EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IRA

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statsnerd
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EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IRA

Post by statsnerd »

I've thought this over in my head multiple times and I keep wavering back and forth.

I currently max out my 401(k), Roth IRA via backdoor, HSA, and after-tax 401(k) converted to Roth which gives me close to 60k of tax-advantaged space per year.

Should my goal be to shelter as much from taxation as possible? I could put $10k in I-Bonds and $10k in EE Bonds (if I know I'll hold onto for at least 20 years).

On the other hand, I can invest in TISM and TSM in my taxable account and have the benefits of long term capital gains, tax loss harvesting and then carrying the tax loss forward which could have a huge impact in my early years of retirement while I'm converting my 401k to my Roth up to, e.g. 15% tax bracket. I've read some of livesoft's threads and played around with http://i-orp.com/ to understand how this can be very beneficial.


As far as I can see the benefits can be broken down
1) I-Bond/EE
all dividends grow tax-free and I only pay the gains in retirement and are additionally exempt from state taxes which would be big if I live in a state like California. In a state like Washington, it won't matter.

2) Taxable
dividends taxed at 15-20% each year which is a con relative to the other strategy. The gains however will be taxed at a lower rate (assuming long term capital gains) than I-Bond/EE, whose gains are taxed like income
Additionally, tax loss harvesting and using my carryforward loss, assuming the market has some big ups and downs, could be a huge benefit early on in my retirement. Also, as these will likely have larger gains than the bonds, I can donate stock at the appreciated level to get the charitable deduction at the stepped-up basis.

And note, as this is comparing bonds vs stock, I would shift my asset allocation accordingly in my taxed-advantaged accounts in order to achieve an overall asset allocation in line with what I want.

So I guess my question is, for those Bogleheads who max out retirement accounts, what is their next priority? Should it always be maxing out I-Bonds or other vehicles where dividends are not taxed?
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by crowd79 »

Why not just diversify? If you have an extra $20k per year sitting around (at least I gather that from your post on I and EE bonds) after filling all retirement space, then I would buy $5k each of I Bonds, EE Bonds, TISM, and TSM every year. Don't buy any bond funds other than the I and EE's though, as regular bond funds are very tax-inefficient.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by rr2 »

We are in a somewhat similar position. We max out 2 403bs, and 2 Roth IRAs. No kids. At the border of the 15/25% tax bracket -- currently just inside the 25%. We are trying to save about $1000/month in non tax advantaged. RIght now this is what I'm doing.

1. Extra $250/month to mortgage principal (Just refi'd last year to a 3.5%/30 year FRM)
2. $500/month to a Vanguard Taxable account -- invested in Vanguard Total World (VTWSX)

Current/desired asset allocation is about 60% equities. Am wondering if I should put the extra $250/month into I-bonds.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by Mel Lindauer »

First, I'd ask myself if I needed more stocks or bonds to flesh out my desired asset allocation. That may help with the decision.

Secondly, I'd point out that tax-efficient index funds in your taxable account could escape the long-term capital gains tax entirely if you left them to your heirs, who would get a step-up in cost basis. It sounds like that may well happen, since you're maxing out all of your tax-deferred/tax-free options and may not need to use the taxable assets.

Finally, even if you needed to eventually utilize the taxable fund assets, as you correctly pointed out, selling the equities and paying the lower LTCG tax rate is more desirable than paying your highest ordinary tax rate on the Savings Bonds.

There is no one right answer; only the one that's right for you.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by FoolStreet »

I like crowd79s idea of splitting it up, except I personally don't see the value of the EEs because you lose some flexibility. Also, factor in the fact that you can use the i-bonds as quasi e-fund accounts. Don't forget the $5k paper i-bonds if appropriate (15k total/year). Last, think about any large purchases that might come up and where you would come up with the $.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by statsnerd »

There's probably one other thing I should have added. I would like to "retire" early, somewhere between 45 and 50 (I am currently 30), so I will have many years before I access my 401(k), Roth or Social Security. I know I can use a SEPP to get to the 401(k) and I can withdraw contributions from the Roth, but I would rather avoid this if I can. That means I will likely deplete my taxable account first. I put retire in quotes because I view it more as not working for anyone. I'm sure there are some pursuits I'd still love to do related to working.

