Does the IRA have any place in ERE?

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Ricky
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Does the IRA have any place in ERE?

Post by Ricky »

I'm sure this has been discussed before but I haven't seen it directly answered through my own searches.

So in short...for the guy/gal in their 20's to 30's interested in ERE, I would assume IRAs don't make much sense...?

Why would you open one of these accounts if you actually planned on living off your investments now? I guess I'm trying to find out if offsetting capital gains and dividend taxes by contributing to a traditional IRA is worth it for the average ERE'er

Chad
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Re: Does the IRA have any place in ERE?

Post by Chad »

It's all math on whether it's worth it or not. Goals? How much can you save? When do you plan on retiring? Will the money you have saved outside of retirement accounts (either IRA's or 401k's) last you until you can access the retirement accounts? Answering all those questions for yourself will answer the IRA question.

Another option is to use a Roth IRA, as you can pull out your principle at anytime with no penalty.

robby152
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Re: Does the IRA have any place in ERE?

Post by robby152 »

Google 72(t) / SEPP

Ricky
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Re: Does the IRA have any place in ERE?

Post by Ricky »

robby152 wrote:Google 72(t) / SEPP
So I guess the advantage here is letting your portfolio grow while you're working with tax advantages since you won't need to start living off of the gains until you cut the cord anyway... Makes sense and I didn't know about the SEPP which makes it feasible...

So question... In a Roth, dividends reinvested are not taxed, which is really the only form of gain that would be taxed anyway right? Because capital gains aren't taxes until realized anyway.

borisborisboris
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Re: Does the IRA have any place in ERE?

Post by borisborisboris »

So like Chad said, do the math for your specific situation to figure out what's best. However as a starting point, a good heuristic model for an EREr goes like this:

1. While you are earning money, your salary is probably pretty high, and you pay a lot of taxes. Therefore shelter as much of the income as possible in 401ks and IRAs

2. Once you are no longer working, you withdraw from these accounts with 72t or a roth pipeline or whatever. But since your expenses are low, you make only very small withdrawals each year such that your tax rate on them is very low / zero. Even if you were to botch the SEPPs and have to pay the 10% penalty, your might still come out ahead of keeping everything in your taxable accounts.

JohnnyH
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Re: Does the IRA have any place in ERE?

Post by JohnnyH »

While you are earning; max out standard IRA for deduction... While you are retired and not earning much; convert standard to Roth (up to 25% bracket) for income tax free gains... While these gains are racking up find a way to get the money out without penalty (there are potentially a few).

bibacula
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Re: Does the IRA have any place in ERE?

Post by bibacula »

Ricky wrote:I guess I'm trying to find out if offsetting capital gains and dividend taxes by contributing to a traditional IRA is worth it for the average ERE'er
Using an IRA and 401k gave me a nice boost.

While working, I maxed a traditional IRA and the company 401k plan to avoid paying 40% in taxes (federal, state and local).

When I became FI, I estimated that about 10% of my net worth was tax savings. Free money!

After FI, I slowly converted the IRA and 401k money to a Roth IRA paying just a few percent to the IRS in the process.

Bonus: The money in a Roth IRA will never be subject to taxation again. Capital gains, interest, dividends, royalties and conforming distributions are not taxable. It's the best long-term savings plan, in my opinion.

dot_com_vet
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Re: Does the IRA have any place in ERE?

Post by dot_com_vet »

If you're working now and in a high tax bracket, it makes a lot of sense.

50% of my net worth is in tax advantaged retirement accounts. It will be upper rung of my retirement income.

George the original one
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Re: Does the IRA have any place in ERE?

Post by George the original one »

bibacula wrote:Bonus: The money in a Roth IRA will never be subject to taxation again.
Only as long as you're not paying sales tax or VAT.

tylerrr
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Re: Does the IRA have any place in ERE?

Post by tylerrr »

correct me if i'm wrong, but if someone is trying to reach FI as soon as possible, it doesn't make sense to put it in am IRA of any kind because you won't want to touch "some" of that money until you can withdraw it at IRA retirement age.

So none of it should go into an IRA of any kind if your goal is to reach FI crossover point as soon as possible.

ONce you have enough and you've reached FI, then I can see stashing money away in IRAs.

Does that make sense?

The only reason would be if you calculated it's worth it to pay the penalty of withdrawing all your funds from the IRA/ROTH early to live FI. Would that penalty be less than the taxes you would pay outside of the ROTH/IRA ?

Tyler9000
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Re: Does the IRA have any place in ERE?

Post by Tyler9000 »

My current ERE plan utilizing an IRA involves converting just enough from my IRA to a Roth each year to get my retirement MAGI up to the minimum required for maximum ACA subsidies. Of course the law may change in the future, but in general having multiple types of accounts may actually increase your flexibility for tax purposes.

George the original one
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Re: Does the IRA have any place in ERE?

Post by George the original one »

tylerrr wrote:So none of it should go into an IRA of any kind if your goal is to reach FI crossover point as soon as possible.

ONce you have enough and you've reached FI, then I can see stashing money away in IRAs.
If you've reached FI and are still employed, yes. But if you're FI and not employed, you have no method to move money into an IRA of any kind unless you take up employment (doh!).

Another way to look at it: if you're withdrawl rate is 25x annual expenses and your actual yield is 16x annual expenses, then you can have 9x annual expenses in the IRA. Since there are annual limits to how much can be placed in an IRA, you need to start it early to reach the 9x annual expenses.

