72t Withdrawals for Young-Retiree

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
OriolesFan89
Posts: 49
Joined: Tue Jul 15, 2014 7:28 am

72t Withdrawals for Young-Retiree

Post by OriolesFan89 » Mon Sep 26, 2016 2:01 pm

I'm curious if any young retirees have taken 72t withdrawals at a significantly younger age than 50? Is that a recommended strategy for someone in their 40's with half of their portfolio in tax-sheltered and tax-free accounts? It's my understanding that doing so locks you into a ~1.8% or so withdrawal rate from that account until you're 59.5 years old... very far off for me!

Summary of my retirement assets ($460k) at 27 years old:

Roth IRA at Vanguard - 16%
Taxable investments at Vanguard - 63%
Roth 401k at Schwab - 16%
Traditional 401k at Schwab - 5%

The Wizard
Posts: 12351
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: 72t Withdrawals for Young-Retiree

Post by The Wizard » Mon Sep 26, 2016 2:06 pm

Might be better to live off your taxable account for a decade+ and use low tax brackets to do Roth conversions...
Attempted new signature...

jjface
Posts: 2570
Joined: Thu Mar 19, 2015 6:18 pm

Re: 72t Withdrawals for Young-Retiree

Post by jjface » Mon Sep 26, 2016 2:07 pm

No need - you will have plenty in taxable

KlangFool
Posts: 10412
Joined: Sat Oct 11, 2008 12:35 pm

Re: 72t Withdrawals for Young-Retiree

Post by KlangFool » Mon Sep 26, 2016 2:09 pm

https://www.bogleheads.org/wiki/Roth_IRA_conversion

OP,

Wiki on Roth conversion.

KlangFool

OriolesFan89
Posts: 49
Joined: Tue Jul 15, 2014 7:28 am

Re: 72t Withdrawals for Young-Retiree

Post by OriolesFan89 » Mon Sep 26, 2016 2:17 pm

KlangFool and Wizard - I've heard of these but doesn't that not make sense for me as I already have almost all of my tax-sheltered money already in Roth accounts? Are you suggesting that I do traditional 401k and traditional IRA contributions now and "convert" to Roth later when I'm in a lower tax bracket?

KlangFool
Posts: 10412
Joined: Sat Oct 11, 2008 12:35 pm

Re: 72t Withdrawals for Young-Retiree

Post by KlangFool » Mon Sep 26, 2016 2:28 pm

OriolesFan89 wrote:KlangFool and Wizard - I've heard of these but doesn't that not make sense for me as I already have almost all of my tax-sheltered money already in Roth accounts? Are you suggesting that I do traditional 401k and traditional IRA contributions now and "convert" to Roth later when I'm in a lower tax bracket?
OriolesFan89,

Yes, if you retire early, you can do Roth Conversion and pay 0% in tax for many years. Why would you pay tax if you do not have to?

KlangFool

User avatar
rob
Posts: 2985
Joined: Mon Feb 19, 2007 6:49 pm
Location: Here

Re: 72t Withdrawals for Young-Retiree

Post by rob » Mon Sep 26, 2016 2:28 pm

Sorry I don't have an answer but another part of this ----- I'm stuck on the fact that taxable accounts get a step up for inheritance....

I'm starting to think taxable [Highest cost basis] for the first part (with Roth conversions as it makes sense) then switch to 72t prior to depleting the taxable then Roth/Trad then RMD's then back to taxable at the end..... assuming that most of anything left would be taxable and get a step-up.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

MI_bogle
Posts: 349
Joined: Mon Aug 01, 2016 3:56 pm

Re: 72t Withdrawals for Young-Retiree

Post by MI_bogle » Mon Sep 26, 2016 2:32 pm

A lot of this would depend on your current marginal rate, and how much you are looking to spend once you retire...

but if it were me, with that large of a taxable account at age 27, I would absolutely contribute Traditional rather than Roth, and once retired, would convert to Roth while living off the taxable account

Tal-
Posts: 359
Joined: Fri Apr 22, 2016 10:41 pm

Re: 72t Withdrawals for Young-Retiree

Post by Tal- » Mon Sep 26, 2016 3:00 pm

Tal has a few thoughts...