I will also have about an extra $40k to invest so I could max out the two bond funds and still put some away in taxable TISM (to get the foreign tax credit)
crowd79 wrote:Why not just diversify? If you have an extra $20k per year sitting around (at least I gather that from your post on I and EE bonds) after filling all retirement space, then I would buy $5k each of I Bonds, EE Bonds, TISM, and TSM every year. Don't buy any bond funds other than the I and EE's though, as regular bond funds are very tax-inefficient.
This is probably the most sensible answer and thank you crowd79. An additional uncertainty is I know what the tax code is now but in 15-20 years it very well may change so diversification helps in regards to that as well. I would probably show a preference for I-Bonds, though EE Bonds could be nice in that period of retirement before accessing my 401(k), having a guaranteed $20k floor in those years before tapping my other accounts and being that I'm 30 now, it would perfectly fill in the years 50-59 before I start on my 401(k).
Mel Lindauer wrote:First, I'd ask myself if I needed more stocks or bonds to flesh out my desired asset allocation. That may help with the decision.

Secondly, I'd point out that tax-efficient index funds in your taxable account could escape the long-term capital gains tax entirely if you left them to your heirs, who would get a step-up in cost basis. It sounds like that may well happen, since you're maxing out all of your tax-deferred/tax-free options and may not need to use the taxable assets.

Finally, even if you needed to eventually utilize the taxable fund assets, as you correctly pointed out, selling the equities and paying the lower LTCG tax rate is more desirable than paying your highest ordinary tax rate on the Savings Bonds.

There is no one right answer; only the one that's right for you.
Thank you Mel. It's actually one year ago today that I purchased the Bogleheads guide to Investing and started on this path. I was stubborn and probably took another 3 months before I started reading this forum and I can't thank you and all the contributors for how much I have learned.

That's a great point about the giving to heirs. I'm additionally thinking about a 529 account that could either be for heirs or for myself as I would love to continue learning later in life.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by Mel Lindauer »

statsnerd wrote:There's probably one other thing I should have added. I would like to "retire" early, somewhere between 45 and 50 (I am currently 30), so I will have many years before I access my 401(k), Roth or Social Security. I know I can use a SEPP to get to the 401(k) and I can withdraw contributions from the Roth, but I would rather avoid this if I can. That means I will likely deplete my taxable account first. I put retire in quotes because I view it more as not working for anyone. I'm sure there are some pursuits I'd still love to do related to working.

I will also have about an extra $40k to invest so I could max out the two bond funds and still put some away in taxable TISM (to get the foreign tax credit)
crowd79 wrote:Why not just diversify? If you have an extra $20k per year sitting around (at least I gather that from your post on I and EE bonds) after filling all retirement space, then I would buy $5k each of I Bonds, EE Bonds, TISM, and TSM every year. Don't buy any bond funds other than the I and EE's though, as regular bond funds are very tax-inefficient.
This is probably the most sensible answer and thank you crowd79. An additional uncertainty is I know what the tax code is now but in 15-20 years it very well may change so diversification helps in regards to that as well. I would probably show a preference for I-Bonds, though EE Bonds could be nice in that period of retirement before accessing my 401(k), having a guaranteed $20k floor in those years before tapping my other accounts and being that I'm 30 now, it would perfectly fill in the years 50-59 before I start on my 401(k).
Mel Lindauer wrote:First, I'd ask myself if I needed more stocks or bonds to flesh out my desired asset allocation. That may help with the decision.

Secondly, I'd point out that tax-efficient index funds in your taxable account could escape the long-term capital gains tax entirely if you left them to your heirs, who would get a step-up in cost basis. It sounds like that may well happen, since you're maxing out all of your tax-deferred/tax-free options and may not need to use the taxable assets.

Finally, even if you needed to eventually utilize the taxable fund assets, as you correctly pointed out, selling the equities and paying the lower LTCG tax rate is more desirable than paying your highest ordinary tax rate on the Savings Bonds.

There is no one right answer; only the one that's right for you.
Thank you Mel. It's actually one year ago today that I purchased the Bogleheads guide to Investing and started on this path. I was stubborn and probably took another 3 months before I started reading this forum and I can't thank you and all the contributors for how much I have learned.

