Pre-tax heavy, should we shift strategies?

[TickTock]

You make $380k/yr, have $2.1MM portfolio, and expect to spend $100k/yr in retirement (are taxes included in that amount?).

I suggest double-checking your current spend and how it might change in retirement. It's unusual, but not unheard of, to live on 26% of what you were making.

Depending on when you both retire, make sure you have enough after-tax savings and/or 401(k) 55 money to cover spend until reaching 59-1/2.

$100k / .04 = $2.5MM, so by the 4% guideline you'll want another $400k in portfolio.

Good luck and let us know how you do!

 

[Exit 2024]

Back of the envelope calculation - OP is in the 24% marginal tax bracket, if he needs only $100k to live on - that would be solidly 12% bracket even including tax. I would not change anything as with additional income and paid off house you will naturally save more in the taxable.

For 2025 top of the 12% bracket is $126,950, if all from taxable - tax liability is $11,157, so net available for the spending would be $115,793 which is enough based on OP's estimated spending per year.

I am actually in the same boat, we are 55-56, have similar amount in the 401k and I can not bring myself to start paying 24% marginal rate now when our spending falling into12%. And yes, I am aware of RMD but it is 17 years away and gives plenty of time (~15 years after planned retirement date) to adjust and convert to the ROTH if needed.

 

[engineernerd]

Appreciate this. We do have the option at work to change our 401ks to Roth 401ks. Would a feasible route be stay the course I outlined with the brokerage portion but change our 401ks to Roth 401ks?

Definitely contribute to a Roth 401k in preference to a traditional 401k, and I would max out those contributions as well as the HSA.

It's good to have enough liquid after-tax cash to pay the taxes if/when you do Roth conversions, which under current laws make sense in the years when you are both retired but not yet claiming SS or taking much in distributions from your tax-deferred accounts. Since you will need to live off your distributions, though, maybe taking more than you need some years and doing Roth conversions the other years would make sense.

A lot of the tax benefit of having significant balances in taxable accounts accrue from having built up capital gains over the years, so that ship has mostly sailed already. Especially if the stock market now goes down. Such is life! Not the end of the world.

The pluses of what you have include the ability to rebalance your portfolio without worrying about tax consequences, and not having to pay much net investment income tax (additional 3.8% on the smaller of your investment income or the excess of your MAGI over $250k for Married Filing Jointly, see IRS Form 8960).

 

[pb4uski]

Thanks for all the feedback. To answer some questions, we are currently in the 24% tax bracket and our “back of the napkin” spend during retirement is in the neighborhood of $100k (22% tax bracket). Transparently, we have not done a great job of tracking expenses and are in process of collecting that info, but that should be fairly close now that the house payment is done.

Regarding retirement age, my wife would like to retire yesterday! However, 2-3 more years is what we are targeting (age 55 or 56) for her (she earns $160yr). I enjoy my job right now and plan to continue to work for another 5 or 6 years (depending on our numbers).

Perhaps its time to sit down with a flat fee / hourly advisor to look over our numbers to bring taxes into the equation?

It's pretty easy to sketch out your taxes in retirement by starting with your sources of income in the first full year and then again each time pensions or SS start. Then go to IRS & State Tax Calculator | 2005 -- 2025 and imput your data or if your use TT for your taxes then use their "What-If" worksheet. You can probably do it yourself in an hour or two.

 

[pb4uski]

Definitely contribute to a Roth 401k in preference to a traditional 401k, and I would max out those contributions as well as the HSA. ...

I dunno. OP says that they are currently in 24% tax bracket so their current tax-deferred savings is avoiding 24% or more. Exit2024's calculation, which seems reasonable to me, is that OP will be paying 12% of less on withdrawals. So OP will bank 12% from today's tax-deferred savings so I think a traditional 401k would come out ~12% ahead than Roth 401k. That's substantial. What am I missing?

Also, if Mars has a state income tax there may be savings there as well or if OP moves to a no tax tax planet.

 

[Chuckanut]

One thing I can share is that on this forum one of the most common regrets members have expressed is too much tax deferred and not enough after tax savings. This has two consequences; one is the inability to better manage the tax bill in retirement, and the other is being forced to take unwanted RMDs.

