Author Topic: 401k Questions Part 2  (Read 1753 times)

taking fire

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401k Questions Part 2
« on: November 18, 2015, 08:33:47 AM »
I asked this question in my other thread, but it was never answered. I thought I would reset, and see if I can get some answers here.

I'm trying to understand the Mustachian target.

Let's say I didn't have any debt and went crazy at saving in 401k, and saved up to 25 times my annual income in about ten years, and wanted to retire. That makes me 41. Wouldn't I take the tax hit for pulling it out early, vs waiting until whatever it is - age 59.5? If so, I have heard that it is something like 35-40% tax hit if you take it early. I'm just trying to understand what I would do here. Would I simply have to save up to whatever amount would make it to where when 35-40% was removed, I was then left with the amount I needed - the amount which is 25 times my income?

I mean if I retire from my job and roll it over into a roth IRA, I'm still going to have to pay taxes as soon as I put it in (which might be less than removing from 401k altogether). But, is there an age limit with a penalty on this too for removing funds early?

Taxes are ridiculous.

Sorry for the confusion. I'm just trying to understand exactly how you all hit these targets at 8-10 years when relying on a 401k. If you are penalized for taking it early, I don't understand how that works.

Philociraptor

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Re: 401k Questions Part 2
« Reply #1 on: November 18, 2015, 08:53:16 AM »
When you quit your job you can roll your 401(k) over into a tIRA. Please read the following concerning how to setup a Roth IRA conversion ladder: http://www.madfientist.com/traditional-ira-vs-roth-ira/

Direct Roth CONTRIBUTIONS may be withdrawn, tax- and penalty-free at any time, and rollover contributions can be withdrawn after "seasoning" for 5 years.

andy85

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Re: 401k Questions Part 2
« Reply #2 on: November 18, 2015, 08:54:07 AM »
couple of things...

first, you can't roll a 401k into a roth IRA...it has to be rolled into a traditional IRA

second, you then convert a portion of the tIRA money into rothIRA money each year, depending on your needs..and this is where you will get hit with taxes (you dont convert all 600k of 401k to traditional IRA to roth ira all at once or you would get hammered on taxes, as you said)

thirdly, you can pull any money out of a roth IRA that you've put in after 5 years, no penalty.

Lastly, the gap years are obviously the biggest issue...i.e. the first 5 years after retirement. You could fund this with a combination of current rothIRA funds (assuming they are at least 5 yrs old), cash savings, brokerage accounts, etc.

Check out: http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/  ...similar articles on there as well.

ThirdTimer

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Re: 401k Questions Part 2
« Reply #3 on: November 18, 2015, 12:42:16 PM »
Yes, the key here is that there's a $18k max on contributions to your 401k, so it's very unlikely that you'd save enough to retire in 10 years just by maxing out your 401k (unless your spending is really really low). So in addition to maxing out your 401k, you're going to have to be doing some savings in a taxable account, and that money will be key for getting you through the early years. For instance, let's say you're planning to retire at 40, and your annual spending is $25k. Your withdrawal strategy might look something like this:

Age 40: Retire! Roll your 401k into an IRA, and roll $25k from the traditional IRA into a Roth IRA. Spend $25k from your taxable account. Pay taxes on the $25k you rolled over from the traditional to Roth.

Ages 41-44: Repeat as above. Spend $25k from taxable, roll $25k from traditional to Roth, and pay taxes on the $25k you rolled over

Ages 45-54: Now that your first $25k installment in the Roth has been sitting there for 5 years, you can pull it out and use it. So no need for the taxable account any more, just spend $25k from the Roth each year, and roll a new $25k in each year.

Ages 55-59: Continue spending $25k from the Roth, but no need to roll new money in anymore as you'll be eligible to pull from the traditional IRA by the time the money 'ripens.'

Age 60+: You've reached traditional retirement age! No need for the Roth or the taxable account anymore, you can just start pulling directly from the traditional IRA.

So, basically, you just need enough money in a taxable account to pay for your lifestyle for the first 5 years of retirement, and from then out, you'll be able to pay out of your 401k money by rolling it through a Roth IRA pipeline.

MDM

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Re: 401k Questions Part 2
« Reply #4 on: November 18, 2015, 02:52:35 PM »
Another link: http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

One clarification: the 25X refers to your annual expenses in retirement, not your pre-retirement income.  And those expenses need to include taxes.