Planning early retirement - Sanity check IRA strategy?

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Callisto
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Planning early retirement - Sanity check IRA strategy?

Post by Callisto »

Current situation: 70% taxable brokerage, 25% Roth IRA, 5% tIRA / 401k.

In the past, I've put everything into Roth type accounts even though at current I'm in a high tax rate and anticipate a 60+ year "retirement" horizon because I was worried about rising tax rates, and felt it was better to err on the side of overestimating my retirement tax rate, rather than risk underestimating it. However, at this point I have enough in my Roth IRA that don't think I ever want to contribute to it, so I need a new IRA strategy.

At this point, I see two options. Forget about IRAs entirely, or contribute to a tIRA despite no tax deductions.

The reason why I'm considering tIRA is because I anticipate a long retirement, so if tax rules do not change significantly, I may be able to convert funds into Roth at a much more favorable tax rate than today. As life situation changes over time, I will probably need to rebalance my AA, so having room to shift my AA without immediately paying taxes will be advantageous. The downside is of course RMDs, but because of my situation, I anticipate my tIRA to be relatively small compared to my total assets. The way I see it, if RMDs are so high that they become a problem, that would imply that my total NW has ballooned to such an amount that I've completely won the game.

Alternatively, I could just not worry about it, since end of the day, its 6k anyways. And frankly, I think I mindgamed myself into being so enticed by Roth accounts that I ended up putting in way too much money at a high tax rate. I would have probably been better off just not doing anything, rather than taking "advantage" of things like backdoor Roth conversions. So I want to make sure that my new strategy isn't just unnecessary complexity.
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BolderBoy
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Re: Planning early retirement - Sanity check IRA strategy?

Post by BolderBoy »

Callisto wrote: Wed Jun 09, 2021 9:45 am In the past, I've put everything into Roth type accounts even though at current I'm in a high tax rate and anticipate a 60+ year "retirement" horizon...

At this point, I see two options. Forget about IRAs entirely, or contribute to a tIRA despite no tax deductions.
I'm not sure what you are trying to do but I have two question:

1) are you planning to retire in your 30s?
2) have you considered doing Backdoor Roth contributions while you still can?
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
wetgear
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Re: Planning early retirement - Sanity check IRA strategy?

Post by wetgear »

I don't think there is any such thing as too much money in a Roth IRA. It may not be optimal to contribute to it over a tIRA but that is more a question of current tax rate vs potential future tax rate in retirement than it is about having too much in there already.

It's a little unclear what you are asking and you haven't provided enough information to answer many questions but if you post in this format you will get better advice: viewtopic.php?f=1&t=6212
KlangFool
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Re: Planning early retirement - Sanity check IRA strategy?

Post by KlangFool »

Callisto wrote: Wed Jun 09, 2021 9:45 am Current situation: 70% taxable brokerage, 25% Roth IRA, 5% tIRA / 401k.

In the past, I've put everything into Roth type accounts even though at current I'm in a high tax rate and anticipate a 60+ year "retirement" horizon because I was worried about rising tax rates, and felt it was better to err on the side of overestimating my retirement tax rate, rather than risk underestimating it. However, at this point I have enough in my Roth IRA that don't think I ever want to contribute to it, so I need a new IRA strategy.
Callisto,

I failed to see how this could be a good idea. For a single person, the standard deduction is around 12K. To generate 12K in retirement income, you need 25 X 12K = 300K in your tax-deferred account. So, in order for you to pay any taxes, you need 300K in your tax-deferred account. And, the standard deduction number is adjusted upward annually by inflation.

<< I'm in a high tax rate >>

Can't you contribute to the 401K? If you are on 1099, can't you crease your own solo 401K?

In summary, we need to know a lot more about your situation.

KlangFool
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cas
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Re: Planning early retirement - Sanity check IRA strategy?

Post by cas »

KlangFool wrote: Wed Jun 09, 2021 10:04 am So, in order for you to pay any taxes, you need 300K in your tax-deferred account.
OP is hinting at a whopping big taxable account. No way for us to know given the current information, but he may well be dealing with the "bump zones" or "shadow brackets" that arise when large amounts of qualified dividends/long-term-capital gains interact with ordinary income.