+1 Many of us are old enough to realize that Roth accounts are fairly recent. For years the only other tax advantaged savings plan was the regular IRA or 401k. Those early contributions have multiplied over and over again, giving us the it-could-be-worse problem of RMDs and IRMAA. My Roth conversions have lessened the power of that tax torpedo. Having to deal with RMD's and Aunt IRMAA is better than wondering how to stretch out the current SS check a few more days.

 

[engineernerd]

I dunno. OP says that they are currently in 24% tax bracket so their current tax-deferred savings is avoiding 24% or more. Exit2024's calculation, which seems reasonable to me, is that OP will be paying 12% of less on withdrawals. So OP will bank 12% from today's tax-deferred savings so I think a traditional 401k would come out ~12% ahead than Roth 401k. That's substantial. What am I missing?

Also, if Mars has a state income tax there may be savings there as well or if OP moves to a no tax tax planet.

Guess that's a good point. There should be better years ahead for OP to move money from tax-deferred to Roths.

 

[pjigar]

If you were suddenly retired, what would you do to bridge to 59.5? That's the problem your math needs to answer. Right now it doesn't - "get another job" is the only way.

I can't tell you how many times we get folks here who find they can retire at 50 or so, but have about 2 years in after-tax savings.

So, yeah, shore that up. I would continue the HSA, and then find a sweet spot in your 401ks between company match and max that allows you to put more into that 50k after-tax bucket.

Also check now into whether your company allows for the rule of 55. Some don't and we've had people find that out the hard way... it's not universally available.

^This. Time to stop savings taxes now and start funding the buckets that you can spend from if you decide to retire before 59.5.

I always ask young folks to balance 3 buckets equally if they can: pre-tax (401K/IRA), tax-free (HSA/Roth 401k/Roth IRA) and after-tax (brokerage, rental, business, etc.). It helps you better manage spending, taxes and future tax law changes.

FWIW our pre-tax:tax-free:after-tax ratio stands at 32%:18%:50% today. We are maxing out all tax-free buckets until FIRE. We will start Roth conversions after FIRE.

 

[pjigar]

Please go through the following questions: Some Important Questions to Answer Before Asking - Can I Retire?

 

[Aerides]

You may wish to seriously consider Roth conversions. I was able to convert a chunk of my ordinary IRA funds to Roth. While the writing the tax check was unpleasant, It has helped.

FWIW, Roth accounts were not available for a good part of my earning years. Had they been, I would have used them exclusively . Those of you who have had Roths available for most of your earning years should count your blessings.

If OP and his wife are grossing $380k, I don't think Roths are available for them.

 

[pjigar]

If OP and his wife are grossing $380k, I don't think Roths are available for them.

OP can use backdoor Roth. Most employers also offer Roth 401(k). And most 401(k) also allow after-tax contributions (mega-backdoor Roth IRA).

 

[Reach]

One consideration not yet mentioned is to account for your healthcare plans prior to Medicare eligible ages.

Roth conversions are attractive. For us, besides maximizing our Roth contributions when we had earned income, we have not been able to take advantage of them.

We chose in early retirement to keep our income in check to meet the ACA eligibility requirements for our healthcare coverage.

Technically, Roth conversions were possible over the last few years due to the Inflation Reduction Act, yet it remains to be seen if that will continue beyond 2025.

I'm 56 (DH 61) and we have been retired for 16 yrs. We have relied on our taxable accounts the entire time, with tax-deferred investments growing in the background.

 

[Phroig]

OP: Given the size of your taxable account and the fact that you're adding significant amounts while you work, I can't imagine you'd need to tap your retirement accounts before you turn 59.5. However, even if you did need to take small occasional distributions of retirement funds to supplement the brokerage money, the 10% penalty just increases the marginal tax rates on those distributions from12% to 22%. Saving 24% today seems like a no-brainer with your numbers.

 

[Pleeplus]

OP: Given the size of your taxable account and the fact that you're adding significant amounts while you work, I can't imagine you'd need to tap your retirement accounts before you turn 59.5. However, even if you did need to take small occasional distributions of retirement funds to supplement the brokerage money, the 10% penalty just increases the marginal tax rates on those distributions from12% to 22%. Saving 24% today seems like a no-brainer with your numbers.

