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when to stop saving in tax-deferred accts
Old 05-05-2017, 09:04 AM   #1
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when to stop saving in tax-deferred accts

I'm looking at numbers for ER and speculating how ER at age 55 or earlier would work for me, and I realize I need two pots of money, one in standard retirement accts, 401k etc. that are all tax-deferred, but can't be withdrawn before 59.5 yrs, and another pot in taxable accounts to cover me from 55yrs to 59.5 years. Running current investments in firecalc and ******** I see that I am getting close to having enough saved in my current tax-deferred retirement accounts to cover pot 1, so at some point I need to switch and start working on pot 2, but it feels like a real waste to not continue investing in tax-deferred accounts to get those capital gains tax free. Perhaps the answer is SEPP withdrawals. Is there a standard line of thinking regarding this "problem"? Perhaps people plan to use SEPP to cover their absolute minimum expenses and then only save enough in taxed accounts to cover the gap/variation between minimum and desired expenses? Is there any concern that SEPP will not be allowed anymore 20 years from now?
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Old 05-05-2017, 09:12 AM   #2
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My conclusion has always been that tax advantaged space is limited and I want to take as much advantage of it as I can. When it's time to live on the funds, I can SEPP or withdraw Roth contributions or rely on other assets not in tax advantaged accounts long enough to get me to 59.5 (or 55 for 401k if I retire from a job that allows it). Too much uncertainty to deliberately not take advantage of the best tax opportunity available. I'll work out details when needed.
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Old 05-05-2017, 09:13 AM   #3
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We have always put at least a little something in taxable after 401k etc was maxed out.Of course the little something got much bigger over time. Some are not as lucky as we were to be able to afford that.
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Old 05-05-2017, 09:27 AM   #4
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I used to worry about this in my 30s and early 40s, when retirement savings were nearly 100% tax-deferred. But then I retired at 52 with close to a 50/50 mix. The taxable account increased dramatically in my late 40s and early 50s. This was a combination of peak earnings, flat spending, and the kids moving out. We continued to max-out our tax-deferred accounts but saved every dime we could beyond that with an eye on ER. If you find yourself retired in your 50s with nothing but tax-deferred, then SEPP is your friend. Some people can access their 401K at 55 as well, which is common solution to this.
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Old 05-05-2017, 09:45 AM   #5
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I see that this is a common theme on this forum. My breakdown is:

18% Deferred Comp
23% Taxable
59% Tax Deferred

So, over 75% of my portfolio will be taxed. Would I have like to have a bigger chunk in taxable? Yes. Am I going to convert any money out of my IRA's? No.

This is just the way it worked out. I was making a very good salary with bonuses so to save me from getting murdered on my taxes I socked away 30% of my salary in tax deferred products. I know I'll have to pay when the time comes but I'm not upset about how things worked out.

At the exact time my Deferred Comp runs out I will have to do my RMD's.
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Old 05-05-2017, 10:39 AM   #6
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My portfolio is 70% tax deferred and, being in the process of retiring at 55, I think I under-did the taxable savings. The problem is that tax deferred is taxed at regular rates which really limits your flexibility in managing taxes.

In planning near term financial moves I'm learning a lot about tax cliffs, in-plan Roth 401(k) conversions, tIRA/Roth conversions, and other niceities that would be much easier to manage if my taxable portfolio was a higher fraction.
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Old 05-05-2017, 10:41 AM   #7
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There are several ways you can access the tax deferred money. You can do 72t like you mentioned, Roth IRA conversions, and even early withdrawal with 10% penalty has shown to be preferential in some situations for ER IIRC.
http://www.madfientist.com/how-to-ac...t-funds-early/

I on the other hand max out tax deferred and then focus on Roth IRA and After tax 401k for additional balance.
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Old 05-05-2017, 12:50 PM   #8
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75% tax deferred
15% after tax
10% tax free (Roth)

Probably overdid the tax deferred a bit.
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Old 05-05-2017, 01:15 PM   #9
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We maxed all tax deferred while in 25% marginal bracket. Also have always maxed Roth contributions. Current mix is:
76% deferred, 20% Roth, 4% after tax
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Old 05-05-2017, 03:30 PM   #10
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Does your 401k permit penalty-free withdrawals if you terminate service in the year you turn 55 (or later)? Most do, and if so, it would be a better option than a SEPP.

We used taxable accounts to fund our living expenses from ER until we had penalty-free access to tax-deferred accounts.
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Old 05-05-2017, 03:47 PM   #11
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As I was nearing my ER "magic number" in 2006-2008, I was torn between how much to invest in my 401k because I wanted to have extra money available to get me from age 45 to age ~60, when I would gain access to the first of my "reinforcements," my tIRA (rollover from my 401k).


This issue resolved itself, more or less, when in 2007 I further reduced my weekly hours worked from 20 to 12. When I did that, I lost the bennie of matching funds for my 401k contributions. So, needing as much of my reduced income to cover my regular expenses, I ended my contributions to the 401k.


When I ERed, I was able to cash out my company stock at favorable tax rates (LTCG) and combine it with my current taxable portfolio to generate enough in monthly dividends to cover my expenses. I have been living off that since 2008.
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Old 05-05-2017, 03:51 PM   #12
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Quote:
Originally Posted by pb4uski View Post
Does your 401k permit penalty-free withdrawals if you terminate service in the year you turn 55 (or later)? Most do, and if so, it would be a better option than a SEPP.

We used taxable accounts to fund our living expenses from ER until we had penalty-free access to tax-deferred accounts.


+1
Also, capital gains in 401k are not tax free. They are tax deferred and taxed at a higher rate than the cap gains rate. That is a good reason for pot #2.
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Old 05-05-2017, 04:05 PM   #13
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True, the beauty of taxable account equities is 0% tax on qualified dividends and long-term capital gains if you stay in the 15% tax bracket and the foreign tax credit for international equities in taxable accounts... almost as good as a Roth.
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Old 05-05-2017, 06:00 PM   #14
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Quote:
Originally Posted by pb4uski View Post
Does your 401k permit penalty-free withdrawals if you terminate service in the year you turn 55 (or later)? Most do, and if so, it would be a better option than a SEPP.

We used taxable accounts to fund our living expenses from ER until we had penalty-free access to tax-deferred accounts.
i just learned about this exception from another poster, its an awesome thing i never heard of before.
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Old 05-05-2017, 07:20 PM   #15
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i just learned about this exception from another poster, its an awesome thing i never heard of before.
Your 457 also.
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Old 05-05-2017, 09:51 PM   #16
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Originally Posted by pb4uski View Post
True, the beauty of taxable account equities is 0% tax on qualified dividends and long-term capital gains if you stay in the 15% tax bracket and the foreign tax credit for international equities in taxable accounts... almost as good as a Roth.
Plus if you harvest losses when you have them you can use the loss against ordinary income ($3K per year max) and/or offset gains in other years.

Timely transfer of appreciated taxable holdings to a DAF can also create some interesting tax rate arbitrage opportunities.

While I wouldn't skip the deferred accounts, taxable accounts if managed a bit can be pretty tax efficient.
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Old 05-05-2017, 10:11 PM   #17
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I had to do just that, but I realized I had to create the fully taxable pot about 7 years before FIRE. I contributed the max to my 401k and non employee ROTH as well as my taxable pot every year until the day I retired.
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