Author Topic: Taxable vs. 401K for early retirement  (Read 30439 times)

JoeB313

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Taxable vs. 401K for early retirement
« on: March 03, 2013, 08:28:09 PM »
Hi everyone,
This seems to be a somewhat common question on investment sites, but I cannot seem to figure out which way to go.  I am relatively new to investing and plan to make the plunge into the markets within the next coming weeks

A little background:
Im 24, soon to be 25 years old and making 55k pre-taxes.  I plan to save ~50%-60% of my income (for now) with hopes of an early retirement (somewhere in my 30s or 40s).  I am hoping to maintain my expenses or lower them over time and will hopefully see an increase in pay as I progress in my career.  I plan to max out a Roth on a yearly basis, but am having trouble deciding how to allocate the rest of my money.  I currently contribute 6% to my 401k to get my employers 3% match.

Here are the options that Im considering:

1)   Max out 401k in addition to Roth IRA every year invest the remainder in a taxable Total Stock Market Index Fund Vanguard Account.
2)   Max out Roth IRA every year and only contribute 401k to match.  Open Total Stock Market Index Fund Admiral Shares at Vanguard with some savings that I have and contribute leftover savings after Roth to this account and eventually diversify with Foreign Stock Index and Bond Funds (in 401k and Roth for maximum tax efficiency ofc).

For the sake of early retirement, I am tempted to go with option 2.  However, I am worried that I will be selling myself short in the long run by not maxing out the 401k and letting the money grow tax free.  But then I ask myself what about being able to take advantage of tax loss harvesting and the fact that I would have to take the tax hit when I withdraw my 401k funds.  Would the long-term realized gains in my taxable accounts be equivalent to the tax hit I would take when withdrawing my 401k funds anyway? 

These are the questions that I need to answer before I begin my investment journey.  Any advice would be greatly appreciated. 

Mr. Sharma

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Re: Taxable vs. 401K for early retirement
« Reply #1 on: March 04, 2013, 12:23:06 AM »
Assuming these savings are to be used for retirement, I would suggest maxing out your 401k + Roth IRA each year.  At your current income level and age, you should also check with your employer to see if you can invest into both a Roth 401k and Traditional 401k to get more Roth money in there. 

You would be selling yourself short by not taking advantage of tax free/deferred growth.  Don't worry too much about the 'tax hit' when withdrawing 401k funds.  If it is your intention to tap into the funds when you are not working, chances are your primary taxable income will be your withdrawals, which won't leave you with a huge tax bill since you will be taking out payments as per 72t.  Also, if you have a good amount of Roth funds in there, you have even less to worry about.

Would the long-term realized gains in my taxable accounts be equivalent to the tax hit I would take when withdrawing my 401k funds anyway? 

The way the question is phrased suggests you will invest X amount into your taxable account and only realize a gain in 15-20 years when you retire.  That is not the case.  In your taxable account and your 401k, you will be receiving dividends, selling securities at a gain, at a loss etc...  The key difference is one account has no immediate tax implication, while the other does.  When you do this in your taxable account, you will realize gains here and there and pay the tax, not all in year 20 upon retirement.  When you do it in your 401k, you will pay the tax on what you take out, not when you realize a gain.  Either way, you want to ultimately have both.  But for retirement moneys, you first want to max out all of your retirement accounts: 401k's, IRA's, HSA's, YSA's... Alright, I made that last one up.   

Mike

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Re: Taxable vs. 401K for early retirement
« Reply #2 on: March 04, 2013, 02:45:45 AM »
If you want to use 401(k) money for early retirement, I feel like the best approach is to roll it to an IRA / convert it to a Roth.  A 72(t) SEPP probably won't offer sufficient income, unless your spending levels are really low, or your 401(k) balance is really high.

momo

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Re: Taxable vs. 401K for early retirement
« Reply #3 on: March 04, 2013, 01:22:16 PM »
@ JoeB313: Do you have a Roth 401k?

@ Mr. Sharma: What is your take on blending both types of 401ks? Tax deferred and the Roth? Do you think blending can be useful or is one type of tax vehicle typically better? I am not a firm believer that just b/c we don't know where our individual tax rates will end up in the future when we retire that we should just use the tax deferred 401k account. Any references you can share is appreciated. I am just trying to understand why many feel strongly for the tax deferred 401k over the tax advantaged Roth401k in particular. Thanks.
« Last Edit: March 04, 2013, 01:29:14 PM by Stashtastic Momo »

JoeB313

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Re: Taxable vs. 401K for early retirement
« Reply #4 on: March 04, 2013, 04:25:28 PM »
@ Shashtastic Momo

I don't have that option.

