Author Topic: What do the young Mustachians do? IRAs they can't touch or funds they pay tax on  (Read 4189 times)

Edog

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New to this site and you are one cool customer.  I was kind of doing this on my own but now I see the end game and understand why I want to be financially independent so bad.  I want my freedom!

My question is for someone hoping to retire early like at forty say.  Would you advise putting money in an IRA.  Because there is a heavy penalty for touching those funds before 59.5.  Does anyone have any thoughts on this?  Is the basics pay off mortgage, invest in index funds, maybe rentals but no IRA/401k type stuff.

Saverocity

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I'm still trying to figure out that answer too, but if you don't go for the IRA what is your plan to support you from 59.5-90?

Edog

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http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Here is the link to that answer.  Sorry I should have searched to see if the question had already been asked.

Eric

iamlindoro

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Most of us plan to use one of the numerous workarounds to get the money out without penalties.  There's even a MMM-written article on the topic.

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Most popular is the Roth IRA pipeline, where you roll your annual expenses into a Roth IRA every year for 5 years.  When the money "seasons" for 5 years, it can be withdrawn without penalty.  So for the sake of argument let's say it cost you $25K a year to live.  You build up 5 years worth of after-tax money to cover you while you're filling the pipeline.  On Jan 1 of every year, you roll 25K from your IRA or 401k into a Roth.  You do this for 5 years.  Now at the end of 5 years, the rollover from 5 years ago is ready to withdraw without penalty, and every subsequent year is set up.  You just keep rolling over annual expenses once a year into the pipeline until you hit 59.5.

starbuck

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1. max out 401k
2. max out roth IRA
3. optimize budget
4. shovel whatever is left into taxable account

I don't have an HSA (yet) but that will move to step 2 or 3. (Steps 1-4 assume no high interest debt.) At the end, a roth pipeline like iamlindoro describes.

garrettld

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I'm 25 and my wife is 26. We plan on maxing out my 401(k) as well as both of our Traditional IRAs, and using the rollover trick to access the money before 59.5. I have an HSA as well, and we'll contribute to it as needed to keep the balance high enough to cover our deductible.

That leaves us with just about enough cash to cover our expenses...but not much else. Very easy to stop contributions to the Traditional IRA and HSA at any time in case unexpected expenses come up, and of course we have an emergency fund to cover 3 months of expenses as well.

I'm not really concerned about whether or not this loophole still exists in later years when I actually retire. If I just used taxable accounts the whole time instead I'd be extending my career by a couple of years to pay for the difference. If they get rid of the "loophole" then it would extend my career by a couple of years to pay for the difference. It's a wash.

jawisco

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There are many strategies that work to get your money out penalty-free.  Get as much as you can into IRAs and other tax-defferred or tax-eliminated (think HSA) vehicles.

A small twist on the Roth Pipeline idea.  Each year, find a way to earn $2000 taxable income.  Put it in a TIRA.  Now you can also get the Savers Credit for $1000, which is a non-refundable credit.  A single person can then rollover 20K that year from a TIRA to a RIRA and can withdraw that 20K in 5 years tax/penalty free. 

Or if you need to have a bigger pipeline, and are married, you will only pay 10% tax on the next $17K.  This means that you could set up a pipeline and get access to $37K/year and only pay  $1700 that year in taxes.  A rate of 4%! 

You just need to plan ahead (and hope the tax laws don't change too much).

StetsTerhune

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Too lazy to search for this specific topic on there, but I highly recommend the blog madfientist.com for this sort of thing. Not a ton of content, but he really takes you through most of the tax etc. strategies for ER really well.

ch12

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Too lazy to search for this specific topic on there, but I highly recommend the blog madfientist.com for this sort of thing. Not a ton of content, but he really takes you through most of the tax etc. strategies for ER really well.

http://www.madfientist.com/traditional-ira-vs-roth-ira/

It's my favorite Mad FIentist article. You can retire a bit earlier if you stash away some cash in your tax deferred accounts. He does a superb job of covering tax strategies, although RootOfGood remains the tax master after paying $150 in federal tax on $150,000 in income.

http://rootofgood.com/make-six-figure-income-pay-no-tax/
« Last Edit: January 21, 2014, 07:34:58 PM by ch12 »

 

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