I've heard that a 72(t) withdrawal can be difficult to manage, and if the incorrect amount is taken, or paperwork doesn't line up exactly, all hell breaks loose. Still, philosophically, it can be a viable resource.

While you need to take a 72t on the full account amount, there's no reason that you can split a single, large, IRA into multiple smaller IRAs and then do a 72t on one/some of those.

I say this because managing taxes is really the name of the game. If you can keep your income from tax-advantaged accounts low enough, you can avoid significant income tax, and keep your cap gains tax low. So, taking from multiple buckets may be an option.

With all of that said, I want to highlight two things. First, 72t and tax planning gets complicated, nuanced, and dynamic, and I'm not an expert. And second, I'm not sure that I would advocate someone aged 27 with $500K in assets to retire. I may be missing something, but those numbers simply don't line up.
Debt is to personal finance as a knife is to cooking.

The Wizard
Posts: 12351
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: 72t Withdrawals for Young-Retiree

Post by The Wizard » Mon Sep 26, 2016 3:29 pm

We don't yet know whether the OP's pleasant financial situation is due mainly to high earned income, or mainly to inheritance.
Projected portfolio mix in coming years will vary depending on which of the above...
Attempted new signature...

EnterprisingDude
Posts: 19
Joined: Tue Aug 23, 2016 9:39 pm

Re: 72t Withdrawals for Young-Retiree

Post by EnterprisingDude » Mon Sep 26, 2016 3:35 pm

MI_bogle wrote:A lot of this would depend on your current marginal rate, and how much you are looking to spend once you retire...

but if it were me, with that large of a taxable account at age 27, I would absolutely contribute Traditional rather than Roth, and once retired, would convert to Roth while living off the taxable account
Can you please clarify a bit more on this? Tough to guesstimate on future tax laws but how would you go about planning Roth vs. Trad contributions assuming one's income will not decrease at retirement age? I am in the same age bracket as the OP and have my wife and I putting all IRA money "back-doored" into Roth's at the moment. If one assumes they will always be in a higher tax bracket Roth's are always preferred correct? Especially if trad contributions are non-deductible....?

Thanks,
EnterprisingDude

OriolesFan89
Posts: 49
Joined: Tue Jul 15, 2014 7:28 am

Re: 72t Withdrawals for Young-Retiree

Post by OriolesFan89 » Mon Sep 26, 2016 4:00 pm

To clear things up a bit, I am currently maxing out my company 401k (67% to traditional and 33% to Roth - This wasn't always the case. I used to be 100% Roth.) and my Roth IRA. It seems like switching to 100% traditional 401k contributions right now would be wise. Most of the taxable investment money has been gifted to me by family over the last decade and I then invest it immediately on my own. I don't make a super high income now. My dad taught me well and it's been an incredibly easy ride since March of 2009 when I first bought 5 shares of apple on my own... got lucky on that one!

I'm in the high-end of the 25% bracket now and I'm not God so I don't know my spending in 20 years. I imagine I'll have kids... yikes! And I'm likely getting married within a couple of years so will have that whole new batch of tax/investment things to weigh. But really, my expenses will be higher in 20 years. I enjoy traveling and hate being cheap!

rob - The 72t distributions alone would never be enough to live off of in my situation. I figured that the 72t option would be a good way to to have some taxable income to fill out the 15% bracket if/when I'm not working anymore.

Tal - You're definitely right that figuring out taxes is the name of the game at that point. For now, I'm just working on enjoying life, accumulating, and trying to set my different investments up the best I can when/if I want to retire in 20 years. I'm certainly not retiring now! $2-$5M sounds like a better number to me to retire on.