I think my strategy is going to be the following:

Max my Roth and my 401k... any additional funds can go in a taxable account.

If I have a big enough nest egg to retire prior to 55-59, I will ROLL my 401k into my Roth IRA. - http://www.goodfinancialcents.com/can-you-roth-ira-rollover-rules-from-401k/

Then I can live off the contributions from my Roth (withdrawing ~6% a year) in my early retirement.

That's my plan thus far... any comments?

Zoot Allures

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Re: Taxable vs. 401K for early retirement
« Reply #5 on: March 04, 2013, 05:15:11 PM »
That's my plan thus far... any comments?

Just one: kudos to you! If I'd been thinking about this stuff 18 years ago when I was 24, I might be retired already. :)

JoeB313

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Re: Taxable vs. 401K for early retirement
« Reply #6 on: March 04, 2013, 05:49:37 PM »
I've actually abanonded that plan as quickly as I thought about it.  I realized that I would have to pay a large chunk of that rollover in taxes (as you have to pay the ENTIRE sum, not just your earnings on a 401k to Roth IRA rollover). 

So now I'm back to square one to sort out my MMMesque' retirement strategy.

Mr. Sharma

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Re: Taxable vs. 401K for early retirement
« Reply #7 on: March 04, 2013, 10:44:16 PM »
@Stashtastic - The best option is to have a mix of both Traditional and Roth funds.  Each account type has their strengths that you should be capitalizing on; there should be no 'invest all your money in traditional only' mentality.  I agree on not solely using the uncertainty in future tax rates to guide your decision making in this regard.  You've probably already heard most of the pros/cons of each account.  One not so commonly heard argument is flexibility. 

Let's keep it simple and just talk about IRA's:  Let's say I'm 30 years old with a decent amount of change in both a Traditional IRA and Roth IRA.  I have just decided to take some time off work and my income is much lower than normal.  I decide that I would like to convert some of my Traditional funds while I'm still in this low 15% tax bracket.  I made those traditional contributions when I was in the 25% tax bracket (or higher).  Deduct contribution and save 25+% in taxes, then later convert Traditional to Roth and pay 15% in taxes.  Not a bad deal if the option ever presents itself throughout the course of your life.  +1 for Traditional and +1 for opportunistic timing conversion to Roth

Let's say instead of taking some time off work, I'm 30, working like normal and need some extra cash for X reason.  I can at anytime take my contributions out of my Roth IRA, tax free and penalty free.  +1 for Roth

Let's say I'm 60 years old and I need to take out money from my accounts for normal living expenses.  I decide I don't want to go past the 15% tax bracket, so I take just enough from my Traditional account (taxed) and the remaining from my Roth (tax free).  +1 for Roth and flexibility

@JoeB313 - You seem to be unnecessarily stressing.  You've got your 401k, IRA and after tax accounts.  If you are earning $55,000 gross, filing single, with not too much else on your tax return, I would recommend for 2013:  Contribute $8,000 to a Traditional 401k, contribute remaining max of $9,500 to a Roth 401k.  Contribute $5,000 to a Roth IRA.  This strategy will just barely put you in the 25% tax bracket, which is very efficient.  You get to deduct the $8,000 which would have been taxed at 25%, and contribute $14,500 to a Roth which is taxed at no more than 15%.  As your income goes up, you can slowly increase the traditional 401k contributions and reduce the roth a bit.  Don't worry about the taxes you'll pay in 20 years, just focus on efficiently stashing away your money with the options available to you today.   



momo

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Re: Taxable vs. 401K for early retirement
« Reply #8 on: March 07, 2013, 01:09:45 PM »
@ Mr. Sharma: Thanks for the detailed response and ideas. As some background, I already converted all previous tax deferred 401k funds so all I have left is the post-tax advantaged accounts like Roth IRAs and Roth 401k. So in my case how might flexibility come into play if I am fully converted?

This brings me to a new hypothetical. I am willing to divide some of the full $17,500 to both Roth 401k and the tax deferred 401k. The concern I have also involves how I also max out the Roth IRA annual contibution $5,500. What amount (if any) should I consider allocating to the tax deferred portion of the 401k? And if don't mind sharing why? Thanks.

