I Did Some Math Today

[peaceandprosperity]

Hello Mustachians,

I Mustache you a question. I have been an avid fan of this site since about Mid January. I have to get my daily fix of Mustachian forums, blog posts and linked articles or i feel i will go crazy. I am a bit of a corporate drone despite having gone into this field for the love of technology, not the love of soul-crushing business decisions that destroy all hope of creativity and autonomy. This is my first substantial forum post.

But i digress. My question without taking too much time to explain the history is this. I want to get out of my corporate job in 2-3 years (short term goal). I am fine with taking a different job by I expect a massive pay reduction at that point. I want to retire by 52 (i'm 47). 54 at the latest. so in 5-7 years.

I have saved quite a bit in tax advantaged accounts and almost NOTHING in savings that i can access today. I have the following for assets.

425K in 401k
125k in Variable annuity through Principal financial (working to convert to IRA @ Vangaurd).
None of which can be accessed until i'm 59 1/2

I do have about 30K in cash type investments now. In January I paid off our one car loan and invested 6K in a Vangaurd VTSX and 5K in Lending club with about 20K in cash right now. No college savings to speak of.
I also save through my employer ESPP plan which works out to anywhere from 11-15K every 6 months that i can access and i usually short term sell it so do not get capital gains advantage. i do get a 15% profit based on the way the shares are priced if i sell the day i can access them.

I will have about 325K in home equity should we sell in a 8 years when the last kid graduates high school.

The math problem is this. If I did not put a single dime into the 401k or IRA starting today, itwould still grow to 1.2 Million dollars by the time i can actually access them.
I project our spending needs to be about 50K per year at retirement so that is plenty by my estimate.


Do i just stop funding the 401k all together and lose the tax advantages and the company match? Should i take that money and start pumping it into taxable savings that can be used to bridge the gap between age 54  and 59 1/2?
It seems to me i need to put more into my cash savings ASAP.

Please let me know your thoughts.

[ZMonet]

I'll let others who know better address your question.  However, if you retire from your company at 55 (1 year more than your max admittedly) then you won't have to pay the early distribution penalty.

[Cromacster]

Start here:

https://forum.mrmoneymustache.com/forum-information-faqs/frequently-asked-questions/

Should I invest in my 401k?

Yes. Tax deferred investments have a big impact on time to FIRE. This is all based on some assumptions. madFIentist has a good post outlining the assumptions and the results. Your case may be different but it may not be.

MMM has also covered this topic, and it has been asked in forum topics in the past.

The general answer has almost always been yes.

I'm not eligible for a Roth IRA due to my income. I've heard of a Backdoor Roth IRA... sounds dirty what's the deal?

This is the deal.

[peaceandprosperity]

Maybe i should be more clear. I have read almost everything here. I should have dropped some phrases like SWR and FIRE just to indicate that. I have read the FAQ. I don't think it answers this question.

If i stay at company x for another 2-3 years, should i continue to contribute to my 401k given that I do get a generous match and it is pre-tax contributions. Even knowing that there is already enough in there today to meet my retirement goals at decent return rate projections if left to sit for another 12 years. (6.5%)

I have no intention of tapping that 401k until age 59.5

I want the freedom to do whatever i want to do between the age of 53 (roughly) and the day i can tap the 401k (59.5).
I will make some money but i don't want to have to make the current level of income. i want some freedom.

Should i spend the next 3-4 years dumping money into accessible savings/investments such as rentals or index funds or other options well documented here, even knowing i am forgoing the tax savings and company match. Or should i seek to find a compromise that still allows me some of the match and still addresses the need for fluid savings.

If it really is spelled out and i've missed it, i do apologize. just looking to engage in a dialogue.

[Gin1984]

Why would want to not pull money out of your 401k, if you can?  I'd also advise increasing your savings rate so you can save in both tax advantage and post-tax accounts.

[kyleaaa]

I think expecting your portfolio to double in 10-12 without having to add a dime is suspect at best. You may or you may not.

Either way, you should save as much as possible in your 401k. You can easily gain access to it before 59 1/2 without penalty. Its not like the money is locked away.

[soccerluvof4]

Being as were similar in Age i Would not at the very least cut off my 401k with Match allocation. I also would need to see your math to see how you are getting from 425k ish to 1.3 million.  But in either case if you wanted to slow down your allotment in 401k for the next few years for sure build up your vanguard index funds then perhaps the last year before your new venture build up your cash stash.

[peaceandprosperity]

I believe that unless I am laid off the rules are that i could not take a distribution from my 401k until age 59.5 without paying a big tax penalty. Do i misunderstand that? I want to be FI as fast as possible. I just look at this as a system of ladders. The first ladder being the next 12 years. The next ladder beginning at 59.5 when i can get to the 401k money. The third ladder kicking in at 62 with SS if it's still viable. Does that make sense?

