Author Topic: Taxable vs. tax-deferred savings  (Read 484 times)

dock28

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Taxable vs. tax-deferred savings
« on: April 20, 2019, 06:46:04 AM »
My wife and I are both about 45 years old, and we hope to be financially independent in about five years around the time we’re 50. We plan to achieve this by using a Roth IRA conversion ladder to fund our living expenses before we’re 59.5. Since we’ll need to wait five years after the first conversion before we can withdraw from the Roth IRAs, we’re also saving up an “early retirement fund” to cover our living expenses during those five years. It appears that by the end of this year, we will have enough saved in our various retirement accounts (403b’s, traditional IRAs, Roth IRAs, HSA) to fund our living expenses beyond age 55, but we’ve only saved a small portion of our “early retirement fund” in a taxable brokerage account to get us from age 50 to 55. So, we’re wondering whether we should stop contributing to our retirement accounts at the end of this year so we can focus entirely on funding our “early retirement fund.” By doing this, we would miss out on the tax advantages of contributing to our tax-deferred retirement accounts, but we assume this is a better option than paying penalties for withdrawing from our retirement accounts before the age of 59.5. (Our employers will continue contributing to our retirement plans regardless of whether we stop contributing, so we wouldn’t lose employer matches by doing this.) What do you advise? Thanks!
« Last Edit: April 20, 2019, 06:51:56 AM by dock28 »

MonkeyJenga

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Re: Taxable vs. tax-deferred savings
« Reply #1 on: April 20, 2019, 07:27:39 AM »
1. What is your marginal tax rate?
2. How much do you need to withdraw each year?
3. How much do you have in Roths already?
4. How much in taxable?

Regardless of the above, one option is SEPP. https://www.investopedia.com/terms/s/sepp.asp

Another option is seeing the 10% penalty on early withdrawals as an acceptable tax, if it's still lower than what the money is being taxed at now.

FatFI2025

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Re: Taxable vs. tax-deferred savings
« Reply #2 on: April 20, 2019, 08:21:18 AM »
My wife and I are both about 45 years old, and we hope to be financially independent in about five years around the time we’re 50. We plan to achieve this by using a Roth IRA conversion ladder to fund our living expenses before we’re 59.5. Since we’ll need to wait five years after the first conversion before we can withdraw from the Roth IRAs, we’re also saving up an “early retirement fund” to cover our living expenses during those five years. It appears that by the end of this year, we will have enough saved in our various retirement accounts (403b’s, traditional IRAs, Roth IRAs, HSA) to fund our living expenses beyond age 55, but we’ve only saved a small portion of our “early retirement fund” in a taxable brokerage account to get us from age 50 to 55. So, we’re wondering whether we should stop contributing to our retirement accounts at the end of this year so we can focus entirely on funding our “early retirement fund.” By doing this, we would miss out on the tax advantages of contributing to our tax-deferred retirement accounts, but we assume this is a better option than paying penalties for withdrawing from our retirement accounts before the age of 59.5. (Our employers will continue contributing to our retirement plans regardless of whether we stop contributing, so we wouldn’t lose employer matches by doing this.) What do you advise? Thanks!

You can withdrawal contributions from the Roth IRA without tax and penalty if the account has been open for at least five years.

But if there's not enough in your Roth IRA to fund that five year period, consider contributing to a Roth 401K now -- the employer match will still go to traditional 401K. But @MonkeyJenga is right that you would probably be better off saving in a traditional now and then doing 72t distributions.

MDM

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Re: Taxable vs. tax-deferred savings
« Reply #3 on: April 20, 2019, 12:23:13 PM »
You can withdraw contributions from the Roth IRA without tax and penalty if the account has been open for at least five years.
No qualifier needed.

Roth conversion of pre-tax traditional money does have a five year waiting period before penalty-free withdrawals are available.

FatFI2025

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Re: Taxable vs. tax-deferred savings
« Reply #4 on: April 20, 2019, 01:10:44 PM »
You can withdraw contributions from the Roth IRA without tax and penalty if the account has been open for at least five years.
No qualifier needed.

Roth conversion of pre-tax traditional money does have a five year waiting period before penalty-free withdrawals are available.


Ah my mistake, thanks for the correction
« Last Edit: April 20, 2019, 02:03:14 PM by FatFI2025 »

Catbert

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Re: Taxable vs. tax-deferred savings
« Reply #5 on: April 20, 2019, 01:56:50 PM »
Sometimes  it can be worth it to pay the early withdrawal penalty.  For example, if your 401k contributions today save you 24% in Federal income taxes and you'd be withdrawing at 10% income tax + 10% penalty that could be worth it. Even better if you'd be in the 0% tax bracket.