@Stashtastic - The best option is to have a mix of both Traditional and Roth funds.  Each account type has their strengths that you should be capitalizing on; there should be no 'invest all your money in traditional only' mentality.  I agree on not solely using the uncertainty in future tax rates to guide your decision making in this regard.  You've probably already heard most of the pros/cons of each account.  One not so commonly heard argument is flexibility. 

Let's keep it simple and just talk about IRA's:  Let's say I'm 30 years old with a decent amount of change in both a Traditional IRA and Roth IRA.  I have just decided to take some time off work and my income is much lower than normal.  I decide that I would like to convert some of my Traditional funds while I'm still in this low 15% tax bracket.  I made those traditional contributions when I was in the 25% tax bracket (or higher).  Deduct contribution and save 25+% in taxes, then later convert Traditional to Roth and pay 15% in taxes.  Not a bad deal if the option ever presents itself throughout the course of your life.  +1 for Traditional and +1 for opportunistic timing conversion to Roth

Let's say instead of taking some time off work, I'm 30, working like normal and need some extra cash for X reason.  I can at anytime take my contributions out of my Roth IRA, tax free and penalty free.  +1 for Roth

Let's say I'm 60 years old and I need to take out money from my accounts for normal living expenses.  I decide I don't want to go past the 15% tax bracket, so I take just enough from my Traditional account (taxed) and the remaining from my Roth (tax free).  +1 for Roth and flexibility.

radix

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Re: Taxable vs. 401K for early retirement
« Reply #9 on: August 23, 2013, 12:50:24 PM »
This is somewhat old, but it's a topic I have struggled with myself.

I have been in this very similar situation for awhile as well.  The basic idea I came up with is similar to what Mr. Sharma addressed.  Although I don't have access to a Roth 401k, I max my Roth and bring my taxable income down below the 25% tax bracket with my normal 401k. Everything else goes into a taxable account. This money has already been taxed in the 15% bracket, but depending on how you withdraw it, you might not have to pay taxes on it.  For example right now if you sell long term capital gains in the 15% tax bracket you don't pay any taxes on them.  At ~35k, that is a very reasonable amount to live on today if you are retired. 

Obviously these rules may change later, but the taxable accounts are not nearly as bad as some make them out to be. In-fact you could even come out ahead of a 401k if you find lower expense options on your own, which is very possible with Vanguard funds.

momo

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Re: Taxable vs. 401K for early retirement
« Reply #10 on: August 23, 2013, 01:13:53 PM »
@ radix:  Do you have any tips or suggestions how to calculate how much to contribute to the tax-deferred 401k or IRA to bring down your taxable bracket?  Thanks.

radix

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Re: Taxable vs. 401K for early retirement
« Reply #11 on: August 23, 2013, 01:51:55 PM »
I don't usually put too much thought into it, since it can be hard to guess exactly due to raises, tax withdraws, medical, social security, mortgage deductions, etc...  I typically just over shoot from where I think it will be and not worry too much. This also leaves room to play with capital gains and such if you want. 

The best way would be to do a hypothetical tax return, but you can get to a close estimate just by using a typical paycheck to calculate your expected annual income.  Then take your adjusted gross income you estimated (likely high) and subtract any deductions you may need to consider to find your taxable income. This will be an estimate of the number on a 1040 line 43.  You want this number to be close or under where ever the 25% bracket cut off is (for 2013 is $36,250) .  The difference between the cutoff and your taxable income, if you are above it, is what additional you should contribute to your 401k. Then throw $5,500 into your Roth, that leaves $30,750-(annual expenses) to contribute to your taxable account.

Once you do it, the following years are easy to keep in that range by just adjusting your contribution % a bit.  If you are serious about it, I would just do a hypothetical tax return or look at last year's.

nukeulis

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Re: Taxable vs. 401K for early retirement
« Reply #12 on: September 13, 2013, 08:19:22 AM »
Very helpful. I had a similar question after reading a number of the articles.

It went something like this:

Quote
So, investing is better than spending or letting the money sit. But if I invest it into a retirement account for the tax benefits, then I can't touch it (without penalty) for over 30 years... so shouldn't I NOT invest my spare money into my retirement accounts, and put it into an account that I could use for an EARLY retirement?