This seems to make this most sense to me as well and is the path I am leaning. I do have the mega back door Roth option as well, but the flexibility of the brokerage account is more comforting.
I know some mentioned being retired “immediately”. I do have a “parachute” if that happens of a years salary ($220k) from my company. That and it would really have to be bad for both my wife and I to loose our jobs.

 

[Pleeplus]

I can’t add much to the discussion, you already have lots of good feedback. One thing I can share is that on this forum one of the most common regrets members have expressed is too much tax deferred and not enough after tax savings. This has two consequences; one is the inability to better manage the tax bill in retirement, and the other is being forced to take unwanted RMDs.

This makes complete sense. It feels like just yesterday everything was moving so slow, we were getting nowhere and this type of conversation seemed irrelevant. Now everything seems to be moving at warp speed.

 

[Pleeplus]

It looks like you need to sharpen the pencil and take a good look at your numbers.

Consider this as the beginning of the pencil sharpening.

 

[imjustawarrior]

For those with no or small taxable account and FIRE, here are some good options How to access funds early

 

[pb4uski]

If you were suddenly retired, what would you do to bridge to 59.5? That's the problem your math needs to answer. Right now it doesn't - "get another job" is the only way.

I can't tell you how many times we get folks here who find they can retire at 50 or so, but have about 2 years in after-tax savings.

So, yeah, shore that up. I would continue the HSA, and then find a sweet spot in your 401ks between company match and max that allows you to put more into that 50k after-tax bucket.

Also check now into whether your company allows for the rule of 55. Some don't and we've had people find that out the hard way... it's not universally available.

OP has $.4m in taxable accounts plus an emergency fund and plans to spend $100k a year and is looking to retire at 55 or 56 so will only need $450k for spending from retirement to 59-1/2. And they could always go a SEPP if they retired today. With their income the can max out traditional 401k and do some taxable savings.

 

[Pleeplus]

Thanks all. Appreciate all the advice, insights and links. We are going to stay the course and really focus our extra dollars on our brokerage account.

 

[NgineER]

Sounds like a good plan! Investigate whether you can utilize the rule of 55. Getting access to the tax deferred accounts prior to 59.5 will be valuable in accessing the money for Roth conversions. Diluting the tax pain over more years is better. Seeing the benefit of converting the tax deferred (24%) at a lower rate will be fantastic.

 

[HappilyRetired]

I can’t believe it’s been 12 years since my first post! I can honestly say that I owe a ton to this forum and thank all that contribute! Thanks to market tailwinds, salary increases, discipline and a little luck we (DW and I) have built our savings to $2.1m, even though we started late. We just ticked off one more major milestone, which is paying off our house.

The “problem” we currently have is that we are very pre-tax heavy. Of the $2.1m, ~$1.7 is in traditional 401k’s. The current plan is to continue to max out (including catch up contributions) our 401ks, continue to max out HSA’s and put the rest ($50k year) directly into our brokerage account (FXAIX), which sits at $160k. I can’t help but question if we should change that strategy, should we put less in 401k’s and more into the brokerage, other, or stay the course? I do worry about tax implications of changing course on the pre-tax funding.

We are 54 and 53, in good health and will make $380k this year. We also have a fully funded emergency fund.

Thanks for any input..

Set up a ROTH for both of you immediately. You can convert portions of your 401k (after you convert it to a Traditional IRA), into your ROTH.
NOTHING Is more powerful in retirement than a ROTH, that you never pay taxes on any appreciation, capital gains, interest or dividends.

You want to get your 401ks down so that you pay less when you are required to take RMD (required minimum distributions.). Always max out HSA's absolutely.....ROTH and HSAs are God's gifts to individuals in the USA.

 

[GrayHare]

NOTHING Is more powerful in retirement than a ROTH, that you never pay taxes on any appreciation, capital gains, interest or dividends.

No Other Tax Haven Is Near Good when you have a Retirees Owe Taxes Hah account.