[peaceandprosperity]

Actually took both the 401k and the IRA to equal 550K and did the Bankrate savings calculator at 6.5% which i thought was pretty conservative to get the 1.2 million. It came out like this:



Your Result
Your monthly deposit of $0.00  for 12 years with an interest rate of 6.50% compounded Annually
with an initial starting balance of $550,000.00 and zero contribution.

To answer another post, my savings rate is currently 50% of take home pay. I do hope to improve that but it's a good start over where i was 3 months ago and it's on a high salary so it does add up.

    Year
    Balance
    1 $585,750.00
    2 $623,823.75
    3 $664,372.29
    4 $707,556.49
    5 $753,547.66
    6 $802,528.26
    7 $854,692.60
    8 $910,247.62
    9 $969,413.71
    10 $1,032,425.61
    11 $1,099,533.27
    12 $1,171,002.93

Final Savings Balance: $1,171,002.93

[Gin1984]

I believe that unless I am laid off the rules are that i could not take a distribution from my 401k until age 59.5 without paying a big tax penalty. Do i misunderstand that? I want to be FI as fast as possible. I just look at this as a system of ladders. The first ladder being the next 12 years. The next ladder beginning at 59.5 when i can get to the 401k money. The third ladder kicking in at 62 with SS if it's still viable. Does that make sense?

No, you do not need to be laid off to take money out of a 401k at 55.  If you leave your job, fired, quit whatever and you keep it as a 401k and don't roll it over, you can pull starting at 55.

[Eric]

I believe that unless I am laid off the rules are that i could not take a distribution from my 401k until age 59.5 without paying a big tax penalty. Do i misunderstand that? I want to be FI as fast as possible. I just look at this as a system of ladders. The first ladder being the next 12 years. The next ladder beginning at 59.5 when i can get to the 401k money. The third ladder kicking in at 62 with SS if it's still viable. Does that make sense?

You can access 401k money penalty free in two ways.  First, rolling it over to a Roth IRA, but it has to sit for 5 years to avoid the penalty.  This is probably not the best option for your time frame.  However, the second way is through Substantial Equal Periodic Payments (SEPP).  I think this would be your best bet, although you'll have to bust out your calculator again.  Once you start taking SEPP, you have to continue until age 59.5.  If you stop or try to change, you'll have to pay the penalty on all that was withdrawn.  However, assuming you can do this without error, you should have access to a small amount of your 401k each year up to age 59.5.  Then you'll just need to cover the difference between your SEPP and your spending with your taxable accounts.

This will give you an idea of how much you can withdrawal through SEPP:
http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx

So even though you don't want to touch the 401k money, it seems like a bad idea to me to not contribute to the 401k at least up to match, as that's like throwing away free money.  But what's stopping you from maxing that 401k AND making substantial contributions to your taxable account?  Sell some shit.  Cut some expenses.  You've got a new goal now!

[Frankies Girl]

just posted this below and Eric beat me to it. :D

There are ways to access a 401K/IRA well before your 50s, without penalty.

SEPP and a Roth pipeline are frequently discussed. Several posts on both methods around the boards, so do some searches to check those out, and also read here:
http://www.madfientist.com/traditional-ira-vs-roth-ira/

If it was me, I probably would start funding a straight-up taxable account, but continue with the contributions to the 401K if they reduce your taxable income significantly and you get a match.

This is how I plan to do things using a Roth pipeline:

Taxable account - invested in FSTVX (spartan total stock market index, equivalent to the Vanguard version) -
Contains a very tax efficient investment that tracks the total stock market. Has at least 10+ years' worth of living expenses. Will be pulling my living expenses from this while I "age" my 401K money in my Roth.

401K/IRA
Two accounts with the bulk of my money... but each year I'm ER, I'm converting over a portion to my Roth. As long as I stay under the 15% taxable income bracket (counting the money I'm living off of as well) I can convert and pay no taxes moving it over.

Roth
Building up money over the 10 years (or longer - depends) I'll eventually start pulling out the "aged" money - tax and penalty free, as long as I don't touch the growth before 59, the contribution/conversion amounts just have to be in there for 5 years minimum.

Once I'm past 59, doesn't matter - can tap whichever account I want, but I'll probably keep rolling to the Roth to avoid ever having to pay taxes again.

[Thegoblinchief]

You got some great mechanical advice, but what about that budget?

$50K seems quite high, at least to me. What's all in it?

[MKinVA]

I am somewhat in the same boat, but a few years older. I continue to contribute to 401, but only up to the level where I get the match. Then I am saving as much cash as possible to get me by for about 4 years until I can get retirement funds, social security, and both kids out of college with their own jobs. So I agree with the others. Continue to get the match and save up taxable funds for the interim years.