Currently most of my money goes towards paying my mortgage. I am putting 8% of my salary into my 401k and get a 7% employer match. But I don't have enough money left over to fully fund my ROTH IRA account. With extra money from slashing my living expenses, should that go towards my ROTH or a non-retirement account?

Thanks :)

Freeyourchains2

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Re: Taxable vs. 401K for early retirement
« Reply #13 on: September 13, 2013, 09:12:54 AM »
Careful, if enough people say taxable, this thread will be locked.

Since Vanguard 401k funds are the only way in Investor Alley...

See thread here: https://forum.mrmoneymustache.com/investor-alley/goal-fi-by-40-and-not-investing-in-401k-till-fi'd/


And how the moderators killed my first life.. R.I.P. FreeYourchains

But if you choose not to invest all your savings in a 401k, yes you'll be taxed more, but you'll have complete freedom to all investment types at any time for any purpose...complete Freedom..., making your own businesses, taking risks, having hard work or hard work of your money give you more active and passive rewards, etc. as you can find in taxable accounts without those pesky age restrictions on fund policies that are updated every quarter to the will of the fund managers.

If a middle class worker can't access his earnings from his investments until age 59.5 by contributing into the trap of a 401k, then the probability of him working his whole life goes up dramatically. That's exactly what all bosses and government taxes are designing 401k's for. To keep the worker class working. He'll be too old to do anything with it by then, or dead from a heart attack from the salt, fat, and sugar monopoly companies, then death taxes are charged after normal taxes.

It has quite Anti-mustachian designs to it, kind of like credit cards trying to lock you into debt for life....but it can be used somewhat effectively if done absolutely right and policies aren't changed. But it requires you to work 20 years and contribute 20 years, to then Retire, and take out initial investments/ initial contributions to live off of the principal, not earnings. Aka your initial growing investments stop completely from growing, whether by dividend growth or capital gains growth inside your 401k/IRA, to be used to fuel your expenses in an Early Retirement/ FI.

Unlike Taxable Dividend growth investments strategy, were you are living off of your earnings, not withdrawing  off of your principal in the form of initial contribution investments from a min of 5 years before.



« Last Edit: September 13, 2013, 10:42:57 AM by Freeyourchains2 »

fiveoclockshadow

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Re: Taxable vs. 401K for early retirement
« Reply #14 on: September 13, 2013, 09:18:52 AM »
Roth is likely your best option as opposed to taxable.  Read up on Roth IRAs - it is very easy to get all your contributions out very early.  And the "Roth Pipeline" can get money out of your 401k plan once you are retired/FI.  Make maximum use of your tax deferred space each year.

If you have a crappy 401k plan then there can be some question about what is better - 401k or taxable - but that's only after you've done your IRA allocation.  You have control of your IRA and its expenses (which are effectively zero at the right places).


Khan

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Re: Taxable vs. 401K for early retirement
« Reply #15 on: September 13, 2013, 11:02:56 AM »
I'm gonna come at this from the other angle. I'm a 25 year old guy making ~65k a year, and I invest 100% of my 401k money in the traditional account right now, while also fully funding a ROTH IRA and trying to grow my taxable account as well. I have several reasons for this.

1. You can convert 401k money to ROTH money, through the backdoor method. You can do this during times when you have no regular income(say, from whenever you retire till 60), because you need to have -taxable- income to fund a ROTH.
2. You have flexibility with traditional 401k to determine where, and when, and how much you get taxed. See also point #3
3. Tax rates in the US are marginable, so if you're withdrawing at the lowest rate from your traditional 401k account, plus all those sweet deductions and everything, as far as I can see that's a better, more tax efficient deal then all ROTH money.
4. It's easier to make 17.5k pre-tax then it is post tax. For median US wage earners like ourselves, this is even more important, because post tax 401k ROTH is what.... ~22k of your yearly salary? Yeah, **** that noise.

kyleaaa

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Re: Taxable vs. 401K for early retirement
« Reply #16 on: September 13, 2013, 11:21:15 AM »
It's easy to withdraw earnings from a 401k before retirement age, so don't let that be a deterrent. You're almost always better off deferring as much of your income as possible.

GreenGuava

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Re: Taxable vs. 401K for early retirement
« Reply #17 on: September 13, 2013, 11:22:46 AM »
On most of the internet, I'm a big believer in "don't feed the troll."  However, one troll in particular repeats the same wrong points on this board frequently, and I worry he'll cause someone to make a huge financial mistake.

