Is FI mostly from "retirement accounts"?

[MVal]

For those of you planning on having FI way before you're 59.5, will most of your income be from the "retirement" type of accounts like 401Ks, Roth IRAs, etc?

I am just wondering, since you're not allowed to tap those accounts until age 59.5, for the most part, what will you be living on before that time of your life? What will most of your FI income come from? I am just confused if I should focus my efforts more outside the 401K and Roth path or not.

[MDM]

See https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/.

If you have access (e.g., many teachers do) to a 457 plan, that is another option.

You need enough (but no more than enough) to get to age 59.5 from some combination of taxable, Roth contributions, 457 accounts, or even paying the 10% penalty on IRA withdrawals.

[kpd905]

You can access money in your 401k penalty-free at any age using a Roth IRA conversion ladder or the 72t (SEPP) method. 

You can also withdraw Roth IRA contributions at any time.

[rpr]

There are a number of ways to get money from retirement accounts well before 59.5 without penalties. One of the ways is referred to as the "Roth Pipeline". There are other ways such as 72t etc.

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

http://forum.mrmoneymustache.com/ask-a-mustachian/help-me-understand-the-roth-conversion-pipeline-idea-and-its-benefits/

http://www.gocurrycracker.com/gcc-vs-rmd/

[rpr]

See https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/.

If you have access (e.g., many teachers do) to a 457 plan, that is another option.

You need enough (but no more than enough) to get to age 59.5 from some combination of taxable, Roth contributions, 457 accounts, or even paying the 10% penalty on IRA withdrawals.

MDM -- Thanks for the link to seattlecyclone's blog entry and to seattlecyclone for that nice concise summary.

[Financial.Velociraptor]

I have about 80% of my stache in a taxable account.  My options premium income plus dividends exceeds my withdrawal rate so I expect to make it to my withdrawal date no sweat.

[forummm]

Right now we're at 80% retirement accounts. If we had higher contribution limits we'd be at 100% retirement accounts.

[innerscorecard]

This is what happens when the "community" focuses on form over function in a mannerist way. People just tick off checkboxes, wondering why they are doing things such as placing money in retirement accounts without understanding why. That's why people also ask questions like "oh, what do I do after I've exhausted all my retirement accounts?" The answer should be obvious if a process of learning rather than mimicry was followed.

[innerscorecard]

And by my post I mean that money is money. You put money in retirement accounts because it allows you to compound faster because of favorable tax treatment. But of course you do need money to survive until then as well. The answers are that you can find loopholes to withdraw tax out of retirement accounts before then, but most people will also need some money from taxable accounts as well. Thankfully, taxable accounts will also not cost you very much in tax if you are in a low enough tax bracket.

This should be apparent if you are thinking about money as a resource, and thinking about the principles behind why that resource is being allocated a certain way, as opposed to simply thinking of checking the boxes that someone told you to do. This will show especially clearly in the likely cases that there are changes to tax or other applicable laws. You need to be able to adapt.

Understanding the vehicles and techniques but not fetishizing the form is, of course, what Jacob, Peter and others do. That is why they were able to achieve financial independence in the first place, because they were able to craft solutions from the tools available for them. Not by mindlessly copying the blueprints of others.

[forummm]

You can also withdraw all your Roth contributions (not earnings) at any time. That includes Roth 401k contributions. So if you've been diligently contributing to max out your and your spouse's Roths for years, you may have enough in there to fund your first 5 years. So it's possible to retire with 100% of your money in retirement accounts.

[Middlesbrough]

You can also withdraw all your Roth contributions (not earnings) at any time. That includes Roth 401k contributions. So if you've been diligently contributing to max out your and your spouse's Roths for years, you may have enough in there to fund your first 5 years. So it's possible to retire with 100% of your money in retirement accounts.

This is fully what I expect to do. I don't think I will ever make enough to use taxable space, but Roth contributions will probably get me there.

[Jags4186]

Search function people...

[AlwaysBeenASaver]

Mine is 33% in retirement accounts and 67% in non-retirement accounts. This is because the retirement accounts have a limit of how much I'm permitted to contribute each year, so the rest of my savings had to go into non-retirement accounts. I've always contributed the max allowed to the retirement accounts, except for my first few years out of college.