That's a great point about the giving to heirs. I'm additionally thinking about a 529 account that could either be for heirs or for myself as I would love to continue learning later in life.
Remember, you can the tax-free educational benefit of any Savings Bonds you own for your qualifying educational expenses, so that may influence your decision.
Best Regards - Mel | | Semper Fi
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by crowd79 »

This is probably the most sensible answer and thank you crowd79. An additional uncertainty is I know what the tax code is now but in 15-20 years it very well may change so diversification helps in regards to that as well. I would probably show a preference for I-Bonds, though EE Bonds could be nice in that period of retirement before accessing my 401(k), having a guaranteed $20k floor in those years before tapping my other accounts and being that I'm 30 now, it would perfectly fill in the years 50-59 before I start on my 401(k).
Though I definitely will not retire as early as you're shooting for, that EE "guaranteed income" is definitely my strategy as I get into my mid 50's. Having that extra income coming in every month could be a difference maker in paying off bills like perscription drugs, rent, etc and/or could allow me to retire perhaps a few years before 65 if I dont use all my EE income in my mid 50's to 60, etc..
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by statsnerd »

Mel Lindauer wrote:
statsnerd wrote:There's probably one other thing I should have added. I would like to "retire" early, somewhere between 45 and 50 (I am currently 30), so I will have many years before I access my 401(k), Roth or Social Security. I know I can use a SEPP to get to the 401(k) and I can withdraw contributions from the Roth, but I would rather avoid this if I can. That means I will likely deplete my taxable account first. I put retire in quotes because I view it more as not working for anyone. I'm sure there are some pursuits I'd still love to do related to working.

I will also have about an extra $40k to invest so I could max out the two bond funds and still put some away in taxable TISM (to get the foreign tax credit)
crowd79 wrote:Why not just diversify? If you have an extra $20k per year sitting around (at least I gather that from your post on I and EE bonds) after filling all retirement space, then I would buy $5k each of I Bonds, EE Bonds, TISM, and TSM every year. Don't buy any bond funds other than the I and EE's though, as regular bond funds are very tax-inefficient.
This is probably the most sensible answer and thank you crowd79. An additional uncertainty is I know what the tax code is now but in 15-20 years it very well may change so diversification helps in regards to that as well. I would probably show a preference for I-Bonds, though EE Bonds could be nice in that period of retirement before accessing my 401(k), having a guaranteed $20k floor in those years before tapping my other accounts and being that I'm 30 now, it would perfectly fill in the years 50-59 before I start on my 401(k).
Mel Lindauer wrote:First, I'd ask myself if I needed more stocks or bonds to flesh out my desired asset allocation. That may help with the decision.

Secondly, I'd point out that tax-efficient index funds in your taxable account could escape the long-term capital gains tax entirely if you left them to your heirs, who would get a step-up in cost basis. It sounds like that may well happen, since you're maxing out all of your tax-deferred/tax-free options and may not need to use the taxable assets.

Finally, even if you needed to eventually utilize the taxable fund assets, as you correctly pointed out, selling the equities and paying the lower LTCG tax rate is more desirable than paying your highest ordinary tax rate on the Savings Bonds.

There is no one right answer; only the one that's right for you.
Thank you Mel. It's actually one year ago today that I purchased the Bogleheads guide to Investing and started on this path. I was stubborn and probably took another 3 months before I started reading this forum and I can't thank you and all the contributors for how much I have learned.

That's a great point about the giving to heirs. I'm additionally thinking about a 529 account that could either be for heirs or for myself as I would love to continue learning later in life.
Remember, you can the tax-free educational benefit of any Savings Bonds you own for your qualifying educational expenses, so that may influence your decision.

Thanks Mel. I had actually considered this as a big plus for Savings Bonds at first, however as I learned more about 529 accounts, that seems to be the better investment vehicle for me. If I know I will use it for education, it's even better than a Roth. It's funded with after-tax money, dividends are not taxed and growth is not taxed provided it's used for educational expenses (making it exactly like a Roth). Additionally, I live in Colorado which is one of the 7 or so states that allow state income tax deduction for 529 accounts, which makes it better than a Roth. If I use the funds at http://collegeinvest.org, I get to use Vanguard funds that have an expense ratio of 0.46%, higher than Vanguard's normal rates but not unreasonable and the savings on state income tax of 4.63% makes this quite beneficial. They use 3-fund portfolios as well and I like the 60% Total US, 15% Total International and 25% Total Bond fund.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by Skinut »

Thanks for posting this question, I've been wondering the same and it's great to see the various viewpoints.

I also like the idea of spreading among the various options, it gives you the ability to adapt if needed while still saving above your "standard tax efficient options". Looking forward to seeing what others suggest.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by STC »

I:

401k to max
Backdoor Roth
IBonds to max
Taxable

I am considering doing after-tax 401k to Roth conversion. But no decision on that yet. Also will have 529 within a year or two.

