Withdrawal Planning - Which Accounts and What Order

[joe189man]

My company just announced after tax contributions are now allowed for our 401k program. This got me thinking if i should be putting money in this program vs a brokerage if our plan is to retire or significantly down shift in around age 50-53 (about 8-11 years from now).

The below plan is what i found to be the most beneficial tax and maximizing growth wise but would love input/comments from the community

Withdrawal Plan Sources List:

1. Cash reserves up to emergency fund limit
2. Brokerage or after tax accounts
3. Social Security (if age appropriate) - https://www.kiplinger.com/retirement/which-retirement-accounts-to-withdraw-from-first
4. Roth Conversion Ladder - https://www.madfientist.com/how-to-access-retirement-funds-early/
4a. Pre-Tax retirement Accounts with a 10% Penalty
4b. 72(t) SEEP
5. Pre-Tax retirement Accounts
6. Roth Retirement Accounts

If the above is correct, we need more brokerage money to fund early retirement (pre 59.5)

[uniwelder]

Posting to follow.  I'm not an expert, but why not put the 72(t) SEPP higher up in the list?

[mistymoney]

are you maxing your pre-tax 401k now?

What is your highest tax bracket?

I thought that you still had the same limits total between pre and post tax 401k, so would have to give up the tax break to put more into the post tax 401k.

[Catbert]

I would look at this differently.  Consider how much countable income you can have to get the ACA subsidy that you want/need.  Then consider the tax bracket you want to stay in.  For example, if you want to keep your income under 45K for ACA make sure you understand exactly what counts.  That may mean taking some combination of selling brokerage stocks/mutual funds (capital gains), making Roth conversions to get to 45K.  Your actual spending might come from a different complication (e.g., capital gains from selling stocks, Roth contributions, and cash on hand).

[ender]

Can you do Roth conversions in your 401k? Or if not, in service withdrawals? 

Assuming you're talking about aftertax aka megabackdoor Roth 401k contributions, the prevailing sentiment is contributions to those can be withdrawn as Roth principle contributions once rolled into an IRA.

So if you do $30k in megabackdoor Roth 401k over the next say 5 years, once you leave your employer and roll to an IRA you can withdraw $150k of the Roth principle without any penalties as part of your withdrawal plan (similar to Roth IRA contributions). Effectively this converts all the growth to Roth and avoids capital gains on it, but locks it up to 59 unless you pay penalties.

are you maxing your pre-tax 401k now?

What is your highest tax bracket?

I thought that you still had the same limits total between pre and post tax 401k, so would have to give up the tax break to put more into the post tax 401k.

This is only true if OP is referring to Roth elective deferrals. Assuming they are referring to after-tax contributions, those can be made per 401k up to a total of elective deferral, match, and aftertax up to $66k in 2023 ($69k in 2024).

[mistymoney]

Can you do Roth conversions in your 401k? Or if not, in service withdrawals? 

Assuming you're talking about aftertax aka megabackdoor Roth 401k contributions, the prevailing sentiment is contributions to those can be withdrawn as Roth principle contributions once rolled into an IRA.

So if you do $30k in megabackdoor Roth 401k over the next say 5 years, once you leave your employer and roll to an IRA you can withdraw $150k of the Roth principle without any penalties as part of your withdrawal plan (similar to Roth IRA contributions). Effectively this converts all the growth to Roth and avoids capital gains on it, but locks it up to 59 unless you pay penalties.

are you maxing your pre-tax 401k now?

What is your highest tax bracket?

I thought that you still had the same limits total between pre and post tax 401k, so would have to give up the tax break to put more into the post tax 401k.

This is only true if OP is referring to Roth elective deferrals. Assuming they are referring to after-tax contributions, those can be made per 401k up to a total of elective deferral, match, and aftertax up to $66k in 2023 ($69k in 2024).

let me check my uncerstanding here, so in 2024 401k limit is 23k, catch up is 7.5k, and say employer match is 10k. So that is 40.5k into pretax 401k.

Are you saying a person could also have 28.5 go into your employers plan as post tax roth contributions??

[ender]

Can you do Roth conversions in your 401k? Or if not, in service withdrawals? 

Assuming you're talking about aftertax aka megabackdoor Roth 401k contributions, the prevailing sentiment is contributions to those can be withdrawn as Roth principle contributions once rolled into an IRA.

So if you do $30k in megabackdoor Roth 401k over the next say 5 years, once you leave your employer and roll to an IRA you can withdraw $150k of the Roth principle without any penalties as part of your withdrawal plan (similar to Roth IRA contributions). Effectively this converts all the growth to Roth and avoids capital gains on it, but locks it up to 59 unless you pay penalties.

are you maxing your pre-tax 401k now?

What is your highest tax bracket?

I thought that you still had the same limits total between pre and post tax 401k, so would have to give up the tax break to put more into the post tax 401k.

This is only true if OP is referring to Roth elective deferrals. Assuming they are referring to after-tax contributions, those can be made per 401k up to a total of elective deferral, match, and aftertax up to $66k in 2023 ($69k in 2024).

let me check my uncerstanding here, so in 2024 401k limit is 23k, catch up is 7.5k, and say employer match is 10k. So that is 40.5k into pretax 401k.

