Author Topic: help with retirement plan  (Read 5027 times)

racevedo

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help with retirement plan
« on: May 27, 2015, 03:46:50 PM »
Hello, my name is Rene, Im a latin guy trying to get the early retirement but I have a lot of questions and I know you guys could you give me advices.
I have a job where I make 35k gross annual but I think I can save 20k-25k for year and I was thinking to contribute 50% on my roth 401k and 5,500 in my roth ira and maybe get to 250k or 300k between both accounts, quit my job and joint my 2 accounts in one, I just need like 12k per year to live a simple and happy life, but I read that I just take money from my contributions until 59 1/2 so maybe that plan won't work, maybe I should just put 5% to my 401k thats the match from my employer and put my money on a brokerage account and roth ira so I can take 12k every year?
I dont have debts, I paid off my car but a rent a apartment, maybe I could save and buy a condom here on Las Vegas for 50k I don't need a big house.
please could you help me to make a plan.
I started to save money this year and I just have 3k on my roth ira, 3k on my roth 401k and like 2k cash.
sorry for my bad English I just have 5 years in USA.

forummm

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Re: help with retirement plan
« Reply #1 on: May 27, 2015, 04:22:52 PM »
You can withdraw from your Roth IRA before 59.5. All of your Roth contributions can be withdrawn without penalty anytime after the account has been open for 5 years. The interest on those contributions can be withdrawn using Substantially Equal Periodic Payments at least 5 tax years after any Roth IRA contribution was made in your lifetime.
« Last Edit: May 27, 2015, 07:53:27 PM by forummm »

forummm

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Re: help with retirement plan
« Reply #2 on: May 27, 2015, 04:25:09 PM »
I dont have debts, I paid off my car but a rent a apartment, maybe I could save and buy a condom here on Las Vegas for 50k I don't need a big house.

$50k! How big of a condom do you need?

I know English isn't your first language and I don't intend to be cruel. I just thought this mistake was a funny one. I know you meant "condo". :)

Le Barbu

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Re: help with retirement plan
« Reply #3 on: May 27, 2015, 04:28:50 PM »
Probably the auto corrector

Eric

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Re: help with retirement plan
« Reply #4 on: May 27, 2015, 05:02:08 PM »
Hi Rene,
It's probably more beneficial for you to contribute to a Traditional 401k, not a Roth 401k.  The reason is that it reduces your taxable income now.  If you plan to be in a lower tax bracket in retirement, this will save you a lot of money on taxes.

You may be wary about saving money in a 401k, but rest assured that you can access that money penalty free prior to age 59.5.  You can use the Roth Pipeline method or the SEPP method.  Read here and here for more details.

You can withdraw from your Roth IRA before 59.5. All of your Roth contributions can be withdrawn without penalty anytime after the account has been open for 5 years. The interest on those contributions can be withdrawn using Substantially Equal Periodic Payments.

You can withdrawal those Roth IRA contributions immediately or at any point after contributing them.  The 5 year waiting period only applies to rollover contributions, not direct contributions.

forummm

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Re: help with retirement plan
« Reply #5 on: May 27, 2015, 05:08:42 PM »
Hi Rene,
It's probably more beneficial for you to contribute to a Traditional 401k, not a Roth 401k.  The reason is that it reduces your taxable income now.  If you plan to be in a lower tax bracket in retirement, this will save you a lot of money on taxes.

You may be wary about saving money in a 401k, but rest assured that you can access that money penalty free prior to age 59.5.  You can use the Roth Pipeline method or the SEPP method.  Read here and here for more details.

You can withdraw from your Roth IRA before 59.5. All of your Roth contributions can be withdrawn without penalty anytime after the account has been open for 5 years. The interest on those contributions can be withdrawn using Substantially Equal Periodic Payments.

You can withdrawal those Roth IRA contributions immediately or at any point after contributing them.  The 5 year waiting period only applies to rollover contributions, not direct contributions.

Eric is correct, as long as the account has been open for 5 years.

And I agree about a traditional 401k being a better idea for you now. If you are living on just $12k in retirement, you won't pay any taxes (or very, very little) when you take that money out.
« Last Edit: May 27, 2015, 07:51:51 PM by forummm »

Eric

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Re: help with retirement plan
« Reply #6 on: May 27, 2015, 05:15:36 PM »
as long as the account has been open for 5 years.

