Author Topic: FIRE? How is that possible considering 401K and IRA penalizations?  (Read 7416 times)

aalferez

  • Stubble
  • **
  • Posts: 101
  • Age: 32
  • Location: Chicago, IL
    • Longing for Travel
I've been reading for a while in this forum and I'm trying to understand something that I have not seen explained:
Let's say I'm saving money; I max out my 401K and my ROTH IRA.
Also, I have a personal taxable investment account.
Lets say I spend 50K a year in living expenses, so I would need a stash of 50K x 25 = $1,25 Million to retire.
Now, I might have this amount of money if I consider all my accounts together, but the real scenario is that I cannot touch the money in either the 401K or ROTH IRA if I don't want to pay for fees since I'm not old enough to withdraw money and not be penalized.

So how does this really work?
How are Mustachians doing the math?

Thank you for taking the time to explain.

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: FIRE? How is that possible considering 401K and IRA penalizations?
« Reply #1 on: June 06, 2017, 02:10:21 PM »
You could simply withdrawal the money and not pay the penalty.  How's that sound?  (Note -- you can always withdrawal your Roth contributions penalty free)

http://www.madfientist.com/how-to-access-retirement-funds-early/

aalferez

  • Stubble
  • **
  • Posts: 101
  • Age: 32
  • Location: Chicago, IL
    • Longing for Travel
Re: FIRE? How is that possible considering 401K and IRA penalizations?
« Reply #2 on: June 06, 2017, 02:24:30 PM »
I see, there are loopholes.

About the 5 year rule for Roth IRA, Lets say:
- 2010 I put 5,5K
- 2011 I put 5,5K
- 2012 I put 5,5K
- 2013 I put 5,5K
- 2014 I put 5,5K
- 2015 Can I withdraw more than 5,5K? Or just the amount of money that I had in 2010?

Wouldn't it be very similar if I just contribute the minimum to the 401K so my company matches the maximum, and then put as much as possible into a personal taxable account?
Why putting money into a Roth or Traditional IRA if I can just invest it in a personal taxable investment account?

Psychstache

  • Pencil Stache
  • ****
  • Posts: 984
Re: FIRE? How is that possible considering 401K and IRA penalizations?
« Reply #3 on: June 06, 2017, 02:50:11 PM »
I see, there are loopholes.

About the 5 year rule for Roth IRA, Lets say:
- 2010 I put 5,5K
- 2011 I put 5,5K
- 2012 I put 5,5K
- 2013 I put 5,5K
- 2014 I put 5,5K
- 2015 Can I withdraw more than 5,5K? Or just the amount of money that I had in 2010?

Wouldn't it be very similar if I just contribute the minimum to the 401K so my company matches the maximum, and then put as much as possible into a personal taxable account?
Why putting money into a Roth or Traditional IRA if I can just invest it in a personal taxable investment account?

You are misunderstanding the 5 year Roth pipeline. You might want to re-read the Mad FIentist post. You can immediately and at any time withdraw the contributions that you directly make to a Roth IRA. The 5 year Rule applies to conversions from a traditional IRA, which can be in any amount you make it.

You want to contribute as much as possible to your tax advantaged accounts because they are....tax advantaged. It's hard to overcome the tax benefits

Scortius

  • Bristles
  • ***
  • Posts: 475
Re: FIRE? How is that possible considering 401K and IRA penalizations?
« Reply #4 on: June 06, 2017, 03:26:51 PM »
Another thing to think about is that most people avoid an approximate 30% tax rate on money they put into a traditional 401k.  Taking it out later at a 10% penalty isn't really the worst trade-off.

That said, if you plan ahead you can get it out early with no penalty whatsoever.
« Last Edit: June 06, 2017, 04:40:34 PM by Scortius »

inline five

  • Pencil Stache
  • ****
  • Posts: 675
Re: FIRE? How is that possible considering 401K and IRA penalizations?
« Reply #5 on: June 06, 2017, 03:41:33 PM »
Roll 401k to IRA and 72t it

If you need $50k you need to withdraw more than that due to taxes. Probably $65k.

nereo

  • Senior Mustachian
  • ********
  • Posts: 12945
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: FIRE? How is that possible considering 401K and IRA penalizations?
« Reply #6 on: June 06, 2017, 04:57:10 PM »
I see, there are loopholes.


I'd object to calling this a "loophole".  The law was intentionally written this way to allow for this flexibility.

Quote
Wouldn't it be very similar if I just contribute the minimum to the 401K so my company matches the maximum, and then put as much as possible into a personal taxable account?
Why putting money into a Roth or Traditional IRA if I can just invest it in a personal taxable investment account?

in a word, no.  Any money placed in a taxable account is subject to taxation (as you'd expect).
The advantage of placing money into an IRA is tax-free growth and (for the ROTH) no taxation when you make withdraws.

Of course there's nothing stopping you from investing in a 401(k), IRA and taxable accounts; that's pretty much the norm around here.
Doing this gives you the maximum amount of flexibility, and plenty of extra investments to leverage when doing the Roth pipeline.
Make sense?

runewell

  • Bristles
  • ***
  • Posts: 418
  • Age: 48
  • actuary
Re: FIRE? How is that possible considering 401K and IRA penalizations?
« Reply #7 on: June 06, 2017, 09:36:47 PM »
Another thing to think about is that most people avoid an approximate 30% tax rate on money they put into a traditional 401k.  Taking it out later at a 10% penalty isn't really the worst trade-off.

That said, if you plan ahead you can get it out early with no penalty whatsoever.

It's a waste of 10% if you are still paying 30%. 

MrMoogle

  • Handlebar Stache
  • *****
  • Posts: 1128
  • Age: 35
  • Location: Huntsville, AL
Re: FIRE? How is that possible considering 401K and IRA penalizations?
« Reply #8 on: June 07, 2017, 09:38:35 AM »
I see, there are loopholes.

About the 5 year rule for Roth IRA, Lets say:
- 2010 I put 5,5K
- 2011 I put 5,5K
- 2012 I put 5,5K
- 2013 I put 5,5K
- 2014 I put 5,5K
- 2015 Can I withdraw more than 5,5K? Or just the amount of money that I had in 2010?

Wouldn't it be very similar if I just contribute the minimum to the 401K so my company matches the maximum, and then put as much as possible into a personal taxable account?
Why putting money into a Roth or Traditional IRA if I can just invest it in a personal taxable investment account?

You really need to read Eric's link:
You could simply withdrawal the money and not pay the penalty.  How's that sound?  (Note -- you can always withdrawal your Roth contributions penalty free)

http://www.madfientist.com/how-to-access-retirement-funds-early/
There's two "5 Year" rules related to Roth IRAs.  One relates to interest made on contribution and one relates to conversion from tIRA.  There's no wait to withdraw contributions.  So you'd be able to withdraw 27.5k without any tax/penalty.  You can withdraw interest made on that money with a penalty.

Eric's link shows that using 401k/IRA ends up with more net worth than just using a taxable account.  So that's why you use them, they have advantages.

aalferez

  • Stubble
  • **
  • Posts: 101
  • Age: 32
  • Location: Chicago, IL
    • Longing for Travel
Re: FIRE? How is that possible considering 401K and IRA penalizations?
« Reply #9 on: June 07, 2017, 10:13:05 AM »
Now I understand. It was a lack of knowledge from my part.

Then, when doing the math for FIRE and calculating that I need 25 times my yearly expenses, I need to have that money invested but not in a 401K or Traditional IRA because it should be after taxes. Or if I consider the 401K/T. Roth then I have to take in consideration that I have to pay taxes in that money.

MrMoogle

  • Handlebar Stache
  • *****
  • Posts: 1128
  • Age: 35
  • Location: Huntsville, AL
Re: FIRE? How is that possible considering 401K and IRA penalizations?
« Reply #10 on: June 07, 2017, 10:28:55 AM »
Now I understand. It was a lack of knowledge from my part.

Then, when doing the math for FIRE and calculating that I need 25 times my yearly expenses, I need to have that money invested but not in a 401K or Traditional IRA because it should be after taxes. Or if I consider the 401K/T. Roth then I have to take in consideration that I have to pay taxes in that money.
Yes, and it's typically better overall to have it in your 401k/tIRA, and account for taxes, realizing they will be relatively small taxes.

Larsg

  • Stubble
  • **
  • Posts: 127
Re: FIRE? How is that possible considering 401K and IRA penalizations?
« Reply #11 on: June 14, 2017, 01:23:23 AM »
I've been reading for a while in this forum and I'm trying to understand something that I have not seen explained:
Let's say I'm saving money; I max out my 401K and my ROTH IRA.
Also, I have a personal taxable investment account.
Lets say I spend 50K a year in living expenses, so I would need a stash of 50K x 25 = $1,25 Million to retire.
Now, I might have this amount of money if I consider all my accounts together, but the real scenario is that I cannot touch the money in either the 401K or ROTH IRA if I don't want to pay for fees since I'm not old enough to withdraw money and not be penalized.

So how does this really work?
How are Mustachians doing the math?

Thank you for taking the time to explain.

Look up rule 72 that you can enact any time but once you start, you can't stop. It is penalty free, basically, you pick an equal amount within limits outlined within rule 72 that you will receive until retirement age. Prob lots of experts on this out on the forum but if not, just research online Rule 72 for Early Retirement and you will get some good research and go to info to carefully consider. Good Luck!