How much is too much in Roth? Should we move the principal to taxable accounts?

[Slicey]

Hey all! Hoping to get some insights to this situation.

My fiancé and I are both in our mid-twenties and spent the first few years of our employment fully contributing to our Roth 401(k)s and Roth IRAs. This was before we thought about what would offer us the most flexibility in early retirement.

We recently switched to funding our tax-advantaged accounts with pre-tax money since that should give us more to save/invest with the tax break now, and we’ll have the option of getting that money out early with a Roth conversion ladder. Plus, if we anticipate spending $40k or less in retirement, it seems that Roth doesn’t have that much of a tax advantage since pulling $40k out of a taxable account per year wouldn’t incur capital gains either (with the only big tax advantage to Roth being the lack of taxing on dividends along the way).

However, now we’re stuck with over 40% of our portfolio consisting of Roth funds. Our combined net worth is $360k – of that, our combined Roth assets are around $150k. Holy crap. I’m concerned that we have way too much in Roth now. I know we can withdraw the principal, but assuming we keep holding them in a total stock market index fund and they double approximately every 10 years, I’m worried that eventually the Roth growth is going to take up a substantial amount of our portfolio as we draw down on everything else. That’d be locking up a huge amount of money that we can’t withdraw in early retirement without incurring a penalty. We’d need the rest of our money to comfortably last around 25 years before age 59 ½.

Currently, the majority of our Roth assets consist of the principal, so I was thinking of pulling all of the principal out now and transferring them to our taxable brokerage accounts, thus allowing all future growth on that money to be accessible in early retirement. My fiancé is more on the fence, since he thinks it may be a good idea to keep our Roth accounts around since he’s skeptical about how capital gains tax brackets might change in the future. Does anyone have any experience with this, and would transferring our Roth assets (or at least a portion of them) to taxable accounts be a sound idea, or a bad one? If we keep everything in the Roth, how does this affect 4% rule considerations since some of that money would be locked away till 59 ½?

Thanks so much in advance!


EDIT (Don't need to read this part):
In case anyone might be curious, I made a quick calculator, attached (that of course involves a lot of assumptions like a consistent 7% growth rate), but it seems that the Roth growth could have the potential to comprise an uncomfortably huge % of the portfolio by the time we're ~60 years old (estimated around 80%).

[Gin1984]

You can pull out the principal when you want to retire prior to 59.5. And it won't affect the 4% rule as you can just rollover the amount you need five years from then from a traditional to a Roth.  That said, you will likely invest later in taxable accounts once you max everything.

[Zamboni]

^This.

Keep it in the Roth until needed in ER. Any principle you have contributed can be withdrawn penalty free at any time (the only penalties apply to the earnings.) That way you NEVER HAVE TO PAY TAX ON THAT MONEY AGAIN!

Why on earth would you convert money that can be converted in TAX FREE earnings into earning that will be taxed again?

Oh, and congratulations!

[erutio]

I'm having trouble understanding what your question or concern is, because you seem to already realize you can withdraw your principle from a roth tax and penalty free.  Why don't you just keep the principal in there, and then when you need it in retirement, just withdraw what you need monthly/quarterly/yearly?  What principal remains in the Roth accounts will continue to grow tax free.

[dandarc]

As your spreadsheet illustrates, this is not actually a problem. You get to 60 with over $200K to spare on the non-Roth part of your portfolio, at which point the concern of having "too much Roth money" goes away entirely. In spite of well below historical average return expectations. Not sure why "percentage of assets inaccessible" is showing 79% at 60 when it should be 0%. If you got to 59.5 with 100% of your money in Roth accounts, that's pretty good - never pay tax again, at least until Social Security kicks in.

Also, it is not like you can't get to the Roth earnings before 59.5. You'll just pay tax and the 10% additional tax if you need to. A potential 10%-50% tax rate is a whole lot different than truly locked away. If anything, this would encourage good spending behavior after the "we ain't working again" decision is made.

[Slicey]

^This.

Keep it in the Roth until needed in ER. Any principle you have contributed can be withdrawn penalty free at any time (the only penalties apply to the earnings.) That way you NEVER HAVE TO PAY TAX ON THAT MONEY AGAIN!

