early retirement, asset location

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Topic Author
bb
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Joined: Wed Apr 25, 2007 10:04 pm

early retirement, asset location

Post by bb »

Hypothetical question - if you were to reach a number whereby you thought
you could support your needed expenses at a 3% withdrawal rate would it
matter in terms of early retirement if the assets were 100/0, 50/50, or 0/100
taxable/tax deferred accounts?
MikeG62
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Re: early retirement, asset location

Post by MikeG62 »

Sure it would. Any money in a tax deferred account will result in income tax being due upon withdrawal. In this case, your 3% withdrawal rate would need to also cover the taxes due on $ withdrawn from the tax deferred account.

While there may be tax due on sales from a taxable account, it is only to the extent of the gain - and even then, only on the portion of your income which exceeds certain thresholds (depending on your filing status).

Long way of saying, much better to have funds in a taxable account (vs. tax deferred account) in retirement. Of course a tax free account (like a ROTH) is best of all three.
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book lover
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Re: early retirement, asset location

Post by book lover »

You also have to consider your Required Minimum Distribution from a traditional IRA at age seventy and a half which would be a major factor if all of your assets were in that type of IRA. In that event, you would want to consider converting that money to a Roth before reaching RMD which then may help determine when you take Social Security.
Topic Author
bb
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Re: early retirement, asset location

Post by bb »

Guess I was thinking there are 2 issues here - accessing retirement accounts before
59 1/2 and how to go about spending money from taxable/tax deferred accounts
which obviously affects taxes. If notionally you could live on 3% of assets how
to think about tax rates and asset location to figure out how much in taxes
you would have to pay.
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lthenderson
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Re: early retirement, asset location

Post by lthenderson »

bb wrote:Guess I was thinking there are 2 issues here - accessing retirement accounts before
59 1/2 and how to go about spending money from taxable/tax deferred accounts
which obviously affects taxes.
There are a couple methods of accessing retirement accounts before 59-1/2. Using form 72(t) is a tax penalty free method but has restrictions. If you have five years of expenses saved up in cash, you can also create a Roth Conversion Ladder as well.

An excellent resource for figuring out which of your accounts to pull money from and when to reduce taxes is the book Bogleheads Guide to Retirement.
Topic Author
bb
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Joined: Wed Apr 25, 2007 10:04 pm

Re: early retirement, asset location

Post by bb »

Sooner or later I will hit upon the right question - if you want x dollars to spend
how do you arrive at how much money you need saved up between y taxable
and z tax deferred accounts.
flyingaway
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Re: early retirement, asset location

Post by flyingaway »

To help building a portfolio faster, put more money in tax-advantaged accounts. To facilitate spending a portfolio easier, wish more money in taxable (or Roth) accounts.
DSInvestor
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Re: early retirement, asset location

Post by DSInvestor »

bb wrote:Sooner or later I will hit upon the right question - if you want x dollars to spend
how do you arrive at how much money you need saved up between y taxable
and z tax deferred accounts.
When I was accumulating, I made sure to always max out 401k/IRA space and then all additional savings went into the taxable account. I didn't worry about how much I had in each type of accounts but I had a high savings rate so more money went into taxable than to tax advantaged accounts.

Assuming you will not have a generous defined benefit pension, a good default plan may be to max out Traditional 401k/403b/457b, Roth IRAs and then invest in taxable. Once you retire early and start to live off the taxable account and take advantage of low tax rates for long term capital gains and Qualified Dividend Income, you may find that you can convert your Traditional assets to Roth IRA for little or no tax liability.

Note that withdrawal rues differ for 401k, 403b, 457b, Traditional IRA and Roth IRA. For example, I believe 457b allows for penalty free withdrawals before age 59.5. Roth IRA allows for tax free and penalty of Roth IRA contribution basis at any time.
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MikeG62
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Re: early retirement, asset location

Post by MikeG62 »

bb wrote:Sooner or later I will hit upon the right question - if you want x dollars to spend
how do you arrive at how much money you need saved up between y taxable
and z tax deferred accounts.
You will get a better answer if you provide more details. We have no idea whether 3% of asset is $25,000 or $250,000. The numbers will greatly affect the tax impact on your withdrawals and I think the answer.

I'm not trying to pry into your personal situation, but you really need to give us more to go on if you want more useful responses. Include as well whether you will be drawing a pension during early retirement and if so how much that will be. Also, MFJ or Single filing status?
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lthenderson
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Re: early retirement, asset location

Post by lthenderson »

MikeG62 wrote:
bb wrote:Sooner or later I will hit upon the right question - if you want x dollars to spend
how do you arrive at how much money you need saved up between y taxable
and z tax deferred accounts.
You will get a better answer if you provide more details. We have no idea whether 3% of asset is $25,000 or $250,000. The numbers will greatly affect the tax impact on your withdrawals and I think the answer.

I'm not trying to pry into your personal situation, but you really need to give us more to go on if you want more useful responses. Include as well whether you will be drawing a pension during early retirement and if so how much that will be. Also, MFJ or Single filing status?
+1

Additional useful information would include current ages, age at retirement, etc. There isn't one magic formula that fits all or even most. Figuring out how much one needs for retirement is highly dependent on your personal situation, of which we know nothing about.
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