[wtjbatman]

Maybe i should be more clear. I have read almost everything here. I should have dropped some phrases like SWR and FIRE just to indicate that. I have read the FAQ. I don't think it answers this question.

If i stay at company x for another 2-3 years, should i continue to contribute to my 401k given that I do get a generous match and it is pre-tax contributions. Even knowing that there is already enough in there today to meet my retirement goals at decent return rate projections if left to sit for another 12 years. (6.5%)

I have no intention of tapping that 401k until age 59.5

I want the freedom to do whatever i want to do between the age of 53 (roughly) and the day i can tap the 401k (59.5).
I will make some money but i don't want to have to make the current level of income. i want some freedom.

Should i spend the next 3-4 years dumping money into accessible savings/investments such as rentals or index funds or other options well documented here, even knowing i am forgoing the tax savings and company match. Or should i seek to find a compromise that still allows me some of the match and still addresses the need for fluid savings.

If it really is spelled out and i've missed it, i do apologize. just looking to engage in a dialogue.

Not to be rude at all, but if you didn't realize there are two easy ways to tap into a 401k or IRA before 59 1/2, you definitely haven't read almost everything here. It is mentioned quite a bit in both this subforum and the Ask a Mustachian subforum. I would take a moment to step back and reevaluate whether you understand everything about your retirement plans before you make any sort of decisions. Better safe than sorry!

[TomTX]

You need to do more reading. Or more careful reading. SEPP withdrawals from a 401(k) are mentioned ALL THE TIME here.

You absolutely need to put enough into the 401(k) to get the full match. You probably should put enough in to keep down your tax bracket.

[foobar]

Is your 50k of spending in 2014 dollars or in 2026 dollars? For example 50k in 2014 dollars is likely to be about 70k in 2026 dollars. 2-3%/yr of inflation over 12 years really starts to add up.

There are very few cases where maxing out the 401(k) doesn't make sense. You need to have a really bad plan and an immediate need to a large chunk of money. Otherwise the 72(t) or ROTH conversion gives you access to the money.

The math problem is this. If I did not put a single dime into the 401k or IRA starting today, itwould still grow to 1.2 Million dollars by the time i can actually access them.
I project our spending needs to be about 50K per year at retirement so that is plenty by my estimate.

[sirdoug007]

I'm in a similar boat and have recently shifted to trying to build a taxable nest egg that will be liquid and available immediately upon FI with as few barriers as possible.

There is a concept of tax diversification that financial planners use but I would expand that to liquidity diversification.  Retirement accounts essentially gives you a break on taxes in exchange for restrictions on access to your money.  Ideally, you can take advantage of these tax breaks and optimize your savings, but you must keep in mind tax laws change regularly so you have a bit of a moving target (i.e., what will be the tax rates/laws when you retire?  This is unknowable with certainty).

My company does matching differently than most others.  They simply put a percentage of your previous years earnings in a mutual fund account in your name.  They are quite generous and average about 8-9% of your earnings.  This account is a 401(a) and cannot be accessed until you are 65 years old.  Even if you leave the company, this money is locked up until you hit 65 or die.

This arrangement means I have a significant portion of my savings locked in a box that can't be opened until I am 65.  The 401(k) is a similar box with a few tricks to open it early.  Social security also comes into play around 65 (and unlike a lot of people I think it will still be around and paying significant benefits.  Even if they "run out" of money they still can pay something like 70% of promised benefits, far from zero!).

This all leads me to the conclusion that I need to get some money into a taxable account that can bridge the gap until 65.  I am 33 now and would like to be working part time on my schedule by 45.

All that said, the most important decision by far is how much you save.  After that it gets a bit academic and has less of an impact on your FI/retirement date.  So regardless of where you put it, make sure it is a big chunk of your earnings!

Cheers,
Doug

[peaceandprosperity]

"There is a concept of tax diversification that financial planners use but I would expand that to liquidity diversification.  Retirement accounts essentially gives you a break on taxes in exchange for restrictions on access to your money.  Ideally, you can take advantage of these tax breaks and optimize your savings, but you must keep in mind tax laws change regularly so you have a bit of a moving target (i.e., what will be the tax rates/laws when you retire?  This is unknowable with certainty)."

Doug - this is sort of the idea i'm working with. I can get into savings rates and budgets but my plan was to do a separate case study post. Suffice it to say that at a high income rate I'm saving quite a bit. I want to make sure enough of that is accessible for the first ladder of my Semi-retirement/FI journey. Keep in mind, though i had been saving, i had been spending rapidly for years and the whole idea of FI is literally 3 months old. I have to just set aside the pain of knowing that if i had discovered this idea even 5 years ago i could be close to done now.

