Money Management for 2-Year Sabbatical

[danaiks17]

Me: 36 years old w/ no kids.

$300,000 in 401k/Roth IRA/Trad. IRA
$275,000 in taxable accounts ($50,000 in cash)
$75,000 in home equity

I spend ~$30,000 a year.

Starting around June 2019, I'm going to take a couple years off, though I anticipate doing some freelancing to make about $1,000 a month.

I want to set things up so I "pay" myself $1500-$1800 every two weeks to keep a sense of normalcy on that front.

What I'm trying to figure out over the next 9 months is the smartest way to manage the $300,000 over the two-year period.

Any insights would be greatly appreciated. Happy to provide more information if it helps clarify anything.

[ILikeDividends]

Me: 36 years old w/ no kids.

I spend ~$30,000 a year.

Starting around June 2019, I'm going to take a couple years off, though I anticipate doing some freelancing to make about $1,000 a month.

I want to set things up so I "pay" myself $1500-$1800 every two weeks to keep a sense of normalcy on that front.

I would net those two statements out against the 30K/year spend rate.

If you really only need to spend 30K/year, you only need about 2.5K per month. 

And if you are going to freelance for 1K per month, that means you only need to draw down your taxable account by about 1.5K per month (roughly $693 every two weeks).  You may need a bit more draw down to cover taxes on the 1K freelance income, but I'm trying to keep this simple to illustrate a point.

If the market keeps doing roughly what it has been doing, that is more than enough growth on 275K in your taxable account to draw down 36K (1.5K * 24 months) and still grow your portfolio at a decent clip through that two years.

In case the market tanks during that two years, you should have at least 36K allocated to fixed income or cash equivalents to secure your two year sabbatical plans.  If an ugly bear rears its head, then you will be back to work at some point soon after, resuming your accumulation phase at discounted levels.

For bonus credits, during the two years you will presumably be in a very low tax bracket.  Personally, I would also consider some incremental backdoor Roth conversions from the tIRA to exploit your low tax bracket during that two years.

It might not be obvious to some, but later, when you start pulling money out of the tIRA, not only do you pay taxes on what you want to spend, you also pay taxes on the amount you pull out to pay those taxes.  Shrinking your tIRA and bulking up your Roth at a discounted tax rate is a gift that keeps on giving for as long as you have the Roth.

Because of this, you might want to consider starting your sabbatical in a January, rather than a June, in order to maximize the options that a minimized tax bracket offers.  Doing so will also minimize the taxes you pay on your freelance income.

[MustacheAndaHalf]

Your $12k/year income matches the $12k standard deduction, so you'll pay $0 tax on that.

If you do a Roth Conversion, that will also be taxed as ordinary income.  You can convert in the 10-12% tax brackets up to $38.7k, which is probably a lower tax rate than the future. 

VTSAX has a 1.8% dividend, so I'll roughly guess your $225k have a similar dividend.  That's $4k of dividends per year - it falls below a $38.6k limit, it's taxed at 0%.

If you roughly set $20k cash aside as an emergency fund, that leaves $30k for living expenses over 2 years.  So maybe you could sell $15k of investments per year, and if you keep below $38.6k, you owe $0 on it.

Without knowing your investments, I'll just have to guess you bought VTSAX in Jan 2017 and it rose +33% since then.  If you sold $15k of that, about 25% of that amount would be gains, roughly $4k.  That's in the 10% tax bracket, so about $400 tax on selling $15,000.

I think you could fit $28k of Roth Conversion into each year, using the above wild assumptions which you will have to update with your own numbers.

$12k income canceled out by $12k standard deduction
you might do a $28k Roth Conversion, owing $3.2k tax
you sell $15k investments held 366 days or more for a $4k gain., owing $0 tax.
you get qualified dividends of $4k, also at $0 tax.

Note you might want to look into health insurance tax subsidies.  I don't know any of the income limits, but they tend to be valuable.