Author Topic: Less than 1/4 of stash in retirement accounts - walk me thru pros and cons?  (Read 567 times)

We be free if we try

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Iíll be semi-retiring shortly (or maybe I already have - long story), at 50 y.o., but through the twin blessings of an inheritance and selling an HCOL house, more that 75% of the stash will be in brokerage rather than retirement accounts. If I end up buying another house, the balance would shift, but will be renting for the near future. Can anyone walk me through the issues of having relatively little in Roth, 401kís, etc?
I will have some RMDís from a trad. IRA in the inheritance, roughly $20k/yr. Iím assuming Iíll also keep contributing the maximum allowed to retirement accounts for the tax benefits - my earned income will hover around $20k/yr, but because so much is in brokerage accounts, there will be dividends / capital gains as well. Any suggestions for minimizing taxes and maximizing the benefits - like should the asset allocation be different between brokerage vs. retirement accounts? Thanks for your thoughts!

seattlecyclone

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Take a look at this Bogleheads page about tax-efficient fund placement. This would generally suggest having much of your bond and REIT allocations in your retirement accounts because they don't have the same favorable tax treatment as stocks and their dividends.

The main point in favor of having a bunch of money in taxable is the flexibility: you can cash out your investments completely on your own schedule without worrying about minimum ages or RMDs or anything. If you had contributed more to retirement accounts while in higher tax brackets you would likely have saved some money on taxes, likely enough to make the additional restrictions worthwhile, but there's not anything you can do about that anymore. At this point with a small amount of earned income you can probably benefit by putting as much of that in Roth accounts as you can, so you aren't taxed on any further growth of that money. Your tax bracket is unlikely to be high enough to make traditional tax-deferred contributions worthwhile. Congratulations on your semi-retirement!

ender

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A lot of this will depend on your actual numbers.

If your overall stash is small enough and your withdrawals small enough, the entire difference of capital gains vs taxes paid on 401k/IRA income (and setting up a Roth pipeline) might not matter at all.

All things being equal, $100k in taxable investments is more useful for an early retiree than $100k in pretax 401k/IRA.

If we're talking $3M in stash size, things start becoming more complicated as the tax implications start being higher.

We be free if we try

  • 5 O'Clock Shadow
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Thank you both for your thoughts. Stash in the neighborhood of $1.75m rather than $3m. At this point, it is my reflex to minimize taxes now as much as possible, even if it means paying somewhat higher taxes later.