Yes i can do SEPP. But i really don't know that it makes sense to draw down on the 401k if i don't have to. Here's what i'm coming to and thank you to those of you that engaged in some of these ideas. Please check my thinking if you would:

47-53 : Continue to save extensively with a goal to get to 70% savings rate in a year. Currently 50%. Details to follow in different post. Continue to save up to 401k match for as long as I'm at company.com. (about 3 years). Put everything else into diversified, taxable and retrievable investments. (and possibly a 529). This gives me cash i can access at age 53. IF investments fail and it's not there for some bizarre reason, I guess i continue to work or look at SEPP.

53-59.5 : Drop back to part time, take up chainsaw carving (or recently inspired by MMM, metal work) or whatever the hells bells i want to do. Maybe even drop to retired if I want to. The wife wants to work now after staying home with the kids, wanting to get back to leading non-profit work so there will be some income there if that happens. Live on the taxable stuff until 401k/IRA can be tapped.

59.5 ----->   401k/IRA
62 (why wait) -----> SS and 401k/IRA    (I too am an optimist and believe that SS will be here to stay, i'm also super happy about the Affordable Care Act for flexibility in health options)

If i had started in my 30s, i'd have a lot more time to do both 401k and taxable accounts but since i've started so late i don't want to overbuild my tax advantaged accounts leaving me less flexibility. I hope I'm making sense.

[matchewed]

Not making much sense because you keep saying you're less flexible in the 401k and as the other posters have pointed out that is not necessarily true. Depending on your expense and the amount you will withdraw the 72(t) or Roth Pipeline methods are just as "flexible". Ignoring their existence is what is inflexible. Acknowledging their existence and evaluating different strategies with actual numbers to determine what would be best for you depending on different scenarios (high expenses/low expenses, taxation changes, drawing down from multiple different account types...etc.) will give you a solid answer as to what is an efficient strategy from a taxation standpoint.

[foobar]

You wait on SS in order to reduce your chances of running out of money in your old age. You get a decent return on every year (well the years between 62-70. Those earlier returns aren't so great:)) you wait and those returns then are inflation adjusted.  The odds are you will make the same money with either choice but in the cases where you win (i.e. you don't die) you get more money. 

Depending on your income during 47-59, there might be tax advantages of taking money out of the 401(k)/IRA to take advantages of the deductions and 10% bracket.

I notice that you also mention you have kids and no college savings. You might want to run the math on what having 300k in taxable savings versus that same amount in tax deferred ones does to your college financial aid.   Granted FA isn't free money (often a good chunk is just loans) but having to come up with an extra 15k is a bit of a bummer.

"There is a concept of tax diversification that financial planners use but I would expand that to liquidity diversification.  Retirement accounts essentially gives you a break on taxes in exchange for restrictions on access to your money.  Ideally, you can take advantage of these tax breaks and optimize your savings, but you must keep in mind tax laws change regularly so you have a bit of a moving target (i.e., what will be the tax rates/laws when you retire?  This is unknowable with certainty)."

Doug - this is sort of the idea i'm working with. I can get into savings rates and budgets but my plan was to do a separate case study post. Suffice it to say that at a high income rate I'm saving quite a bit. I want to make sure enough of that is accessible for the first ladder of my Semi-retirement/FI journey. Keep in mind, though i had been saving, i had been spending rapidly for years and the whole idea of FI is literally 3 months old. I have to just set aside the pain of knowing that if i had discovered this idea even 5 years ago i could be close to done now.

Yes i can do SEPP. But i really don't know that it makes sense to draw down on the 401k if i don't have to. Here's what i'm coming to and thank you to those of you that engaged in some of these ideas. Please check my thinking if you would:

47-53 : Continue to save extensively with a goal to get to 70% savings rate in a year. Currently 50%. Details to follow in different post. Continue to save up to 401k match for as long as I'm at company.com. (about 3 years). Put everything else into diversified, taxable and retrievable investments. (and possibly a 529). This gives me cash i can access at age 53. IF investments fail and it's not there for some bizarre reason, I guess i continue to work or look at SEPP.

53-59.5 : Drop back to part time, take up chainsaw carving (or recently inspired by MMM, metal work) or whatever the hells bells i want to do. Maybe even drop to retired if I want to. The wife wants to work now after staying home with the kids, wanting to get back to leading non-profit work so there will be some income there if that happens. Live on the taxable stuff until 401k/IRA can be tapped.

59.5 ----->   401k/IRA
62 (why wait) -----> SS and 401k/IRA    (I too am an optimist and believe that SS will be here to stay, i'm also super happy about the Affordable Care Act for flexibility in health options)

If i had started in my 30s, i'd have a lot more time to do both 401k and taxable accounts but since i've started so late i don't want to overbuild my tax advantaged accounts leaving me less flexibility. I hope I'm making sense.