Careful, if enough people say taxable, this thread will be locked.

No, you just get kicked out of conversations because you repeat the same demonstrably false things, time and again, after being corrected.  You couple this with bizarre conspiracy theories and we end up having to respond to you to prevent someone from making a massively expensive mistake by taking your "advice" on the internet.

Since Vanguard 401k funds are the only way in Investor Alley...

False; other funds and other approaches (real estate, etc) are frequently suggested too.  It's a matter of what the person who is doing the investing wants to spend in terms of time and effort for their investment.

See thread here: https://forum.mrmoneymustache.com/investor-alley/goal-fi-by-40-and-not-investing-in-401k-till-fi'd/


And how the moderators killed my first life.. R.I.P. FreeYourchains

That's a great thread to read - I'll be sure to link to it.  Has many great rebuttals to the points you continue to make - including in the comment I'm responding to.

But if you choose not to invest all your savings in a 401k, yes you'll be taxed more, but you'll have complete freedom to all investment types at any time for any purpose...complete Freedom..., making your own businesses, taking risks, having hard work or hard work of your money give you more active and passive rewards, etc. as you can find in taxable accounts without those pesky age restrictions on fund policies that are updated every quarter to the will of the fund managers.

(point fully rebutted almost six months ago to you.  What you post is simply not true)


If a middle class worker can't access his earnings from his investments until age 59.5 by contributing into the trap of a 401k,

It's very easy to access the money put into a 401(k) without penalty.  It requires a little bit of thinking and planning, but not much.  The idea that a person who contributes to a 401(k) can't access that money before age 59.5 is demonstrably false - and has been demonstrated as such to you many times.

then the probability of him working his whole life goes up dramatically. That's exactly what all bosses and government taxes are designing 401k's for.

The design of a 401(k) - and if you're going to comment about it, designate it correctly to at least pretend you have some basic competence in the area - was for highly compensated employees to be able to defer compensation until they were in a lower income bracket.  Someone figured out this could be used to make employees responsible for their own retirement planning - a huge improvement over having to work for 30+ years and hope that the company planned your retirement well.

Get out of the conspiracy theories and learn about the reality of these things, please.

Unlike Taxable Dividend growth investments strategy, were you are living off of your earnings, not withdrawing  off of your principal in the form of initial contribution investments from a min of 5 years before.

And then you can cap it off by demonstrating that you don't know what a dividend is.  We've discussed this before too.  Whether you take X% of your portfolio by dividends that you spend rather than re-invest, or sell the same X% in share values, it's the same result.  Dividends are simply the profit that the company isn't re-investing in increasing its value.

jpo

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Re: Taxable vs. 401K for early retirement
« Reply #18 on: September 13, 2013, 12:25:28 PM »
OP, what about this plan?

  • Max out Roth IRA and 401k every year until retirement.
  • Retire.
  • Each year withdraw from Roth IRA 1 year's living expenses. Roll over 1 year's living expenses from 401k -> Roth IRA.
If you have 5 years of expenses in your Roth by the time you retire (quite possible if you take 10+ years to FIRE), you can do this indefinitely.

GreenGuava

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Re: Taxable vs. 401K for early retirement
« Reply #19 on: September 13, 2013, 06:00:58 PM »
JPO, your plan is a good start, but it won't quite work:  you need to have made five years' worth of contributions to the Roth IRA, because it's only that part that can be withdrawn penalty-free prior to 59.5. The pre-tax plan rollovers only become contributions five years - not one year - after being converted.

jpo

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Re: Taxable vs. 401K for early retirement
« Reply #20 on: September 13, 2013, 06:18:16 PM »
JPO, your plan is a good start, but it won't quite work:  you need to have made five years' worth of contributions to the Roth IRA, because it's only that part that can be withdrawn penalty-free prior to 59.5. The pre-tax plan rollovers only become contributions five years - not one year - after being converted.
Good point, seems like he'll need to start rolling over a few years before retiring. That's rough because he'll likely be in a higher tax bracket then than in retirement :-/

GreenGuava

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Re: Taxable vs. 401K for early retirement
« Reply #21 on: September 13, 2013, 11:07:21 PM »
JPO, your plan is a good start, but it won't quite work:  you need to have made five years' worth of contributions to the Roth IRA, because it's only that part that can be withdrawn penalty-free prior to 59.5. The pre-tax plan rollovers only become contributions five years - not one year - after being converted.
Good point, seems like he'll need to start rolling over a few years before retiring. That's rough because he'll likely be in a higher tax bracket then than in retirement :-/

Or alternately have enough Roth contributions to last those five years.  There's one guy on here - maybe he'll chime in - who has some way through his 401(k) to put a large amount of post-tax money into what will be rolled to his Roth IRA when he leaves that company.  I don't remember enough of his plan to tell you the details - or even if it counted as contributions.

