The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: channant on August 17, 2018, 01:26:08 PM
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And really, my only fear. This (almost) keeps me up at night. And I'm sure it's been asked before, but...
For those of us just starting out on this path, and for me specifically, it could be 10-15 years before FI. A huge part of making this work out is the Roth Conversion ladder...but what are the odds of that getting shut down by another administration between now and then? It is basically a loophole to not pay taxes and have a hard time imagining something like that lasting forever.
What if everyone teaching these fundamentals are actually just fundamentally lucky! They took advantage of this stuff while it was available and reached FI just in the knick of time. Will there be a day where we look back on the glory days of investing? When there were 0% LTCG tax brackets and backdoor Roths and conversion ladders?
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SEPP is the answer that you seek.
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When that happens, you'll have to do like all of us non-Americans who don't have such generous tax benefits.
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And really, my only fear. This (almost) keeps me up at night. And I'm sure it's been asked before, but...
For those of us just starting out on this path, and for me specifically, it could be 10-15 years before FI. A huge part of making this work out is the Roth Conversion ladder...but what are the odds of that getting shut down by another administration between now and then? It is basically a loophole to not pay taxes and have a hard time imagining something like that lasting forever.
What if everyone teaching these fundamentals are actually just fundamentally lucky! They took advantage of this stuff while it was available and reached FI just in the knick of time. Will there be a day where we look back on the glory days of investing? When there were 0% LTCG tax brackets and backdoor Roths and conversion ladders?
Given the tax benefits of IRAs and 401ks, you can straight up take the 10% penalty and end up ahead.
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SEPP is the answer that you seek.
And if SEPP gets removed too, you pay a 10% penalty until age 59.5.
The penalty could mean you need to save for a little longer. If you're currently saving about 50% of income and are on track to retire at age 30 and options to take out pretax retirement funds early without penalty evaporate right as you're getting ready to retire, you'd need 20 years x 50% spending rate x 10% penalty = 1 year. But you were planning on a conversion ladder, so you already have a plan for paying for the first 5 years without penalty: 15 years * 50% * 10% = 9 months. So worst case scenario for someone expecting to use a Roth conversion ladder is that the option gets taken away (and SEPP disappears) and they have to work 9 months longer (before considering investment returns on that extra savings). Sequence of return risk has a much greater impact on your FI date than this particular tax loophole - why is this your ONLY fear?
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I'm not personally worried about this going away.
Also, what I really worry about is dying before I get to chance to retire. Not to be a dick, but if your biggest concern is a change in tax policy then maybe you should go sit on the beach for a while?
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And really, my only fear. This (almost) keeps me up at night. And I'm sure it's been asked before, but...
For those of us just starting out on this path, and for me specifically, it could be 10-15 years before FI. A huge part of making this work out is the Roth Conversion ladder...but what are the odds of that getting shut down by another administration between now and then? It is basically a loophole to not pay taxes and have a hard time imagining something like that lasting forever.
What if everyone teaching these fundamentals are actually just fundamentally lucky! They took advantage of this stuff while it was available and reached FI just in the knick of time. Will there be a day where we look back on the glory days of investing? When there were 0% LTCG tax brackets and backdoor Roths and conversion ladders?
If that's your greatest fear, you got it made in the shade.
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My greatest fear is running out of "top" memes before we run out of tops.
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When you're lined up with the folks who have a lot of money, you've always got the political wind at your back. My main worry is that it will be just as easy as it looks, and capital will keep its outsize political clout forever. Who's going to vote against tax breaks for capital? Not the people with Roths. And not the people who don't even know what they are. Insofar as America even has a Left, what it wants is to tax corporate earnings, not to shut down retirement saving incentives. I run in lefty circles (obviously), and I don't see *anybody* who wants to hit any part of the IRA benefits. It never even comes up. It's not on anyone's radar. So sleep at night, man :-)
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When you're lined up with the folks who have a lot of money, you've always got the political wind at your back. My main worry is that it will be just as easy as it looks, and capital will keep its outsize political clout forever. Who's going to vote against tax breaks for capital? Not the people with Roths. And not the people who don't even know what they are. Insofar as America even has a Left, what it wants is to tax corporate earnings, not to shut down retirement saving incentives. I run in lefty circles (obviously), and I don't see *anybody* who wants to hit any part of the IRA benefits. It never even comes up. It's not on anyone's radar. So sleep at night, man :-)
THIS is what I wanted to hear!
The penalty could mean you need to save for a little longer. If you're currently saving about 50% of income and are on track to retire at age 30 and options to take out pretax retirement funds early without penalty evaporate right as you're getting ready to retire, you'd need 20 years x 50% spending rate x 10% penalty = 1 year. But you were planning on a conversion ladder, so you already have a plan for paying for the first 5 years without penalty: 15 years * 50% * 10% = 9 months. So worst case scenario for someone expecting to use a Roth conversion ladder is that the option gets taken away (and SEPP disappears) and they have to work 9 months longer (before considering investment returns on that extra savings). Sequence of return risk has a much greater impact on your FI date than this particular tax loophole - why is this your ONLY fear?
I guess it just feels like the one thing that would be totally out of my control, despite taking all other appropriate steps. Obviously a market crash would be a fear but that is more of a certainty and again, appropriate steps can be taken. I have some worries, just not many fears!
Also, what I really worry about is dying before I get to chance to retire. Not to be a dick, but if your biggest concern is a change in tax policy then maybe you should go sit on the beach for a while?
I already live at the beach!
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What if everyone teaching these fundamentals are actually just fundamentally lucky! They took advantage of this stuff while it was available and reached FI just in the knick of time. Will there be a day where we look back on the glory days of investing? When there were 0% LTCG tax brackets and backdoor Roths and conversion ladders?
You can "what if?" yourself to death. Unless you have info that a change is imminent just keep going. When and/if something solid sounds like it might happen worry about it. For sure in the 50+ years of your retirement something unexpected and negative will happen. That's just part of life. Save your money, keep your mind and body healthy and develop strong relationships. You'll figure it out when the problem presents itself. Worrying is just wasting your time with hypothetical negativity.
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What if everyone teaching these fundamentals are actually just fundamentally lucky! They took advantage of this stuff while it was available and reached FI just in the knick of time. Will there be a day where we look back on the glory days of investing? When there were 0% LTCG tax brackets and backdoor Roths and conversion ladders?
You can "what if?" yourself to death. Unless you have info that a change is imminent just keep going. When and/if something solid sounds like it might happen worry about it. For sure in the 50+ years of your retirement something unexpected and negative will happen. That's just part of life. Save your money, keep your mind and body healthy and develop strong relationships. You'll figure it out when the problem presents itself. Worrying is just wasting your time with hypothetical negativity.
Love this, I totally agree. Thanks for the encouragement!
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It's unlikely this goes away for starters bc it gets the govt money today vs tomorrow. If it does the 10% penalty still comes out ahead in most cases. Assuming current tax law is like the future.
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It's unlikely this goes away for starters bc it gets the govt money today vs tomorrow. If it does the 10% penalty still comes out ahead in most cases. Assuming current tax law is like the future.
This is a very good point. During the recent tax reform there was talk of forcing people into Roths because it boosts current revenues.