[CB]

62 (why wait) -----> SS

Doesn't it pay for most people to wait until 70 as long they expect to live to 83ish or longer? Or do I have that backwards?

[Gin1984]

62 (why wait) -----> SS

Doesn't it pay for most people to wait until 70 as long they expect to live to 83ish or longer? Or do I have that backwards?

No CB, you have it right.

[sirdoug007]

The reason you wait is because benefits increase substantially as you move retirement age from 62 (you get 70%) to 67 (100%) to 70 (124%).  The increase goes from 5% per year up to 8% per year which are guaranteed returns.

As long as you are healthy and have other funds, you should wait as long as possible to start collecting Social Security.

[peaceandprosperity]

I do get that SS increases dramatically if you wait beyond 62. and I would likely be able to do that given that my 1.2m 401k/IR # isn't touched until 59.5 and is enough to fund 50k per year indefinitely. SS is just literally over and above and more than i need at that point. I am fine with that, i just note it as another source of income that may be important. It is not the important part of the question to me. Sure, i can wait to take it until 70 or later. Or i can take it earlier and enjoy some of it and do some travel that otherwise would not have been in the budget. But that's all 3rd ladder stuff which i feel good about. It's the first ladder stuff i do not.

I am not steadfastly refusing to consider the assets in the 401k. I do understand SOSEPP/72t. However it locks you into minimum of 5 years of inflexible distribution whether you need it or not. Given my scenario, why SHOULD I rely on the 401k? Remember in my example the tax advantaged $$  does not reach my FI # of 1.2M  until 12 years from now. Which just happens to be when it can be accessed through regular distribution.

[Eric]

I am not steadfastly refusing to consider the assets in the 401k. I do understand SOSEPP/72t. However it locks you into minimum of 5 years of inflexible distribution whether you need it or not. Given my scenario, why SHOULD I rely on the 401k? Remember in my example the tax advantaged $$  does not reach my FI # of 1.2M  until 12 years from now. Which just happens to be when it can be accessed through regular distribution.

Because 401k contributions lower your tax bill, whereas taxable investment account contributions do not.  By contributing to a taxable account instead of your 401k, you're paying more in taxes than you need to.  (assuming lower tax bracket upon retirement)

If you start SEPP at an amount that ends up being "too high", it's not like you lose the money.  You can take the excess funds and re-invest them right back into your taxable account.

[peaceandprosperity]

Eric,

That makes sense. With regards to distributing and reinvesting. And I like the idea of continuing to gain the tax advantages. Also i read through the Mad Fientist article at this link http://www.madfientist.com/traditional-ira-vs-roth-ira/
so some light bulbs are starting to come on here. thanks.

[Gin1984]

I am not steadfastly refusing to consider the assets in the 401k. I do understand SOSEPP/72t. However it locks you into minimum of 5 years of inflexible distribution whether you need it or not. Given my scenario, why SHOULD I rely on the 401k? Remember in my example the tax advantaged $$  does not reach my FI # of 1.2M  until 12 years from now. Which just happens to be when it can be accessed through regular distribution.

Because 401k contributions lower your tax bill, whereas taxable investment account contributions do not.  By contributing to a taxable account instead of your 401k, you're paying more in taxes than you need to.  (assuming lower tax bracket upon retirement)

If you start SEPP at an amount that ends up being "too high", it's not like you lose the money.  You can take the excess funds and re-invest them right back into your taxable account.

I don't know though.  This year I can pay $6000 and get into the 10% bracket and lock some nice tax rates in the Roth for a couple grand, but the next 6 years I can't get out of the 15% no matter what.  And I do plan to be in the 15% bracket in retirement.

[foobar]

If you contribute to the 401(k) for another 5 years, you will get to 1.2 million in less than 12 years:) You don't mention what your company match is but in pretty much every case, you would be better off putting in up to the company match and paying a 10% early withdrawal penalty. The added free money is that valuable.

Have you run the math on how much money you need to live on from 52-59.6 and where it is coming from? Without cashing in on that home equity, its seems like your numbers aren't close.

I do get that SS increases dramatically if you wait beyond 62. and I would likely be able to do that given that my 1.2m 401k/IR # isn't touched until 59.5 and is enough to fund 50k per year indefinitely. SS is just literally over and above and more than i need at that point. I am fine with that, i just note it as another source of income that may be important. It is not the important part of the question to me. Sure, i can wait to take it until 70 or later. Or i can take it earlier and enjoy some of it and do some travel that otherwise would not have been in the budget. But that's all 3rd ladder stuff which i feel good about. It's the first ladder stuff i do not.