No way for us to know given the current information, but his nominal 0% bracket (federal) for ordinary income (from the standard/itemized deduction) may have been transformed into a marginal rate of:
0% or
15% or
18.8% or
23.8%

Or even 32.5% if Alternative Minimum Tax is involved and AMT exemption is still phasing out. (High QD/LTCG combined with low ordinary income is one way to trigger AMT.)

On the other hand, if OP really does have a whopping big taxable account, I'm not sure that the low tax rates for Roth conversion that he is hoping for really exist to the degree that he hopes they do.
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Callisto
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Re: Planning early retirement - Sanity check IRA strategy?

Post by Callisto »

Thanks all. To give some more context

I'm currently maxing tax advantaged space that I am eligible for. But I have a very high savings rate due to living modestly, and as my income has increased, the amount I can put into tax advantaged accounts have mostly stayed the same, meaning I'm throwing the majority of my earnings into a standard taxable account. That is why, unlike many young(er) people, the vast majority of my assets sits outside of retirement accounts.

I plan to retire in my early 30s. That means I have to live off of my taxable assets for a long while. I chose to contribute to Roth in the past as I was concerned that within the next 40 years, tax rates, especially as they relate to capital gains, may increase substantially, even though by today's standards, it was probably not a good idea and so I will not be continuing that strategy.

So to expand upon my question. I am unsure if I should bother contributing to a tIRA giving me the benefit of tax free rebalancing and maybe cheap Roth conversion, at the cost of RMDs. Or if I should just not bother and throw it all into standard taxable account.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by KlangFool »

Callisto wrote: Wed Jun 09, 2021 12:44 pm
I plan to retire in my early 30s. That means I have to live off of my taxable assets for a long while.
Callisto,

That statement is false. If you choose to early retire in the 30s, more money in the tax-deferred space is useful due to Roth conversion.

Please check out the following URL.

https://www.madfientist.com/how-to-acce ... nds-early/

<<So to expand upon my question. I am unsure if I should bother contributing to a tIRA giving me the benefit of tax free rebalancing and maybe cheap Roth conversion, at the cost of RMDs. Or if I should just not bother and throw it all into standard taxable account.>>

You have 40+ years of Roth conversion. So, why do you need to worry about RMD?

KlangFool
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Re: Planning early retirement - Sanity check IRA strategy?

Post by TinyElvis »

KlangFool wrote: Wed Jun 09, 2021 10:04 am For a single person, the standard deduction is around 12K. To generate 12K in retirement income, you need 25 X 12K = 300K in your tax-deferred account. So, in order for you to pay any taxes, you need 300K in your tax-deferred account. And, the standard deduction number is adjusted upward annually by inflation.
Can you help me to understand the correlation?
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KlangFool
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Re: Planning early retirement - Sanity check IRA strategy?

Post by KlangFool »

TinyElvis wrote: Wed Jun 09, 2021 12:57 pm
KlangFool wrote: Wed Jun 09, 2021 10:04 am For a single person, the standard deduction is around 12K. To generate 12K in retirement income, you need 25 X 12K = 300K in your tax-deferred account. So, in order for you to pay any taxes, you need 300K in your tax-deferred account. And, the standard deduction number is adjusted upward annually by inflation.
Can you help me to understand the correlation?
TinyElvis,

If you have 300K in your tax-deferred account and you withdraw 4% every year, you only generate 4% of 300K = 12K of taxable income. With 12K of standard deduction, you pay 0%.

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Re: Planning early retirement - Sanity check IRA strategy?

