305pelusa wrote: ↑
Sat Jan 25, 2020 11:07 pm
Read the book and disliked it quite a bit. It just says to buy VTSAX until you need some bonds (at which point, you could buy some VBTLX).
The lack of International diversification isn't terrible (many do that on this very forum). But he has a chapter on tax-advantaged accounts where he says IRA/401ks are the best with taxable afterwards but that Roth IRAs were not very good. Something like "IRAs let you take deductions to invest more in the market and hence make more money".
At that point I paused the audiobook and returned it. I don't think the fella knows what he's talking about.
He explains the pros and cons of each here: Stocks — Part VIII: The 401K, 403b, TSP, IRA & Roth Buckets
He's generally speaking to investors who reach financial independence early and use the following strategy
Step 1: Contribute to a Traditional IRA During Your Working Years
While you are working, your tax rate will likely be higher than it will be after FI so shield as much of your income from the taxman as possible by contributing to a Traditional IRA.
Step 2: Slowly Convert Traditional IRA to Roth IRA
Once you begin your early retirement, you’ll have less taxable income than you did when you were working so use this period to convert your Traditional IRA to a Roth IRA.
You didn’t pay tax on the money when you contributed to your Traditional IRA so you have to pay tax when you convert to a Roth. Your income will be lower after you retire though so you’ll likely pay very little tax on the conversion. In fact, if you convert an amount equal to your deductions, exemptions, and credits every year (and assuming you have no other ordinary income), you could execute these conversions without paying any tax at all!
Step 3: Enjoy Your Completely Tax Free Retirement Money
After converting your entire Traditional IRA to a Roth IRA during your early retirement, you can withdraw that money from the Roth tax free!
Note: To avoid paying a 10% early-withdrawal penalty, you have to wait five years after the conversion (or until you turn 59.5, if that’s sooner) to withdraw the converted funds from the Roth.
How is This Possible?
This strategy is referred to as a Roth IRA Conversion Ladder and you may be wondering why everyone doesn’t do this.
Well, there are a few reasons this strategy only makes sense for early retirees…
Low Income and Living Costs
Most early retirees live on a modest amount of income from tax-efficient sources like long-term capital gains and dividends (which are taxed at 0% when you’re in the 15% tax bracket or below). This means they can use their tax-free space (i.e. deductions and exemptions) for things like Roth conversions.
Long Conversion Timeframe
Conversions from a Traditional IRA to a Roth IRA are taxed as ordinary income so it’s beneficial to spread the conversion over a large timeframe. That way, you don’t increase your taxable income too much in any given year.
Since most people work full time until they reach retirement age, they never have periods of lower income to do these conversions cheaply. Any amount converted while working would increase the amount of tax they have to pay at their marginal tax rate and wouldn’t be worthwhile.
more here: https://www.madfientist.com/traditional ... -roth-ira/
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger