Optimum Tax Advantage

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ThisDinosaur
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Optimum Tax Advantage

Post by ThisDinosaur »

Assume you don't want to take early withdrawals from retirement accounts, but you do plan to retire early.
Assume you'd like as much of your investable assets as possible in tax-deferred, creditor-protected accounts at the time you quit working.

Seems like you would only need enough in your taxable account to get to age 59.5. I've been referring to akratic's chart to figure out how much should be in taxable so that it runs out right as I reach traditional retirement age. But I'm wondering if there is a better way, mathematically, to pin this down for different FIRE ages.

GoCurryCracker says you can make up to $19,500 per year (2013 numbers) in "income" (how retirement withdrawals are taxed) before having to pay income taxes. HSA withdrawals for non-medical expenses are tax-free after age 65.
Last edited by ThisDinosaur on Thu Jun 08, 2017 12:35 pm, edited 1 time in total.

George the original one
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Re: Optimum Tax Advantage

Post by George the original one »

Taking advantage of deductibles (medical expenses, mortgage) and give-aways (Obamacare)? Biggest problem is that available options are likely to change if you have decades to live before reaching age 59.5.

Having money in a Roth is a good emergency stash, withdrawing your contributions tax free in case you underestimated the taxable amount (or your expenses change).

In my case, I exited at age 53 with local government employment pension available at age 58. Pretty easy to guesstimate the amount needed to bridge a 5 year gap, but Obamacare minimum income threw me a curveball a couple years before the exit and I had to divert extra funding into a standard IRA for later conversion Roth.

Fish
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Re: Optimum Tax Advantage

Post by Fish »

What exactly are you asking? For your two-phase retirement scenario, here's a table with minimum accumulation targets for taxable and tax-advantaged accounts. This format makes it easier to account for things like old-age pensions by treating age 60+ savings/expenses separately. With your constraints, the conclusion is to save heavily in taxable for extreme early retirement, or conversely to favor traditional retirement savings vehicles if punching out of the workforce at a more normal age.

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Viktor K
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Re: Optimum Tax Advantage

Post by Viktor K »

@Fish what are the numbers there in those columns? For age 30, 4% for example, there's a 17.98. Is that like a factor by which I need to multiple my monthly spending by? Sorry, I feel like this is a silly question.

ThisDinosaur
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Re: Optimum Tax Advantage

Post by ThisDinosaur »

Viktor, those are years of expenses.

Fish, That chart seems to line up with the method ive been using. Where did you get it?

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Viktor K
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Re: Optimum Tax Advantage

Post by Viktor K »

So if I'm trying to retire at 30, save 17.98 years of spending into a taxable account, and 5.54 years of spending into a tax-advantaged account for Scenario 1 (non-pension).

I'm also curious where this chart comes from now and if there is more to read on the assumptions it makes

jacob
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Re: Optimum Tax Advantage

Post by jacob »

The chart itself pretty much says what its assumptions are: constant depletion and fixed and constant exponential growth.

For example: In the taxable account: Start at age 40, assume 3% and the field says 15.33 ... Now run
(15.33-1)*1.03=14.76 (at age 41)
(14.76-1)*1.03=14.71 (at age 42)
etc
=> ... =0 (at age 60)

(or translate it into a analytic form: it's an annuity payment calculation)

In scenario 1, it's just presuming that the growth is CAGR w/o depletion until age 60 and then the drawdown for 30 years is as above.
E.g. 10.35*1.02^40 for the age 20 number is 22.85 which is the age 60 number.

In scenario 2, it's the same except the target is a perpetuity at age 60 which should be obvious from the "4%-rule": note the 25.00 in the last field in the table.

The table doesn't really tell you what's optimal from a taxation point, just how big two separate portfolios should be under very simplified assumptions. Depending on the securities in the portfolio, you can probably assume that the non-taxed portfolio grows faster (higher %) ... but if it's tax-deferred, you'd have to account for paying taxes later (possibly higher spending in scenarios 1 and 2).

ThisDinosaur
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Re: Optimum Tax Advantage

Post by ThisDinosaur »

My question is only partly motivated by tax optimization. It's mainly motivated by asset protection. Umbrella insurance has been discussed on the forum, but it has caps. If i have a 1M policy, and get sued for 2M in damages, I'm broke. By contrast, ERISA retirement assets are protected by federal law, so i would like most of my assets in the "protected" category.

Fish
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Re: Optimum Tax Advantage

Post by Fish »

I made the table using equation 7.10 of the ERE book, but switched the dependent variable to solve for the required initial fund size, given a fixed number of years for the withdrawal period. This makes the equation more useful (and dangerous?) for the strivers who know how long the fund needs to last, and need to find out roughly how much more they need to accumulate to FIRE.

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