401k and Roth IRA Impediment to Early Retirement?

[jkivel]

Hi Mustachians,

Something's tripping me up here. I have a Roth IRA account and I understand the benefits of no taxes upon withdrawal, and the benefits of a 401k with no initial tax and an employer contribution. However, I'm trying to retire at 35, not 65, and I would hate to have $500k in my retirement accounts that I couldn't touch at 35 and nothing liquid that I could live on. So here's my theory: wouldn't you just want to put money straight into a Vanguard Index Fund and not put money in your retirement accounts? If I could get to 500k in my index funds, I could retire whenever I get there. But if I have 500k in IRAs and 401ks, that does me no good until I'm 65.

Does this reasoning make sense? Please talk me down here if this is stupid. I just see this as a retirement vehicle from 35 until I die rather than from 65 until I die. Thanks for any input you guys have.

[clarkm04]

ROTH conversion ladder

http://www.madfientist.com/retire-even-earlier/

[iamlindoro]

This question comes up basically daily.  There are multiple ways to get your money out of tax-advantaged accounts with no penalty.  The two most popular are Roth IRA conversion ladders and SEPP.

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

[nicknageli]

There's not anything wrong with a portion of your assets in a taxable account either, right?

[iamlindoro]

There's not anything wrong with a portion of your assets in a taxable account either, right?

It depends on the goal.  If the goal is retirement as early as possible, and given the fact that most people's tax rates will be lower in retirement, it would be a bad idea to first fund taxable accounts.  You wouldn't want to pay 20, 25%, or more in income tax now on the money when you could pay 15% in early retirement.  It's just giving away money.

For early retirement purposes, you want to max out all available tax-advantaged accounts before you put anything in taxable accounts.

If you just want access to the money, not expressly for the purpose of ER, then put it wherever you want.  Do, however, consider that if your employer offers matching in the 401k, you may be leaving money on the table *even if you immediately withdraw that money from the 401k on leaving the job and pay the penalties*.

[nicknageli]

Yeah, those are good points.  We have done the 401k maximums, HSA max (but have yet to do the Roth IRA backdoor) and have started a new dividend index fund with Vanguard that's taxable.  Can't think of any other ways to get tax deferred savings.

[foobar]

Lets say your in 25% tax bracket. Would you rather have 625k in the 401(k) or 500k in taxable knowing that you will be paying <10% tax when you take the money out of the 401(k). Sure you have to play games to get access to the 401(k) money but having an extra 75k or so makes it worth while.

Hi Mustachians,

Something's tripping me up here. I have a Roth IRA account and I understand the benefits of no taxes upon withdrawal, and the benefits of a 401k with no initial tax and an employer contribution. However, I'm trying to retire at 35, not 65, and I would hate to have $500k in my retirement accounts that I couldn't touch at 35 and nothing liquid that I could live on. So here's my theory: wouldn't you just want to put money straight into a Vanguard Index Fund and not put money in your retirement accounts? If I could get to 500k in my index funds, I could retire whenever I get there. But if I have 500k in IRAs and 401ks, that does me no good until I'm 65.

Does this reasoning make sense? Please talk me down here if this is stupid. I just see this as a retirement vehicle from 35 until I die rather than from 65 until I die. Thanks for any input you guys have.

[jkivel]

Thanks all. I see a lot of information on $9,500 per year tax-free income when you roll over your money from a Traditional IRA to a Roth IRA. What if your money is in a Roth IRA already? Can anyone lead me towards or link me to a strategy to withdraw money from a Roth IRA when you have enough in that account to be FI (for me probably $750,000)?

[Cromacster]

Thanks all. I see a lot of information on $9,500 per year tax-free income when you roll over your money from a Traditional IRA to a Roth IRA. What if your money is in a Roth IRA already? Can anyone lead me towards or link me to a strategy to withdraw money from a Roth IRA when you have enough in that account to be FI (for me probably $750,000)?

With a Roth IRA you essentially just..withdraw the money, its yours (the principle at least).  Just make sure if any of it was from a roll over you wait the appropriate amount of time (see roth ladder above)

If you have 750,000 in a Roth that can only mean a few things.  1) you rolled a crap ton over and paid a crap ton of tax. 2)Backdoor Roth strategy (wait 5 years). 3) You made some wildy risky investments and it paid off. 4)There are other ways to fund a Roth which I am not privy to.

[Undecided]

If you have 750,000 in a Roth that can only mean a few things.  1) you rolled a crap ton over and paid a crap ton of tax. 2)Backdoor Roth strategy (wait 5 years). 3) You made some wildy risky investments and it paid off. 4)There are other ways to fund a Roth which I am not privy to.

If you're curious, look for the threads about after-tax 401(k) contribution rollovers to Roth IRA. While I may pay a "crap ton" of tax on the approximately $32,000 a year I can put into my Roth IRA, I have to pay the same tax whether I put it into the Roth IRA or not. If not for my employer contribution to my 401(k), I could get another $8k+ into my Roth IRA (although I prefer the free money from my employer). For someone who starts a career with such conditions and can afford to make the contributions, a $750k Roth after a dozen years isn't inconceivable.

[The Mobile Mustachian]

If you have 750,000 in a Roth that can only mean a few things.  1) you rolled a crap ton over and paid a crap ton of tax. 2)Backdoor Roth strategy (wait 5 years). 3) You made some wildy risky investments and it paid off. 4)There are other ways to fund a Roth which I am not privy to.