I am not steadfastly refusing to consider the assets in the 401k. I do understand SOSEPP/72t. However it locks you into minimum of 5 years of inflexible distribution whether you need it or not. Given my scenario, why SHOULD I rely on the 401k? Remember in my example the tax advantaged $$  does not reach my FI # of 1.2M  until 12 years from now. Which just happens to be when it can be accessed through regular distribution.

[nereo]

I don't know though.  This year I can pay $6000 and get into the 10% bracket and lock some nice tax rates in the Roth for a couple grand, but the next 6 years I can't get out of the 15% no matter what.  And I do plan to be in the 15% bracket in retirement.

Why are you expecting to pay so much in taxes in retirement?  Sounds like you are already planning to have a decent chunk of change in a ROTH IRA. Are you referring to your marginal rate?  Seems like your effective tax rate should be well under 15%. Plenty of strategies here to keep it under 10%.

[Gin1984]

I don't know though.  This year I can pay $6000 and get into the 10% bracket and lock some nice tax rates in the Roth for a couple grand, but the next 6 years I can't get out of the 15% no matter what.  And I do plan to be in the 15% bracket in retirement.

Why are you expecting to pay so much in taxes in retirement?  Sounds like you are already planning to have a decent chunk of change in a ROTH IRA. Are you referring to your marginal rate?  Seems like your effective tax rate should be well under 15%. Plenty of strategies here to keep it under 10%.

I think I explained myself enough over here: https://forum.mrmoneymustache.com/investor-alley/roth-vs-traditional-ira/ but let me know if it did not make sense.

[nereo]

I think I explained myself enough over here: https://forum.mrmoneymustache.com/investor-alley/roth-vs-traditional-ira/ but let me know if it did not make sense.

Ok - that posting certainly helps.  But my question remains, why do you expect to pay so much in taxes in retirement.  Also, from your posts I'm wondering if you are confusing marginal tax rate with effective tax rate.   In your situation, it doesn't seem like you should be paying that much in taxes at all. 

2014 tax rates (filing jointly):
First $18,150                10%
$18,151 - 73,800          15%
$73,801 - 148,850        25%
Here's a hypothetical example based on some information in your posts.
You have the standard deduction of $12,200 plus $3900 for each family member.  You also deduct any amount you contribute towards your 401(k).  Plus there's the Child tax credit of $1k per kid. If you are making out just one 401(k) at $17,500 and earning $100k your tax liability is on $62,500 of earned income, not including other deductions.  Applying your child tax credit that leaves you with $7,467 in taxes on $100k of income, or 7.467%.
Obviously there will be differences (mortgage interest, expenses, AMT etc) but it seems improbable that you would pay a 'solid 15%' in taxes unless you were earning above the $148,850 level or not saving in your 401(k).

But more to my point, why would you be paying 15% in retirement (besides a drastic re-write of the tax code)? You will have some income tax free from your ROTH, and taxable income from your 401(k) and other savings.  If you withdraw $10k from your ROTH per year in 20+ years, and $18,00 from your 401(k) and/or savings your tax rate would be 6.4% before deductions.*


*yes, tax laws in the future will never be certain.  But it seems highly unlikely the g'vt would ever try to re-tax a ROTH.

[Gin1984]

I think I explained myself enough over here: https://forum.mrmoneymustache.com/investor-alley/roth-vs-traditional-ira/ but let me know if it did not make sense.

Ok - that posting certainly helps.  But my question remains, why do you expect to pay so much in taxes in retirement.  Also, from your posts I'm wondering if you are confusing marginal tax rate with effective tax rate.   In your situation, it doesn't seem like you should be paying that much in taxes at all. 

2014 tax rates (filing jointly):
First $18,150                10%
$18,151 - 73,800          15%
$73,801 - 148,850        25%
Here's a hypothetical example based on some information in your posts.
You have the standard deduction of $12,200 plus $3900 for each family member.  You also deduct any amount you contribute towards your 401(k).  Plus there's the Child tax credit of $1k per kid. If you are making out just one 401(k) at $17,500 and earning $100k your tax liability is on $62,500 of earned income, not including other deductions.  Applying your child tax credit that leaves you with $7,467 in taxes on $100k of income, or 7.467%.
Obviously there will be differences (mortgage interest, expenses, AMT etc) but it seems improbable that you would pay a 'solid 15%' in taxes unless you were earning above the $148,850 level or not saving in your 401(k).

But more to my point, why would you be paying 15% in retirement (besides a drastic re-write of the tax code)? You will have some income tax free from your ROTH, and taxable income from your 401(k) and other savings.  If you withdraw $10k from your ROTH per year in 20+ years, and $18,00 from your 401(k) and/or savings your tax rate would be 6.4% before deductions.*


*yes, tax laws in the future will never be certain.  But it seems highly unlikely the g'vt would ever try to re-tax a ROTH.

