The Money Mustache Community

Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Acg on April 06, 2013, 04:51:36 PM

Title: How Do 401k's and Traditional IRA's factor into ones stache?
Post by: Acg on April 06, 2013, 04:51:36 PM
Do you increase the target size of the account due to the fact that you'll need to pay taxes when you make distributions?  I know the rule is a minimum of 20x living expenses, so do you just inflate this a bit to account for taxes?
Title: Re: How Do 401k's and Traditional IRA's factor into ones stache?
Post by: Done by Forty on April 06, 2013, 05:21:26 PM
I've found it hard to plan for taxes since they could change pretty dramatically over time.  Without knowing what the tax rates will be, I plan assuming that my current effective tax rates will be the same, and then I adjust accounting for any income I'll pull from Roth IRAs.
Title: Re: How Do 401k's and Traditional IRA's factor into ones stache?
Post by: GreenGuava on April 06, 2013, 05:49:13 PM
There's a very good chance that, by the time you reach 59.5, you'll have been retired for quite some time and your expenses will be quite low.  Accordingly, when you pull from your t-IRA (with high probability, you will have rolled over all of your 401(k)s and equivalents into IRAs), you will be pulling into the lowest tax brackets - if you pull at all (until RMDs at 70.5). 

So don't weigh heavily on the idea that you'll have huge taxes to pay on these.  Neither party really wants to increase taxes on the very poorest, and distributions are treated as income;  you'll be taxed as if you're a low income earner.

But do you still use them?  Yes.  If nothing else, it's a great way to help ensure you'll have money available to you when your human capital is lower than it is now.  If you think you're FI at, say, 40, and at 45 you discover that the money you have won't last until you can withdraw from an IRA, one option is going back to work for money, at least part-time;  it is unlikely you'll be as easily able to do this at 75.

Also, if you get to 59.5+ and determine that you can withdraw some from an IRA and still be at a 0% income tax bracket, you might want to calculate how much you can convert to a Roth at that 0% rate if you weren't planning to spend it otherwise.

And this doesn't even get into 72(t) rules or the pipeline.

Long story short, at least at my perspective : it's a great way to put money aside for the second phase of your retirement, and to help that subset of your money grow until you need it.  My own plan is to put aside until I project it will have enough for post-59.5, and then not think about it much anymore after that.  If I'm still working for pay when that happens - maybe my taxable will be enough to get me to 59.5 then - I'll probably still contribute, at least employer matching dollars and maybe some Roth IRA dollars.