Portfolio Advice, New Options Available

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Topic Author
CurledMoss
Posts: 44
Joined: Fri May 03, 2019 7:08 am

Portfolio Advice, New Options Available

Post by CurledMoss » Tue Jul 30, 2019 4:55 pm

Hello, fellow Bogleheads! I'm 33 years old and starting investing in stocks 3 years ago. Before that, I was investing in a self-employed business.

I'm slowly liquidating the business taking in around 135k for the next 5 years. After that, I will be taking in around 90k. I have recently started a new government job and that has opened a few doors for investing. I live very conservatively now, and don't plan on needing much in retirement (Leaving the option open to retire early).

I currently have
HSA
ROTH
Pension (Government)
Supplemental Pension (Union)
SEP Traditional IRA (Self Employed Account varies with income but last year was 28k)
457b ROTH (Government Account $19k max)

I opened the SEP in 2018 and maxed out what I could. The 457b is new as of 2 months ago, which I'm maxing out by end of the year.

My questions are:

Instead of contributing to the SEP (Traditional), should I open a solo/individual 401k (Roth option) for 2019 and start contributing to that?

I'm a big fan of Roth, but I recently read that it's a smart idea to have both (Traditional & Roth), that way I have an option of pulling from either in retirement?

If people have anything else to add I'm all ears!

Topic Author
CurledMoss
Posts: 44
Joined: Fri May 03, 2019 7:08 am

Re: Portfolio Advice, New Options Available

Post by CurledMoss » Tue Jul 30, 2019 5:06 pm

One more thing to add. It looks with an Individual 401k you can contribute 25% as the employer and $19,000 as an employee. Which could be 19k more than a SEP.

lakpr
Posts: 3965
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio Advice, New Options Available

Post by lakpr » Tue Jul 30, 2019 10:34 pm

If your business income itself if $135k, and along with the government income of some unknown amount, I guess you are in a very high tax bracket. Wild guess is 32% or more.

In such a high tax bracket, why are you contributing to a Roth 401k? You are making a conscious decision to pay at least 10% more to taxes than what is necessary.

Get yourself a Solo 401k for 2020. Since you already contributed and maxed out SEP for 2019, you cannot have an Independent 401k (aka Solo 401k) for this year. The higher limits will help you shelter more money into Solo 401k. Even there, you should be making a tax-deferred contribution of $19k.

In high tax brackets like you, you should be looking at every nook and cranny to shelter as much income into tax-deferred accounts as possible.

Edited to add: I did read that you are expecting pension in your old age, so I can see the rationale for contributing to Roth. *HOWEVER*, if you are actually in the 32% tax bracket as your $135k income implies, you should still be looking to shelter as much income into traditional tax-deferred vehicles as possible. The idea is to drop down into 24% or 22% tax bracket, and THEN make the rest of the contributions (if there is room left) to Roth.

Topic Author
CurledMoss
Posts: 44
Joined: Fri May 03, 2019 7:08 am

Re: Portfolio Advice, New Options Available

Post by CurledMoss » Wed Jul 31, 2019 12:12 pm

Sorry for not being clear. I'm able to keep my total income at around 135k each year, actually more like 120k or whatever max is before you can't contribute to ROTH. My plan is to stay in that lower income tax bracket, as you said.

I forgot to mention I have a few acres of land that will generate 25k-30k a year in retirement.

Something people don't talk about with roth is if I choose early retirement or have a hardship (injury unable to make money), there would be more stashed away for later vs a traditional. Because you paid the taxes in the early years.

The individual account looks the way to go. As you said it needs to be open the prior year so looks like it will be SEP this year. Individual/solo next year.

lakpr
Posts: 3965
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio Advice, New Options Available

Post by lakpr » Wed Jul 31, 2019 12:48 pm

CurledMoss wrote:
Wed Jul 31, 2019 12:12 pm
Something people don't talk about with roth is if I choose early retirement or have a hardship (injury unable to make money), there would be more stashed away for later vs a traditional. Because you paid the taxes in the early years.
Specifically with this point, do you know that there is something called 72(t) distributions in which you agree with the IRS that you will withdraw from IRA equal amounts per year, for at least 5 years? If something like that does befall you, that's actually the BEST time to actually withdraw more from a traditional account since you will be in the lowest tax bracket. You will have escaped taxes at 24% or more, but then would have paid taxes at 12% or so. No penalties will be due.

That $25k to $30k in retirement will cover your standard exemption ($12.2k) plus the 10% tax bracket which is another $9.5k. Presumably if you are unable to work, this income will sustain you for some time until you get back on your feet.

Even if you don't agree to the 72(t) restrictions and want to withdraw money from your traditional accounts, you will owe 10% penalty + 12% taxes = 22% marginal taxes. You will still have won choosing the traditional route than the Roth route.
CurledMoss wrote:
Wed Jul 31, 2019 12:12 pm
The individual account looks the way to go. As you said it needs to be open the prior year so looks like it will be SEP this year. Individual/solo next year.
:thumbsup

Topic Author
CurledMoss
Posts: 44
Joined: Fri May 03, 2019 7:08 am

Re: Portfolio Advice, New Options Available

Post by CurledMoss » Wed Jul 31, 2019 4:12 pm

I don't really plan on the hardship... It was just an example. For early retirement I probably wouldn't draw from retirement accounts. Just move to a more affordable country and live off the land income.