Because I have to hope the bush tax credits expire because the US can't afford to keep them, one and two, by the time I retire we won't have child tax credits, inflation will move us up and we won't have too much in our Roths, most will be in a 401k or traditional IRA/possible pension which are all taxable.

[nereo]

Because I have to hope the bush tax credits expire because the US can't afford to keep them, one and two, by the time I retire we won't have child tax credits, inflation will move us up and we won't have too much in our Roths, most will be in a 401k or traditional IRA/possible pension which are all taxable.

Ok - at least I can understand where you are coming from.  No one can say with any certainty what the tax code will look like in ~20 years, but starting in 2013 our tax rates have been indexed to inflation, so you won't be "moved up" because of inflation.  Everything else constant, $28k today will be taxed at the same rate as $41k in 20 years (with 2% inflation)
There are only two ways I can see for you to pay a tax rate in retirement of 15%; 1) congress drastically increases taxes or 2) your withdraws and capital gains exceed $91,950 in today's dollars per year.  Neither seem likely.
For better or worse, the changes in the tax code in 2013 also made permanent most of the Bush-era tax cuts (meaning simply that there is no expiration date on these cuts, like there was before).  Congress could always act and modify the tax brackets, but lately this has seemed unlikely due to the drumbeat of "lower taxes, lower taxes!".

There are plenty of threads here about how to reduce your retirement tax rate, and plenty of people to help you.  I've gone through all this because I hope you realize that you can be paying much less in taxes than you are calculating.

[warfreak2]

Congress could always act and modify the tax brackets, but lately this has seemed unlikely due to the drumbeat of "lower taxes, lower taxes!".

I wouldn't count on this sort of "drumbeat" lasting longer than a few election cycles. The politics of whole countries can change dramatically over time periods as short as 10 years, as a new generation of voters replaces an old one. That said, I don't think what you suggested really counted on it very much.

[CB]

I hope you realize that you can be paying much less in taxes than you are calculating.

Right on. Thanks to guidance from this forum and other blogs (madfientist and rootofgood come to mind), I paid a grand total of $170 in federal taxes last year on a family gross of just about $105k (and $150 of that $170 was because I accidentally did more than $400 in side work and had to pay self-employment tax on that income). Qualified for the saver's credit for the first time.

Our gross is probably going down a bit so this year my goal is to see if I can sock enough away in above-the-line reductions (via a supplemental 403b and a LPMRA for one kid's orthodontics work) that I'll qualify for the Earned Income Credit--it looks like I may be able to actually achieve a negative federal income tax if I get everything dialed in.

With the Roth pipeline I expect to be paying little to no income tax in retirement as well. In fact, I'm thinking I might take some previous Roth contributions out and use them to make tIRA contributions to reduce my AGI--maxing out all above-the-line options leaves me with not a lot of take-home to fund the tIRA. I sock money away in a taxable account for the pipeline years.

[Gin1984]

I hope you realize that you can be paying much less in taxes than you are calculating.

Right on. Thanks to guidance from this forum and other blogs (madfientist and rootofgood come to mind), I paid a grand total of $170 in federal taxes last year on a family gross of just about $105k (and $150 of that $170 was because I accidentally did more than $400 in side work and had to pay self-employment tax on that income). Qualified for the saver's credit for the first time.

Our gross is probably going down a bit so this year my goal is to see if I can sock enough away in above-the-line reductions (via a supplemental 403b and a LPMRA for one kid's orthodontics work) that I'll qualify for the Earned Income Credit--it looks like I may be able to actually achieve a negative federal income tax if I get everything dialed in.

With the Roth pipeline I expect to be paying little to no income tax in retirement as well. In fact, I'm thinking I might take some previous Roth contributions out and use them to make tIRA contributions to reduce my AGI--maxing out all above-the-line options leaves me with not a lot of take-home to fund the tIRA. I sock money away in a taxable account for the pipeline years.

Anyone want to run the numbers for me on the other thread?  I can see how to get much lower, even with a 401k with the amount I am saving.

[CB]

Anyone want to run the numbers for me on the other thread?  I can see how to get much lower, even with a 401k with the amount I am saving.

Just running ballpark numbers from your other post (about $51k gross, $43k W-2, standard deduction, 3 exemptions) does put you into the 15% tax bracket. However, you'd also qualify for the child tax credit ($1k), the saver's credit ($400 due to your 3% pre-tax contribution), and about $1k in EITC.  $2k in federal tax would be balanced by $400 nonrefundable credit (saver's) and ~$2k in refundable credits (child and EIC)--you should net ~$400 from the federal government if you take advantage of the credits available. You'd come out with a negative effective tax rate, about -2.7%, due to the refundable credits.  This despite you technically being in the 15% bracket.  So you're already doing well in terms of tax-minimization.