Post by Katietsu »

It is unlikely, though not impossible, that the answer is to forget about tax deferred space or to make a non deductible traditional IRA contribution. I do not think you said what your income is now, what you are currently contributing to and what retirement accounts are available. I assume you have a 401k, otherwise your traditional IRA contribution would be deductible. If so, I would consider making the 401k contributions as traditional and continuing the Roth IRA contributions. But without more details about your options, it is hard to give more specific suggestions.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by wetgear »

Callisto wrote: Wed Jun 09, 2021 12:44 pm So to expand upon my question. I am unsure if I should bother contributing to a tIRA giving me the benefit of tax free rebalancing and maybe cheap Roth conversion, at the cost of RMDs. Or if I should just not bother and throw it all into standard taxable account.
The answer probably isn't to put it in taxable. Whether you should be putting it in Trad vs. Roth is probably an important question you should be asking but we don't have enough information to help you with that. If you can edit your original post with the "pencil" button and post in this format we can help: viewtopic.php?f=1&t=6212
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Re: Planning early retirement - Sanity check IRA strategy?

Post by TinyElvis »

KlangFool wrote: Wed Jun 09, 2021 1:00 pm
TinyElvis wrote: Wed Jun 09, 2021 12:57 pm
KlangFool wrote: Wed Jun 09, 2021 10:04 am For a single person, the standard deduction is around 12K. To generate 12K in retirement income, you need 25 X 12K = 300K in your tax-deferred account. So, in order for you to pay any taxes, you need 300K in your tax-deferred account. And, the standard deduction number is adjusted upward annually by inflation.
Can you help me to understand the correlation?
TinyElvis,

If you have 300K in your tax-deferred account and you withdraw 4% every year, you only generate 4% of 300K = 12K of taxable income. With 12K of standard deduction, you pay 0%.

KlangFool
Ah. Thank you.
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Callisto
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Re: Planning early retirement - Sanity check IRA strategy?

Post by Callisto »

KlangFool wrote: Wed Jun 09, 2021 12:56 pm
Callisto wrote: Wed Jun 09, 2021 12:44 pm
I plan to retire in my early 30s. That means I have to live off of my taxable assets for a long while.
Callisto,

That statement is false. If you choose to early retire in the 30s, more money in the tax-deferred space is useful due to Roth conversion.

Please check out the following URL.

https://www.madfientist.com/how-to-acce ... nds-early/
What I mean by taxable assets are just the standard brokerage assets, those without any preferential tax treatment. Since most of my assets are outside of retirement accounts, I don't need to tap them early. I would only be doing Roth conversions as a tax strategy, not necessarily to access them earlier. Unless I'm mistaken, there is no advantage to tapping retirement accounts early if I have standard assets available.

KlangFool wrote: Wed Jun 09, 2021 12:56 pm <<So to expand upon my question. I am unsure if I should bother contributing to a tIRA giving me the benefit of tax free rebalancing and maybe cheap Roth conversion, at the cost of RMDs. Or if I should just not bother and throw it all into standard taxable account.>>

You have 40+ years of Roth conversion. So, why do you need to worry about RMD?

KlangFool
If my previous assertion is correct, then I would be in a position where I first draw from my normal taxable accounts, leaving my retirement accounts to grow. That means that by the time I reach the age where RMDs become relevant, I would expect my tIRA to be very substantial. That means I would have to have brought my tIRA balance down through Roth conversions. If tax rates increase, especially as it relates to capital gains, Roth conversions may be less appealing.

That being said, I think I'm being paranoid and given the long timespan, assuming tax rates do not change substantially, it won't be a real problem.
wetgear wrote: Wed Jun 09, 2021 2:52 pm
Callisto wrote: Wed Jun 09, 2021 12:44 pm So to expand upon my question. I am unsure if I should bother contributing to a tIRA giving me the benefit of tax free rebalancing and maybe cheap Roth conversion, at the cost of RMDs. Or if I should just not bother and throw it all into standard taxable account.
The answer probably isn't to put it in taxable. Whether you should be putting it in Trad vs. Roth is probably an important question you should be asking but we don't have enough information to help you with that. If you can edit your original post with the "pencil" button and post in this format we can help: viewtopic.php?f=1&t=6212
I saw your suggestion earlier to add all the info, but don't really want to provide all of my info. But I also think my question is more of a theory one, rather than the typical Trad vs Roth which is mostly about running the numbers. My question is roughly trad vs none, and for the reasons I explained earlier, I don't think the "none" option can be easily written off. That being said, I am leaning towards trad.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by KlangFool »

