15 months before retirement - Which accounts to add $100k to?

[G-Man]

I will be receiving 15 months of severance pay before officially retiring in April 2025. I plan to add an additional $100k to my retirement portfolio during the 15 months period but unsure how to distribute the $100k to the various accounts (tax-deferred, tax-free, taxable).

Currently our tax-deferred account (401k) is 5x our taxable accounts (checking/saving/brokerage) and 25x our tax-free accounts (Roth IRA and HSA).

I plan to continue to max out our Backdoor Roth IRA in 2024 and 2025 while I receive severance pay. However, our Roth IRAs was just opened in 2022. My employer does offer a Roth 401k, but I have not contributed anything at the moment. Should I?

I plan to continue to max out our HSA contributions in 2024,2025 and while receiving retiree healthcare from my former employer.

What are some other recommendations on how to distribute the $100k to the various accounts (tax-deferred, tax-free, taxable) during the 15 months of severance pay? For example, should I try to build up my taxable account as much as possible? Should I start contributing to the Roth 401k?

 

[latexman]

What is your age?

 

[G-Man]

What is your age?

57 1/2, wife is 60

 

[Al18]

I would put 40K in a retirement account, 30K in a taxable broker account and 30K in a high interest savings account (4.35% is common). Setup monthly transfer from the savings account to your checking account to spend.

You can keep the retirement account and brokerage account in Money Market funds until you decide how to invest.

 

[G-Man]

I would put 40K in a retirement account, 30K in a taxable broker account and 30K in a high interest savings account (4.35% is common). Setup monthly transfer from the savings account to your checking account to spend.

You can keep the retirement account and brokerage account in Money Market funds until you decide how to invest.

Retirement account? Are you suggesting adding $40K to my tax-deferred account? The only tax-deferred account right now is my 401k.

High interest savings account? Currently I have a Fidelity Cash Management account that I have invested in Fidelity SPRXX Money Market fund.

So, you are suggesting the following:

Tax-deferred account: $40K in Money Market Fund
Taxable Brokerage account: $30K in Money Market Fund
Taxable Savings account: $30K in high interest savings account

 

[Al18]

You could substitute the cash management account instead of the online savings account.

I don’t know if you can deposit severance money in a 401K account - you should check with your employer.

Don’t forget to contribute $7500 in your Roth IRA for 2023.

 

[G-Man]

My thinking was to continue to build up my taxable account by saving all the dollars in the Fidelity Cash Managment account that is invested in the Fidelity Money Market fund SPRXX/FZDXX.

Also is there any benefit of increasing my Roth contributions during the 15 months' severance period by starting to contribute to the employer Roth 401k in 2023, 2024, and 2025 as well as doing in-plan Roth conversions from my Traditional 401k to Roth 401k?

 

[G-Man]

You could substitute the cash management account instead of the online savings account.

I don’t know if you can deposit severance money in a 401K account - you should check with your employer.

Don’t forget to contribute $7500 in your Roth IRA for 2023.

The Backdoor Roth IRA conversion has been done for my wife and I for 2023 already.

 

[G-Man]

Any suggestions?

 

[Montecfo]

what is your tax rate now compared to when you are retired?

that is the largest drive of the the best answer to your question.

How many years of expenses are in your taxable? I assume you will begin tapping that right away.

 

[G-Man]

what is your tax rate now compared to when you are retired?

that is the largest drive of the the best answer to your question.

How many years of expenses are in your taxable? I assume you will begin tapping that right away.

Current marginal tax rate is 24% (bottom half of 24% bracket). In retirement it will at the top of the 22% marginal tax bracket.

We have about 2-3 years of expenses in my taxable account. Dividend income and my taxable account will bridge me (from 59-60) until pension kicks in at age 60. Then a combination of pension income, dividend income, taxable income, and tax-deferred income will bridge me (from 60-70) until social security kicks in at age 70. With pension and social security at age 70, there is no need to tap into my tax-deferred account anymore.

 

[Aerides]

We can't really answer because the question requires extra data.

You are 57 so you can access your pre-tax stuff in a few years, but do you want to - ie, when do you want to start taking capital gains and paying taxes on that. What kind of cash position do you have now? What are your expenses? Is anything you'd contribute still matched by your employer on severance (probably not). It's 100k so it's not a massive difference any way you shove it around.

 

[G-Man]

We can't really answer because the question requires extra data.

You are 57 so you can access your pre-tax stuff in a few years, but do you want to - ie, when do you want to start taking capital gains and paying taxes on that. What kind of cash position do you have now? What are your expenses? Is anything you'd contribute still matched by your employer on severance (probably not). It's 100k so it's not a massive difference any way you shove it around.

With the severance payments, that will take me to approximately age 59 before I need to tap into my retirement portfolio. Age 59 is my official retirement.