You could bring your net payout from Uncle Sam up to ~$3k (i.e., you'd get a check from the IRS for $3k in addition to getting all of your withholding back) by putting about $8000 into a traditional IRA, giving you an effective tax rate of nearly -6%.  This would mostly come from a sizable increase in the amount of the saver's credit--in fact, the trick is to get your AGI down just enough for the multiplication factor (on Form 8880) to tick up to 0.50; the threshold was $35,500 in 2013.  If instead you put that $8000 into a Roth, you'd only end up with the $400 net credit, missing out on $2600 of free money from the feds.

Disclaimer: this all comes from my own super-messy set of spreadsheets and is probably off by a bit. I use it for my own personal tax planning but so far it's been pretty accurate. If you're interested, I'd encourage you to construct your own "Form 1040 simulation" so that you understand the ins and outs of your personal tax situation. Also, it sounds like you may have some rental income? I wasn't clear but that would change things, too.

[beltim]

Anyone want to run the numbers for me on the other thread?  I can see how to get much lower, even with a 401k with the amount I am saving.

Just running ballpark numbers from your other post (about $51k gross, $43k W-2, standard deduction, 3 exemptions) does put you into the 15% tax bracket. However, you'd also qualify for the child tax credit ($1k), the saver's credit ($400 due to your 3% pre-tax contribution), and about $1k in EITC.  $2k in federal tax would be balanced by $400 nonrefundable credit (saver's) and ~$2k in refundable credits (child and EIC)--you should net ~$400 from the federal government if you take advantage of the credits available. You'd come out with a negative effective tax rate, about -2.7%, due to the refundable credits.  This despite you technically being in the 15% bracket.  So you're already doing well in terms of tax-minimization.

You could bring your net payout from Uncle Sam up to ~$3k (i.e., you'd get a check from the IRS for $3k in addition to getting all of your withholding back) by putting about $8000 into a traditional IRA, giving you an effective tax rate of nearly -6%.  This would mostly come from a sizable increase in the amount of the saver's credit--in fact, the trick is to get your AGI down just enough for the multiplication factor (on Form 8880) to tick up to 0.50; the threshold was $35,500 in 2013.  If instead you put that $8000 into a Roth, you'd only end up with the $400 net credit, missing out on $2600 of free money from the feds.

Disclaimer: this all comes from my own super-messy set of spreadsheets and is probably off by a bit. I use it for my own personal tax planning but so far it's been pretty accurate. If you're interested, I'd encourage you to construct your own "Form 1040 simulation" so that you understand the ins and outs of your personal tax situation. Also, it sounds like you may have some rental income? I wasn't clear but that would change things, too.

Before doing this, you need to check the eligibility requirements for each of those tax credits.  This year neither Gin nor husband are eligible for the retirement savings contribution credit because they are both students for at least 5 months.  I'd definitely check the requirements for the other tax credits, and then it becomes very important exactly how you are paid, as fellowships are not considered earned income and can mess with these sorts of credits.

[Gin1984]

Anyone want to run the numbers for me on the other thread?  I can see how to get much lower, even with a 401k with the amount I am saving.

Just running ballpark numbers from your other post (about $51k gross, $43k W-2, standard deduction, 3 exemptions) does put you into the 15% tax bracket. However, you'd also qualify for the child tax credit ($1k), the saver's credit ($400 due to your 3% pre-tax contribution), and about $1k in EITC.  $2k in federal tax would be balanced by $400 nonrefundable credit (saver's) and ~$2k in refundable credits (child and EIC)--you should net ~$400 from the federal government if you take advantage of the credits available. You'd come out with a negative effective tax rate, about -2.7%, due to the refundable credits.  This despite you technically being in the 15% bracket.  So you're already doing well in terms of tax-minimization.

You could bring your net payout from Uncle Sam up to ~$3k (i.e., you'd get a check from the IRS for $3k in addition to getting all of your withholding back) by putting about $8000 into a traditional IRA, giving you an effective tax rate of nearly -6%.  This would mostly come from a sizable increase in the amount of the saver's credit--in fact, the trick is to get your AGI down just enough for the multiplication factor (on Form 8880) to tick up to 0.50; the threshold was $35,500 in 2013.  If instead you put that $8000 into a Roth, you'd only end up with the $400 net credit, missing out on $2600 of free money from the feds.

Disclaimer: this all comes from my own super-messy set of spreadsheets and is probably off by a bit. I use it for my own personal tax planning but so far it's been pretty accurate. If you're interested, I'd encourage you to construct your own "Form 1040 simulation" so that you understand the ins and outs of your personal tax situation. Also, it sounds like you may have some rental income? I wasn't clear but that would change things, too.

How are you getting the EITC here, I can't get it down low enough in my calcs.