Callisto wrote: Wed Jun 09, 2021 5:43 pm
If my previous assertion is correct, then I would be in a position where I first draw from my normal taxable accounts, leaving my retirement accounts to grow. That means that by the time I reach the age where RMDs become relevant, I would expect my tIRA to be very substantial.
Callisto,

1) You have substantial Taxable account. You can spend from that account using 0% long-term capital gain tax rate

2) You can Roth convert your T-IRA up to standard deduction + 12% tax bracket. Aka, 50K to 60K per year

3) Unless you tell us that you have 5 million in your T-IRA.

4) Why would you have a problem after 40+ years?

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Callisto
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Re: Planning early retirement - Sanity check IRA strategy?

Post by Callisto »

KlangFool wrote: Wed Jun 09, 2021 6:00 pm
Callisto wrote: Wed Jun 09, 2021 5:43 pm
If my previous assertion is correct, then I would be in a position where I first draw from my normal taxable accounts, leaving my retirement accounts to grow. That means that by the time I reach the age where RMDs become relevant, I would expect my tIRA to be very substantial.
Callisto,

1) You have substantial Taxable account. You can spend from that account using 0% long-term capital gain tax rate

2) You can Roth convert your T-IRA up to standard deduction + 12% tax bracket. Aka, 50K to 60K per year
This would be fine today, but I want to protect myself from the potential of increased tax rates (and potentially cap gains tax rates). The amount I convert to Roth would be on top of my living expenses. So while I expect it to be much lower than my tax rate now, I'm also not going to plan on it being extremely low either.

KlangFool wrote: Wed Jun 09, 2021 6:00 pm
3) Unless you tell us that you have 5 million in your T-IRA.

4) Why would you have a problem after 40+ years?

KlangFool
After 40+ years, I would expect my tIRA to be worth millions (causing a big problem with RMDs), if I do no conversions beforehand. So this goes back to the previous point, where I absolutely must do Roth conversions to wind down the tIRA balance. And the fact that I must do Roth conversions then puts me at the mercy of whatever the tax rates are.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by KlangFool »

Callisto wrote: Wed Jun 09, 2021 6:30 pm
KlangFool wrote: Wed Jun 09, 2021 6:00 pm
Callisto wrote: Wed Jun 09, 2021 5:43 pm
If my previous assertion is correct, then I would be in a position where I first draw from my normal taxable accounts, leaving my retirement accounts to grow. That means that by the time I reach the age where RMDs become relevant, I would expect my tIRA to be very substantial.
Callisto,

1) You have substantial Taxable account. You can spend from that account using 0% long-term capital gain tax rate

2) You can Roth convert your T-IRA up to standard deduction + 12% tax bracket. Aka, 50K to 60K per year
This would be fine today, but I want to protect myself from the potential of increased tax rates (and potentially cap gains tax rates). The amount I convert to Roth would be on top of my living expenses. So while I expect it to be much lower than my tax rate now, I'm also not going to plan on it being extremely low either.

KlangFool wrote: Wed Jun 09, 2021 6:00 pm
3) Unless you tell us that you have 5 million in your T-IRA.

4) Why would you have a problem after 40+ years?

KlangFool
After 40+ years, I would expect my tIRA to be worth millions (causing a big problem with RMDs), if I do no conversions beforehand. So this goes back to the previous point, where I absolutely must do Roth conversions to wind down the tIRA balance. And the fact that I must do Roth conversions then puts me at the mercy of whatever the tax rates are.
Callisto,

<<The amount I convert to Roth would be on top of my living expenses. >>

Who says so? The amount that you choose to Roth convert each year has nothing to do with what you spend each year. It has to do with how much taxes that you want to pay that year. If the answer is 12%, you Roth convert up to 12%. If the answer is 22%, you Roth convert up to 22%.

<<After 40+ years, I would expect my tIRA to be worth millions >>

How is that possible unless you have 5 million in the T-IRA now?

Let's say that you Roth convert 100K per year, in 40 years, you would had Roth convert 40 X 100K = 4 millions.