I don't believe that's a requirement either.  There's no 5 year anything to my knowledge when considering withdrawing non-rollover contributions to a Roth IRA.  As usual, Kitces has a thorough article on it.

https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/

forummm

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Re: help with retirement plan
« Reply #7 on: May 27, 2015, 05:20:04 PM »
I was imprecise. I said "the account". I should have said "the first contribution is made to any Roth IRA". I made the mental shortcut of you'd only open an IRA to put something in it right away, and that he'd only have one IRA. Which may not be valid assumptions.

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The 5-year rule essentially states that five tax years must pass from when the first contribution is made to (any) Roth IRA, until a qualified distribution can be made.
[/s]

EDIT: Disregard. I got confused between contributions and earnings for a bit there. Eric was right.
« Last Edit: May 27, 2015, 07:51:07 PM by forummm »

Eric

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Re: help with retirement plan
« Reply #8 on: May 27, 2015, 05:42:27 PM »
I was imprecise. I said "the account". I should have said "the first contribution is made to any Roth IRA". I made the mental shortcut of you'd only open an IRA to put something in it right away, and that he'd only have one IRA. Which may not be valid assumptions.

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The 5-year rule essentially states that five tax years must pass from when the first contribution is made to (any) Roth IRA, until a qualified distribution can be made.

No, it's not an imprecision thing.  I'm flat out stating that under no circumstances do you need to wait 5 years.  Open a Roth IRA account.  Deposit $5500.  Withdrawal the next day.  No penalties. (again for non-rollover contributions only)

The first sentence of the entire 5-Year Rule For Roth Contributions section is this: 
Quote
The 5-year rule for Roth contributions is used to determine whether a withdrawal of growth will be tax-free as a "qualified distribution" from a Roth IRA.
Every other statement after that (including your quoted sentence above) references withdrawal of growth or earnings.  So unless you're withdrawing earnings, or have had a rollover, there's no applicable 5 year waiting period.

This is summarized in the last paragraph:
Quote
The bottom line, though, is simply this: it's important to remember that there are two separate 5-year rules, each with their own requirements and stipulations. The Roth conversion 5-year rule is about accessing penalty-free conversion principal (and is irrelevant if the individual already meets one of the other exceptions to the early withdrawal penalty), while the Roth contribution 5-year rule is about accessing tax-free Roth earnings (which are assumed to be extracted last, anyway).
« Last Edit: May 27, 2015, 05:44:07 PM by Eric »

racevedo

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Re: help with retirement plan
« Reply #9 on: May 27, 2015, 07:36:07 PM »

$50k! How big of a condom do you need?

I know English isn't your first language and I don't intend to be cruel. I just thought this mistake was a funny one. I know you meant "condo". :)
jajajajajajaja yeah I meant condo lol. Thanks Forumm and eric.
thanks a lot I was worry about my plan, I will change to a regular 401k, but I wonder if I could do the conversion for the entire 401k to ira and then to roth? Or its better just to take small parts every year?

forummm

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Re: help with retirement plan
« Reply #10 on: May 27, 2015, 07:50:13 PM »
Oh, right. Sorry, I wasn't thinking clearly. You're 100% right about that. Thanks for pointing that out, Eric. Contributions can be taken out at any time. I got mixed up with earnings for a bit there. Earnings have to wait until a contribution was made 5 years ago (I actually didn't know it wasn't 5 years, it's 5 tax years--not that it matters to most people) and either 59.5 or SEPP. Thanks for posting the article--I love the detail of the IRS rules. I'd never looked into the Roth 401k rules before since I've never had one.

Sorry for the confusion Rene.

forummm

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Re: help with retirement plan
« Reply #11 on: May 27, 2015, 07:56:35 PM »

$50k! How big of a condom do you need?

I know English isn't your first language and I don't intend to be cruel. I just thought this mistake was a funny one. I know you meant "condo". :)
jajajajajajaja yeah I meant condo lol. Thanks Forumm and eric.
thanks a lot I was worry about my plan, I will change to a regular 401k, but I wonder if I could do the conversion for the entire 401k to ira and then to roth? Or its better just to take small parts every year?

