Early Retirement/Efficient Account Use

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Topic Author
Colleen
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Early Retirement/Efficient Account Use

Post by Colleen » Thu Jan 16, 2020 11:02 am

My husband recently lost his job and we’re trying to figure out if retirement is in the cards or whether he must still work. I work and get benefits for our family (children are in 1st and 3rd grade). Looking for some insights into how to spend from our various accounts.

Husband turns 52 and I turn 45 this year.

I take home about $28,800 a year.

Mortgage balance of $275,500 at 3.875%,

Taxable Accounts have $900,000: 60% US, 25% International, 8% Bonds and 6% split between real estate ETFs and Crypto.

Traditional Rollover IRA: $1,730,000: 49% US, 4% international, 31% Bonds and 13% cash.

ROTH IRAS: $352,000, 51% US, 39% International, 7% Bonds

New York State Retirement Fund: $176,000 (Fixed return of 7%)

529 Accounts: $231,000 (51% International, 35% US, 11% Bonds)

So, that puts us at a whopping $3.4 million dollars with two kids to put through college in the distant future and $231,000 earmarked for that expense. Overall, the investment allocation is 49% US Equities, 16% International, 30% fixed income/Cash, with a smattering of other things).

We live in the northeast and our expenses are high. We figure we should budget $140,000-$150,000 a year based on previous years. Using the 4% rule we could theoretically cover those expenses, though, of course, we’d need to pay capital gains and income taxes on any sales to fund those expenses.

Paying off the mortgage is an option (eliminating $18,700 a year in expenses at a cost of $275,500) but we’d need to sell securities, pay the tax and probably pay some of the NIIT tax as a result. It also means significantly reducing the taxable accounts and making it likely we will have to spend down the IRA before 59 1/2. Investment returns typically exceed the 3.875% interest, but there is something to be said for eliminating the expense).

We don’t want to spend down he Roth now if we can avoid it, but it seems the tax man has got to be paid eventually! We are struggling a bit to figure out the best way to spend. Do we just cash out the unsheltered accounts as needed, move on to the Roth and then the Traditional? Or do we set up a plan for substantially equal withdrawals from the Traditional and withdraw before 59 1/2 (avoiding the 10% penalty). Any insights are welcome.
Last edited by Colleen on Thu Jan 16, 2020 11:23 am, edited 1 time in total.

Jack FFR1846
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Re: Early Retirement/Efficient Account Use

Post by Jack FFR1846 » Thu Jan 16, 2020 11:06 am

I would think that your absolute first step should be to accurately document what you spend. $140k to $150k is a boatload of money. I live outside of Boston and we don't spend more than half that including 2 kids in college and supporting our 5 cars. We don't have a mortgage. You have a lot of savings and that is commendable but your spending is extremely high.

With no changes, and your ages, I'd think a withdrawal rate of 3% might be reasonable. From $3.4M, that's $102k a year.....2/3 what you think you need.
Last edited by Jack FFR1846 on Thu Jan 16, 2020 11:08 am, edited 1 time in total.
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livesoft
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Re: Early Retirement/Efficient Account Use

Post by livesoft » Thu Jan 16, 2020 11:08 am

Future murky. The 4% withdrawal rate was for folks in the 60's and not as young as you.

I suggest while looking for another job that is likely to take awhile that y'all cut expenses to under $100K a year.
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Wanderingwheelz
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Re: Early Retirement/Efficient Account Use

Post by Wanderingwheelz » Thu Jan 16, 2020 11:20 am

Agree with previous comments.

With a net worth similar to yours and approximately the same ages, but no dependents anymore, we spend about half of what you spend considering we have no debt. We live in the middle Atlantic region in a MCOL area.

We both still have full time careers but are comforted by the fact that any work we do going forward is because we want to, not because we have to. We want to be sure that our kids achieve full independence (so far, so good) before making any life changing decisions like early retirement.

