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Old 11-01-2017, 07:52 PM   #41
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As many have stated, there is really no ratio. I'm FI (But still working) and I'm 3-1 tax deferred to taxable.

I think a significant issue on your strategy is your tax rate. If you are in a top bracket I would tend to keep filling the traditional 401k. If you can do Roth 401k, would consider that to the extent not in a top bracket. As your income grows you should be able to supplement your taxable and you have a lot of time to do so.

You just need a strategy to fund those pre 59.5 years as several have said.

These is a lot of detailed advice and ideas here. But it seems you are doing well to this point. So far so good.
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Old 11-02-2017, 06:10 AM   #42
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Originally Posted by EvrClrx311 View Post
I wanted to pose a question, in an attempt to calibrate my mind towards an appropriate understand of what works best...

Assuming the goal is to FIRE around the age of 50...
Is there an ideal ratio of 401k vs taxable account values?

I've always had a mindset of getting the 401k as high as I possibly could, but does there come a point where it's better to have invested money other places. I'm not really talking about emergency funds, or cash, but the equity (growth) piece.


I'm currently 35, and have a bit of a unique situation with my job in that they set aside $34,000 a year towards my 401k. I've been putting in $18,000 myself. A total of $52,000 a year. By my math my 401k should get to the $1M mark sometime around age 42, and ideally in the $2M range when I'm 50.

I haven't bothered much in the taxable savings department to date, and was wondering if I should start ramping that up? Obviously, the more invested, the better in the long run... but specifically I wanted to know if it might be better to allocate some or all of that $18,000 away from 401k and into something else? I'd get the $34,000 contribution from work regardless of what I put in. Are there any benefits to having invested wealth outside of the 401k if my goal is to FIRE around 50? More specifically, does the 401k trap you in a way? I only vaguely understand the rules about planning scheduled early withdrawals from 401k... I guess I'd be using that if all my eggs were in the 401k basket and I wanted to Retire at 50.

Appreciate any thoughts or insights people have.
What a great employer contribution!
In your position, at 35 years old and in the 33% tax bracket, I would absolutely keep up the 401k contributions at full steam. Some of the comments here recommend making a spreadsheet to predict future cash flow and taxes. These are great ideas, but at 35 it's not worth the effort, too many variables over too long a time period. Keep maxing out your 401k. Your pay could and will likely increase in the future, at that point, look at starting to fund a taxable account. When you get to 45ish, now start to look at current tax laws and taxable vs tax advantaged and determine what you want. Make sure you take into account the ways of getting to the tax advantaged accounts before 59.5, as there are quite a few (55 situation, 72t, roth conversions, etc). I would recommend doing what you are doing and in your shoes I would do this. One of the best things in doing things this way, it's brainless, the money just goes to your 401k via payroll deduction. Simple is nice!
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Old 11-02-2017, 06:42 AM   #43
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Hi OP. Thanks for your questions. They encouraged me to research this topic.

I had originally been thinking along the lines of backdoor Roths as non-deductible IRA contributions rolled into a Roth. This encounters (at least) two problems.

1. IRA contribution is limited to 5,550.
2. IRA rollover are done on a prorated, all IRA combined basis.

You might want to look at strategy known as mega backdoor Roth. This strategy replaces the IRA in the above example with a 401K. It potentially addresses both of the issues listed above.

1. 401K contribution limit is $55,000 is 2018.
2. IRS Notice 2014-54 clarifies that you can effectively split your deductible contributions and earnings to an IRA and non deductible contributions to Roth at disbursement of the 401k.

You will also need to talk to your 401K admin / HR to clarify if the plan you are using has the capability needed to make this work.

An issue to consider, you indicated in your OP, that you already had 52k going into your 401k. That may leave little room for non deductible 401k contributions.

In Service Withdrawals an really good feature for the 401K to have. Otherwise the growth in the non deductible contributions becomes fully taxable at distribution. In Service Withdrawals allow that growth to occur in a Roth and thus become tax free.

Others posters have talked about the 5 year rules in Roths. I have largely ignored this because you are still significant more than 5 years from ER. It is a detail you need to consider with a specific plan.

This is also a potentially good strategy for me. I am looking for ways to shift brokerage dollars to Roth. This is a possibility.

Others have suggested it is not worth creating a cash flow spreadsheet at 35. I created mine at 38 with less assets than you currently have. It suits my personality and provides a measuring stick for my FI plan. I agree it is a personal choice. Based on the questions you are asking, it might be your time for this step.

I would also caution you against making an assumption that earnings only go up over a career. This may be true for some people. Most data I have seen suggests that for most of us earnings peak between your late 30s and 40s. There is a lot of variance with this. So apply your own specifics as best you can.
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Old 11-02-2017, 06:56 AM   #44
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What a great employer contribution!
In your position, at 35 years old and in the 33% tax bracket, I would absolutely keep up the 401k contributions at full steam. Some of the comments here recommend making a spreadsheet to predict future cash flow and taxes. These are great ideas, but at 35 it's not worth the effort, too many variables over too long a time period. Keep maxing out your 401k. Your pay could and will likely increase in the future, at that point, look at starting to fund a taxable account. When you get to 45ish, now start to look at current tax laws and taxable vs tax advantaged and determine what you want. Make sure you take into account the ways of getting to the tax advantaged accounts before 59.5, as there are quite a few (55 situation, 72t, roth conversions, etc). I would recommend doing what you are doing and in your shoes I would do this. One of the best things in doing things this way, it's brainless, the money just goes to your 401k via payroll deduction. Simple is nice!
I don't completely agree. I would build up some after tax $ and invest in equities (individuals if you like or ETFs) that kick of qualified dividends if anything. (personally I don't do many individual stocks). These dividends will be taxed at a lower rate than your income.