It sounds like the consensus is:
- Skip the 72t plans
- Contribute to traditional 401k now
- Back-door Roth conversions to fill out the lower (15%?) tax bracket after retiring

This is all assuming our country's tax setup is about the same as it is now... obviously this could all change in 20 years.

ryman554
Posts: 1107
Joined: Sun Jan 12, 2014 9:44 pm

Re: 72t Withdrawals for Young-Retiree

Post by ryman554 » Mon Sep 26, 2016 4:04 pm

EnterprisingDude wrote:
MI_bogle wrote:A lot of this would depend on your current marginal rate, and how much you are looking to spend once you retire...

but if it were me, with that large of a taxable account at age 27, I would absolutely contribute Traditional rather than Roth, and once retired, would convert to Roth while living off the taxable account
Can you please clarify a bit more on this? Tough to guesstimate on future tax laws but how would you go about planning Roth vs. Trad contributions assuming one's income will not decrease at retirement age? I am in the same age bracket as the OP and have my wife and I putting all IRA money "back-doored" into Roth's at the moment. If one assumes they will always be in a higher tax bracket Roth's are always preferred correct? Especially if trad contributions are non-deductible....?

Thanks,
EnterprisingDude
Roth ALWAYS beats non-deductible tIRA. Why would you want your earnings taxed, ever?
Roth USUALLY beats taxable -- but I can't think of a place when it would not.
Only exception is if you have a large tIRA pre-tax amount, in which case taxable beats IRA if non-deductible.

New money into Roth vs deductible tIRA is the place where you have to balance income now vs. retirement. Just recall that tIRA deducts from the top today, and (typically) adds near the bottom tomorrow.

One place where it is beneficial to have a large tIRA balance is for years of high medical expenses where you can itemize. And the need for ACA plans to have some kind of income for subsidies. I have not looked into this in any detail, but if you are retiring early, is a concern.

KlangFool
Posts: 10412
Joined: Sat Oct 11, 2008 12:35 pm

Re: 72t Withdrawals for Young-Retiree

Post by KlangFool » Mon Sep 26, 2016 4:37 pm

EnterprisingDude wrote:how would you go about planning Roth vs. Trad contributions assuming one's income will not decrease at retirement age? I am in the same age bracket as the OP and have my wife and I putting all IRA money "back-doored" into Roth's at the moment. If one assumes they will always be in a higher tax bracket Roth's are always preferred correct? Especially if trad contributions are non-deductible....?

Thanks,
EnterprisingDude
EnterprisingDude,

<< assuming one's income will not decrease at retirement age? >>

This assumption is wrong for 90+% of people. How could this be true for you? Start your own thread and we can prove this to you.

KlangFool

MI_bogle
Posts: 349
Joined: Mon Aug 01, 2016 3:56 pm

Re: 72t Withdrawals for Young-Retiree

Post by MI_bogle » Mon Sep 26, 2016 4:39 pm

OriolesFan89 wrote:To clear things up a bit, I am currently maxing out my company 401k (67% to traditional and 33% to Roth - This wasn't always the case. I used to be 100% Roth.) and my Roth IRA. It seems like switching to 100% traditional 401k contributions right now would be wise. Most of the taxable investment money has been gifted to me by family over the last decade and I then invest it immediately on my own. I don't make a super high income now. My dad taught me well and it's been an incredibly easy ride since March of 2009 when I first bought 5 shares of apple on my own... got lucky on that one!

I'm in the high-end of the 25% bracket now and I'm not God so I don't know my spending in 20 years. I imagine I'll have kids... yikes! And I'm likely getting married within a couple of years so will have that whole new batch of tax/investment things to weigh. But really, my expenses will be higher in 20 years. I enjoy traveling and hate being cheap!

rob - The 72t distributions alone would never be enough to live off of in my situation. I figured that the 72t option would be a good way to to have some taxable income to fill out the 15% bracket if/when I'm not working anymore.