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Re: Planning early retirement - Sanity check IRA strategy?

Post by retired@50 »

Callisto wrote: Wed Jun 09, 2021 6:30 pm After 40+ years, I would expect my tIRA to be worth millions (causing a big problem with RMDs), if I do no conversions beforehand. So this goes back to the previous point, where I absolutely must do Roth conversions to wind down the tIRA balance. And the fact that I must do Roth conversions then puts me at the mercy of whatever the tax rates are.
If you're retiring early, presumably, your marginal income tax rate will go down when the wages stop, right?

So, to avoid a high dollar tax-deferred balance in your IRA/401k you can do a couple of things.
1. Invest the money in your tax-deferred space in a bond index fund like VBTLX.
2. Do partial traditional to Roth conversions each year. This will give you 40 years to whittle down the balance in the tax-deferred account.

Regards,
This is one person's opinion. Nothing more.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by KlangFool »

OP,

You may want to check out this thread. Someone with 1.8 million in the T-IRA.

viewtopic.php?f=1&t=350438

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Re: Planning early retirement - Sanity check IRA strategy?

Post by Callisto »

KlangFool wrote: Wed Jun 09, 2021 6:38 pm
Callisto wrote: Wed Jun 09, 2021 6:30 pm
KlangFool wrote: Wed Jun 09, 2021 6:00 pm
Callisto wrote: Wed Jun 09, 2021 5:43 pm
If my previous assertion is correct, then I would be in a position where I first draw from my normal taxable accounts, leaving my retirement accounts to grow. That means that by the time I reach the age where RMDs become relevant, I would expect my tIRA to be very substantial.
Callisto,

1) You have substantial Taxable account. You can spend from that account using 0% long-term capital gain tax rate

2) You can Roth convert your T-IRA up to standard deduction + 12% tax bracket. Aka, 50K to 60K per year
This would be fine today, but I want to protect myself from the potential of increased tax rates (and potentially cap gains tax rates). The amount I convert to Roth would be on top of my living expenses. So while I expect it to be much lower than my tax rate now, I'm also not going to plan on it being extremely low either.

KlangFool wrote: Wed Jun 09, 2021 6:00 pm
3) Unless you tell us that you have 5 million in your T-IRA.

4) Why would you have a problem after 40+ years?

KlangFool
After 40+ years, I would expect my tIRA to be worth millions (causing a big problem with RMDs), if I do no conversions beforehand. So this goes back to the previous point, where I absolutely must do Roth conversions to wind down the tIRA balance. And the fact that I must do Roth conversions then puts me at the mercy of whatever the tax rates are.
Callisto,

<<The amount I convert to Roth would be on top of my living expenses. >>

Who says so? The amount that you choose to Roth convert each year has nothing to do with what you spend each year. It has to do with how much taxes that you want to pay that year. If the answer is 12%, you Roth convert up to 12%. If the answer is 22%, you Roth convert up to 22%.
I guess to be more precise, its technically not how much I spend that affects the Roth conversion. But how much I spend determines how much assets I must sell, which is then related to how much LTCG I must incur.

So under the current tax rates, if I Roth convert up to the 22% bracket, that means all of my LTCG would be in the 15% bracket. Is this not correct?
KlangFool wrote: Wed Jun 09, 2021 6:38 pm <<After 40+ years, I would expect my tIRA to be worth millions >>

How is that possible unless you have 5 million in the T-IRA now?

Let's say that you Roth convert 100K per year, in 40 years, you would had Roth convert 40 X 100K = 4 millions.

KlangFool
My point is that to avoid the problem of having a large tIRA balance, I am forced to convert. If I do not convert, then decades of compounding will result in a balance in the millions.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by retired@50 »

Callisto wrote: Wed Jun 09, 2021 7:10 pm My point is that to avoid the problem of having a large tIRA balance, I am forced to convert. If I do not convert, then decades of compounding will result in a balance in the millions.
You must be dealing with a pretty large tIRA balance.

If you have $500k in there today, and you put it into a short or intermediate term bond index fund, it could double every 20 years, so you'd wind up with $2 million after 40 years.

