IRA-poor?

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Topic Author
suevv
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IRA-poor?

Post by suevv »

Well I've always heard of folks who are house poor. But I didn't realize we were walking ourselves into being "IRA-poor." Husband and I are early 60s. We have about $7M in various IRA-type vehicles (IRA, small Roth, SEP, 403b, 401k). We are considering purchase of a second home at a destination we love. The Roth IRAs are small relative to what we need - from our early days before we exceeded the income limit. So it looks like we have no way to access all that tax-deferred saving without blowing half the money on taxes.

FWIW - we'd like to access about $1M from the retirement accounts - net after taxes. And we really don't want to touch the Roths. Is there a strategy I'm missing? Or should I just be grateful for all the growth, hold my nose, and pay the taxes?
smitcat
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Re: IRA-poor?

Post by smitcat »

suevv wrote: Thu Jun 06, 2024 11:21 am Well I've always heard of folks who are house poor. But I didn't realize we were walking ourselves into being "IRA-poor." Husband and I are early 60s. We have about $7M in various IRA-type vehicles (IRA, small Roth, SEP, 403b, 401k). We are considering purchase of a second home at a destination we love. The Roth IRAs are small relative to what we need - from our early days before we exceeded the income limit. So it looks like we have no way to access all that tax-deferred saving without blowing half the money on taxes.

FWIW - we'd like to access about $1M from the retirement accounts - net after taxes. And we really don't want to touch the Roths. Is there a strategy I'm missing? Or should I just be grateful for all the growth, hold my nose, and pay the taxes?
"Is there a strategy I'm missing?"
Without any other details the typical strategy would be to Roth convert a specific amount each year prior to electing to recieve SS/pensions at a "lower tax rate" .....rather then upping the tax rate with one larger withdrawal or conversion.
Accumulating those conversions each year for the required total.
And/or utlizing the existing Roth accounts for part of the required total with a plan to 'replace' that with future conversions.
And/or borrowing part of the funds, and utilizing the existing Roths, and converting for a year of two ....untill you can convert the required amount.
the_wiki
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Re: IRA-poor?

Post by the_wiki »

You cold take out a loan on the new house and then withdraw small amounts each year to pay the bill, keeping you in a lower tax bracket. For example, 24% tax bracket + 7% loan interest beats 37% tax bracket by a lot. Just have to do the math on tax bracket vs mortgage rate
bradpevans
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Re: IRA-poor?

Post by bradpevans »

Admittedly a tangential question: how did you get 7M in IRA accounts?

Back on track, a loan seems more palatable than a huge withdrawal needed to pay cash.
Then keep a sharp eye (and fingers croseed) on re-fi offers in the coming years.
delamer
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Re: IRA-poor?

Post by delamer »

It may be advantageous to spread the withdrawals out over two years — 2024 & 2025.

But without more details on your income (are you retired?), it is hard to say.

Probably some combination of a large downpayment and a mortgage will be your best option. An asset depletion loan is worth looking into if your incone is relatively low.
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Johm221122
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Re: IRA-poor?

Post by Johm221122 »

I can understand not wanting to pay a large amount of taxes but even if you takeout 2 million and loose 50% to taxes, will 5 million be enough to live on after that?
You only live once and I'm not recommend you pay any more taxes than necessary. You saved very well, you should enjoy your reward for doing that. I would not consider myself "poor" but blessed with the ability to have your dreams come true.
Topic Author
suevv
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Re: IRA-poor?

Post by suevv »

Thanks for the thoughts, folks.

bradpevans - $7M in retirement accounts is a combo of following Bob Brinker's "max out retirement accounts" from early days of careers, plus husband maxing out a SEP which has always had higher contribution limits plus long-term growth in the market. It was all just a year-over-year build.

Also - we are both still working, and our combined income puts us in a high tax bracket in fed and California. Both looking to retire in 2-5 year window. And we'd like to be able to pull the trigger on the second home purchase in the same time-frame.

John221122 - we are just coming to terms with your point that we only live once. We have just spent so long not spending, saving every penny. We need to look up and realize how blessed we are, and how much we need to change our ways. It's surprising how hard it is to do!
123
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Re: IRA-poor?

Post by 123 »

suevv wrote: Thu Jun 06, 2024 11:21 am ...So it looks like we have no way to access all that tax-deferred saving without blowing half the money on taxes...
That's what tax-deferred means. You don't actually save taxes, you defer them. Eventually taxes get paid, if not by you then by those that inherit the accounts. Many times people will pay their deferred taxes at a lower marginal rate but not always.