Chris
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Re: Does the IRA have any place in ERE?

Post by Chris »

George the original one wrote:Since there are annual limits to how much can be placed in an IRA, you need to start it early to reach the 9x annual expenses.
^This.

If you could reach FI in 6 years, you can't then take $33k and dump it into an IRA in year 7. That $33k will live on, producing taxable returns for you (until you get yourself in a lower tax-bracket).

I find IRA attractive for certain types of investments, such as BDCs, which generate income that would otherwise be taxable at my standard tax rate.

Additionally, IRA are at least somewhat protected from creditors, if you get yourself in legal trouble.

bibacula
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Re: Does the IRA have any place in ERE?

Post by bibacula »

tylerrr wrote:correct me if i'm wrong, but if someone is trying to reach FI as soon as possible, it doesn't make sense to put it in am IRA of any kind because you won't want to touch "some" of that money until you can withdraw it at IRA retirement age.
I reached FI about 10% faster maxing tIRA/401k accounts.

When I became FI, 28% of my capital was in tax-deferred accounts. I'd been paying a 39% marginal tax rate (33% federal plus 6% state). [28% x 0.39 = 10.5% of total net worth saved from the taxman.]

I've always included the IRA money in my withdrawal rate calculations, even though I don't plan on tapping the account until much later in life.

Do the math to see if it works for you, but investing money that would otherwise be lost in taxes is a sure bet.

tylerrr
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Re: Does the IRA have any place in ERE?

Post by tylerrr »

bibacula wrote:
I've always included the IRA money in my withdrawal rate calculations, even though I don't plan on tapping the account until much later in life.
I guess this is the part i don't quite understand. How/Why are you including your IRA money in your calculations?

Can you give me an example of your age at FI and how long you plan to live with your calculations?

I currently don't include my Roth IRA money in my calculations to FI because I want to reach FI before 59.5 years of age which is when you can withdraw from Roth IRA.

Maybe I should start including my Roth money.....

Seneca
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Re: Does the IRA have any place in ERE?

Post by Seneca »

tylerrr wrote:
bibacula wrote:
I've always included the IRA money in my withdrawal rate calculations, even though I don't plan on tapping the account until much later in life.
I guess this is the part i don't quite understand. How/Why are you including your IRA money in your calculations?

Can you give me an example of your age at FI and how long you plan to live with your calculations?

I currently don't include my Roth IRA money in my calculations to FI because I want to reach FI before 59.5 years of age which is when you can withdraw from Roth IRA.

Maybe I should start including my Roth money.....
Definitely!

As long as you will not run out of unsheltered money before 59.5, there's no need to break out your IRA separately for the purposes of SWR calcs. For any sort of ERE strategy, you should be investing way more outside IRAs than within, so you shouldn't run out. You'll simply use other funds first as you draw down.

tylerrr
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Re: Does the IRA have any place in ERE?

Post by tylerrr »

Seneca wrote:
tylerrr wrote:
bibacula wrote:
I've always included the IRA money in my withdrawal rate calculations, even though I don't plan on tapping the account until much later in life.
I guess this is the part i don't quite understand. How/Why are you including your IRA money in your calculations?

Can you give me an example of your age at FI and how long you plan to live with your calculations?

I currently don't include my Roth IRA money in my calculations to FI because I want to reach FI before 59.5 years of age which is when you can withdraw from Roth IRA.

Maybe I should start including my Roth money.....
Definitely!

As long as you will not run out of unsheltered money before 59.5, there's no need to break out your IRA separately for the purposes of SWR calcs. For any sort of ERE strategy, you should be investing way more outside IRAs than within, so you shouldn't run out. You'll simply use other funds first as you draw down.
yep, thanks....

bibacula
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Re: Does the IRA have any place in ERE?

Post by bibacula »

tylerrr wrote:Can you give me an example of your age at FI and how long you plan to live with your calculations?
Sure. I was 34 when I was laid-off in 2001. I decided that I was basically FI.

The IRA percentage increased at first (due to withdrawals from the taxable account). At the highest, I think that the IRA was 35% of total assets.

I've worked paid jobs for interesting experiences. Any extra money earned has been invested in the taxable account. Now, about 25% of my assets are in the IRA.

This year I'll turn 48, and age 59 doesn't seem old anymore... :)

tylerrr
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Re: Does the IRA have any place in ERE?

Post by tylerrr »

bibacula wrote:
tylerrr wrote:Can you give me an example of your age at FI and how long you plan to live with your calculations?
Sure. I was 34 when I was laid-off in 2001. I decided that I was basically FI.

The IRA percentage increased at first (due to withdrawals from the taxable account). At the highest, I think that the IRA was 35% of total assets.

I've worked paid jobs for interesting experiences. Any extra money earned has been invested in the taxable account. Now, about 25% of my assets are in the IRA.

This year I'll turn 48, and age 59 doesn't seem old anymore... :)
interesting, since 34, what do you think your average annual expenses have been? Do you rent or own?

bibacula
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Re: Does the IRA have any place in ERE?

Post by bibacula »

Since FI, my annual expenses have been between $10k and $15k. I've mainly rented apartments in Asia (Thailand, Cambodia, Malaysia, Taiwan), but I've also shared rentals in Washington DC and NYC.

For reference, I spent $16k-$18k before FI. I would either buy fix-up homes and sell after 2 years, or I'd rent a small apartment on my own.

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