[Schaefer Light]

I know this isn't really the intent of the original post, but if you have more in taxable accounts than you do in tax-advantaged retirement accounts then you are doing very well for yourself (assuming you max out your retirement accounts).

[AlwaysBeenASaver]

I'm doing ok, FIRE date is today :-)    I also had quite a few years where I had no access to a 401K so was stuck with the low limits of an IRA.

[dandarc]

You can also withdraw all your Roth contributions (not earnings) at any time.  That includes Roth 401k contributions.

Note that you have to roll the Roth 401K over to a Roth IRA first to take advantage of this.

http://www.morganstanleyfa.com/public/projectfiles/627909bb-5718-4c45-b372-8f66239bd7bc.pdf

Non-qualified distributions directly from a Roth 401K are pro-rated between contributions and earnings, and while taxes only apply to earnings, the 10% penalty applies to the whole amount.

Which leads me to another question - on a rollover, is there paperwork that would indicate the contributions rolled over vs. the earnings?  Need to track that basis!

[brooklynguy]

Which leads me to another question - on a rollover, is there paperwork that would indicate the contributions rolled over vs. the earnings?  Need to track that basis!

Nope (or at least, not always), which led me to post this:

http://forum.mrmoneymustache.com/welcome-to-the-forum/importance-of-financial-record-keeping/

[dandarc]

Thank God I only had ~$5K at my former employer's Roth 401K when I rolled over.

Adding "Roth Basis" to our spreadsheet right now.

[mickeyj]

What I'm curious to know is, if the rules were different and you couldn't withdraw money from your 401k until 59.5 yrs old without any penalty.

Would your strategy change and put more money in taxable accounts? Or still continue to put bulk of the money in retirement accounts?

[seattlecyclone]

Which leads me to another question - on a rollover, is there paperwork that would indicate the contributions rolled over vs. the earnings?  Need to track that basis!

Your W-2 from the year(s) you made the Roth 401(k) contributions should have this number. Keep those W-2s. Once you roll over the account to a Roth IRA and start withdrawing, the first year you make the withdrawals is the first time you'll have to report your basis on your Form 8606, Line 22. After that first year of withdrawals you just subtract your withdrawals from any remaining basis and so it should be a bit easier.

[dandarc]

What I'm curious to know is, if the rules were different and you couldn't withdraw money from your 401k until 59.5 yrs old without any penalty.

Would your strategy change and put more money in taxable accounts? Or still continue to put bulk of the money in retirement accounts?

If you 100% couldn't withdraw money from tax-advantaged accounts until 59.5, and you were looking at early retirement, then yes, you'd want to have more in taxable accounts.

You'd want to be sure you have enough taxable account money to get you to 59.5, while minimizing your lifelong tax burden along the way by also contributing to tax-advantaged accounts.  Much more complicated equation there.

[sol]

Search function people...

That would be ideal, but it's probably too much to ask of most folks.

I love seeing this question crop up in a new thread every month or so, as soon as the previous one dies down.  It tells me that this is super valuable information that most people don't know about.  How to access your retirement accounts before retirement age is probably the best thing on this forum, so I don't mind having the same question asked over and over again.

[AJ]

What I'm curious to know is, if the rules were different and you couldn't withdraw money from your 401k until 59.5 yrs old without any penalty.

Would your strategy change and put more money in taxable accounts? Or still continue to put bulk of the money in retirement accounts?

If you 100% couldn't withdraw money from tax-advantaged accounts until 59.5, and you were looking at early retirement, then yes, you'd want to have more in taxable accounts.

Well, that would still depend on individual tax circumstances. If you are in a very high tax bracket while working, and expect to me in a VERY low one in RE (or move from, say, California with 13% state tax to Nevada with 0%) it still could be worth it to take the deduction while working and lose 10% to the penalty in RE. Though admittedly, few people would be in that situation.

[brooklynguy]

I love seeing this question crop up in a new thread every month or so, as soon as the previous one dies down.  It tells me that this is super valuable information that most people don't know about.  How to access your retirement accounts before retirement age is probably the best thing on this forum, so I don't mind having the same question asked over and over again.