Tal - You're definitely right that figuring out taxes is the name of the game at that point. For now, I'm just working on enjoying life, accumulating, and trying to set my different investments up the best I can when/if I want to retire in 20 years. I'm certainly not retiring now! $2-$5M sounds like a better number to me to retire on.

It sounds like the consensus is:
- Skip the 72t plans
- Contribute to traditional 401k now
- Back-door Roth conversions to fill out the lower (15%?) tax bracket after retiring

This is all assuming our country's tax setup is about the same as it is now... obviously this could all change in 20 years.

You've hit upon the real issue - you don't know your spending needs far into the future, or what the tax code will look like. Without knowledge of future tax bracket, all one can do is make a somewhat-educated guess. Thankfully, you are maxing out your 401k and already have a sizeable taxable account, so you will be well-prepared.

If you just do the following, you will be in a great position, even if your tax bracket is different in the future due to spending desire or changes in tax rates:


1) Max 401k (traditional)
2) Max Roth IRA
3) Leftover to taxable

cherijoh
Posts: 4960
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: 72t Withdrawals for Young-Retiree

Post by cherijoh » Mon Sep 26, 2016 4:54 pm

OriolesFan89 wrote:To clear things up a bit, I am currently maxing out my company 401k (67% to traditional and 33% to Roth - This wasn't always the case. I used to be 100% Roth.) and my Roth IRA. It seems like switching to 100% traditional 401k contributions right now would be wise. Most of the taxable investment money has been gifted to me by family over the last decade and I then invest it immediately on my own. I don't make a super high income now. My dad taught me well and it's been an incredibly easy ride since March of 2009 when I first bought 5 shares of apple on my own... got lucky on that one!

I'm in the high-end of the 25% bracket now and I'm not God so I don't know my spending in 20 years. I imagine I'll have kids... yikes! And I'm likely getting married within a couple of years so will have that whole new batch of tax/investment things to weigh. But really, my expenses will be higher in 20 years. I enjoy traveling and hate being cheap!

rob - The 72t distributions alone would never be enough to live off of in my situation. I figured that the 72t option would be a good way to to have some taxable income to fill out the 15% bracket if/when I'm not working anymore.

Tal - You're definitely right that figuring out taxes is the name of the game at that point. For now, I'm just working on enjoying life, accumulating, and trying to set my different investments up the best I can when/if I want to retire in 20 years. I'm certainly not retiring now! $2-$5M sounds like a better number to me to retire on.

It sounds like the consensus is:
- Skip the 72t plans
- Contribute to traditional 401k now
- Back-door Roth conversions to fill out the lower (15%?) tax bracket after retiring

This is all assuming our country's tax setup is about the same as it is now... obviously this could all change in 20 years.
I think you have your terminology mixed up. A Backdoor Roth is a combination of a an after-tax contribution to an IRA followed up with a Roth conversion. After you retire, you will no longer be eligible to contribute to your IRA. However, anything that is already in your IRA (or other tax-advantaged traditional plan like a 401k) is eligible for a Roth conversion. So Back-door Roth is when you are working and you earn to much to make a direct Roth contribution. Roth conversions can happen anytime but makes the most sense when you are in a lower marginal tax-bracket.

EnterprisingDude
Posts: 19
Joined: Tue Aug 23, 2016 9:39 pm

Re: 72t Withdrawals for Young-Retiree

Post by EnterprisingDude » Tue Sep 27, 2016 9:52 am

KlangFool wrote:
EnterprisingDude wrote:how would you go about planning Roth vs. Trad contributions assuming one's income will not decrease at retirement age? I am in the same age bracket as the OP and have my wife and I putting all IRA money "back-doored" into Roth's at the moment. If one assumes they will always be in a higher tax bracket Roth's are always preferred correct? Especially if trad contributions are non-deductible....?

Thanks,
EnterprisingDude
EnterprisingDude,

<< assuming one's income will not decrease at retirement age? >>

This assumption is wrong for 90+% of people. How could this be true for you? Start your own thread and we can prove this to you.