Topic Author
CurledMoss
Posts: 44
Joined: Fri May 03, 2019 7:08 am

Re: Portfolio Advice, New Options Available

Post by CurledMoss » Wed Jul 31, 2019 4:52 pm

After doing some research. It looks like roth is the way to go. In retirement the rental land will bring in say around 30k. A traditional account could still be used to hit 39k (12% bracket), then if anymore cash is needed pull from the roth. Does this make sense?

lakpr
Posts: 3965
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio Advice, New Options Available

Post by lakpr » Wed Jul 31, 2019 4:59 pm

CurledMoss wrote:
Wed Jul 31, 2019 4:52 pm
After doing some research. It looks like roth is the way to go. In retirement the rental land will bring in say around 30k. A traditional account could still be used to hit 39k (12% bracket), then if anymore cash is needed pull from the roth. Does this make sense?
Not really. How much balance do you already have in the traditional account, that you contemplate pulling $39k out of on an annual basis? Is it at least $780k, that it would last 20 such years? If you don't, build your traditional account first before contributing to Roth.

Otherwise you are back to the same equation -- you are paying 24% or more in taxes now when you could be withdrawing at 12% up to $39k, and the next few minimal dollars at 22%, with an effective rate much less than 24% you will have escaped on ALL your traditional contributions.

Topic Author
CurledMoss
Posts: 44
Joined: Fri May 03, 2019 7:08 am

Re: Portfolio Advice, New Options Available

Post by CurledMoss » Wed Jul 31, 2019 5:14 pm

lakpr wrote:
Wed Jul 31, 2019 4:59 pm
CurledMoss wrote:
Wed Jul 31, 2019 4:52 pm
After doing some research. It looks like roth is the way to go. In retirement the rental land will bring in say around 30k. A traditional account could still be used to hit 39k (12% bracket), then if anymore cash is needed pull from the roth. Does this make sense?
Not really. How much balance do you already have in the traditional account, that you contemplate pulling $39k out of on an annual basis? Is it at least $780k, that it would last 20 such years? If you don't, build your traditional account first before contributing to Roth.

Otherwise you are back to the same equation -- you are paying 24% or more in taxes now when you could be withdrawing at 12% up to $39k, and the next few minimal dollars at 22%, with an effective rate much less than 24% you will have escaped on ALL your traditional contributions.
In the previous post I mentioned I can pull 30k a year off land without touching accounts retirement accounts. Add 9k at 12% from the traditional account. Anything over pull from the roth which would be taxed at 22%. So yeah if I'm paying 24% I'm going backwards if taxes stay exactly the same.

I'm only 33, I don't have enough to retire. I'm just thinking in the future, say 55 or something.

ExitStageLeft
Posts: 1829
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio Advice, New Options Available

Post by ExitStageLeft » Wed Jul 31, 2019 5:19 pm

CurledMoss wrote:
Wed Jul 31, 2019 4:52 pm
After doing some research. It looks like roth is the way to go. In retirement the rental land will bring in say around 30k. A traditional account could still be used to hit 39k (12% bracket), then if anymore cash is needed pull from the roth. Does this make sense?
It doesn't make sense if you're paying 22% federal tax today. What makes sense is saving today in a mix of tax-deferred and Roth accounts. It will probably take some time to figure out your optimal strategy, but your best bet for now is likely to be saving as much as possible in a 401k tax-deferred and maxing out a Roth IRA.

Get yourself set up with that and then run some calculations in a spreadsheet to figure out how much of the 401k should be tax-deferred versus Roth. You have lots of time to figure this out.

lakpr
Posts: 3965
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio Advice, New Options Available

Post by lakpr » Wed Jul 31, 2019 5:22 pm

CurledMoss wrote:
Wed Jul 31, 2019 5:14 pm
lakpr wrote:
Wed Jul 31, 2019 4:59 pm
CurledMoss wrote:
Wed Jul 31, 2019 4:52 pm
After doing some research. It looks like roth is the way to go. In retirement the rental land will bring in say around 30k. A traditional account could still be used to hit 39k (12% bracket), then if anymore cash is needed pull from the roth. Does this make sense?
Not really. How much balance do you already have in the traditional account, that you contemplate pulling $39k out of on an annual basis? Is it at least $780k, that it would last 20 such years? If you don't, build your traditional account first before contributing to Roth.

Otherwise you are back to the same equation -- you are paying 24% or more in taxes now when you could be withdrawing at 12% up to $39k, and the next few minimal dollars at 22%, with an effective rate much less than 24% you will have escaped on ALL your traditional contributions.
In the previous post I mentioned I can pull 30k a year off land without touching accounts retirement accounts. Add 9k at 12% from the traditional account. Anything over pull from the roth which would be taxed at 22%. So yeah if I'm paying 24% I'm going backwards if taxes stay exactly the same.

I'm only 33, I don't have enough to retire. I'm just thinking in the future, say 55 or something.
The bold-underlined part is not true. When you pull out from Roth, assuming you are still under the age of 59.5 at that time, part of the withdrawal is return of contributions, and non-taxable. The remaining portion is earnings, are taxable, and also attract the penalty, so 10% + 22% = 32%. So you are not really gaining an advantage over traditional by going Roth way. What is the proportional fraction of contributions and earnings, only the custodian can do their complex calculations and tell you, I can't.

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