FI... Sort of? (Liquidity challenge)

[FLSUnFIRE]

Happy 4th! Speaking of independence… I really need to jump over to FI.

I’m technically FI just looking at withdrawal rates but liquidity (tax implications) and a few other relatively short term issues are keeping me slaving away. I actually intend to seek out work (possibly enough to cover my living expenses) but on my terms and definitely “at will” in every sense of the word. Ideally, 1-3 part time gigs without concern with rate of pay but what I get out of it (socializing, learning, etc).

My plan now is to try to quit my current job (“career”) at the end of 2020 and I am now trying to get my ducks in a row. I intend to live off of taxable investments (about 18% of my net worth) for the first few years drawing as necessary to make up gaps in any income I receive from part time gigs. This would last me from 6-15 years depending on part time income. At about 5 years, I would start a SEPP to augment and maintain liquidity by keeping a few years expenses in my AT accounts. I plan to liquidate/build a ladder for my expenses in January of 2021 (when my income will be much lower after giving up my primary income)

Stage setting:

Currently 45.

Bought a home free and clear.

Gross assets divided by anticipated expenses is about 3%.

Currently very little cash, almost all equity. I have a fair amount of 0% leveraged debt that I will pay off by 4/2020 with earned income.

I have an outstanding 401K loan (the real clincher keeping me stuck) that I need to figure out prior to separation. I took out the loan to reduce my CG tax hit this year (already getting hit bad enough as I still liquidated some to purchase the house.

Goals over the next year and a half:

Pay off 0% card balances and build up cash from current income. Hopefully, I’ll have about a year of living expenses cash by the end of 2020 but I still need to figure out how to pay off the 401K loan. I really don’t want to liquidate my AT account to do so as I would like a higher balance (ie, lower withdrawal rate from it so it will last longer and give me more time before starting my SEPP). Trying to think of strategies to increase liquidity (possibly even taking a loan to pay off the 401K loan –obviously when I am still employed but that might be expensive).

Any out of the box thinking on getting liquidity without tax hits (CG or penalties)? All I really want to do is adjust my balance sheet to eliminate the loan with assets without getting hit and without overly depleting my AT account balance. The AT account is mutual funds so I can’t take a margin loan (which would probably be my first choice or a solid plan B).

Sorry this is sort of wordy, hopefully this makes sense and someone has a creative and safe/legal way to help me gain the liquidity I need.

 

[pb4uski]

You probably aren't going to like this alternative, but you could take out a mortgage on the house (rates are attractive) just before your retire and use the proceeds to payoff the 401k loan... taking that burden off your neck.

Then once you stop working perhaps take a year off and harvest capital gains up to the top of the 0% capital gains bracket... $51,575 of gains in 2019 if no other income.. less $12,200 standard deduction would be $39,375 of taxable income and would be tax-free (0%). So if your basis was 50% of value you could raise up to $103,150 of cash and pay no tax assuming you had no other income.

Or start a SEPP and use the proceeds to make the mortgage payments and have money towards living expenses.

 

[RunningBum]

I'm not understanding the aversion to CGs. Are they being taxed at more than 15%? I guess in retirement you can probably take a lot at 0%.

I like the mortgage idea above. Low interest, and gives you a lot of leverage. You were talking about a margin loan or some other kind of loan. A mortgage would be a lot better IMO.

 

[Winemaker]

I concur about the mortgage. A $200,000 mortgage at 3.37% for 15 years is $1418/month. Gets you out of the liquidity hole, allows for lower cap gains, and Roth conversions.

 

[Nature Lover]

Not enough details for me to advise, but PB4's approach is an excellent start in addressing your primary question.

 

[kcowan]

I like the plan for a mortgage to facilitate and then work just enough to liquidate your Cg at low rates.

 

[flintnational]

OP, you mentioned a 3% wr using "gross assets". Most here use "net" assets aka investable assets. If you have included the value or your house in the wr calculation, I would remove it and recalculate.

 

[Closet_Gamer]

Without some absolute dollars, its hard to know the relative scale of the problems.

I like the mortgage idea.

Have you prowled through you AT accounts looking for assets that are underwater and/or don't have a lot of gains? Perhaps there is a way to fund some (all?) of the loan pay down without triggering CG?

 

[FLSUnFIRE]

Sorry to get back so late.. holiday and still working FT. (boo!) Thanks for the responses.



The aversion to CG is that I expect to be working so I would likely be paying at least 15% of 60% (unrealized gains) of anything I withdrew. Ideally, I will have enough cash on hand for 1st year expenses (not counting the 401K loan repayment) and will start withdrawals only enough to meet my needs if I don't earn enough.



The mortgage is ruled out by me, I chose to pay cash to reduce my cashflow requirements and avoid origination costs. My original intention was to delay the tax burden and liquidate taxable assets in the next tax year to keep my MAGI under threshholds - and hopefully, finding a more efficient way.


I'll delay as long as possible and also exercise my frugality muscles a bit more this next year while I continue to brainstorm other out of the box ideas (I've managed to scheme myself into what I want in the past). Who knows, maybe some bank will send me a nice 0% offer with low enough fees I can take a cash advance!

 

[FLSUnFIRE]

OP, you mentioned a 3% wr using "gross assets". Most here use "net" assets aka investable assets. If you have included the value or your house in the wr calculation, I would remove it and recalculate.

That was a bit of a mistype but the math works the same for me as I don't count any property as an asset (just an insurance policy -although I did consider imputed rent when I decided to pay cash for my home) and my only enduring debt is the 401K loan that nets out to zero since it's owed to myself.

 

[pb4uski]

.... The mortgage is ruled out by me, I chose to pay cash to reduce my cashflow requirements and avoid origination costs. My original intention was to delay the tax burden and liquidate taxable assets in the next tax year to keep my MAGI under threshholds - and hopefully, finding a more efficient way. ...