EEBonds should be used 20 years out (or other doubling period) from retirement to maximize effectiveness. At 33, 20 years from now those EEBonds would double at the height of my earning potential. I will start them at 35 in anticipation of retiring at 55. For me and my wife, thats $40k per year we would be able to generate. That should cover property taxes and some basic living expenses.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by statsnerd »

STC wrote:I:

401k to max
Backdoor Roth
IBonds to max
Taxable

I am considering doing after-tax 401k to Roth conversion. But no decision on that yet. Also will have 529 within a year or two.

EEBonds should be used 20 years out (or other doubling period) from retirement to maximize effectiveness. At 33, 20 years from now those EEBonds would double at the height of my earning potential. I will start them at 35 in anticipation of retiring at 55. For me and my wife, thats $40k per year we would be able to generate. That should cover property taxes and some basic living expenses.
Thanks for the perspective, STC. I think maxing EE Bonds each year for 20 years before I know I will be retired and prior to age 59 when I can access my 401(k) makes a ton of sense.

One question. Why are you debating on after-tax 401k to Roth conversion? It's essentially the exact same as Backdoor Roth. Comparing the after-tax 401k to Roth vs Taxable, both are funded with after-tax dollars. With the Roth, anything after that point is tax-free provided you wait until 59. Taxable you are taxed on dividends and gains. The only argument I can see for taxable would be if liquidity is important, and possibly the benefits of tax loss harvesting.

I:
1) Max 401(k) (17.5k + 8.75k match)
2) Max after-tax 401(k) and convert to Roth (24.75k)
3) Backdoor Roth (5.5k, and note I only slightly prefer 2) to 3) because 2) must be done in the calendar year, 3) can be done up until tax day the following year)

and essentially my question with this post is what should 4) be? I-Bonds and Taxable all seem appealing. EE Bonds are when you know 20 years out from being retired. Additionally 529 could be very attractive.

Additionally I have an HSA that company puts in 1k, then I space out the rest of the 2.2k over my 26 pay checks so no priority in maxing that right away.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by letsgobobby »

I bonds are a good fixed income option. what is your other fixed income in?

I use I bonds, stable value funds, and TBM to make up my fixed income. Some will also use CDs in an IRA. There are attractive FDIC savings accounts in two different 529 plans - even if you don't have children, they pay more than other liquid savings accounts (even taking into account the penalty for nonqualified withdrawals).
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by statsnerd »

letsgobobby wrote:I bonds are a good fixed income option. what is your other fixed income in?

I use I bonds, stable value funds, and TBM to make up my fixed income. Some will also use CDs in an IRA. There are attractive FDIC savings accounts in two different 529 plans - even if you don't have children, they pay more than other liquid savings accounts (even taking into account the penalty for nonqualified withdrawals).
My fixed income is primarily in Vanguard TBM, which I have access to in my 401(k). I also took out 10k in I-Bonds last year. I don't really care for CDs at the moment but a CD ladder in retirement may be attractive when I get there.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by mall0c »

Do you have a mortgage? For me the order is as follows:

1: 51k to 401k and
1 (tie): 5500 to Roth
3: 15k to i-bonds
4: 10k to ee-bonds
5: additional mortgage principal
6: taxable investing (VTI and VEU)

I will switch (5) and (6) depending on valuations, for example in 2009 (5) and (6) were switched. Right now not so much.
FIRE'd. Mid-40s.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by STC »

statsnerd wrote:
STC wrote:I:

401k to max
Backdoor Roth
IBonds to max
Taxable

I am considering doing after-tax 401k to Roth conversion. But no decision on that yet. Also will have 529 within a year or two.

EEBonds should be used 20 years out (or other doubling period) from retirement to maximize effectiveness. At 33, 20 years from now those EEBonds would double at the height of my earning potential. I will start them at 35 in anticipation of retiring at 55. For me and my wife, thats $40k per year we would be able to generate. That should cover property taxes and some basic living expenses.
Thanks for the perspective, STC. I think maxing EE Bonds each year for 20 years before I know I will be retired and prior to age 59 when I can access my 401(k) makes a ton of sense.

One question. Why are you debating on after-tax 401k to Roth conversion? It's essentially the exact same as Backdoor Roth. Comparing the after-tax 401k to Roth vs Taxable, both are funded with after-tax dollars. With the Roth, anything after that point is tax-free provided you wait until 59. Taxable you are taxed on dividends and gains. The only argument I can see for taxable would be if liquidity is important, and possibly the benefits of tax loss harvesting.