Diligent savers can often accumulate higher after-tax level of assets by avoiding tax favored accounts (except for Roth). Tax deferred accounts rob you of the capital gains tax treatment of stock investments since all the gains get taxed as regular income. And taxable accounts don't have RMD issues. However few people will have the discipline to grow and maintain sizeable taxable accounts. Just about everyone succumbs to the siren call of "save money on taxes" by contributing to tax-deferred retirement accounts.
Last edited by 123 on Thu Jun 06, 2024 12:55 pm, edited 2 times in total.
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mikejuss
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Re: IRA-poor?

Post by mikejuss »

suevv wrote: Thu Jun 06, 2024 11:21 am Well I've always heard of folks who are house poor. But I didn't realize we were walking ourselves into being "IRA-poor." Husband and I are early 60s. We have about $7M in various IRA-type vehicles (IRA, small Roth, SEP, 403b, 401k). We are considering purchase of a second home at a destination we love. The Roth IRAs are small relative to what we need - from our early days before we exceeded the income limit. So it looks like we have no way to access all that tax-deferred saving without blowing half the money on taxes.

FWIW - we'd like to access about $1M from the retirement accounts - net after taxes. And we really don't want to touch the Roths. Is there a strategy I'm missing? Or should I just be grateful for all the growth, hold my nose, and pay the taxes?
This is a confusing post (or perhaps I'm misreading it), OP. You seem not to realize that there are no income limits when contributing to a Roth IRA; look up "backdoor Roth IRA." In addition, you can liquidate other accounts in order to make a downpayment on the second house. Yes, you will need to pay taxes at the point of liquidation, but with $7 million, you shouldn't be too worried about that. Finally, how could have have $7 million in retirement accounts (I'm a little unclear how this is even possible, given the contribution limits) and nothing in a brokerage account? That seems odd.
Last edited by mikejuss on Thu Jun 06, 2024 12:57 pm, edited 1 time in total.
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Svensk Anga
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Re: IRA-poor?

Post by Svensk Anga »

You said early 60's, but it matters how early. Your income in the year(s) you turn 63 determines your cost for Medicare via IRMAA surcharges. If you are not yet 63 this year, you probably should get some extra money out of the IRA. That could be via withdrawal or by Roth conversion. If you are already 63 or getting there this year, you need to understand the IRMAA rates. See https://thefinancebuff.com/medicare-irm ... ckets.html

My understanding is that asset depletion mortgages are uncommon. Lenders want to see income. If you don't already have enough to qualify for a mortgage, I understand that some will accept seeing $XXXX/month coming into your checking account from regular IRA withdrawals as qualifying income.

I just saw that you are still working. Best to apply for a mortgage before that income stops. Or maybe you can get a HELOC on your current home before retiring to partly pay for the move.
mikejuss
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Re: IRA-poor?

Post by mikejuss »

bradpevans wrote: Thu Jun 06, 2024 11:56 am Admittedly a tangential question: how did you get 7M in IRA accounts?
The OP does not appear to be an investor in index funds.
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
Topic Author
suevv
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Re: IRA-poor?

Post by suevv »

mikejuss - just for the record - nearly all S&P 500 index. We did hop out/hop back in one time on a sell/buy signal from Bob Brinker - maybe in 2000? Maybe that made more than a difference than I realized. But we've been almost exclusively index investing since our 20's. I guess I didn't realize our saved amount was out of the ordinary. We do have some funds in a brokerage accounts. But the amount is small compared to the IRA-type accounts. Also - we never did the backdoor Roth because ... I don't know why. Wish we had.

svensk - thank you SO MUCH for that information about IRMAA, which I had no idea about. And I turn 63 in a few weeks. My husband is younger - so maybe there is a window there. I have to learn here. Thanks for the resource.
Last edited by suevv on Thu Jun 06, 2024 1:13 pm, edited 1 time in total.
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suevv
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Re: IRA-poor?

Post by suevv »

also - svensk - asset depletion mortgage is new to me. definitely worth learning about!
barnaclebob
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Re: IRA-poor?

Post by barnaclebob »

Why dont you want to touch the roths? Thats probalby your best source of funds for this if you can pay for it via principle withrdrawals.

Otherwise you need to give a better overview of your entire situation using the standard format. It may be better for you to reduce retirement contributions to minimums and then pay for a mortgage with that money.

Do you have any taxable savings?
mikejuss
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Re: IRA-poor?