KlangFool

Klangfool,
The assumption for continued income stems from my equity position in a family business. I am shooting for FI around 40 and hope to be able to use yearly family business income to cover expenses without touching taxable accounts besides for big purchase items.

Thanks,
EnterprisingDude

OriolesFan89
Posts: 49
Joined: Tue Jul 15, 2014 7:28 am

Re: 72t Withdrawals for Young-Retiree

Post by OriolesFan89 » Tue Sep 27, 2016 10:06 am

cherijoh - Thanks for clearing that up. You're right - I was confused.

MI_Bogle - You would do 100% of 401k contributions to traditional rather than Roth? I know it's a guessing game but it seems like having an even mix of both would be good. I realize I'm not even close to there right now with way more in Roth. FWIW I have a 2% employer match that goes to the traditional portion.

KlangFool
Posts: 10412
Joined: Sat Oct 11, 2008 12:35 pm

Re: 72t Withdrawals for Young-Retiree

Post by KlangFool » Tue Sep 27, 2016 11:04 am

EnterprisingDude wrote:
KlangFool wrote:
EnterprisingDude wrote:how would you go about planning Roth vs. Trad contributions assuming one's income will not decrease at retirement age? I am in the same age bracket as the OP and have my wife and I putting all IRA money "back-doored" into Roth's at the moment. If one assumes they will always be in a higher tax bracket Roth's are always preferred correct? Especially if trad contributions are non-deductible....?

Thanks,
EnterprisingDude
EnterprisingDude,

<< assuming one's income will not decrease at retirement age? >>

This assumption is wrong for 90+% of people. How could this be true for you? Start your own thread and we can prove this to you.

KlangFool

Klangfool,
The assumption for continued income stems from my equity position in a family business. I am shooting for FI around 40 and hope to be able to use yearly family business income to cover expenses without touching taxable accounts besides for big purchase items.

Thanks,
EnterprisingDude
EnterprisingDude,

Think carefully. How could your assumption be correct?

1) Current

A) Income pays for annual expense plus contribution to retirement saving

2) At retirement

B) Income pays for annual expense only

How could (B) be the same as (A)? (A) has to be larger than (B).

KlangFool

MI_bogle
Posts: 349
Joined: Mon Aug 01, 2016 3:56 pm

Re: 72t Withdrawals for Young-Retiree

Post by MI_bogle » Tue Sep 27, 2016 11:20 am

KlangFool wrote:
EnterprisingDude wrote:
KlangFool wrote:
EnterprisingDude wrote:how would you go about planning Roth vs. Trad contributions assuming one's income will not decrease at retirement age? I am in the same age bracket as the OP and have my wife and I putting all IRA money "back-doored" into Roth's at the moment. If one assumes they will always be in a higher tax bracket Roth's are always preferred correct? Especially if trad contributions are non-deductible....?

Thanks,
EnterprisingDude
EnterprisingDude,

<< assuming one's income will not decrease at retirement age? >>

This assumption is wrong for 90+% of people. How could this be true for you? Start your own thread and we can prove this to you.

KlangFool

Klangfool,
The assumption for continued income stems from my equity position in a family business. I am shooting for FI around 40 and hope to be able to use yearly family business income to cover expenses without touching taxable accounts besides for big purchase items.

Thanks,
EnterprisingDude
EnterprisingDude,

Think carefully. How could your assumption be correct?

1) Current

A) Income pays for annual expense plus contribution to retirement saving

2) At retirement

B) Income pays for annual expense only

How could (B) be the same as (A)? (A) has to be larger than (B).

KlangFool
Well first of all, I agree that for *most* people that are saving heavily to set themselves up for early retirement, their retirement income is going to be less than their working income. Which is why I suggested contributing ALL of the 401k as traditional, rather than any portion of it as Roth.

But let's not oversimplify things - there are a number of scenarios in which someone could find themselves in a higher tax bracket at retirement than during working years. Some are more likely than others.