I RE @ 53 with about 55% after tax. When you do roth conversions noted in the quoted text, you can pay the taxes with after tax $. This is more efficient than using more TIRA distributions (72t or otherwise) to pay the taxes.
It is usually considered best to have a mix of taxability (after tax, TIRA and Roth) in retirement.
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Old 11-02-2017, 07:29 AM   #45
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I think your point about tax diversification is right on. Nice to have flexibility and options. In my case when I ER'd at 56, about 50% of our portfolio was in taxable account, 25% in traditional IRA, and 25% in employer deferred comp plans. Agree with others that the ratio on its own is not important, but a plan for how you'll get the cash flow you need to fund your lifestyle while also minimizing your tax exposure is.
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Old 11-02-2017, 11:40 AM   #46
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I don't completely agree. I would build up some after tax $ and invest in equities (individuals if you like or ETFs) that kick of qualified dividends if anything. (personally I don't do many individual stocks). These dividends will be taxed at a lower rate than your income.

I RE @ 53 with about 55% after tax. When you do roth conversions noted in the quoted text, you can pay the taxes with after tax $. This is more efficient than using more TIRA distributions (72t or otherwise) to pay the taxes.
It is usually considered best to have a mix of taxability (after tax, TIRA and Roth) in retirement.
I'm totally on board with (eventually) targeting taxable investments when you have enough beyond what you can defer, but beyond an emergency fund or saving for a down payment on a house, I would not target taxable right now, but I would maximize my tax deferred space. This is a use it or lose it proposition. Also, if the OP starts to invest in taxable and his income increases significantly, those dividends might be taxed at close to 20% or more depending on AMT. This was my point that s/he should defer everything s/he is able to now and see how the future plays out. In the 33% tax bracket, this is pretty much a no-brainer in my book. Worse thing that happens is that the OP is in the 33% tax bracket in retirement and its a break-even. If OP is in a higher tax bracket than that in retirement, then this discussion is moot as s/he is very wealthy.

Also, all of those (qualified) dividends that are taxed at a lower rate currently are still taxed. At least with deferment, the dividends compound deferred, and are likely withdrawn at a lower rate.

OP, since you see some disagreement, its likely it doesn't matter much either way as you are saving a lot. My point is, it is really easy not to screw this up when it is automated through payroll deductions, and the use it or lose it nature of deferment is well worth it.

Edited to add:
Even for house down payment, I believe there is a one time deal where you can take money from you 401k penalty free for a first time purchase of a home. Note that "first time purchase" doesn't mean that its the only house you've ever purchased, just the first one in a certain amount of years. Google for more info....
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Old 11-24-2017, 06:55 AM   #47
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how old are you?
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Old 12-08-2017, 02:06 PM   #48
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how old are you?
35
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Old 12-09-2017, 06:47 AM   #49
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If I start drawing from the IRA at 59, won’t I be creating taxes? Right now I'm looking at virtually no federal taxes for the next 7 years. What am I missing?


You are looking at no tax now, but when you draw SS and have RMDs in the future, you’d pay more in taxes. If you draw from the tax deferred now, you’ll spread the income over time and will be able to manage your taxes better.
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Old 12-09-2017, 07:02 AM   #50
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I think you are in a great situation. Congratulations on that tIRA match! I wish I had it. If you truly plan to Reid’s early, I would defer as much taxes now and you’d most likely find that your taxes are lower in retirement.
There are ways to easily manage your taxes in retirement, and it does not require a huge after tax account. I’m assuming Roth conversions will hand around as the government will always prefer a bird in hand, ie get taxes now vs waiting for a long time to get more in taxes.
Madfientist have some interesting articles on withdrawal strategies that could help you in your decision. Here is one about accessing tIRA money early.
https://www.madfientist.com/how-to-a...t-funds-early/
Here is another comparing Roth vs tIRA.
He is catering more to the really early retiree, but the logic is the same, but if you spend more money, you are going to pay more taxes, either now or later.
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Old 12-09-2017, 07:03 AM   #51
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Here is another comparing Roth vs tIRA.
He is catering more to the really early retiree, but the logic is the same, but if you spend more money, you are going to pay more taxes, either now or later.


https://www.madfientist.com/traditio...a-vs-roth-ira/
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Old 12-09-2017, 09:02 AM   #52
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You are looking at no tax now, but when you draw SS and have RMDs in the future, you’d pay more in taxes. If you draw from the tax deferred now, you’ll spread the income over time and will be able to manage your taxes better.
Spot on.

I'm doing Roth conversions rather than withdrawals but the current year tax impact is the same.... over the last 5 years the tax on my Roth conversions have averaged 8% because a portion is covered by deductions and exemptions in excess of our other income and taxed at 0%, some at 10% and the remainder at 15% (I only convert to the top of the 15% tax bracket). In fact, Roth conversions are better because you don't need to be 59 1/2 so earlier retirees can tax advantage of them.

If I didn't do withdrawals/conversions I would definitely pay 25% later.... with withdrawals/conversions I may pay 25% for a few years once SS starts and moves us into a higher tax bracket but 15% thereafter.... if I skipped withdrawals/conversions now I would be paying 25% for a very long time.

IMO better to pay 8% now and 15% later than 25% later. Let's say that I can convert 30% at 8% and pay 15% on the remainder... that's a blended rate of 13% and a lot less than paying 25% on everything later... on a $1 million IRA that is a savings of $120k!

ACA subsidies do not make sense in my situation so that is not an issue for me.
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