Author Topic: Balancing taxable, Roth, and pre-tax investment contributions  (Read 1669 times)

Runge

  • Stubble
  • **
  • Posts: 219
  • Location: TX
Let me walk you through my thought process... So I'm currently 25 yrs old, and have been in the workforce for 2  years now. Now that I've got my feet pretty well settled down and planted, I'm starting to really hammer away at saving for retirement. I've currently got $12k saved away mostly in my Simple IRA, but I've also got a Roth IRA and a taxable account set up ($100/mo each).

I'm expecting to increase my FI/RE contributions by around $500/mo starting next month, but I can't decide on where I want to put them. My original plan is to put all that in my Simple IRA and then keep the $100/mo going for my Roth and taxable, eventually maxing out my Simple ($1000/mo) and then work on maxing out Roth. But where I'm getting hung up on is what if when I reach FI, I actually do want to pull the trigger and RE. If the vast majority of my money is in Simple/Roth IRAs, then I can't really access it until I'm 59.5. What do I do until I reach that age? My only answer is to start contributing to my taxable and live off that account until I can withdraw from my tax-deferred accounts.

So since I (like many of us here) love spreadsheets, I've created one that roughly calculates my "Net Worth FIRE Goal," basically last year's expenses times 25. I'm not treating it as a defacto number, but a loose goal. I then calculate how many years it will take to get there based on last year's savings and liquid NW using F/P and F/A formulas (http://goo.gl/WnWlLm).

I also calculate what "FIRE Income" I'll have using a SWR of 4% based on last year's liquid NW; however, this assume that I have open access to all of my accounts. Should I be breaking it up between my taxable and tax-deferred accounts to calculate that? Also, from a conceptual standpoint, what would be a good way to construct the spreadsheet, so that way I'll know how much I can pull from for taxable and tax-deferred accounts?

I have a decent idea of how to do this, I just need some validation and maybe some other ideas that will help clear it all up. I'll be updating the spreadsheet annually during tax season.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7849
Re: Balancing taxable, Roth, and pre-tax investment contributions
« Reply #1 on: June 17, 2014, 08:18:32 AM »
this question comes up all the time ... its called a roth IRA conversion ladder google that do research report back.  There is a balance and i will be figuring mine out soon as you need a 5 year bridge for the ladder to work.  I max out 2 401ks at 35k (which really is only 25k b/c of the tax break) and i max out 2 Roth IRAs.  In a year or so i'm going to crunch numbers to find how much i need in taxable.  I currently do 5-10k in taxable a year.  but with ER happening around 8 years from now this isnt enough for my bridge. 

gt7152b

  • Stubble
  • **
  • Posts: 234
Re: Balancing taxable, Roth, and pre-tax investment contributions
« Reply #2 on: June 17, 2014, 08:24:40 AM »
boarder42 covered most of it but remember that regular Roth IRA contributions are still accessible without penalty at anytime so that helps with your 5 year bridge. You just can't access the earnings until 59 1/2 unless you pay the penalty.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7849
Re: Balancing taxable, Roth, and pre-tax investment contributions
« Reply #3 on: June 17, 2014, 08:29:44 AM »
they are accessible 5 years after input.  not ANY time. 

Runge

  • Stubble
  • **
  • Posts: 219
  • Location: TX
Re: Balancing taxable, Roth, and pre-tax investment contributions
« Reply #4 on: June 17, 2014, 08:30:36 AM »
I did find a link to the conversion ladder explanation, and apparently I have read it before... I guess it didn't sink in fully! http://www.madfientist.com/retire-even-earlier/

So basically, we'll need those 5 years to have some sort of income (job, real estate, taxable, etc.), then the bridge can fully kick in. I also didn't realize Roth contributions were accessible without penalty as well. Very good news.

/thischangeseverything.jpg