Author Topic: Tax Advantaged vs. Brokerage  (Read 1389 times)

RainyWindow

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Tax Advantaged vs. Brokerage
« on: April 23, 2015, 11:58:04 AM »
Hello all, 

The bulk of my stash is accumulating in various tax advantaged accounts (2 traditional IRAs and 2 401ks) and I'm trying to figure out how to think about my ability to turn savings in these accounts into cash flow in an early retirement situation. 

If we end up at our FIRE date (7ish years away) with 700k in traditional IRAs and 401ks, 500k in home equity, and 250k in a taxable brokerage account, can I assume I'll be able to generate any income from the 700k? 

I understand I can rollover to a Roth post-FIRE, pay taxes on that amount, and then move the initial contributions into a taxable account where they generate usable cash-flow.  Is that the best option though? 

I'm considering limiting contributions to tax advantaged accounts to the minimum contributions necessary to get full employer matches...but I would love to reduce my current tax bill by maxing our our 401k contributions if I can be comfortable that I will be able to access that cash to generate income down the road. 

I'm guessing this has been hashed through elsewhere, but haven't been able to find the info I'm looking for.

Thanks in advance for any insights you may have!

nereo

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Re: Tax Advantaged vs. Brokerage
« Reply #1 on: April 23, 2015, 12:22:19 PM »
You are correct that this has been hashed out many times, but oh... what the heck.  I'm waiting for some serious files to transfer and have 10-15 minutes to kill.

You didn't include your expected age at FIRE, nor what  taxable accounts and other assets you may have at that point. 
There are two strategies you should consider.  The first is the backdoor ROTH you mentioned (and since you also have access to a 401(k), you may want to consider a "Mega-backdoor ROTH").  The second is SEPP, which can provide a fair bit of income from your 401(k) accounts.
Beyond that the other option is having some or all of oyur income come from taxbale accounts. 

To get a sense of what it might look like in practice, you may need $25k/year in living expense, and you could use $10k/year in ROTH contributions, $8k/year in SEPP payments ($665/mo - your value might be higher or lower), and $7k from taxable accounts.

Given how easy it is to do a conversion later, I'd strongly recommend still maxing out your tax-deferred accounts now to reduce you tax liability and then converting funds later to give yourself a ROTH pipeline.  Of course, if you can max our your tax-advantaged accounts and *still* make investments in normal savings, that would be even better ;-D

EDIT;  Oops, forgot to include some useful links
SEPP: http://www.investopedia.com/articles/retirement/02/112602.asp
Mega-backdoor ROTH: http://www.madfientist.com/after-tax-contributions/
« Last Edit: April 23, 2015, 12:25:00 PM by nereo »

RainyWindow

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Re: Tax Advantaged vs. Brokerage
« Reply #2 on: April 23, 2015, 01:26:44 PM »
Excellent, thanks!  I had a feeling I was missing something.  Maxed out 401k contributions here we come!

My one concern is that this relies heavily on federal policy which is changeable.  The rules will certainly change again between now and the time I've completed my 401k to Roth conversion.  Also, I anticipate my wife and I will continue to work post-FIRE...perhaps 50 - 60k in annual income?  That will increase the tax implications of a Roth conversion.

Re you questions, I'll be 45 at my FIRE date.  Total anticipated assets at that time:

 - 401k/Trad IRA - 700k
 - home equity - 500k
 - taxable brokerage - 250k

I will also have higher ed costs for 4 kids to contend with post-FIRE. 

MDM

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Re: Tax Advantaged vs. Brokerage
« Reply #3 on: April 23, 2015, 04:31:42 PM »