1) social security and/or pension combined with RMDs could push tax bracket higher
2) changes in the tax code
3) much higher expense requirements than anticipated, due to large life changes such as declining health, lifestyle inflation, or other changes in circumstance


It is the very reason that we don't know our future tax bracket relative to our current that there are so many posts on Roth vs Traditional. To oversimplify so much is a disservice imo, even though I personally favor Traditional over Roth in terms of 401k

EnterprisingDude
Posts: 19
Joined: Tue Aug 23, 2016 9:39 pm

Re: 72t Withdrawals for Young-Retiree

Post by EnterprisingDude » Tue Sep 27, 2016 11:32 am

KlangFool wrote:
EnterprisingDude wrote:
KlangFool wrote:
EnterprisingDude wrote:how would you go about planning Roth vs. Trad contributions assuming one's income will not decrease at retirement age? I am in the same age bracket as the OP and have my wife and I putting all IRA money "back-doored" into Roth's at the moment. If one assumes they will always be in a higher tax bracket Roth's are always preferred correct? Especially if trad contributions are non-deductible....?

Thanks,
EnterprisingDude
EnterprisingDude,

<< assuming one's income will not decrease at retirement age? >>

This assumption is wrong for 90+% of people. How could this be true for you? Start your own thread and we can prove this to you.

KlangFool

Klangfool,
The assumption for continued income stems from my equity position in a family business. I am shooting for FI around 40 and hope to be able to use yearly family business income to cover expenses without touching taxable accounts besides for big purchase items.

Thanks,
EnterprisingDude
EnterprisingDude,

Think carefully. How could your assumption be correct?

1) Current

A) Income pays for annual expense plus contribution to retirement saving

2) At retirement

B) Income pays for annual expense only

How could (B) be the same as (A)? (A) has to be larger than (B).

KlangFool

KlangFool,
A will definitely be bigger but potentially not by much. Wife and I are currently saving around the 506-0% mark. Depending on how my business equity position pans out over the next few decades it could be very likely that my income from that source heavily outweighs my current salaried job. If that does happen, my MAGI would never be low enough to take advantage of lower tack brackets/benefits. I did not mean to get off topic from the original post but I just wanted to clarify that sole Roth contributions would be the right choice assuming my above situation.

Thanks,
EnterprisingDude

KlangFool
Posts: 10412
Joined: Sat Oct 11, 2008 12:35 pm

Re: 72t Withdrawals for Young-Retiree

Post by KlangFool » Tue Sep 27, 2016 11:41 am

EnterprisingDude wrote:
KlangFool,
A will definitely be bigger but potentially not by much. Wife and I are currently saving around the 506-0% mark. Depending on how my business equity position pans out over the next few decades it could be very likely that my income from that source heavily outweighs my current salaried job. If that does happen, my MAGI would never be low enough to take advantage of lower tack brackets/benefits. I did not mean to get off topic from the original post but I just wanted to clarify that sole Roth contributions would be the right choice assuming my above situation.

Thanks,
EnterprisingDude
EnterprisingDude,

<< Depending on how my business equity position pans out over the next few decades it could be very likely that my income from that source heavily outweighs my current salaried job. >>

What if it does not work out?

The impact of your decision is asymmetric.

A) If you put money into Trad. 401K, in the worst case, you pay the same amount of tax as it is now.

B) If you pay more tax now by putting money into Roth 401K and something bad happened over the few decades, you cannot get the money back from IRS. And, you need the money but you do not have it.

In (A), there is no adverse result to your decision regardless of outcomes.

In (B), if things went well, you do not save much tax. If things went bad, you will be in deep trouble.

Why would you choose (A) if the tax bracket does not change between now and retirement?

