Thanks a bunch ixtap. I'm still in the process of figuring how all this works... so complicated.
So, is what you're citing here about converting the Traditional IRA to the Roth what people refer to as the "Roth Conversion Ladder"? I've heard some say the ability to do that is likely to go away at some point in the future.
For mustachian folk, what type of investments makeup the lions share of their portfolio? IRAs? Straight stocks/bonds? Annuities? Etc? And what are the percentages in each? It seems there is a lot that says you want to have 25 times your annual expenses built up in savings but isn't how that money is allocated also super important?
And do you know any good articles that go into detail on how to actually start living off the money you've saved? I am ready to embrace this lifestyle and learn how the investing works but also want to understand how it's going to work when I'm on the other end. Really don't want to get to that point and find out we put way too much into the wrong asset...
Greatly appreciate your insights.
- Ben
Some great questions Ben. Welcome.
I think the key to most of your questions is knowledge. As you learn more, you can do more. And yes, things change. It is your responsibility to keep track of changes to tax law, and to plan accordingly. People here are great at discussing that sometimes with a political flair(I am guilty as charged). Keep asking, keep reading, and eventually you will lay out a plan that we would be more than happy to look at and comment on.
To some of your points:
Roth ladder - I have not heard of a law being proposed that would eliminate this ability. If it changes, we will change our plans to fit the law. As another example, tax law could change anytime to say that all future Roth withdrawals are taxed at 90%. I think the odds of this are almost zero, but I do believe that before I leave this earth, there will be added rules to Roth withdrawals I will need to maneuver to lower my taxes. I think the odds of unlimited tax free withdrawal of Roth accounts for my lifetime is also close to zero.
I like to think that investing is about buckets. You can have different buckets, and those buckets can be filled with different things. Each bucket has advantages and disadvantages under current tax law.
Roth IRA's have tax free withdrawals and no required minimum distributions but are funded with taxed money and have rules to access them. Traditional IRA's, 401k's, SEP's, etc. can be used to lower current AGI and grow tax deferred, but have RMD's and are income when you take them out. Non-qualified accounts(sometimes called cash accounts) have very few withdrawal requirements but realized earnings are taxed every year.
Annuities are a different animal. I do not consider annuities as part of an investment portfolio, because they make poor investments and charge very high fees in general. There can be some uses for them, but I think most here do not find them necessary. If interest rates skyrocket that may change.
As far as what to put in each bucket, same thing with regards to advantages and disadvantages. In qualified accounts(tax deferred ones), most earnings do not matter, since what matters is how much you take out, not how much that investment made. But in non-qualified accounts, how you earned the money means everything. Stocks held long term get favored tax treatment. For a married couple filing jointly, the tax due on $77,000 on long term capital gains is a big fat $0.00. CD's and bonds are taxed as regular income, but are guaranteed for the duration of the CD. Real estate revenue is taxed at your income tax rate, but depreciation lowers the amount of earnings.
For my family, we are much more concerned about adjusted gross income(Modified AGI, actually) for purposes of healthcare rather than taxes due to current law. We are a family of 4, FIRE for 4 years, with a MAGA around $45,000. If we made around $40,000 more, our take home (after taxes and ACA credit "losses") would not increase at all. I like to think of it as being taxed at 100% for the next $40,000 of income. The ACA credit dwarfs the tax bill. When the law changes, we will change to maximize take home with the help of the suggestions on this site.
I think the even bigger picture around here is that a typical FIRE person hanging out in these parts will have moderate income, and hence a moderate tax bill to go with it. If my entire $45,000 income was from what I consider the worst taxed entity(bank interest), our tax bill would only be about $2,000 if we received no credits of any kind. So meh really.
For our family, we are about 40% retirement buckets and 60% non-retirement. 60% stocks, 10% real estate, and 30% guaranteed stuff. What is WAY more important than all that is to consistently spend less than you make and invest the difference using the investment order on a different forum post.