By that time, you probably won't need the money anyway, so just give it all to charity when you're 71, before RMDs begin.

No taxes, no conversions, and you'll look like a hero to whichever charity you choose.

Regards,
This is one person's opinion. Nothing more.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by Callisto »

retired@50 wrote: Wed Jun 09, 2021 7:58 pm
Callisto wrote: Wed Jun 09, 2021 7:10 pm My point is that to avoid the problem of having a large tIRA balance, I am forced to convert. If I do not convert, then decades of compounding will result in a balance in the millions.
You must be dealing with a pretty large tIRA balance.

If you have $500k in there today, and you put it into a short or intermediate term bond index fund, it could double every 20 years, so you'd wind up with $2 million after 40 years.

By that time, you probably won't need the money anyway, so just give it all to charity when you're 71, before RMDs begin.

No taxes, no conversions, and you'll look like a hero to whichever charity you choose.

Regards,
My tIRA is not substantial today, but I've switched over from Roth 401k to normal 401k, and under this plan I'm planning on keeping my IRA contributions in trad. I don't think I'd hit 500k, but at the same time, based on my risk tolerance and comfort level, I'd be comfortable being stock heavy so based on historic trends I would anticipate, sans Roth conversions, to hit millions.

The idea of giving it away beforehand is actually quite interesting though. Frankly, that's what I plan to do with the money, but I had always figured I'd hang on to it until I died. I actually don't know why it never occurred to me that I could just start giving it away earlier.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by retired@50 »

Callisto wrote: Wed Jun 09, 2021 8:22 pm
retired@50 wrote: Wed Jun 09, 2021 7:58 pm
Callisto wrote: Wed Jun 09, 2021 7:10 pm My point is that to avoid the problem of having a large tIRA balance, I am forced to convert. If I do not convert, then decades of compounding will result in a balance in the millions.
You must be dealing with a pretty large tIRA balance.

If you have $500k in there today, and you put it into a short or intermediate term bond index fund, it could double every 20 years, so you'd wind up with $2 million after 40 years.

By that time, you probably won't need the money anyway, so just give it all to charity when you're 71, before RMDs begin.

No taxes, no conversions, and you'll look like a hero to whichever charity you choose.

Regards,
My tIRA is not substantial today, but I've switched over from Roth 401k to normal 401k, and under this plan I'm planning on keeping my IRA contributions in trad. I don't think I'd hit 500k, but at the same time, based on my risk tolerance and comfort level, I'd be comfortable being stock heavy so based on historic trends I would anticipate, sans Roth conversions, to hit millions.

The idea of giving it away beforehand is actually quite interesting though. Frankly, that's what I plan to do with the money, but I had always figured I'd hang on to it until I died. I actually don't know why it never occurred to me that I could just start giving it away earlier.
Don't you hold any bond index funds?

If so, and if you're interested in limiting the growth of your tax-deferred accounts, then use them to hold the bond funds you own.

You paint a picture of a large taxable account, and I'm in the same boat. My IRA is entirely in bond index funds. Plus, I'm converting annually.

As far as charity goes, you can look into Qualified Charitable Distributions (QCD) (starting at 70.5 years old) and you can look into a Donor Advised Fund (DAF).

Regards,
This is one person's opinion. Nothing more.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by KlangFool »

Callisto wrote: Wed Jun 09, 2021 7:10 pm
I guess to be more precise, its technically not how much I spend that affects the Roth conversion. But how much I spend determines how much assets I must sell, which is then related to how much LTCG I must incur.
Callisto,

Do you spend 100K per year? Let's assume that for every $2 that you spend, you have $1 of capital gain. That is approximately the amount of you need to spend to reach 22% tax bracket.

https://www.google.com/search?client=fi ... x+brackets

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Re: Planning early retirement - Sanity check IRA strategy?