Post by mikejuss »

suevv wrote: Thu Jun 06, 2024 1:09 pm mikejuss - just for the record - nearly all S&P 500 index. We did hop out/hop back in one time on a sell/buy signal from Bob Brinker - maybe in 2000? Maybe that made more than a difference than I realized. But we've been almost exclusively index investing since our 20's. I guess I didn't realize our saved amount was out of the ordinary.
I still don't see how to get to $7 million via retirement accounts alone.
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bombcar
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Re: IRA-poor?

Post by bombcar »

You need a full financial picture to determine the best strategic way to do what you want.

For example, you may be able to do a normal or reverse mortgage on your primary to buy the secondary home.

You could take a loan against a 401(k) - usually not recommended but it might be an option in your case.

The taxman will get his due at some point if you use the money, so you might as well pay him for something you want. Otherwise the only way to escape taxes is to escape life (stepped up basis on death).

The Roths are probably want you want to touch, they're not "magical" - it's just they're post-tax so the dollars in them are "bigger" than dollars in a 401(k).
bsteiner
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Re: IRA-poor?

Post by bsteiner »

Half of your IRA (assuming a constant 50% tax bracket) was the government's from the beginning. If you didn't contribute to the IRA, the government would have received its share when you earned it.

The benefit to you is that the income and gains on your 50% share are tax-free as long as you keep the money in the IRA. Whenever you take money out, the government gets its share, and you get your share, but the future income and gains on your share are no longer tax-free.
bombcar
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Re: IRA-poor?

Post by bombcar »

To be precise on the above - if your tax rate at contribution and tax rate at withdrawal (and it's permitted, not penalized) is the same, the IRA and Roth IRA are exactly identical.

It's hard to believe, but if you run the numbers it comes out true.

In fact, capital gains taxes are lower than IRA distribution taxes in some cases, so taxable can be more advantageous, sometimes. It all depends on when and where the taxes are applied, and if it causes a drag.
esteen
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Re: IRA-poor?

Post by esteen »

the_wiki wrote: Thu Jun 06, 2024 11:34 am You cold take out a loan on the new house and then withdraw small amounts each year to pay the bill, keeping you in a lower tax bracket. For example, 24% tax bracket + 7% loan interest beats 37% tax bracket by a lot. Just have to do the math on tax bracket vs mortgage rate
Unfortunately this is untrue for most scenarios, due to the 7% compounding over the loan payback period while the tax brackets do not compound.

Example:

Need $630K for home purchase.

Option 1: Up Front Withdrawal
  • Take out $1M up front and pay 37% tax on it (nets $630K)
Option 2: Loan + Gradual Withdrawal
  • Take a $630K loan at 7%
    Take out $150K each year from your IRA to pay back the loan. Net annual loan repayment = $150K*(1-.24)=$114,000.
    Total loan balance keeps accruing 7% interest as you are paying it down.
    Total estimated repayment time ~7 years (or more if payments are paid after interest has accrued for the period, see below).
    Total withdrawn from IRA = $150,000 x 7 = $1,050,000.
Excel formulas for reference: =FV(7%,7,114000,-630000,0)=$25083.93 still left on the loan (end of period pmts) or =FV(7%,7,114000,-630000,1)=-$43,975.16 i.e. paid it off with $44K left over (beginning of period pmts)

The outcome would be even worse for longer terms, say a 15-yr home loan (if you didn't pre-pay).
Last edited by esteen on Thu Jun 06, 2024 1:59 pm, edited 1 time in total.
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Topic Author
suevv
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Re: IRA-poor?

Post by suevv »

hey barnacle bob - I'm beginning to realize that we don't need to hold the Roths as some magical untouchable thing :)

I didn't know there was a standard format. I'll look in pinned posts for it. But here is the high level overview:

I'm 63 years old this year; Husband 60. I work full time at a start-up; husband also works full time but is self-employed.

Liquid assets:
Taxable (brokerage) accounts - $400k - all in equities
Tax deferred accounts - $7M - 90% equities/index fund; 10 percent US Treasuries. Of this, $250K in Roth IRAs. The rest is in trad IRA/401k/403b/SEP.

Real estate:
Principal residence - ~$4.5M ($700k mortgage at 3 percent)
Investment property - single family home with long-term renter - $1.3M ($400k mortgage at 3.9%)

We are looking at tiny homes in our target destination (Carmel, CA) that are still north of $2M. Eeek!!
Topic Author
suevv
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Re: IRA-poor?

