Author Topic: Why contribute to an IRA if I plan to retire early?  (Read 1297 times)

baritoneguy

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Why contribute to an IRA if I plan to retire early?
« on: November 20, 2018, 09:30:20 PM »
I used the search function but, couldn't find an answer to this question here nor could I find any "good" answers through google.

Why would I contribute to an account that I can't touch until 60 if I plan to retire at 35? Does that not delay my retirement? Wouldn't I rather have the $5500 ($6000 starting in 2019) each year going to index funds that can help me reach my goal of having 25 times my annual spending?



ixtap

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Re: Why contribute to an IRA if I plan to retire early?
« Reply #2 on: November 20, 2018, 09:42:49 PM »
I used the search function but, couldn't find an answer to this question here nor could I find any "good" answers through google.

Why would I contribute to an account that I can't touch until 60 if I plan to retire at 35? Does that not delay my retirement? Wouldn't I rather have the $5500 ($6000 starting in 2019) each year going to index funds that can help me reach my goal of having 25 times my annual spending?

The easy answer is that it sets some of that 25x spending aside for your elder years with potential tax savings. Tax savings mean that you can retire sooner, because you are either either putting aside more now or spending less later.

The longer answers are in stickies and MMM posts. A deductible IRA can reduce your tax burden now, be converted to Roth later while you are in a lower tax bracket and then you can use the converted amount at any point after 5 years (look for "Roth ladder"). A Roth IRA allows you to access your contributions at any time, while any earnings continue to accumulate tax free until they are easily accessed at 59.5.

Did you try googling "IRA early retirement"? Pretty much every FIRE blogger has an article on this topic.

shinn497

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Re: Why contribute to an IRA if I plan to retire early?
« Reply #3 on: November 20, 2018, 10:07:45 PM »
HEre are some reasons
  • 5500 is a LOT less than you should be putting away. We are talking about having a savings rate of ~50% + so you should have enough in taxable that can be withdrawn
  • If you have money in a Roth IRA or Roth 401(k), you can take out your contributions early. Than it is on you to make that last with your taxable accounts until you hit 59
  • There are ways of withdrawing from your tax advantaged accounts early if you really want to[/li[
Honestly I am 32 and looking to FIRE at 45 (maybe but not really)? The more I learn about taxes, the more I am allergic to them. The govt takes out 15% of gains on distribution. That is so annoying. I'm putting in as much into tax advantaged accounts as possible!

MustacheAndaHalf

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Re: Why contribute to an IRA if I plan to retire early?
« Reply #4 on: November 21, 2018, 03:34:39 AM »
Any 401(k) money can turn into a Traditional IRA during years when you're not earning money.  When you have almost no income, converting Traditional IRAs to Roth IRAs should be quite cheap.  But there's not enough room in those accounts, in general, for really early retirement.  So you can live off taxable while you do those conversions, and wait for that money to become available.

lexde

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Re: Why contribute to an IRA if I plan to retire early?
« Reply #5 on: November 21, 2018, 10:31:38 AM »
1. Roth Conversion Ladder
2. You can withdraw early without penalties in certain circumstances. Check out MadFientist’s article on Roth Conversion Ladder.
3. Even if you couldn’t, you still need money to live on after you hit 65, so it’s still worth it to contribute. You should be putting away a LOT more than $5,500 annually if you want to retire early, anyway.

baritoneguy

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Re: Why contribute to an IRA if I plan to retire early?
« Reply #6 on: November 23, 2018, 03:27:33 PM »
Lots of good information here, thank you for clearing this up.
As for the 401k, my company doesn't offer one (only profit sharing) which I need to do my homework on as well.

TFT

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Re: Why contribute to an IRA if I plan to retire early?
« Reply #7 on: November 29, 2018, 05:57:50 AM »
2. You can withdraw early without penalties in certain circumstances. Check out MadFientist’s article on Roth Conversion Ladder.

Can 2nd the rec on MadFientists Roth Conversion Ladder. It's solid.

DS

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Re: Why contribute to an IRA if I plan to retire early?
« Reply #8 on: November 29, 2018, 08:53:18 AM »
Wouldn't I rather have the $5500 ($6000 starting in 2019) each year going to index funds

An IRA is a type of account.

An index fund is an investment within an account.

You can invest in index funds within an IRA.

Scandium

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Re: Why contribute to an IRA if I plan to retire early?
« Reply #9 on: November 29, 2018, 09:57:07 AM »
You don't, if you plan to die at 60. Then you also need to save less; win-win.