How do you factor non-roth 401k balances into retirement calc?

[Accountant]

If you have 700k now, you wont realize that much because of taxes and or penalty for early withdrawal.  When folks here talk about how much they need using a multiple of average spend, are they taking a percent of those balances?  Also, how do these balances show in net worth, gross or some sort of net?

[Cromacster]

Taxes have to be factored in as an expense, but you should be doing what you can to minimize them or have low enough expenses that you don't pay any.  So if a married couple budget for a 40k/yr spend it should include approximately 3-5k in income taxes they will pay.  So really they will have 35-37k to live off.

If you are utilizing a mix of pretax retirement accounts and Roth accounts, which most people are, there is something called the Roth Conversion Ladder.

Here is a good conversation on it.
https://forum.mrmoneymustache.com/investor-alley/traditional-ira-to-roth-conversion-ladder/

Essentially you estimate how much money you will need in 5 years.  Convert that from an IRA to a Roth (this is a taxable event).  In 5 years you withdraw the principle tax free.  Repeat this every year until you don't need to anymore.  You do need some sort of savings/income to cover the first 5 years.

 

[Cromacster]

I can't find the OP but here is a quote from inside the link I posted above which sums it up better.

The Roth conversion pipeline is a method in which you retire and then annually convert part of your pre-tax 401k to your Roth IRA, let it sit for five years, and then withdraw it for living expenses without ever paying taxes or penalties.  The challenge is to annually convert the highest amount which does not incur any tax liability.  For a family with a few kids, this amount can easily reach $60k/year under the current tax code, and for some people has been as high as $100k/year under special circumstances like having kids in college.

It has been explained in more detail on this forum many many times, but that's the abbreviated version.  You contribute your money to the 401k before taxes are paid, you convert it tax free, you wait five years, and then you withdraw it tax free and penalty free, regardless of your age.  Thus, the "tax-deferred" account becomes a "tax-free" account, assuming you have five years of patience.

The reason the previous poster said it doesn't work for very large amounts of money is that above about $60k/year the odds of you paying something in taxes start to go up.  You of course start at the 10% bracket on the first $18k of income, so if you wanted to draw $78k/year from your 401k and only had the typical $60k of tax shelter from deductions and exemptions and child tax credits, you'd pay 10% of $18k is $1800 on a total income of $78k, or a 2.3% tax rate.>>