Are you saying a person could also have 28.5 go into your employers plan as post tax roth contributions??

Yes, assuming the plan allows in plan conversions (most allowing aftertax contributions do, otherwise aftertax contributions are worse than taxable investments because the gains become traditional IRA).

In 2024, I am planning on contributing $23k elective deferral, receiving $13.8k match, and will put $32.2k into megabackdoor Roth.

Something interesting to note, the $69k 401k total limit is per unrelated 401k so if I wanted to put $69k into my current 401k between those three sources and change jobs I'd be able to contribute more in my next 401k above $69k/year.

For example in 2021 I changed jobs and contributed a total around $75k between two 401ks, because when I joined my company I did megabackdoor Roth all the way to the $58k limit. I'd also contributed around $17k total at my first company 401k between all those sources. The elective deferral limit is per person, per year, but the total plan limit is per unrelated plan per year.

[joe189man]

are you maxing your pre-tax 401k now?

What is your highest tax bracket?

I thought that you still had the same limits total between pre and post tax 401k, so would have to give up the tax break to put more into the post tax 401k.

we max out 401k, fully fund back door Roth IRAs, and fully fund HSAs
Looks like for 2023 we will be in the we may just barely hit the 32%

[joe189man]

I would look at this differently.  Consider how much countable income you can have to get the ACA subsidy that you want/need.  Then consider the tax bracket you want to stay in.  For example, if you want to keep your income under 45K for ACA make sure you understand exactly what counts.  That may mean taking some combination of selling brokerage stocks/mutual funds (capital gains), making Roth conversions to get to 45K.  Your actual spending might come from a different complication (e.g., capital gains from selling stocks, Roth contributions, and cash on hand).

this is a good idea i had not considered, i will investigate? Has the ACA changes much over the last few years? Are there expected changes moving foward?

[joe189man]

Can you do Roth conversions in your 401k? Or if not, in service withdrawals? 

Assuming you're talking about aftertax aka megabackdoor Roth 401k contributions, the prevailing sentiment is contributions to those can be withdrawn as Roth principle contributions once rolled into an IRA.

So if you do $30k in megabackdoor Roth 401k over the next say 5 years, once you leave your employer and roll to an IRA you can withdraw $150k of the Roth principle without any penalties as part of your withdrawal plan (similar to Roth IRA contributions). Effectively this converts all the growth to Roth and avoids capital gains on it, but locks it up to 59 unless you pay penalties.

are you maxing your pre-tax 401k now?

What is your highest tax bracket?

I thought that you still had the same limits total between pre and post tax 401k, so would have to give up the tax break to put more into the post tax 401k.

This is only true if OP is referring to Roth elective deferrals. Assuming they are referring to after-tax contributions, those can be made per 401k up to a total of elective deferral, match, and aftertax up to $66k in 2023 ($69k in 2024).

i am not sure if i can do roth conversions in the 401k plan, we can make roth contributions for the $23k for 2024. i am mainly talking about after tax mega back door roth contributions

If the bolded above is true then this would be a great option

[joe189man]

Posting to follow.  I'm not an expert, but why not put the 72(t) SEPP higher up in the list?

i hadnt given this option much thought, as it sounded complicated and, i should have mentioned this, we may work "part time" or on specific projects for a few years to bring in some income and offset SORR. So i figured it would be easier to just use brokerage/cash, but need to review all options and consider the ACA requirements

[joe189man]

Looking to crowd source info here as well - What are your withdrawal plans? Which accounts and what order?

[somers515]

Looking to crowd source info here as well - What are your withdrawal plans? Which accounts and what order?

I'm no expert and I haven't started to withdraw yet but from what I've read you are looking at this the wrong way (as someone else pointed out above).  Let's say you spend 50k a year but you want to look like your income is only 45k for ACA purposes then you'd withdraw 45k from taxable income sources and 5k from Roth. So there is no ideal set order like when you are in the savings stage. I'm over simplifying to make a point.

Also here's a link I saw posted in another MMM forum thread about the withdrawal phase that you might want to check out: https://earlyretirementnow.com/safe-withdrawal-rate-series/
Hope this is helpful to you!

[reeshau]

2. Brokerage or after tax accounts

I think taxable brokerage money is underappreciated for years before you begin tIRA withdraws.  The federal tax for MFJ on LTCG is 0%, up to $82k.  Hard to beat that!  And that's the gains, not even the cost basis!  Tack on a standard deduction, and even a moderately Mustacian household can live very well.  Taxes become an exercise in balancing / optimizing ACA costs.  Manufacturing income with Roth withdrawals keeps me at my target income, and has the double benefit of reducing the threat of RMD's.

The LTCG rate only applies after ordinary income, so as I begin tIRA withdrawals, it will work with or replace the Roth rollovers.   For now, though, I wad amazed at the degree of freedom I have to pick an income and get to it.  There are a lot of factors to think about, long term.