Amen.  Absent the unyielding onslaught of new mustachians perpetually re-asking this same question and its assorted variations, seattlecyclone would not have been driven to create the internet's single best resource on the topic linked to above.  This forum's greatest virtue lies in its service as a medium for the crowdsourcing of our collective retirements, and people's tendency not to use the search function has been an indispensable catalyst in the evolution of the forum and its homegrown offshoots.

[dandarc]

What I'm curious to know is, if the rules were different and you couldn't withdraw money from your 401k until 59.5 yrs old without any penalty.

Would your strategy change and put more money in taxable accounts? Or still continue to put bulk of the money in retirement accounts?

If you 100% couldn't withdraw money from tax-advantaged accounts until 59.5, and you were looking at early retirement, then yes, you'd want to have more in taxable accounts.

Well, that would still depend on individual tax circumstances. If you are in a very high tax bracket while working, and expect to me in a VERY low one in RE (or move from, say, California with 13% state tax to Nevada with 0%) it still could be worth it to take the deduction while working and lose 10% to the penalty in RE. Though admittedly, few people would be in that situation.

This is a good point, though I thought the exercise was that your money was in the 401K and could not be withdrawn for any reason prior to 59.5 - not a penalty situation.  Purely hypothetical, at least in the US.

[TomTX]

Why are we talking age 59.5 for a 401k?

If you have retired, you can pull from the 401k without penalty at age 55.

http://www.forbes.com/sites/advisor/2012/05/09/did-you-know-you-can-access-your-401k-penalty-free-at-age-55/

If you are retiring from police, fire or medic (with certain service requirements) - it's age 50.

[MDM]

Why are we talking age 59.5 for a 401k?

If you have retired, you can pull from the 401k without penalty at age 55.

Does it depend on how old you are at retirement?  If you are 55 or older in the year in which you retire, you can do this.  But if you retire earlier than that, you still have to wait until 59.5.  At least, that's how the article seems to read:

Here’s how it works: if you are employed by a company and are participating in the company’s 401(k) plan and you leave employment with that company at any time during or after the year in which you reach age 55, there will be no penalty for taking distributions from the plan. Normally, any distribution (other than specifically-qualified distributions) prior to age 59˝ would result in a 10% early-distribution penalty being applied.

[mickeyj]

Why are we talking age 59.5 for a 401k?

If you have retired, you can pull from the 401k without penalty at age 55.

http://www.forbes.com/sites/advisor/2012/05/09/did-you-know-you-can-access-your-401k-penalty-free-at-age-55/

If you are retiring from police, fire or medic (with certain service requirements) - it's age 50.

I'm asking this because I'm based in Singapore. Our 401k equivalent, called CPF can't be withdrawn until 65. There's no Roth ladder equivalent to tap on.

Just want to get a sense of what you guys think.

[MVal]

So many great answers and I thank you all for helping out a newbie even though people probably ask this question a lot (thank you for your comment on that, Sol!).

I'm not a great math-accounting mind, so I'm trying to find a simple way I can fit all this in my little pea-brain. My gross income right now is right at about 40,000, but I assume that with the $2,000 I'm contributing to my 401K and the $2,000 I'm putting in my HSA this year, that I will fall below the $36,900 or so starting point for the 25% tax bracket. So I guess my tax rate must be 15%.

And from what you all seem to be saying, you don't want to convert parts of your 401K to your Roth until you're pretty much already FI and have stopped working a real job with huge taxable income, so that when you take the distribution from the 401K, it won't bump you into the next bracket, is that the idea? Otherwise, I guess it would be stupid if I put all my savings pre-tax into the 401K right now while I'm in the 15% bracket and then start converting it when I'm older and probably making enough to be well into the 25% bracket. And I just read somewhere that you can't convert your 401K to anything until you no longer work for that employer...I guess that is another newbie thing I didn't know.

I'm getting the picture now as to what might be a good plan for some folks like me...bulk up your 401K or tIRA as much as you can and put any taxable income you can spare to maxing out the Roth. Then, when you're ready, quit your job and start living off old contributions to Roth and it won't count as taxable income. With little or no taxable income, convert big chunks of 401K yearly to Roth and pay minimal tax. Let newly beefed up Roth grow until 59.5 and continue drawing off contributions as they reach 5 years of age. Is this what a lot of you are talking about? Correct me if I've got it wrong.

