Qualified vs Unqualified strategy?

[ShortInSeattle]

Correct me if I am wrong, but couldn't you roll your 401(k) into an IRA upon retirement and take out substantially equal periodic payments, even before the age of 59.5.

If so, a taxable nest egg could be less important.

SIS

[Original Wally]

Quote:

Originally Posted by ShortInSeattle Correct me if I am wrong, but couldn't you roll your 401(k) into an IRA upon retirement and take out substantially equal periodic payments, even before the age of 59.5. If so, a taxable nest egg could be less important. SIS

An after tax portfolio is good for those times you need a chunk of cash. You can get a cash out of an after tax portfolio with less of a tax burden.

[audreyh1]

Quote:

Originally Posted by ShortInSeattle Correct me if I am wrong, but couldn't you roll your 401(k) into an IRA upon retirement and take out substantially equal periodic payments, even before the age of 59.5. If so, a taxable nest egg could be less important. SIS

IMO, for most people, you are simply not allowed to put enough money into a tax deferred account each year to save enough if you restrict yourself to only saving tax-deferred. The limits are a bit more generous now. They were very restricted back in the 80s and 90s. If you are self-employed and have access to a SEP-IRA, then you are allowed to defer quite a bit. But not self-employed folks, especially those with higher salaries, run into a lot of limits for how much can be tax deferred. 401k plans often restrict how much the higher income folks can put away, and these same folks often don't qualify for traditional IRA or Roth IRA due to salary limits. So, unless you have a decent pension, you had better save a lot in after tax accounts, otherwise your nest egg will not be large enough to retire early comfortably.

[audreyh1]

I remember that for me in the 90s, I wanted to put 10% away in my 401K, but I was usually restricted to 6% or 7% due to the salary restrictions of the plan. At least I was able to put in enough to catch the 3% company match. I did not qualify for a tax-deferred IRA due to salary level, but at least I was able to put in $2K after tax each year in an IRA to grow tax-deferred. But $2K a year is piddling. I did not qualify for a Roth IRA either, due to salary, so no option there.

So I saved and invested as much as I could in taxable accounts to make up for these restrictions.

[PatrickA5]

Quote:

Originally Posted by LOL! Married, filing jointly, 2 kids (1 in college, education credits), pay property taxes, give away to charity (over the standard deduction), pay health insurance premiums, $3K capital loss, foreign tax credit. Have you ever done your own taxes with TurboTax? Have you ever thought, what if I did this? And checked it out in TurboTax?

Actually, I prepare taxes for a living (CPA).

I thought someone had found a way to do huge conversions tax-free. True, if you have little other taxable income, several exemptions, adjustments to income, lots of itemized deductions and credits, you can lower the tax liability of a conversion. But, most people that have large deductions and credits also make a lot of taxable income of which the conversion is added on top. Also, I doubt there are many who could do 50K-70K in conversions with offsetting deductions/credits over a period of 20 years.

Having said that, you're doing a great job of lowering your tax bill. I've got kids in college, itemize, HSA, etc, but we make too much to even consider a Roth conversion. Once we retire and the income comes down, we'll probably start doing conversions as my goal is to be 50% tax deffered and 50% after-tax.

[LOL!]

Quote:

Originally Posted by PatrickA5 Actually, I prepare taxes for a living (CPA). ... Having said that, you're doing a great job of lowering your tax bill. I've got kids in college, itemize, HSA, etc, but we make too much to even consider a Roth conversion. Once we retire and the income comes down, we'll probably start doing conversions as my goal is to be 50% tax deffered and 50% after-tax.

Well, I doubt anybody would do conversions while still working in a high tax bracket. But once retired and/or living off of "return of capital", things are a little easier.

And you saw this as well: http://www.early-retirement.org/foru...ml#post1264682 which makes taxes pretty low as well for folks still working, but living off of "return of capital".

Do any of your 6-figure-income clients shelter 80+% of their W-2 compensation?

[PatrickA5]

I have very few higher-end clients that can shelter even 30% of their ordinary income, so in that respect, you're doing great!

Me personally, I don't like "spending" money to save taxes as is the case with itemized deductions and most credits. I'll be happier when I finally get to the point where I can't itemize (i.e. take standard deduction) and don't qualify for college 529 plan income exclusions. That means I'm spending less money! I still have people tell me they keep their mortgage for the interest deduction. I tell them they can give me a dollar and I'll give them back a quarter - all day long - don't even have to itemize!

[LOL!]

We did not shelter 80+% of W-2 compensation.

We did not itemize in 2011, but we do bunch deductions into every other year, so 2012 will be a year to itemize. I agree with not spending money needlessly to reduce taxes. In my list in the other thread, we really did not spend money that was not going to be spent anyways. For example, we have no mortgage and no mortgage interest deduction. We have no state income taxes and no state income tax deduction. And we did our own taxes, so had no deduct misc itemized expenses.

We have been at about 50% taxable / 50% tax-advantaged in our overall portfolio since we started investing decades ago. I hope to convert to almost all Roth IRA in the next 20 years.