There's also the idea that one might have sizable taxable investments after maxing out tax-advantaged options.  In fact, it might be the case that there might be an "enough" limit in taxable such that there's no reason to favor it over tax-advantaged, even for ER folks.  That might be the number that would allow one to survive the five years, using only taxable and the Roth contributions, before the first round of the Roth pipeline becomes available.  This might be the best available way to go for the folks who want to go an ER route but aren't making well into the six figures.

As a bonus, if one is using Roth contributions and taxable money, the traditional-to-Roth conversions are probably at a very low effective rate.

DK

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Re: Taxable vs. 401K for early retirement
« Reply #22 on: September 22, 2013, 12:05:05 PM »
Personally I think the best route to take is to have a mix of accounts, and focus more on tax bracket, than specific account:

1 - Invest enough in 401k to make sure you end up in 15% bracket.
2 - Invest enough in any employer match sponsored account to get full match (free money!)
3 - Max out Roth IRA
4 - Invest leftover in taxable account

This gives you a wide variety of accounts to manipulate your taxable in many ways. Pre-retirement age you also have access to all the money without penalty except for roth ira gains.

Freeyourchains2

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Re: Taxable vs. 401K for early retirement
« Reply #23 on: September 24, 2013, 08:56:48 AM »
On most of the internet, I'm a big believer in "don't feed the troll."  However, one troll in particular repeats the same wrong points on this board frequently, and I worry he'll cause someone to make a huge financial mistake.
I am entitled to my opinion and my voice. If you wish to call me a troll for intellectually debating with these recurring index fund/Max 401(k) advice threads as there are things you are leaving out that are important to discuss, then that's your choice of words. Differing opinions don't mean i am a troll. And you shouldn't label so many other's as trolls because they think differently and are just saying their opinion and may even be constructively debating with your opinions, and you fail to realize this and think your way is the only way.

 There are many other taxable strategies that you shouldn't so easily dismiss that allow people reach Financial Independence, and others need to know about them as an investor, especially in investor alley here.

No, you just get kicked out of conversations because you repeat the same demonstrably false things, time and again, after being corrected.  You couple this with bizarre conspiracy theories and we end up having to respond to you to prevent someone from making a massively expensive mistake by taking your "advice" on the internet.

Putting all your money into a 401(k) and IRA , to hope that a loophole to withdraw without penalty continues indefinitely is a mighty big risk at a "massive expensive mistake" for those making only $60k a year income. You fail to understand that the average american makes less than this, and they have many other choices of investments other then to max out 401(k) and be locked in to age restrictions, commercialized rollover to IRA fees, employer only chosen expensive funds sometimes, maybe no employer matching, etc. Many employers don't sponsor vanguard low expense funds or even match now a days.

See thread here: https://forum.mrmoneymustache.com/investor-alley/goal-fi-by-40-and-not-investing-in-401k-till-fi'd/


And how the moderators killed my first life.. R.I.P. FreeYourchains
That's a great thread to read - I'll be sure to link to it.  Has many great rebuttals to the points you continue to make - including in the comment I'm responding to.

This thread still has unanwsered questions, but then gets to lingering topics that went unrebuttaled. It ends showing exactly how you are treated in the forums if you refuse to invest inside a 401k for Financial Independence. Dividendmantra, ERE, Brave New Life, and other financial independent investors all over, do it their own way, even outside of 401k investments, GASP!
For example:
http://www.dividendmantra.com/2013/08/why-i-hold-100-of-my-equity-investments.html#more

But if you choose not to invest all your savings in a 401k, yes you'll be taxed more, but you'll have complete freedom to all investment types at any time for any purpose...complete Freedom..., making your own businesses, taking risks, having hard work or hard work of your money give you more active and passive rewards, etc. as you can find in taxable accounts without those pesky age restrictions on fund policies that are updated every quarter to the will of the fund managers.
(point fully rebutted almost six months ago to you.  What you post is simply not true)
False again. What i post is true to many middle class financial independent investors whom focus on High Quality Dividend  (or Capital Gain focuced) Investments outside of traditional retirement accounts who get the cash now to use now for extremely early retirement. Day Traders (or Month to Month), Real estate Owners and Entrepreneurs all use taxable accounts and do what they want with the earnings at any age.