Another quick question - I have a small part time job that's only going to make me about $2000 this year. Should I probably see if I can contribute more to my 401K or HSA this year to off-set that so I don't go over the $36,900 mark?

I really appreciate your informed opinions.

[Dexterous]

I'm getting the picture now as to what might be a good plan for some folks like me...bulk up your 401K or tIRA as much as you can and put any taxable income you can spare to maxing out the Roth. Then, when you're ready, quit your job and start living off old contributions to Roth and it won't count as taxable income. With little or no taxable income, convert big chunks of 401K yearly to Roth and pay minimal tax. Let newly beefed up Roth grow until 59.5 and continue drawing off contributions as they reach 5 years of age. Is this what a lot of you are talking about? Correct me if I've got it wrong.

Mostly correct.  Of note, your contribution limit each year for all of your Trad & Roth IRAs is $5,500.  Not $5,500 for each.

Additionally, you'll want to annually convert from Trad to Roth only the amount needed for 1 year... 5 years from the year you make the conversion.  Don't convert more than needed because you'll pay tax on that (with few exceptions: you can actually have zero taxes up to a fairly large withdrawal rate if you have no other taxable income + have children and other large tax credits).

Last, some of us contribute to a Traditional 401k (or Traditional TSP for us government workers) and a Roth IRA rather than the Traditional IRA.  There can be a few reasons for this, one may be that taxable income is low enough that there is no need to invest in Trad IRA to lower taxes more.  Other reasons include the worry of tax laws changing in the future.  Or, someone might not be able to invest enough (or need) so much that they max a 401K + IRA + taxable accounts.  In those cases, a Trad 401k can be used combined with a Roth in order to utilize the Roth contributions as living money for the first 5 years of early retirement.

[TomTX]

Well, thanks for the additional clarification on the "55 rule" on the 401k. I've got a 457 currently, so I didn't get that far into the details.

We have always used a mixture of Traditional and Roth vehicles - never paying more than 15% tax rate on the money going into the Roth. I have records of Roth contributions, but I really ought to better organize them. OTOH, I'll have time to do that when I retire and actually draw them down ;)

Once the house is paid off (2021), we plan to both increase Traditional contributions and Roth contributions. I plan to work til 2027 when a reduced pension first becomes available. Basic expenses will be covered by the pension, unusual expenses or extras* covered from the Roth conversions.

*Mainly travel. Likely a vehicle for extended travel, such as a van.

[MVal]

I'm getting the picture now as to what might be a good plan for some folks like me...bulk up your 401K or tIRA as much as you can and put any taxable income you can spare to maxing out the Roth. Then, when you're ready, quit your job and start living off old contributions to Roth and it won't count as taxable income. With little or no taxable income, convert big chunks of 401K yearly to Roth and pay minimal tax. Let newly beefed up Roth grow until 59.5 and continue drawing off contributions as they reach 5 years of age. Is this what a lot of you are talking about? Correct me if I've got it wrong.

Mostly correct.  Of note, your contribution limit each year for all of your Trad & Roth IRAs is $5,500.  Not $5,500 for each.

Additionally, you'll want to annually convert from Trad to Roth only the amount needed for 1 year... 5 years from the year you make the conversion.  Don't convert more than needed because you'll pay tax on that (with few exceptions: you can actually have zero taxes up to a fairly large withdrawal rate if you have no other taxable income + have children and other large tax credits).

Thanks, Dexterous. Yeah, I realize you can only contribute the $5500 combined on any type of IRAs yearly. I guess I meant a 401K OR a tIRA, not both. I think in my case, my company 401K seems pretty good so I will skip the Traditional IRA. So if I understand this right, a good game plan would be to have 5 years worth of living expenses ready to go (either in your Roth, taxable accounts or some other savings) when you quit, and then each year, transfer one year's expenses from 401K to Roth. In that way, you'll be locked into a cycle of always having a 5-year-aged amount of cash to live on, right? Wow, that sounds pretty darn good!