Post by KlangFool »

Callisto wrote: Wed Jun 09, 2021 8:22 pm
My tIRA is not substantial today, but I've switched over from Roth 401k to normal 401k, and under this plan I'm planning on keeping my IRA contributions in trad. I don't think I'd hit 500k, but at the same time, based on my risk tolerance and comfort level, I'd be comfortable being stock heavy so based on historic trends I would anticipate, sans Roth conversions, to hit millions.
Callisto,

Then, if you spend less than 100K per year, you have enough room to Roth convert away all your T-IRA account over 40 years.

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Callisto
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Re: Planning early retirement - Sanity check IRA strategy?

Post by Callisto »

retired@50 wrote: Wed Jun 09, 2021 8:26 pm Don't you hold any bond index funds?

If so, and if you're interested in limiting the growth of your tax-deferred accounts, then use them to hold the bond funds you own.

You paint a picture of a large taxable account, and I'm in the same boat. My IRA is entirely in bond index funds. Plus, I'm converting annually.

As far as charity goes, you can look into Qualified Charitable Distributions (QCD) (starting at 70.5 years old) and you can look into a Donor Advised Fund (DAF).

Regards,
I don't currently hold bonds. Based on messing around with FIRE calculators/simulators, using my current projections, bonds don't offer meaningful protection, while the reduction in expected growth compounds into significant losses over my investing horizon. I imagine as my life situation changes, I'll need to revisit things.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by Callisto »

KlangFool wrote: Wed Jun 09, 2021 9:19 pm
Callisto wrote: Wed Jun 09, 2021 7:10 pm
I guess to be more precise, its technically not how much I spend that affects the Roth conversion. But how much I spend determines how much assets I must sell, which is then related to how much LTCG I must incur.
Callisto,

Do you spend 100K per year? Let's assume that for every $2 that you spend, you have $1 of capital gain. That is approximately the amount of you need to spend to reach 22% tax bracket.

https://www.google.com/search?client=fi ... x+brackets

KlangFool
The math doesn't look great to me. Unless I'm wrong:

50k capital gains, no Roth conversion, I'd be taxed 40k @ 0%, 10k @ 15%, equals 1.5k cap gains tax.

50k capital gains, but with 40k taxable Roth conversion, that shoots me up to 50k @ 15%, equals 7.5k cap gains tax.

I think due to compounding, estimating only 50% being capital gains is going to be a very optimistic estimate for most of my life. Might be true for the first 10-20 years, but beyond that the portion that comes from capital gain is going to spike heavily. This is also assuming the capital gains tax rate doesn't increase either.
KlangFool wrote: Wed Jun 09, 2021 9:22 pm
Callisto wrote: Wed Jun 09, 2021 8:22 pm
My tIRA is not substantial today, but I've switched over from Roth 401k to normal 401k, and under this plan I'm planning on keeping my IRA contributions in trad. I don't think I'd hit 500k, but at the same time, based on my risk tolerance and comfort level, I'd be comfortable being stock heavy so based on historic trends I would anticipate, sans Roth conversions, to hit millions.
Callisto,

Then, if you spend less than 100K per year, you have enough room to Roth convert away all your T-IRA account over 40 years.

KlangFool
It's certainly possible to convert it all, but based on the previous calculation, that almost certainly means I'm completely giving up the 0% LTCG bracket.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by KlangFool »

Callisto wrote: Wed Jun 09, 2021 10:02 pm
It's certainly possible to convert it all, but based on the previous calculation, that almost certainly means I'm completely giving up the 0% LTCG bracket.
Callisto,

What is your annual expense?

The best combination is Roth convert 12K and capital gain harvest 40K. That gives you about 80K to spend every year and you pay ZERO taxes.

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Re: Planning early retirement - Sanity check IRA strategy?

Post by retired@50 »

Callisto wrote: Wed Jun 09, 2021 9:37 pm I imagine as my life situation changes, I'll need to revisit things.
I would suppose that will be true.

While bonds aren't super attractive today to young investors, I have a hard time believing that they won't be attractive at some point during your life. Eventually, you might get tired of the ups and downs of the stock market. Best of luck.

Regards,
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Re: Planning early retirement - Sanity check IRA strategy?