Also, not everyone makes over $85k/ a year and can do both, max out their retirement and invest outside of retirement accounts for the purposes mentioned above.

So then they chose what they wish to invest in. I am just giving the other side of the debate, saying you don't necessarily have to fully max out 401ks and IRAs to become FI at an extremely early age.


It's very easy to access the money put into a 401(k) without penalty.  It requires a little bit of thinking and planning, but not much.  The idea that a person who contributes to a 401(k) can't access that money before age 59.5 is demonstrably false - and has been demonstrated as such to you many times.

What you fail to understand, and I keep repeating because you and others don't understand;  is that you can only withdraw your initial contributions. This is like only being able to withdraw your principal, and not your earnings from your principal. You get taxed fully plus 10% penalty if you withdraw any earnings from your IRA or 401k before age 59.5.

While this is ok to do for those that will be retiring from age 50+, it's not quite ok for those wishing to retire much earlier, or to live on their expenses off of their investment returns and earnings at a much earlier age.

Investments in a taxable account into high quality dividend growth companies or for Capital Gains earnings, allow you to live off of earnings once your principal is built up enough.

Those with middle class incomes, at a very young age, and that develop a higher savings rate into taxable accounts, can reach FI quicker without limitations or restrictions this way(except some tax brackets which have exemptions for long term investments).


As you keep telling me: Any investment (contribution) that has been rollovered into the IRA, are then  withdrawn at lower tax brackets as you withdraw what you need for retirment expenses....

but all gains/earnings are kept inside IRA until age 59.5 and the "investment" ceases to exist upon withdrawal. Unlike an investment already in a taxable account, whose earnings you can live off of (limited in taxes if you are above the 25% tax bracket in America).



The design of a 401(k) - and if you're going to comment about it, designate it correctly to at least pretend you have some basic competence in the area - was for highly compensated employees to be able to defer compensation until they were in a lower income bracket.  Someone figured out this could be used to make employees responsible for their own retirement planning - a huge improvement over having to work for 30+ years and hope that the company planned your retirement well.

Get out of the conspiracy theories and learn about the reality of these things, please.

It's not a consipracy theory that Governments survive off of tax income. Income taxes and sales taxes. Thus they need many workers to keep working till they die for max income, and they need many over-consumers to keep over-consuming till they die for max income.

MMM'ers or ERE'ers or DM'ers learn the basics of how to spend less to increase their savings rate and stop over-consuming.

401(k)'s are controlled by employers and government policy. They entice the middle class into contributions that are not taxed at the front end, for the exchange of locking your earnings until the age of 59.5 or they penalize your hard earned money. Thus the middle class works longer, since they can not live off of their earnings from their non-taxed investments for their lowered expenses.

As a middle class person making $60k and maxes out their 401(k)'s and IRAs, they do save on taxes over the long run; yet, these contributions' earnings are locked up until age 59.5.

You'll have to pay full taxes plus 10% penalities to access these "earnings" or returns from your investments.

401k investors are then limited to only withdrawing what they input.

Middle class workers maxing out 401k's/IRAs at $23k invested, must work about 15 years min, and must rollover each year (with rollover fees) beginning at year 10, to just be able to withdraw from their initial input or contribution or principal after a 5 year grace period. If your family expenses are at $23k/year, then you can only retire and live off of principal withdrawals for 15 years then, and not have access to your earnings until age 59.5.

Yes this is a fine if you are already age 40 and just became an MMM'er and want FI. or slightly early retirement.

But if you are age 25...it won't allow you to retire fully or at a much younger age... (unless you can  go from $60k income to $120k without an investment of money. Or in other words you took a lot more student loans and time to go to Grad school at some point to reach higher incomes.)


And then you can cap it off by demonstrating that you don't know what a dividend is.  We've discussed this before too.  Whether you take X% of your portfolio by dividends that you spend rather than re-invest, or sell the same X% in share values, it's the same result.  Dividends are simply the profit that the company isn't re-investing in increasing its value.

