IRA or 403b accounts (this will be lower once a house downsizing is achieved down the road).

Few planning calculators handle the fact that to net $1000 I need to gross it up for income tax when I take distributions, but I don't have to do that while I am living off of post-tax dollars. I kind of have to fudge it into a two phase retirement for planning purposes.

 

[clifp]

I have a question concerning the allocation between regular, taxable investments and “retirement investments” such as 401(k)s, IRAs, etc.
Here is my specific situation. I am 46 and have about $2M in investments. About $700k of that is in my 401(k) plan at work and my IRAs. The rest ($1.3M) is in taxable investments. Suppose I want to RE at 50. Since I cannot withdraw from any of the “retirement” investments before age 59 ½ without paying a penalty, I will need to live off the other investments until age 59 ½. This got me to wondering if it is actually possible to have too much of your investment portfolio in retirement accounts that you cannot easily access before age 59 ½. For the folks who will work until they are at least 60, it makes sense to put as much in your retirement accounts, but are there any guidelines for folks who want to RE? Am I missing something here?

Hi Dave

I am in pretty much exactly your situation. I retired 8 years ago at 39 with twice as much taxable investment as my IRAs. My taxable accounts are roughly the same 8 years latter (more real estate) but of course my IRA have increased in value significantly so now the ratio is 60%/40%

In my case I've considered starting a 72(t) withdrawal, but I think I'll just stick with my orginal plan which was to treat my IRA accounts as my emergency/inflation protection fund. So I will start withdrawing it at 59.5.

To answer your question directly, I don't think it is possible to have too much in retirement accounts. Since you can always access via a 72(t) or at 55 in 401K, or the contribution portions of ROTH IRA at any age.

That being said I think it is much easier for an early retiremee to have a large portion of your funds in taxable account, with easy access to the money and not owing additional taxes and being subject to additional bureacracy.

 

[jIMOh]

You have significant advantages relative to someone which has the opposite (most in tax advantaged accounts).

Your advantages are that you have paid taxes on most of the money already. You can also use lower tax rates to convert 401k money to Roth money at low effective tax brackets. Converting to a Roth means tax free withdraws, and tax free is good in my book.

issue 1, dividends. Dividends are taxed at 5%, 10% or 15% depending on AGI and the tax bracket the AGI puts you in. If you can keep yourself in the lowest tax bracket based on income, you might be paying 5% on dividends paid in taxable accounts.

issue 2, long term capital gains. I believe LTCG are taxed at 5%, 10% or 15% levels similar to dividends. Keep earned income low and then LTCG of winners is taxed at low rates.

issue 3, taxable losses. You could withdraw taxable investments which lost money, and pay zero taxes on this money. In addition the losses could offset gains, to minimize taxes paid for issue 2.

issue 4, know your tax brackets. I use Fairmark web site for tax tables. Below shows an edited table for tax percentage and max income for some brackets (married filing jointly).

15,629 10%
63,446 15%
128,030 25%
195,046 28%
348,329 33%
If you choose the 72t option to withdraw from 401k, this is important. If your 401k withdraw is below 63446, for example, you are in 15% bracket (if you need to withdraw only 50k for expenses, you have 13446 you can convert to a Roth account and still be paying 15% taxes on that money (as opposed to higher rates in future if RMD pushes you into higher tax brackets).