If you're curious, look for the threads about after-tax 401(k) contribution rollovers to Roth IRA. While I may pay a "crap ton" of tax on the approximately $32,000 a year I can put into my Roth IRA, I have to pay the same tax whether I put it into the Roth IRA or not. If not for my employer contribution to my 401(k), I could get another $8k+ into my Roth IRA (although I prefer the free money from my employer). For someone who starts a career with such conditions and can afford to make the contributions, a $750k Roth after a dozen years isn't inconceivable.

Hello Undecided,

How are you contributing 32k per year to your Roth IRA?

[Nothlit]

Thanks all. I see a lot of information on $9,500 per year tax-free income when you roll over your money from a Traditional IRA to a Roth IRA. What if your money is in a Roth IRA already? Can anyone lead me towards or link me to a strategy to withdraw money from a Roth IRA when you have enough in that account to be FI (for me probably $750,000)?

If you have a Roth IRA that you just made regular contributions to over the years (no rollovers/conversions from other types of accounts) then you can just withdraw your contributions at any time, tax- and penalty-free. That's one of the defining features of a Roth IRA; no weird tricks or loopholes required. It's only the earnings (gains) which would be subject to taxes or penalties if withdrawn early in that case.

[Undecided]

If you have 750,000 in a Roth that can only mean a few things.  1) you rolled a crap ton over and paid a crap ton of tax. 2)Backdoor Roth strategy (wait 5 years). 3) You made some wildy risky investments and it paid off. 4)There are other ways to fund a Roth which I am not privy to.

If you're curious, look for the threads about after-tax 401(k) contribution rollovers to Roth IRA. While I may pay a "crap ton" of tax on the approximately $32,000 a year I can put into my Roth IRA, I have to pay the same tax whether I put it into the Roth IRA or not. If not for my employer contribution to my 401(k), I could get another $8k+ into my Roth IRA (although I prefer the free money from my employer). For someone who starts a career with such conditions and can afford to make the contributions, a $750k Roth after a dozen years isn't inconceivable.

Hello Undecided,

How are you contributing 32k per year to your Roth IRA?

See, for example, http://www.bogleheads.org/forum/viewtopic.php?t=82767

Make after tax contributions to 401(k), take in-service distribution to IRA, convert to a Roth IRA.

[FIPurpose]

This question comes up basically daily.  There are multiple ways to get your money out of tax-advantaged accounts with no penalty.  The two most popular are Roth IRA conversion ladders and SEPP.

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

Can we have a sticky on one of these threads. I feel like the Investor forum probably needs a few basic sticky threads so that people can have that reference. (A best of Investor threads)

[The Mobile Mustachian]

If you have 750,000 in a Roth that can only mean a few things.  1) you rolled a crap ton over and paid a crap ton of tax. 2)Backdoor Roth strategy (wait 5 years). 3) You made some wildy risky investments and it paid off. 4)There are other ways to fund a Roth which I am not privy to.

If you're curious, look for the threads about after-tax 401(k) contribution rollovers to Roth IRA. While I may pay a "crap ton" of tax on the approximately $32,000 a year I can put into my Roth IRA, I have to pay the same tax whether I put it into the Roth IRA or not. If not for my employer contribution to my 401(k), I could get another $8k+ into my Roth IRA (although I prefer the free money from my employer). For someone who starts a career with such conditions and can afford to make the contributions, a $750k Roth after a dozen years isn't inconceivable.

Hello Undecided,

How are you contributing 32k per year to your Roth IRA?

See, for example, http://www.bogleheads.org/forum/viewtopic.php?t=82767

Make after tax contributions to 401(k), take in-service distribution to IRA, convert to a Roth IRA.

This just blew my mind. I've been trying to find a way to put my real estate investments in a tax advantaged account, but the $5500 contribution per year isn't enough to roll the ball. 30k definitely is, however. Just so I understand, taxes are only paid on the earnings (if any) when converting the after tax 401k portion to the Roth IRA?

[Undecided]

If you roll 401(k) to traditional IRA, you can then roll the earnings back to the 401(k) (assuming it will take incoming rollovers) before you convert the basis to the Roth.

[MissPeach]

I think it was the mad fientist who did a case study on your questions. It's also covered on the Bogglehead book. Basically over many years you are robbing yourself a few hundred thousand dollars. Both sources worked out the numbers and showed you.

I think the main thing is to rely on the ability to do a roth conversion ladder. Since you need to have it in there 5 years, you will want some money in a taxable account to hold you over but you don't need most of your holdings there unless the tax code dramatically changes.

[foobar]

It comes down to you assumptions. If you can avoid paying 28% tax and take the money out tax free, it is a huge win. If you put it in at 28% and take it out at 28%, it is either break even or a slight loss if your compounding period is long enough. Way more people fall into variations of the first case than second.

Some day some one has to write a article about the most efficient way to roll money from an traditional IRA to a roth. If you can handle the paperwork, I have a feeling it will involve like 6+ roth iras and filing a ton of amended tax returns:)

I think it was the mad fientist who did a case study on your questions. It's also covered on the Bogglehead book. Basically over many years you are robbing yourself a few hundred thousand dollars. Both sources worked out the numbers and showed you.

I think the main thing is to rely on the ability to do a roth conversion ladder. Since you need to have it in there 5 years, you will want some money in a taxable account to hold you over but you don't need most of your holdings there unless the tax code dramatically changes.

[Nords]

I've taken the links in this thread (plus a bunch of other references) and put together a comprehensive guide on tapping your tax-deferred retirement accounts early.  It's oriented toward the military pay/accounts system but the tax advice applies to civilians as well.  It includes the usual Roth IRA and 72(t) withdrawals, as well as the dreaded Roth IRA conversion ladder:
http://the-military-guide.com/2014/03/20/early-withdrawals-from-your-tsp-and-ira-after-the-military/