Non tax Rich, Taxable Poor

[Yoheadden]

Firstly, thank you to everyone on this Forum for all the advice, information and suggestions posted. I find this a truly invaluable resource.

After years of being frugal and diligently saving, the DW and I are a little over 2 years from being able to ER. The problem I have is now my taxable accounts are only 10% of my overall savings and currently not enough to cover the 6 years until I can dip into my IRAs without penalty. I have time to add to my taxable accounts, but my question is, which accounts would you stop funding to do this.
The DW and I each have HSAs, Roths and Simple IRAs.
We each also have SEPs, but can no longer fund them.
I’m thinking the Roths since the HSAs offer multiple benefits and by not funding the Simple IRAs, our taxable income would increase by $33,000.

Has anyone else been in a similar situation and what did you do to fix it. Any other suggestions or ideas are welcome as always and thank you.

 

[Gumby]

The last few years before we retired, I cut back our contributions to our 403b/457 accounts. Just enough to get us down into the 22% bracket. For two reasons: 1) so we'd have some post tax money in our portfolio and 2) because it didn't make sense to me to save taxes at a 22% rate now only to pay taxes at a 22% rate when we withdrew the money later. (I figure we'll be in the 22% bracket or higher for the rest of our lives.) I suppose that if we had employer matches, I would have put in enough to get the match. In any event, that allowed us to build a little more cash in after tax accounts.

So, in your shoes, I might look to cutting down on contributions to the simple IRAs -- contributing just enough to get you down a tax bracket (depends, of course, on how far above the limit that $33,000 puts you), but no more than that. We've never had HSA accounts, so I can't advise about that.

 

[Montecfo]

It's not an all or nothing thing.

Are considering the idea of pulling money from the Roths? That could be part of the solution. You could replace it later with Roth conversions post 59.5.

Unless you are in the 12 percent bracket, in which case I would cut back the taxable IRAs.

 

[Hamlet]

One thing to keep in mind is that your original contributions to a Roth IRA can be withdrawn before you are 59 without taxes or penalties.

 

[SecondCor521]

I'd consider an SEPP. Figure out how much you need for spending over the next six years, then do the SEPP calculations in reverse to figure out how big of an IRA you need. Then split off part of your or your DW's IRA and do the SEPP from that split off account. Probably better to do the SEPP from the IRA of whomever is closest to 54.5 between the two of you, since you have to do the SEPP until the longer of 5 years and age 59.5.

Depending on how much in Roth contributions you have, you could also consider a Roth conversion ladder.

A third option is to pay the 10% EW penalty for a few years as needed. We're conditioned not to, and it's nice if you can avoid it with one of the other options, but it's also probably not the end of the world for a 58 year old ER.

(Personally I did the Roth conversion ladder. Things have turned out much better than I planned, so my Roth ladder has a decade or two of spending available and I only have 8 years to 59.5, so I don't really need to worry about the "accessing money" part. But an SEPP is a good option for people who know their budget well and are in their early 50's, as you seem to be.)

 

[gauss]

One thing to keep in mind is that your original contributions to a Roth IRA can be withdrawn before you are 59 without taxes or penalties.

+1

Roth IRA 'contributions' are available tax and penalty free at any time.

Once I realized this, I stopped considering 72(t)/SEPP plans to get me to 59 1/2.

If you have access to a Roth 401k in your retirement plan, then there may be a loophole available to move these funds to your Roth IRA and the "investment-in-the-contract" portion (aka 1099-R Box 5) (aka your contributions, not the growth) would be classified as a Roth contribution allowing immediate withdrawal without penalty or tax.

-gauss

 

[ILikeStarTrek]

I retired in 2018 at age 55. Although I was pretty sure I could make it to age 59.5 without needing any money from my retirement funds, I wanted a backup plan. So before I retired (i.e. while I still had a job income, which makes it easier to get a loan), I got the largest home equity line on my house that I could get (which in my case was about $250k). I figured that if I ran out of non-retirement money with a year or two left until age 59.5, I could pull out enough money from the equity line to pay my living expenses and even pull out money to make the monthly payments. Once I got to age 59.5, I could pay back whatever I had pulled out.

It's kind of similar to one of the suggestions above "to pay the 10% Early Withdrawal penalty for a few years as needed" - but the equity line interest rate will probably be a lot lower than 10%.

I'm now age 58 and I'm not even close to needing any equity line money. But having the equity line gave me more peace of mind!

 

[moneymaker]

Hi,

Kind of the same situation.

We have about 97% of our investable assets in retirement accounts.

Now I will get a pension at 44, we are 38, but I’m more concerned with growing our taxable accounts.

Basically I card back my 401k contributions to 5% of my pay and my wife’s to the minimum to where she still gets the company match, and I’ve taken those contributions and just refocused them to taxable accounts.

 

[pb4uski]

Firstly, thank you to everyone on this Forum for all the advice, information and suggestions posted. I find this a truly invaluable resource.

After years of being frugal and diligently saving, the DW and I are a little over 2 years from being able to ER. The problem I have is now my taxable accounts are only 10% of my overall savings and currently not enough to cover the 6 years until I can dip into my IRAs without penalty. I have time to add to my taxable accounts, but my question is, which accounts would you stop funding to do this.
The DW and I each have HSAs, Roths and Simple IRAs.
We each also have SEPs, but can no longer fund them.
I’m thinking the Roths since the HSAs offer multiple benefits and by not funding the Simple IRAs, our taxable income would increase by $33,000.

Has anyone else been in a similar situation and what did you do to fix it. Any other suggestions or ideas are welcome as always and thank you.

You can withdraw Roth contributions at any time without penalty... would taxable accounts AND Roth contributions be sufficient to cover 6 years?

Or perhaps do after-tax 401k contributions then later roll into a Roth and then later withdraw contributions?

 

[Koolau]

Yeah, we did too good a job of shielding income from taxes using 401(k). Ended up we had to pull from it before we really planned to. Fortunately, we were beyond 59 1/2 before the need arose. Looking back, I would change some things - less in tax advantaged and every possible nickel into ROTHs and taxable. But as always, YMMV.

 

[RetireBy90]

+1 on the Roth as a solution. I didn't focus much on how to get to the money in retirement as I was growing the pile, mostly focused on the combined TIRA, Roth and after tax total compared to the need in retirement. It was only about 5 years before retirement that opened my eyes to the Roth and the flexibility it provides.

 

[Yoheadden]

Hmmm,
As always, a lot of good suggestions and you all have given me much to think about.
I will need to check my tax rate to see if a reduction in the Simple is an option. Although, I get a 3% match, which isn’t much, but still free money.

I’m in the perfect situation for a SEPP, being that the DW and I will both be 53 at this point. I kind of hate the idea of paying interest on my own money.

The Roth seems like the most obvious choice. I just need to rewire my thinking. Currently, the plan was to access my Roth accounts last to maximise the tax free withdrawals and they have the most aggressive funds to achieve this.
I suppose a conversion would help this, as well as lower future RMDs.

It is nice to be able ask for advice and get feedback from people that have the same goals, experiences & outlook, so thank you.

 

[wallygator69]

We were in same situation. My Accountant didn't file the correct forms for Roth Conversions. 8606's and something else was wrong,


Decided to just sell home and move to a condo for 4 years as a test for downsizing in the future. Pluses and Minuses but not dealing with IRS at all ....PRICELESS.


Good Luck,


W