I know this. I say dividends to keep it simple on a more passive investment sense. Funny how the government thinks they are different and treats them differently.






kyleaaa

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Re: Taxable vs. 401K for early retirement
« Reply #24 on: September 25, 2013, 11:44:11 AM »

What you fail to understand, and I keep repeating because you and others don't understand;  is that you can only withdraw your initial contributions. This is like only being able to withdraw your principal, and not your earnings from your principal. You get taxed fully plus 10% penalty if you withdraw any earnings from your IRA or 401k before age 59.5.


No, this is incorrect. With SEPP you can access the FULL VALUE of your 401k or IRA without any penalties, not just the principal. You might be thinking of the rule for Roth IRA's stating you can withdraw contributions at any time without penalty. That's separate from SEPP and other early-withdrawal strategies.

Quote from: Freeyourchains2
Investments in a taxable account into high quality dividend growth companies or for Capital Gains earnings, allow you to live off of earnings once your principal is built up enough.

You can do this with 401k/IRA funds as well. Money is fungible. It doesn't matter if you make a withdrawal from a retirement account or spend dividends from a taxable investment. You'd STILL end up with more money using the 401k, paying taxes on withdrawals, and investing the rest in an identical fund in a taxable account.


Quote from: Freeyourchains2
Those with middle class incomes, at a very young age, and that develop a higher savings rate into taxable accounts, can reach FI quicker without limitations or restrictions this way(except some tax brackets which have exemptions for long term investments).

This is mathematically false.

Quote from: Freeyourchains2
but all gains/earnings are kept inside IRA until age 59.5 and the "investment" ceases to exist upon withdrawal. Unlike an investment already in a taxable account, whose earnings you can live off of (limited in taxes if you are above the 25% tax bracket in America).

As stated above, you can just reinvest your withdrawals in an identical taxable investment and still come out ahead in the vast majority of cases. Money is fungible.

Quote from: Freeyourchains2
You'll have to pay full taxes plus 10% penalities to access these "earnings" or returns from your investments.

No you won't. There are several simple strategies for avoiding the 10% penalty.

Quote from: Freeyourchains2
401k investors are then limited to only withdrawing what they input.

This has no basis in reality. 401k investors are absolutely not limited in this way.

Quote from: Freeyourchains2
Middle class workers maxing out 401k's/IRAs at $23k invested, must work about 15 years min, and must rollover each year (with rollover fees) beginning at year 10, to just be able to withdraw from their initial input or contribution or principal after a 5 year grace period. If your family expenses are at $23k/year, then you can only retire and live off of principal withdrawals for 15 years then, and not have access to your earnings until age 59.5.

Again, this has no basis in reality. That's just not how 401k's work.

Kipp

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Re: Taxable vs. 401K for early retirement
« Reply #25 on: October 01, 2013, 12:28:17 PM »
I've actually abanonded that plan as quickly as I thought about it.  I realized that I would have to pay a large chunk of that rollover in taxes (as you have to pay the ENTIRE sum, not just your earnings on a 401k to Roth IRA rollover). 

So now I'm back to square one to sort out my MMMesque' retirement strategy.

I am not sure how much longer you believe you will be working for, but I agree with many other posters regarding the ROTH IRA pipeline.

If you continue contribute the maximum to your ROTH IRA during your remaining working years, you will have all of contributions available for withdraw tax free immediately.  Lets say for simplicity sake, you annual expenses at retirement will be $27,500 (5 years of $5,500 contributions).  Inflation will add to the amount, but your contribution limit will go up on occasion as well.  So, if you have 15 years until financial independence you will have three years of contributions saved into your ROTH IRA.  You will need to cover those remaining 2 years somehow.  You can do this a by either having the money in a taxable account, or reducing the money needed to withdraw by having rental income.  If you have a 457, you can draw your first year penalty free in a lump sum and roll the remaining balance into a IRA.  This isn't an option for everyone since not all companies offer 457's, but it could cut off one full year needed.

Keep in mind that if you are married, you can DOUBLE how much goes into the ROTH IRA and easily get the 5 years needed until the pipeline is available.

I am at age 26, planning on doing pretty much a little of all of the above.  I plan on having all debts (mortgage, student loan, car) paid off in about 8 years, then maxing retirement accounts for early retirement (still contributing 10% of gross pay while de-leveraging).  I am also interested in acquiring a rental property for income before making the plunge.  The rental property is in hopes to add some stability to the income stream and to avoid withdrawing larger sums of money from accounts when a market downturn comes.