Post by suevv »

esteen - thank you for the detailed calculations. In your Option 2 - is it feasible to get a mortgage based on the ability to pay back through IRA withdrawals as opposed to regular income? The answer here feels like it is critical to our timing (and how much longer I have to endure this startup!)
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suevv
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Re: IRA-poor?

Post by suevv »

bsteiner - totally get your point. I guess we always just assumed our tax bracket would be so much lower in retirement. But it looks unlikely to be so, especially once RMDs kick in. Sort of a big fail on our part as far as understanding the ins and outs of actually retiring. Obviously we are not complaining - we are lucky to have this nest egg and to be worrying about what to do with it.
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suevv
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Re: IRA-poor?

Post by suevv »

bombcar - that is a truly fascinating point. I always had this idea in the back of my mind that then end result would be different because our tax bracket in retirement would be markedly lower. Bad assumption it appears! And point taken about the "magical" Roths. I am adjusting my thinking.
bombcar
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Re: IRA-poor?

Post by bombcar »

You can get a loan for anything if you convince a lender.

But with a house, you want to also fit into the various ways they resell the mortgages. Adding costs and complexity is unlikely to save money over the long term - unless you can clearly show it in excel spreadsheets.
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suevv
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Re: IRA-poor?

Post by suevv »

123 said: "Diligent savers can often accumulate higher after-tax level of assets by avoiding tax favored accounts (except for Roth). Tax deferred accounts rob you of the capital gains tax treatment of stock investments since all the gains get taxed as regular income. And taxable accounts don't have RMD issues. However few people will have the discipline to grow and maintain sizeable taxable accounts. Just about everyone succumbs to the siren call of "save money on taxes" by contributing to tax-deferred retirement accounts."

123 - This point about avoiding tax favored accounts (except for Roth) - is the single biggest point that we just failed to see all these decades! What with impending RMDs and the point that tax treatment comes out as a wash for us - the smart plan is starting to look like: pull the money, pay the taxes, buy the house and enjoy it and realize how lucky we are.
mikejuss
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Re: IRA-poor?

Post by mikejuss »

suevv wrote: Thu Jun 06, 2024 1:57 pm I'm 63 years old this year; Husband 60. I work full time at a start-up; husband also works full time but is self-employed.

Liquid assets:
Taxable (brokerage) accounts - $400k - all in equities
Tax deferred accounts - $7M - 90% equities/index fund; 10 percent US Treasuries. Of this, $250K in Roth IRAs. The rest is in trad IRA/401k/403b/SEP.

Real estate:
Principal residence - ~$4.5M ($700k mortgage at 3 percent)
Investment property - single family home with long-term renter - $1.3M ($400k mortgage at 3.9%)
Apart from the question of purchasing a third residence, you might want to give a little thought to your asset allocation--which is very stock-heavy--if you're intending to retire in the near-future.
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
mikejuss
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Re: IRA-poor?

Post by mikejuss »

123 wrote: Thu Jun 06, 2024 12:49 pm Diligent savers can often accumulate higher after-tax level of assets by avoiding tax favored accounts (except for Roth). Tax deferred accounts rob you of the capital gains tax treatment of stock investments since all the gains get taxed as regular income. And taxable accounts don't have RMD issues. However few people will have the discipline to grow and maintain sizeable taxable accounts. Just about everyone succumbs to the siren call of "save money on taxes" by contributing to tax-deferred retirement accounts.
This is a peculiar idea: contributing to, say, a 401(k) year in and year out is a perfectly fine way for those with high incomes to lower their tax bills during their prime earning years. I wouldn't say many people on this board would recommend a person contribute to a brokerage account if they're not first maxing out their tax-advantaged options (e.g., Roth IRA, 401[k], HSA, etc.). Diligent savers--at least among Bogleheads--often have higher levels of assets in their brokerage accounts not because they avoid tax-advantaged accounts but because tax-advantaged accounts have severe contribution limits and brokerage accounts have none.
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suevv
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Re: IRA-poor?

Post by suevv »

mikejuss - re diversifying - you are 100 percent correct. I'm embarrassed to say that even our small percentage of Treasury bonds is very recently purchased. we are living on borrowed time - and that is part of what kicked off this consideration of buying the third property sooner rather than later. (which I realize is not protecting our future fixed income except to the extent we can generate rental income like we are doing with our second property)
Scoop21
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Re: IRA-poor?