Post by Katietsu »

You titled your thread “sanity check”. You are trying to predict account balances, tax laws and tax rates into the future for more years than you have been alive. Have you considered that some or all of income taxes could be replaced by a national sales tax by 2060?

You state that you are in a high tax bracket now. You have very little in tax deferred and a lot in taxable yet you are considering increasing this imbalance. Maybe you could consider using traditional for tax diversification since a sanity check says that the 2060 tax code is a big unknown.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by VanGar+Goyle »

anticipate a 60+ year "retirement" horizon ...

1) are you planning to retire in your 30s?
Maybe the spouse will be 28 and nubile?
I don't think there is any such thing as too much money in a Roth IRA.
Paying income taxes for a Roth IRA can be too much if you are charitable or will have unused untaxable income buckets ( e.g. standard deduction ).

Using a non-deductible IRA should allow you to defer more income to a time when you are in a lower tax bracket,
specially if you retire early, spend from the Roth contributions, or pay larger medical expenses in your long retirement.
But going further into the looking glass, you may be deferring income to a lower regular tax rate,
but not a lower long term capital gains or qualified dividend rate. Much is unclear.
When you have eliminated all which is impossible, then whatever remains, however improbable, must be the truth." ― Arthur Conan Doyle
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Re: Planning early retirement - Sanity check IRA strategy?

Post by Exchme »

Callisto wrote: Wed Jun 09, 2021 8:22 pm My tIRA is not substantial today, but I've switched over from Roth 401k to normal 401k, and under this plan I'm planning on keeping my IRA contributions in trad.
It would have been better if you did this ever since you've been in high tax brackets. Certainly it's the way to go for the rest of your working career to get the tax deduction now.
Callisto wrote: Wed Jun 09, 2021 12:44 pm So to expand upon my question. I am unsure if I should bother contributing to a tIRA giving me the benefit of tax free rebalancing and maybe cheap Roth conversion, at the cost of RMDs.
Seems insignificant. Non-deductible IRA contributions will be limited to just a few thousand per year and then you are comparing the tax drag over the years of holding in taxable vs. the possible future tax rates when you withdraw the gains at some future date with some unknown amount of taxable income at that time. The general theme of your writing seems to be that you expect to be in high tax brackets forever, so intangibles like rebalancing or where to keep a few thousand here or there seems like you are optimizing the 3rd digit of something inherently uncertain in the 1st digit.

Just keep working and saving until you have more than plenty.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by Callisto »

Thanks all once again.

I think the overall conclusion that I'm going to draw is there's no significant risk to just throwing it all into a tIRA. Maybe tax rates increase or whatever, but the risk of that is probably not going to be so high as to make tIRA a bad idea. Even if I do end up making a mistake, the amount I'll be taxed is not super high anyways.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by Katietsu »

Callisto wrote: Thu Jun 10, 2021 1:19 pm Thanks all once again.

I think the overall conclusion that I'm going to draw is there's no significant risk to just throwing it all into a tIRA. Maybe tax rates increase or whatever, but the risk of that is probably not going to be so high as to make tIRA a bad idea. Even if I do end up making a mistake, the amount I'll be taxed is not super high anyways.
By all means, use your traditional 401k. Is there something stopping you from using a Roth IRA via the back door method? I am assuming you are ineligible for a deductible contribution to a traditional IRA.
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Re: Planning early retirement - Sanity check IRA strategy?

Post by marcopolo »

Callisto wrote: Thu Jun 10, 2021 1:19 pm Thanks all once again.

I think the overall conclusion that I'm going to draw is there's no significant risk to just throwing it all into a tIRA. Maybe tax rates increase or whatever, but the risk of that is probably not going to be so high as to make tIRA a bad idea. Even if I do end up making a mistake, the amount I'll be taxed is not super high anyways.
I may be confused. Are you talking about Traditional 401k (where you get a tax deduction now), or as you mentioned in the original post, a Traditional IRA (where because of your income, they would be non-deductible contributions).

If the former, it probably makes sense. If the latter, i don't think so.

I can't really think of a scenario where a non-deductible tIRA would be better than a Roth IRA. Am i missing something?
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