KlangFool

EnterprisingDude
Posts: 19
Joined: Tue Aug 23, 2016 9:39 pm

Re: 72t Withdrawals for Young-Retiree

Post by EnterprisingDude » Tue Sep 27, 2016 12:15 pm

KlangFool wrote:
EnterprisingDude wrote:
KlangFool,
A will definitely be bigger but potentially not by much. Wife and I are currently saving around the 506-0% mark. Depending on how my business equity position pans out over the next few decades it could be very likely that my income from that source heavily outweighs my current salaried job. If that does happen, my MAGI would never be low enough to take advantage of lower tack brackets/benefits. I did not mean to get off topic from the original post but I just wanted to clarify that sole Roth contributions would be the right choice assuming my above situation.

Thanks,
EnterprisingDude
EnterprisingDude,

<< Depending on how my business equity position pans out over the next few decades it could be very likely that my income from that source heavily outweighs my current salaried job. >>

What if it does not work out?

The impact of your decision is asymmetric.

A) If you put money into Trad. 401K, in the worst case, you pay the same amount of tax as it is now.

B) If you pay more tax now by putting money into Roth 401K and something bad happened over the few decades, you cannot get the money back from IRS. And, you need the money but you do not have it.

In (A), there is no adverse result to your decision regardless of outcomes.

In (B), if things went well, you do not save much tax. If things went bad, you will be in deep trouble.

Why would you choose (A) if the tax bracket does not change between now and retirement?

KlangFool
You definitely make some valid points however I was referring specifically to IRA's. At current and projected income levels we will only have access to non-deductible TIRA's which I plan on backdooring into our Roths. As a previous poster mentioned it seems like non-deductible T-IRA's aren't too beneficial besides for a vehicle to get monies into a Roth. I do use a TRAD-401k because that is my only option at work!

Thanks,
EnterprisingDude

User avatar
Bogle_Feet
Posts: 826
Joined: Tue Jan 14, 2014 6:56 pm

Re: 72t Withdrawals for Young-Retiree

Post by Bogle_Feet » Tue Sep 27, 2016 6:47 pm

I'm curious if any young retirees have taken 72t withdrawals at a significantly younger age than 50? Is that a recommended strategy for someone in their 40's
When you understand that retirement account gains will eventually be taxed at the HIGHER ordinary income rate, then you understand that you want to get that money OUT sooner than later and into a taxable account that is being taxed at the normal capital gains tax rate. So I think it's a great idea to get a head start out.
Image

User avatar
nedsaid
Posts: 10500
Joined: Fri Nov 23, 2012 12:33 pm

Re: 72t Withdrawals for Young-Retiree

Post by nedsaid » Wed Sep 28, 2016 1:47 am

When you understand that retirement account gains will eventually be taxed at the HIGHER ordinary income rate, then you understand that you want to get that money OUT sooner than later and into a taxable account that is being taxed at the normal capital gains tax rate. So I think it's a great idea to get a head start out.
Flawed advice. Workplace savings plans represent deferred wages, you get a reduction in taxable wage income when you contribute. Wages are taxed as ordinary income. Money taken out of such plans are ordinary income also. IRAs work the same way to the extent that they contain rollovers from workplace savings plans and to the extent that direct contributions were tax deductible.

Getting money out of such plans early triggers tax at ordinary income tax rates just the same as if you took withdrawals later on. Your strategy may not save taxes, if the idea is to take money out as fast as you can, the additional taxes up front are likely to be more than whatever savings you might get at capital gains rates later on. Taking larger than needed withdrawals from an IRA might also put you in a higher tax bracket adding insult to injury.

Such advice also assumes knowledge of future tax rates which is unknown. No matter what you do, monies taken out from Traditional IRAs will be taxed as ordinary income. Any after tax contributions made to an IRA come out tax free but come out as a ratio of after tax contributions to the prior calendar year's year end account balance. Consult IRS Tax Form 8606.

Don't pay attention to the flawed "tax trap" narrative and scare tactics that some folks use regarding Traditional IRAs and workplace savings plans. You have to really think through tax strategies and not just take flip advice.
A fool and his money are good for business.

Post Reply