Post by Scoop21 »

the_wiki wrote: Thu Jun 06, 2024 11:34 am You cold take out a loan on the new house and then withdraw small amounts each year to pay the bill, keeping you in a lower tax bracket. For example, 24% tax bracket + 7% loan interest beats 37% tax bracket by a lot. Just have to do the math on tax bracket vs mortgage rate
These percentages are not of the same thing and can't simply be added together to compare. The mortgage rate is a yearly expense on remaining principle owed, while the tax cost is a one time expense on funds withdrawn.

Over the life of a 30 year 7% mortgage with no extra payments one will pay ~240% of the purchase price, so 2.4 mil for OP. At a 24% tax rate on funds for these payments they would need to liquidate 3.15 mil from the IRAs. This is significantly more than the 1 mil/.63= 1.59 mil they would need to liquidate in the outright payment example (assuming it is all in the high bracket).

Of course this is all in nominal dollars, and ignores the time value of money advantage of the mortgage option. There will be some discount rate where the mortgage option will come out ahead, and it will be lower than the mortgage rate itself due to the tax arbitrage, but I don't have time to do that math right now. And regardless, OP should do the analysis with their own tax numbers rather than just assuming all distributions would be fully in one bracket or the other.
BPnWhiskey
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Re: IRA-poor?

Post by BPnWhiskey »

suevv wrote: Thu Jun 06, 2024 1:57 pm
I'm 63 years old this year; Husband 60. I work full time at a start-up; husband also works full time but is self-employed.

Liquid assets:
Taxable (brokerage) accounts - $400k - all in equities
Tax deferred accounts - $7M. Of this, $250K in Roth IRAs. The rest is in trad IRA/401k/403b/SEP.

Real estate:
Principal residence - ~$4.5M ($700k mortgage at 3 percent)
Investment property - single family home with long-term renter - $1.3M ($400k mortgage at 3.9%)
Is there any particular reason that you're still working? (Let me hasten to add that there are many valid reasons that you might give.) You have significant assets, both liquid and real estate. Do you need more?

If you stopped working today, you would have many years for Roth conversions, lowering your tax burden overall. Combined with the mortgage idea presented above, this could be your best bet. Of course, in order to answer this question with any level of certainty, you will need a good estimate of your future annual expenses.

Best,
BP
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suevv
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Re: IRA-poor?

Post by suevv »

Hey BP - thanks for the important question. Why are we still working? Force of habit. Paranoia about future inflation. Husband loves his business. I love to work, but wouldn't mind backing off to something less all-consuming.

We've had pretty steady annual expenditures for more than a decade now - roughly $250k per year. Of course that includes contributions to retirement accounts. I think we could do that with a pretty conservative portfolio. You guys are all helping me realize it's time to dial in to the future - make some changes.
AceSD
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Re: IRA-poor?

Post by AceSD »

suevv wrote: Thu Jun 06, 2024 1:09 pm I guess I didn't realize our saved amount was out of the ordinary.
$7M is above average.
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suevv
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Re: IRA-poor?

Post by suevv »

Thanks AceSD - it felt so ordinary. Max out contributions (starting at about 27 years old). Dump it in index funds. Don't touch it. Husband was able to put in larger allocations in his SEP and 403b accounts, and started that very early. His 403b was from a part time job at a university and we basically put his whole salary into the 403b. It wasn't that much though! More than minimum wage - but 20 hours a week of low level staff salary. I don't know - it all felt so typical.
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dogagility
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Re: IRA-poor?

Post by dogagility »

suevv wrote: Thu Jun 06, 2024 2:14 pm ...the smart plan is starting to look like: pull the money, pay the taxes, buy the house and enjoy it and realize how lucky we are.
You've just reached personal finance nirvana. :beer
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BPnWhiskey
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Re: IRA-poor?

Post by BPnWhiskey »

suevv wrote: Thu Jun 06, 2024 3:26 pm Hey BP - thanks for the important question. Why are we still working? Force of habit. Paranoia about future inflation. Husband loves his business. I love to work, but wouldn't mind backing off to something less all-consuming.

We've had pretty steady annual expenditures for more than a decade now - roughly $250k per year. Of course that includes contributions to retirement accounts. I think we could do that with a pretty conservative portfolio. You guys are all helping me realize it's time to dial in to the future - make some changes.
Well, the famous Trinity study suggests that you could safely withdraw 4% of your 7M every year for 30 years. (Search the wiki for constant dollar withdrawal methods and/or search the forums for 4%, Trinity study, 25x, if you aren't familiar with this idea.) That would be 280k to cover taxes + spend. You'll probably have SS income, too. Maybe a pension....