When you leave your job, you can roll the entire traditional 401k into a traditional IRA. No tax due there. Then you can convert whatever dollar amount of the traditional IRA into a Roth contribution, and pay the tax on it. If you do small amounts each year (say, just the $12k you need), you will probably owe no or very little tax. If you did the whole thing in one year, you would owe a lot of tax!

Indexer

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Re: help with retirement plan
« Reply #12 on: May 27, 2015, 09:26:02 PM »
You can withdrawal those Roth IRA contributions immediately or at any point after contributing them.  The 5 year waiting period only applies to rollover contributions, not direct contributions.

I don't believe this is true either.  Conversions have a 5 year rule, but rollovers do not.  A rollover from a regular pre tax 401k to a Roth IRA would obviously be a conversion as well as a rollover, but a rollover from a Roth 401k into a Roth IRA doesn't have this problem.  If you roll the roth portion of a roth 401k into a Roth IRA you can take out the 'contributions' tax free.  Now for earnings you are bound by the 5 year and age 59 1/2 rule.

racevedo

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Re: help with retirement plan
« Reply #13 on: May 27, 2015, 11:06:37 PM »
Ooh I see, that's make sense, thanks Indexer and forummm.

matchewed

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Re: help with retirement plan
« Reply #14 on: May 28, 2015, 06:50:03 AM »
You can withdrawal those Roth IRA contributions immediately or at any point after contributing them.  The 5 year waiting period only applies to rollover contributions, not direct contributions.

I don't believe this is true either.  Conversions have a 5 year rule, but rollovers do not.  A rollover from a regular pre tax 401k to a Roth IRA would obviously be a conversion as well as a rollover, but a rollover from a Roth 401k into a Roth IRA doesn't have this problem.  If you roll the roth portion of a roth 401k into a Roth IRA you can take out the 'contributions' tax free.  Now for earnings you are bound by the 5 year and age 59 1/2 rule.

You are correct.

The breakdown seems to go like this according to Form 8606. - http://www.irs.gov/pub/irs-pdf/f8606.pdf

Line 19 - How much did you take out of your Roth IRA? Ex: 6k
Line 22 - How much did you contribute over time (1998-present)? Ex:24k (This is also adjusted as you keep pulling from your Roth IRA via these instructions)
Line 23 - Subtract Line 22 from 21 (the first time home owner buying thing is factored to get line 21 from 19), if less than 0 put 0 for the rest. Voila no taxes.

So this shows that the first priority is contributions as was previously discussed and that they are not subject to taxes.

But let's say that you have a Roth 401k rollover and have never made a contribution. (New example)
Line 19 - 6k
Line 22 - 0
Line 23 - 6k
Line 24 - How much have you rolled over? 30k
Line 25 - Subtract 24 from 23, if less than or = to 0 then put 0. 0 Voila again no taxes.

This is only an example for contributions and rollovers. This is not an example of conversion at all.

Further instructions for form 8606 - http://www.irs.gov/pub/irs-pdf/i8606.pdf


 

racevedo

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Re: help with retirement plan
« Reply #15 on: May 29, 2015, 10:51:48 PM »
Aah ok thank you guy, now I have another question maybe someone could help me.
I have these options on my 401k


And I got these


What you think? Im good or maybe I should change some?

Ooh and if I have like 5k cash should I put that money on a brokerage account with vanguard? But I know I will use that money for my roth ira next year, so next yeard could you transfer that money to roth without penalty? If a want to buy the same fund?
« Last Edit: May 29, 2015, 10:58:23 PM by racevedo »

matchewed

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Re: help with retirement plan
« Reply #16 on: May 30, 2015, 05:41:22 AM »
Come up with an Asset Allocation. Write an Investment Policy Statement, pick the lowest cost funds which reflect that.

As for the 5k cash I would not put it into a taxable account only to pull out pay taxes and put it in a Roth. That is silly. Just wait until next year.

racevedo

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Re: help with retirement plan
« Reply #17 on: May 30, 2015, 01:06:52 PM »
Ohok thanks matchewed.