Then sorry, no other ideas... just keep working.

 

[FLSUnFIRE]

Then sorry, no other ideas... just keep working.

I will, for about 18 months.... I'm just fine tuning to make the transition as efficient as possible! I see the finish line and am more and more excited every day...

 

[pb4uski]

....Trying to think of strategies to increase liquidity (possibly even taking a loan to pay off the 401K loan –obviously when I am still employed but that might be expensive). ...

I'm confused.... in your OP taking a loan to pay off the 401k loan was a distinct possibility... but if you can do that with a low-cost mortgage then it is "ruled out".... thou speak with forked-tongue.

 

[FLSUnFIRE]

I'm confused.... in your OP taking a loan to pay off the 401k loan was a distinct possibility... but if you can do that with a low-cost mortgage then it is "ruled out".... thou speak with forked-tongue.

A mortgage does not seem low cost, I would not be deducting interest and I would incur origination and recording fees for a relatively short term (I'd likely pay it off within 2-3 years) which would boost the cost of that cheap loan substantially.


With a 2-3% balance transfer fee, a 0% CC may be my best option if I can find one as I get closer to quitting if the 0% has enough duration.

 

[Nature Lover]

OP,

We don't know how much you'll want in new liquidity, which may be why we all went towards the mortgage option (addresses most material needs and could be the lowest cost option). To clarify, if the amount needed is small, maybe a HELOC is a low cost option you'd consider?

Assuming the need is larger - since the tax impact you're trying to avoid would be immaterial otherwise - the only question I haven't seen asked yet is whether you have other assets (non-portfolio assets - cars, boats, artwork, investment real estate, etc..) that you would consider selling to pay off the 401k loan?

Liquidity most frequently comes from 3 primary sources: income, asset sales, and/or loans. If loans are effectively off the table, and working longer is not desirable (clearly), you'll likely be selling some assets (market investments, investment property, cars, boats, artwork, collectables, or your home).

Of course, if the 401k loan is small, maybe this exercise is fun but not really a big deal. (Fine tuning, as you said.)

NL

PS. OP, our posts crossed in the mail so to speak. Sounds like the amount is small (since you're considering a credit card option. That means it's likely this exercise is more "fun" than solving a more material issue. That said, I'm sure you'll figure things out.

 

[pb4uski]

A mortgage does not seem low cost, I would not be deducting interest and I would incur origination and recording fees for a relatively short term (I'd likely pay it off within 2-3 years) which would boost the cost of that cheap loan substantially.


With a 2-3% balance transfer fee, a 0% CC may be my best option if I can find one as I get closer to quitting if the 0% has enough duration.

If you're going to pay it off in 2-3 years, then perhaps a HELOC might work better. We had a HELOC way back when and IIRC there was no initial cost. I think we used it once for a couple months but that was it.

 

[skipro33]

The 2018 tax overhaul extended the 401(k) repayment period until the due date of your federal income tax return, including extensions, for loans treated as distributions after December 31, 2017. Under previous law, the loan became due within 60 days of leaving the job with the 401(k) plan.

Based on the new rules, retire in January 2020 and you'll have to have your 401K loan paid back by April 15th 2021 (16 months into retirement) File an automatic 6 month extension and you will have 22 months from quitting to pay back the loan.

This is certainly better than the 60 days the old law mandated before the loan was considered a draw.

 

[corn18]

These kinds of financial gymnastics indicate you are not FI.

 

[MarieIG]

Keep working, put every extra penny to pay off the 401k as it will become due upon you leaving the job.

 

[NgineER]

I’d consider a Roth ladder to increase flexibility rather than using a SEPP. You can start it as soon as you quit and after five years start the withdrawals.

 

[FlaGator]

These kinds of financial gymnastics indicate you are not FI.

Yep, what I was thinking, but didn't have the brass to be the first to say it.

At 45, still fiddling with -0- interest credit cards, more concerned about CG tax than ensuring adequate liquidity, then trying to find a way to square the circle of conflicting goals and asking randos on the internet to help do that......?

MarieIG's recommendation to work a couple more years is sound. Clean up your balance sheet, so looking for an "angle" isn't necessary. In your mid-40's, you have a long way to go, and a good foundation at the start will make it easier.

 

[FLSUnFIRE]

These kinds of financial gymnastics indicate you are not FI.

It implies that I want to optimize my position. I don't want to waste money paying taxes if I don't have to and want to keep my MAGI low so I can qualify for the heath care premium tax credit. I have no interest in throwing away thousands of dollars.


I am trying to keep as much of my taxable funds in place as I can though to maintain liquidity and avoid tapping my tax advantaged accounts sooner than I have to.

 

[pb4uski]

....I am trying to keep as much of my taxable funds in place as I can though to maintain liquidity and avoid tapping my tax advantaged accounts sooner than I have to.

Tapping tax-advantaged accounts instead of taxable can be preferable to avoid getting bumped into a much higher tax bracket once SS and RMDs start as long as you can do it without penalties and at a lower tax cost than you'll have once SS and RMDs start.

 

[FLSUnFIRE]

So, I'm thinking I'll pull the trigger next summer. I should earn enough to max out my 401K one last time and cover my living expenses for the year. Since I plan to do some paid activities, I will use those funds to reduce my burn rate in 2020 so my first withdrawals wouldn't start until at least 2021 when my tax rate will be much lower. When I do tap my accounts, I think I will start a SEPP using the RMD method which should cover about 2/3 of my expenses and withdraw from my taxable account to make up the difference each year. Over time, the SEPP withdrawal should go up and may even cover all my expenses if the market is kind. My Roth IRA would stand guard to cover any unforeseen expenses.