It's sometimes hard to see, but remind yourselves that you should be saving (and working) for a reason. Otherwise, what's the money for?
FIRWYW
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Re: IRA-poor?

Post by FIRWYW »

the_wiki wrote: Thu Jun 06, 2024 11:34 am You cold take out a loan on the new house and then withdraw small amounts each year to pay the bill, keeping you in a lower tax bracket. For example, 24% tax bracket + 7% loan interest beats 37% tax bracket by a lot. Just have to do the math on tax bracket vs mortgage rate
This is the strategy I was going to recommend, but over more than 2 years.
realclemsongrad
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Re: IRA-poor?

Post by realclemsongrad »

suevv wrote: Thu Jun 06, 2024 3:36 pm Thanks AceSD - it felt so ordinary. Max out contributions (starting at about 27 years old). Dump it in index funds. Don't touch it. Husband was able to put in larger allocations in his SEP and 403b accounts, and started that very early. His 403b was from a part time job at a university and we basically put his whole salary into the 403b. It wasn't that much though! More than minimum wage - but 20 hours a week of low level staff salary. I don't know - it all felt so typical.
This is such a remarkably successful story. Congratulations 👏. Well done!! A remainder for us that we keep contributing to our 401k max and one day it will turn into a big number
bombcar
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Re: IRA-poor?

Post by bombcar »

suevv wrote: Thu Jun 06, 2024 1:57 pm Investment property - single family home with long-term renter - $1.3M ($400k mortgage at 3.9%)
I just noticed this! Oh my.

You could do a 1031 exchange from this investment property into another one that would be suitable as a second home someday (maybe). It cannot be done immediately, but if you 1031 now and in four / five years decide to move in, it shouldn't be a major hurdle. Find a real estate lawyer who knows what a 1031 exchange is.
KlangFool
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Re: IRA-poor?

Post by KlangFool »

suevv wrote: Thu Jun 06, 2024 12:44 pm
Also - we are both still working, and our combined income puts us in a high tax bracket in fed and California. Both looking to retire in 2-5 year window. And we'd like to be able to pull the trigger on the second home purchase in the same time-frame.
suevv,

Then, you should not have any problem to get a mortgage on the second house.

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986racer
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Re: IRA-poor?

Post by 986racer »

bombcar wrote: Thu Jun 06, 2024 1:24 pm To be precise on the above - if your tax rate at contribution and tax rate at withdrawal (and it's permitted, not penalized) is the same, the IRA and Roth IRA are exactly identical.

It's hard to believe, but if you run the numbers it comes out true.

In fact, capital gains taxes are lower than IRA distribution taxes in some cases, so taxable can be more advantageous, sometimes. It all depends on when and where the taxes are applied, and if it causes a drag.
It's true as long as you are talking about relatively low contribution numbers. Once you start hitting the caps, the Roth IRA provides a greater benefit than the traditional IRA. Let's say for instance you are in a 50% bracket and the cap is $7K. If you contribute $7K to the Roth, you'd have to contribute $14K to the traditional to have the same amount at retirement (assuming you pulled the whole amount at retirement and you were in a 50% bracket then). However, due to the cap, you aren't allowed to contribute $14K to your IRA. So, you end up being far ahead by putting in $7k to the Roth
bombcar
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Re: IRA-poor?

Post by bombcar »

986racer wrote: Thu Jun 06, 2024 4:25 pm It's true as long as you are talking about relatively low contribution numbers. Once you start hitting the caps, the Roth IRA provides a greater benefit than the traditional IRA. Let's say for instance you are in a 50% bracket and the cap is $7K. If you contribute $7K to the Roth, you'd have to contribute $14K to the traditional to have the same amount at retirement (assuming you pulled the whole amount at retirement and you were in a 50% bracket then). However, due to the cap, you aren't allowed to contribute $14K to your IRA. So, you end up being far ahead by putting in $7k to the Roth
True, because you can "fit more in" the Roth, but you can also then do backdoor Roth if you want.
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suevv
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Re: IRA-poor?

Post by suevv »

realclemsongrad wrote: Thu Jun 06, 2024 4:00 pm
suevv wrote: Thu Jun 06, 2024 3:36 pm Thanks AceSD - it felt so ordinary. Max out contributions (starting at about 27 years old). Dump it in index funds. Don't touch it. Husband was able to put in larger allocations in his SEP and 403b accounts, and started that very early. His 403b was from a part time job at a university and we basically put his whole salary into the 403b. It wasn't that much though! More than minimum wage - but 20 hours a week of low level staff salary. I don't know - it all felt so typical.
This is such a remarkably successful story. Congratulations 👏. Well done!! A remainder for us that we keep contributing to our 401k max and one day it will turn into a big number
LOL - and thanks very much. I still remember that day when two very nervous 20-somethings without a clue went into a Charles Schwab office to open a SEP with a great big $300 deposit. I even remeber getting a little dressed up for it. They probably thought we were hilarious!
Last edited by suevv on Thu Jun 06, 2024 4:44 pm, edited 1 time in total.
Topic Author
suevv
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Re: IRA-poor?