We have a little over $200K in cash/cash equivalents. Expenses is estimated around $120k (not including taxes) until age 70 and then drop to $100k (not including taxes). However, they could be higher in the go-go years if we are not spending enough money.

During the severance period (only in 2024, not in 2025), my employer will provide a 10% contribution to my 401k. My employer will also contribute $2K to my HSA in year 2024 and 2025 (during severance) as well as while I am on retiree healthcare (age 59-65).

 

[cyber888]

With the severance payments, that will take me to approximately age 59 before I need to tap into my retirement portfolio. Age 59 is my official retirement.

We have a little over $200K in cash/cash equivalents. Expenses is estimated around $120k (not including taxes) until age 70 and then drop to $100k (not including taxes). However, they could be higher in the go-go years if we are not spending enough money.

During the severance period (only in 2024, not in 2025), my employer will provide a 10% contribution to my 401k. My employer will also contribute $2K to my HSA in year 2024 and 2025 (during severance) as well as while I am on retiree healthcare (age 59-65).

If your expenses is $120K/year, you may want to add to your cash.
$200K is less than 2 years of your yearly expenses. What if markets tank.
I also retire this year at 59 and had more than 3 years in cash equivalent to my yearly expenses in case the market goes south. But interest rates are quite good today for cash earning 4.35% - 9.6% (iBonds).

 

[G-Man]

If your expenses is $120K/year, you may want to add to your cash.
$200K is less than 2 years of your yearly expenses. What if markets tank.
I also retire this year at 59 and had more than 3 years in cash equivalent to my yearly expenses in case the market goes south. But interest rates are quite good today for cash earning 4.35% - 9.6% (iBonds).

Sorry. I forgot that in my tax-deferred account (401k), I have an interest income bucket that is equivalent to cash in the amount of $225k (recommended by Fidelity advisor). So, in reality I have about $425k in cash/cash equivalent.

Also, don't forgot I have pension and dividend income as a source of income as well. So, I don't need the entire $120k + taxes coming from my taxable account or cash equivalent bucket in my 401k.

 

[G-Man]

Anymore suggestions?

 

[USGrant1962]

So you are >80% tax deferred - do not add another penny to that (other than capturing matching funds). I'm about 70% tax deferred (including some after-tax contributions - a MISTAKE) and am envious of the sweet, sweet, capital gains tax rates. I should have put more in brokerage.

Anyway, Roth first if you qualify, then your brokerage account. There is nothing wrong with money markets paying >5% these days to fund your next few years of expenses.

 

[G-Man]

So you are >80% tax deferred - do not add another penny to that (other than capturing matching funds). I'm about 70% tax deferred (including some after-tax contributions - a MISTAKE) and am envious of the sweet, sweet, capital gains tax rates. I should have put more in brokerage.

Anyway, Roth first if you qualify, then your brokerage account. There is nothing wrong with money markets paying >5% these days to fund your next few years of expenses.

Thanks for the advice.

 

[pb4uski]

It sounds like there isn't a big tax play here given 24% now vs 22% later and you have enough to carry you to 59-1/2 penalty free withdrawals.

I would not add to tax-deferred 401k so that leaves the Roth or taxable. Perhaps split it between these two.

 

[G-Man]

It sounds like there isn't a big tax play here given 24% now vs 22% later and you have enough to carry you to 59-1/2 penalty free withdrawals.

I would not add to tax-deferred 401k so that leaves the Roth or taxable. Perhaps split it between these two.

Thanks as always for your recommendations.

 

[cyber888]

Sorry. I forgot that in my tax-deferred account (401k), I have an interest income bucket that is equivalent to cash in the amount of $225k (recommended by Fidelity advisor). So, in reality I have about $425k in cash/cash equivalent.

Also, don't forgot I have pension and dividend income as a source of income as well. So, I don't need the entire $120k + taxes coming from my taxable account or cash equivalent bucket in my 401k.

That's great news G-Man. Same strategy with me. Aside from my real cash, I have also that bucket around $223K fixed income in my 401K earning around 5.25%, which I can withdraw anytime, but won't be touching that anytime soon.

 

[VanWinkle]

I agree with Taxable and Roth. Contributions to both are tax free and that is important in early retirement as it allows you to control your taxable income for other advantages. Cash prior to reaching Medicare and Social Security can be very helpful for ACA subsidies and Roth conversions.

VW

 

[G-Man]

I agree with Taxable and Roth. Contributions to both are tax free and that is important in early retirement as it allows you to control your taxable income for other advantages. Cash prior to reaching Medicare and Social Security can be very helpful for ACA subsidies and Roth conversions.

VW

Thanks

 

[VanWinkle]

Thanks

I meant contributions to your income are tax free from these accounts not including interest earned. Correction to an earlier post.

VW