I:
1) Max 401(k) (17.5k + 8.75k match)
2) Max after-tax 401(k) and convert to Roth (24.75k)
3) Backdoor Roth (5.5k, and note I only slightly prefer 2) to 3) because 2) must be done in the calendar year, 3) can be done up until tax day the following year)

and essentially my question with this post is what should 4) be? I-Bonds and Taxable all seem appealing. EE Bonds are when you know 20 years out from being retired. Additionally 529 could be very attractive.

Additionally I have an HSA that company puts in 1k, then I space out the rest of the 2.2k over my 26 pay checks so no priority in maxing that right away.
Weighing the fact that I want to retire (or be able to) at 55. So I cannot use the Roth for the first several years of retirement. Will also still have college expense for 1-2 kids at the point of retirement. So I am thinking on how I address that reality, and have not come to any conclusions at this point.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by letsgobobby »

Any kids? Have you looked into 529s, as mentioned there are a couple of good savings products within 529s.

Taxable investing is still relatively inexpensive, even if you have to pay 20% instead of 15 and even with the 3.8%. So I think the decision is really whether you want to own I bonds or TBM for your bond component. For example, if you prefer I bonds then you will buy $15k per year (I think you are single) and put more stocks in your tax-deferred accounts. If you prefer TBM you will put that in your tax-deferred accounts and put stocks in taxable. On the third hand (!) if you prefer munis, you would put those in taxable and stocks in tax-deferred. There are lots of ways to skin this cat.

If you are interested, 529s are the ultimate cop-out and that's what I do. Very high contribution limits, tax-deferred gains, estate advantages, etc.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by statsnerd »

mike_slc wrote:Do you have a mortgage? For me the order is as follows:

1: 51k to 401k and
1 (tie): 5500 to Roth
3: 15k to i-bonds
4: 10k to ee-bonds
5: additional mortgage principal
6: taxable investing (VTI and VEU)

I will switch (5) and (6) depending on valuations, for example in 2009 (5) and (6) were switched. Right now not so much.

Mortgage is certainly important to consider, but I currently rent. I've moved to 4 different cities in the past 7 years and I don't really want to take one on at the moment. I rent in a place where it's a 2 block walk to work, and median house prices in my city are easily 600k+.

I think I'll get a place when I retire, probably in Denver or Seattle (no state income tax) and have that serve as my base and travel half of the year.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by market timer »

STC wrote:Weighing the fact that I want to retire (or be able to) at 55. So I cannot use the Roth for the first several years of retirement. Will also still have college expense for 1-2 kids at the point of retirement. So I am thinking on how I address that reality, and have not come to any conclusions at this point.
Roth contributions can be withdrawn anytime, tax- and penalty-free. Your 401K can be accessed early through 72(t) SEPP distributions.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by statsnerd »

STC wrote: Weighing the fact that I want to retire (or be able to) at 55. So I cannot use the Roth for the first several years of retirement. Will also still have college expense for 1-2 kids at the point of retirement. So I am thinking on how I address that reality, and have not come to any conclusions at this point.
I don't know the precise law, but I've seen it mentioned multiple times where if you retire at 55, you can have access to your 401(k) early. Here's one article I found http://money.usnews.com/money/articles/ ... 401k-perks
Last edited by statsnerd on Fri Feb 22, 2013 4:05 pm, edited 1 time in total.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by STC »

Roth can be withdrawn penalty free? I thought there was a 10% penalty if under the age of 59? Am I misinformed?
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by statsnerd »

STC wrote:Roth can be withdrawn penalty free? I thought there was a 10% penalty if under the age of 59? Am I misinformed?
Contributions can be withdrawn penalty free, not gains though.

One way to essentially take this money from your 401(k) instead is to withdraw what you need from your Roth and convert an equal amount of money from your 401(k) to your Roth. That way you pay taxes on the 401(k) to Roth conversion, take out the Roth money tax-free, and you're left with the same amount of money in your Roth as when you began.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by Angst »

STC wrote:Roth can be withdrawn penalty free? I thought there was a 10% penalty if under the age of 59? Am I misinformed?
Contribution, not earnings. You already paid taxes on your contributions.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by STC »

Well. That solves that problem. Thanks! :)
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by crowd79 »

Keep in mind though, any money from a Traditional IRA that gets converted to a Roth IRA has a holding period of 5 years.
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Re: EE/I-Bonds vs Taxable Investing after Maxing Out 401k/IR

Post by STC »

crowd79 wrote:Keep in mind though, any money from a Traditional IRA that gets converted to a Roth IRA has a holding period of 5 years.
Great. So I have 17 years till I hit 50, an additional $34k per year into a Roth, or $1m @ 6% growth. Sweet!
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