Post by suevv »

Thanks bombcar - I vaguely knew about 1031 exchange from the old Bob B days. Time to learn the details!
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Wiggums
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Re: IRA-poor?

Post by Wiggums »

Unfortunately, withdrawals from a tax deferred account are taxed as ordinary income. It would be less painful to withdrawal pre-tax money at a lower tax bracket. We are in a high tax state as well. With most of your money being deferred, this will affect your RMDs, Medicare premium with 2 year look back, etc. You really need a plan on how you will address the tax bomb before you get there. You need an estate plan.

We had a similar “cashflow” problem in early retirement. We are doing large Roth conversions. Now we have to slow down because we’re bumping up against Medicare premiums (IRMAA). We also learned that our IRA balance is going down very slowly in spite of conversions due to the growth of our portfolio. Picture Roth converting $150-200k annually, and having the IRA grow by $75k or more back. I’m just suggesting that you need a strategy for today and tomorrow. I would be open to all options regarding the Carmel home. Do you really want three houses? Taking a loan and using your taxable account might be the best option for you.
"I started with nothing and I still have most of it left."
Grt2bOutdoors
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Re: IRA-poor?

Post by Grt2bOutdoors »

Consider a 10 year mortgage - assuming you hold no other debt, you should be able to finance this purchase and use available regular assets to fund the down payment. What you have not considered is that $7m today will continue to grow - you don’t have a financing issue, you have a liquidity issue. Either payoff the mortgage by paying it down annually or pay it all off at the end.
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EricGold
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Re: IRA-poor?

Post by EricGold »

esteen wrote: Thu Jun 06, 2024 1:54 pm
the_wiki wrote: Thu Jun 06, 2024 11:34 am You cold take out a loan on the new house and then withdraw small amounts each year to pay the bill, keeping you in a lower tax bracket. For example, 24% tax bracket + 7% loan interest beats 37% tax bracket by a lot. Just have to do the math on tax bracket vs mortgage rate
Unfortunately this is untrue for most scenarios, due to the 7% compounding over the loan payback period while the tax brackets do not compound.

Example:

Need $630K for home purchase.

Option 1: Up Front Withdrawal
  • Take out $1M up front and pay 37% tax on it (nets $630K)
Option 2: Loan + Gradual Withdrawal
  • Take a $630K loan at 7%
    Take out $150K each year from your IRA to pay back the loan. Net annual loan repayment = $150K*(1-.24)=$114,000.
    Total loan balance keeps accruing 7% interest as you are paying it down.
    Total estimated repayment time ~7 years (or more if payments are paid after interest has accrued for the period, see below).
    Total withdrawn from IRA = $150,000 x 7 = $1,050,000.
Arithmetic aside, I don't know why $150k annual WD is required for a $630k loan

-----
OP:
- I wonder if you are allowed to itemize mortgage interest on the home with the higher rate
- It does sound like you should stop putting MORE into pre-tax from wages. Whatever is left over can finance your 2nd home loan
- $7M now in pre-tax will most likely run head-on into RMD in 15 years. If you have room in the 24% tax bracket to start nibbling away at the pre-tax balance, you should consider doing so. I think the general approach of IRA withdrawal to max out whatever tax bracket you are in might also be fair advice.
- Notice that the advice you are getting is mostly tax planning and not Carmel home purchase related

Here is the sort of arithmetic I apply to your situation:
Starting pre-tax balance: $7M
REAL appreciation: 4% (probably conservative)
15 year horizon
5% RMD at age 80
Calculate end balance. This is solidly in the 35% - 37% tax bracket range for *MFJ*. Then you get to consider possible reversion to higher tax brackets if the current brackets sunset in 2026
Last edited by EricGold on Thu Jun 06, 2024 5:38 pm, edited 3 times in total.
Topic Author
suevv
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Re: IRA-poor?

Post by suevv »

Thanks Chief Wiggums. We don't need 3 homes for sure. But for various reasons, the investment property feels worth keeping. The rent more than covers mortgage, insurance, taxes and maintenance - with a decent amount left over to save. It's steadily appreciating in value, and a 3.9% mortgage is nice.

