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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Tantillo on January 15, 2016, 06:17:09 AM

Title: Where I am and where am I going?
Post by: Tantillo on January 15, 2016, 06:17:09 AM
Hello all,

I'm just stepping onto the path of Badassity, but need a little clarification on just how it works in the later stages.

Right now, I have a Roth IRA, Roth 401k, and general investment account, the first two of which I am maxing out annually, and the rest I slush as much as possible into from my monthly budget.  I have them all dumping into either VTSMX or VFINX, and am just buying steadily regardless of market conditions. Based on my current estimates, using this strategy I should be able to retire with 25x of my desired retirement income invested as a sum of all three accounts in about 16 years (~age 40).

My confusion is just HOW I get money out of those accounts and into my spending stream. With the general account, it's simple enough that I can withdraw the dividends paid out and/or the principle/gains whenever I want.  How I get funds out of the 401k/IRA pre-59.5 is what's confusing me. I'm worried that by using the IRA/401k, over half of my retirement funds will be locked away where I can't get to them when I want to retire. If I've read correctly, I really can't get anything except my principles out of those two accounts until I hit 59.5, no?

So my questions:
1. I understand the Roth pipeline, but if it is ultimately funded by my 401k, why not simply have the IRA sit there while maxing out my 401k and general savings, then doing the 401k-IRA trick down the road? This would put $5500/yr into my general account, which I have easier access too.
2. Really, why not put everything into my general account, so I don't have to worry about all the restrictions on withdrawals? Is it mostly an issue of saving on taxes?
3. I haven't seen anyone talking about Roth 401ks around here. Are they not recommended for mustachians? I definitely work in a higher tax bracket now than I will retire (early or not) into.

I tried to search out these questions, so hope I'm not beating a very dead horse here for you all.  Thanks a bunch for the help!
Title: Re: Where I am and where am I going?
Post by: Retire-Canada on January 15, 2016, 06:36:12 AM
Look at the very top of the investment forum and you see this thread:
Title: Re: Where I am and where am I going?
Post by: nereo on January 15, 2016, 06:37:27 AM
Welcome Tantillo - I hope you stick around.

First, you seem to be in a good position since you are young nad saving lots.  You also seem to have fallen victim to the myth that you "cannot access retirement accounts before age 59.5 without paying enormous penalties.  We'll get to that in a second.

To address your specific questions:
1) A ROTH pipeline can be 'fueled' by a 401(k) or from a tIRA.  The idea for most people is to do basically what you described; you max out your IRA now ($5500/year, plus another $5500 if you have a spouse) *AND* contribute to your 401(k).  Whenever you retire or leave your job for a new one, roll that 401(k) over into your tIRA.  Because you can contribute up to $18,000 of tax-deductable contributions to a 401(k) *and* your employer might also match some of these dollars, your 401(k) can grow much faster than your IRA. 
Then, once you stop working and have less earned income and are in a lower tax bracket you can start the ROTH pipeline.

2) Taxes.  You will pay a boatload more in taxes.  In short - contributions to your 401(k)/tIRA reduce your taxable income this year.  So; say you are in the 25% tax bracket now and contribute $10,000 to a combination of your 401(k) and tIRA. Your will save $2500 on taxes this year.  BUt it gets better.  Those contributions grow tax free, so while they are compounding you are not paying taxes on their earnings.  Then, when it comes time to sell those in retirement, you pay taxes on the 'first dollar out' principle.  Without going into too much detail, because you will be taking out a smaller amount (coupled with your standard deductions, savings etc.) you probably will pay far less in taxes on that money in the future. 
The difference between tax-advantaged accoutns and taxable accounts can easily be $100k or more over 20 years of contributions and subsequent withdraws.

3) ROTH 401(k)s are occasionally mentioned, but they are newer, not as common in most jobs nad ultimately not as useful to most who are living the mustachian lifestyle.  Because you can convert your 401(k) into an IRA, and than use a pipeline to convert those into a ROTH-IRA it makes more sense for most of us to take the tax deduction now nad pay less in taxes down the road.

Yes - you can withdraw funds without penalty from tax-advantaged accounts before you turn 59.5.  There are several strategies, icnluding SEPPs, conversions as well as treating it as 'old-man money'.  See these posts to start, and then start googling: ( (