Why on earth would you convert money that can be converted in TAX FREE earnings into earning that will be taxed again?

Oh, and congratulations!

Thanks! :D

I would only convert the principal that already had the tax paid on it coming in. Wouldn't the earnings in a taxable account be tax-free so long as we stay within the 0% capital gains tax bracket? We'd be in the 0% bracket as long as our taxable income is less than $78,750 in retirement, which it should be if we only are withdrawing around $40k per year. The only extra tax that would be incurred would be on dividends thrown off along the way, right?

As your spreadsheet illustrates, this is not actually a problem. You get to 60 with over $200K to spare on the non-Roth part of your portfolio, at which point the concern of having "too much Roth money" goes away entirely. In spite of well below historical average return expectations. Not sure why "percentage of assets inaccessible" is showing 79% at 60 when it should be 0%. If you got to 59.5 with 100% of your money in Roth accounts, that's pretty good - never pay tax again, at least until Social Security kicks in.

Also, it is not like you can't get to the Roth earnings before 59.5. You'll just pay tax and the 10% additional tax if you need to. A potential 10%-50% tax rate is a whole lot different than truly locked away. If anything, this would encourage good spending behavior after the "we ain't working again" decision is made.

Whoops, yup, I meant to kick that down to 0% at age 60 - updated the original spreadsheet. I guess I'm just kind of wary since my calculations involve a lot of assumptions, including if I draw down on non-Roth funds during years when the market tanks (not sure how much this would affect it though). I suppose I might just be overthinking this and overreacting?

I'm having trouble understanding what your question or concern is, because you seem to already realize you can withdraw your principle from a roth tax and penalty free.  Why don't you just keep the principal in there, and then when you need it in retirement, just withdraw what you need monthly/quarterly/yearly?  What principal remains in the Roth accounts will continue to grow tax free.

So the idea is to draw down on the Roth funds first? Perhaps during the first 5 years before the first batch of a Roth conversion ladder is ready?

[MDM]

Wouldn't the earnings in a taxable account be tax-free so long as we stay within the 0% capital gains tax bracket?

Yes, but when you start taking social security benefits those "tax free" dividends and capital gains can cause some amount of the SS benefits to be taxable (and taxed) as ordinary income.

Roth withdrawals will not cause SS benefit taxation.

[mistymoney]

Wouldn't the earnings in a taxable account be tax-free so long as we stay within the 0% capital gains tax bracket?

Yes, but when you start taking social security benefits those "tax free" dividends and capital gains can cause some amount of the SS benefits to be taxable (and taxed) as ordinary income.

Roth withdrawals will not cause SS benefit taxation.

ooo - good to know! thank you!

OP - there may come a time when you make too much money to fund a roth. Treasure this wonderful vehicle and feed it frequently!

[Rob_bob]

Wouldn't the earnings in a taxable account be tax-free so long as we stay within the 0% capital gains tax bracket?

Yes, but when you start taking social security benefits those "tax free" dividends and capital gains can cause some amount of the SS benefits to be taxable (and taxed) as ordinary income.

Roth withdrawals will not cause SS benefit taxation.

Don't forget those dividends and cap gains could effect ACA subsidies or medicare premiums too, Roth won't.

[markbike528CBX]

360K Roth mid- twenties? Great, awesome, no problem. You have a set and forget situation.

If you have issues with this much in a Roth, you have lots of time to contribute to taxable going forward.

If you have a traditional 401k, then contribute to the match ( or higher to reduce current taxes), then do the rest as taxable.

I certainly would not withdraw anything from the Roth, just let it ride.

[Dragonswan]

There's no such thing as too much Roth money.

[Slicey]

Thanks for the input, everyone!

Now I'm thinking I'll leave the money in the Roth accounts be until retirement, then start pulling out the principle when I want to tap into my retirement funds during FIRE while any Roth conversion ladder money is brewing (since contributions have to come out before conversions anyways). As a last resort, if I start to draw low on my taxable and convertible money, I can start a SEPP distribution on the Roth gains later on.