The Medicare thing scares me, as do the RMD tax implications. We've always been DIY savers, but I'm thinking now that I'm behind and need a pro for some guidance. Dumb move. But appreciate all the guidance here that's making me see things more clearly.
986racer
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Re: IRA-poor?

Post by 986racer »

123 wrote: Thu Jun 06, 2024 12:49 pm
suevv wrote: Thu Jun 06, 2024 11:21 am ...So it looks like we have no way to access all that tax-deferred saving without blowing half the money on taxes...
That's what tax-deferred means. You don't actually save taxes, you defer them. Eventually taxes get paid, if not by you then by those that inherit the accounts. Many times people will pay their deferred taxes at a lower marginal rate but not always.

Diligent savers can often accumulate higher after-tax level of assets by avoiding tax favored accounts (except for Roth). Tax deferred accounts rob you of the capital gains tax treatment of stock investments since all the gains get taxed as regular income. And taxable accounts don't have RMD issues. However few people will have the discipline to grow and maintain sizeable taxable accounts. Just about everyone succumbs to the siren call of "save money on taxes" by contributing to tax-deferred retirement accounts.
Mathematically, that's not true.

You have two choices
1. Invest in traditional 401k - no taxes are paid now, then money grows at whatever rate, and then you pay a percentage later (often this is a lower percentage than what you would've paid now)
2. Invest in taxable - taxes are taken out now, and you invest the rest. The money grows at the same rate as option 1, but then you also pay more taxes (LTCG) unless your plan is to not use the money at all and bequeath it instead

The only way #2 grows to more is if you are in a low tax rate now and will be in a much higher tax rate at retirement. In that case, you should be using a Roth rather than investing in taxable.

EDIT:
To help illustrate why option 1 is always better, let's imagine the scenario where the tax rate now is the same as the tax rate at retirement. Let's say that it is 20%. Further, let's say that growth is a constant 7% for 10 years. And, let's say that capital gains tax will be 15%. Finally, let's say that you have $10k to contribute.

Option 1: Contribute $10k. It grows to 10000 * 1.07^10, which is after tax equivalent to 10000 * 1.07^10 * 80%
Option 2: Can put in $10k - 20%. It grows to 10000 * 80% * 1.07^10. So, that part is identical to option 1. However, you then have to pay taxes on that growth and that's where it has to be mathematically less.
Last edited by 986racer on Thu Jun 06, 2024 5:10 pm, edited 1 time in total.
exodusNH
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Re: IRA-poor?

Post by exodusNH »

mikejuss wrote: Thu Jun 06, 2024 1:12 pm
suevv wrote: Thu Jun 06, 2024 1:09 pm mikejuss - just for the record - nearly all S&P 500 index. We did hop out/hop back in one time on a sell/buy signal from Bob Brinker - maybe in 2000? Maybe that made more than a difference than I realized. But we've been almost exclusively index investing since our 20's. I guess I didn't realize our saved amount was out of the ordinary.
I still don't see how to get to $7 million via retirement accounts alone.
It does seem to be on the high end, but if two people were diligently saving for 35 years, they could have compounded to that size. They mention 401k and 403b as well as a SEP IRA. Those all have higher limits than regular IRA contributions.
exodusNH
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Re: IRA-poor?

Post by exodusNH »

suevv wrote: Thu Jun 06, 2024 2:14 pm 123 said: "Diligent savers can often accumulate higher after-tax level of assets by avoiding tax favored accounts (except for Roth). Tax deferred accounts rob you of the capital gains tax treatment of stock investments since all the gains get taxed as regular income. And taxable accounts don't have RMD issues. However few people will have the discipline to grow and maintain sizeable taxable accounts. Just about everyone succumbs to the siren call of "save money on taxes" by contributing to tax-deferred retirement accounts."

123 - This point about avoiding tax favored accounts (except for Roth) - is the single biggest point that we just failed to see all these decades! What with impending RMDs and the point that tax treatment comes out as a wash for us - the smart plan is starting to look like: pull the money, pay the taxes, buy the house and enjoy it and realize how lucky we are.
For the vast majority of people, the tax deferral is more valuable.

The median retirement balance for someone needing to take their first RMD is only $200,000, which results in an RMD of less than $8,000. The median is higher -- about $600,000, because savings are heavily skewed to a small number high earners. Even those people would only be facing $23,000 for their first RMD.
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