Best of luck to you in figuring it all out. It isn’t easy.

Topic Author
Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Thu Jan 16, 2020 11:30 am

Jack FFR1846 wrote:
Thu Jan 16, 2020 11:06 am
I would think that your absolute first step should be to accurately document what you spend. $140k to $150k is a boatload of money. I live outside of Boston and we don't spend more than half that including 2 kids in college and supporting our 5 cars. We don't have a mortgage. You have a lot of savings and that is commendable but your spending is extremely high.

With no changes, and your ages, I'd think a withdrawal rate of 3% might be reasonable. From $3.4M, that's $102k a year.....2/3 what you think you need.
What we spend is accurately documented. It just happens to be a lot of money. Yes, we can certainly spend less. We've just not been very successful doing so.

Topic Author
Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Thu Jan 16, 2020 11:36 am

Jack FFR1846 wrote:
Thu Jan 16, 2020 11:06 am
I would think that your absolute first step should be to accurately document what you spend. $140k to $150k is a boatload of money. I live outside of Boston and we don't spend more than half that including 2 kids in college and supporting our 5 cars. We don't have a mortgage. You have a lot of savings and that is commendable but your spending is extremely high.

With no changes, and your ages, I'd think a withdrawal rate of 3% might be reasonable. From $3.4M, that's $102k a year.....2/3 what you think you need.
Appreciated. Any insight into the main question - withdrawing from what accounts, paying off mortgage, taking distributions in substantially equal payments to avoid 10% penalty?

Topic Author
Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Thu Jan 16, 2020 11:39 am

Jack FFR1846 wrote:
Thu Jan 16, 2020 11:06 am
I would think that your absolute first step should be to accurately document what you spend. $140k to $150k is a boatload of money. I live outside of Boston and we don't spend more than half that including 2 kids in college and supporting our 5 cars. We don't have a mortgage. You have a lot of savings and that is commendable but your spending is extremely high.

With no changes, and your ages, I'd think a withdrawal rate of 3% might be reasonable. From $3.4M, that's $102k a year.....2/3 what you think you need.
Lets say 3% on 3.2 million (not taking the kids 529 money) plus my salary gives us about $124,800. How would you structure the withdrawals? Would you just tap the taxable accounts until he is 59 1/2? Keep the mortgage? Or tap the Roth before the traditional?

02nz
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Re: Early Retirement/Efficient Account Use

Post by 02nz » Thu Jan 16, 2020 11:54 am

(Leaving aside the spending issue, although I would be concerned that, with kids that age, it'll be hard to reduce your expenses by much until they're out of college.) I agree that you shouldn't use 4%. It has worked for normal-age retirees, but for someone in their early 50s, I'd go with 3%. And yes pay off the mortgage first.

You'd want to make sure to fill up your low-tax space every year. Very roughly: you have about 100K as married filing jointly that you can fill up with a combination of regular income (including distributions from trad'l 401k/IRAs) and long-term capital gains. So a little over 70K after accounting for your salary. Within this amount the retirement plan distributions would be taxed at no higher than 12%, the LTCG at 0%. Again that's very rough - do some scenarios using tax software. You could do a mix for your withdrawal that is in rough proportion to your taxable/trad'l balances, but I'd avoid touching the Roth if at all possible.

72(t) SEPP is one way to avoid the penalty, but it's very inflexible and if you mess up the penalties are stiff (and IRS cannot waive them). May be better to do a Roth conversion ladder, and live off taxable in the meantime. This is a useful reference for all the possibilities: https://www.madfientist.com/how-to-acce ... nds-early/

Topic Author
Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Thu Jan 16, 2020 12:06 pm

Thanks for that. We also get about 700 a month in dividends in the taxable accounts. Not sure if that impacts the tax buckets any. And of course, that will reduce as we spend those accounts down.

I am reluctant to pay the mortgage only because there is not a ton of cash in the taxable accounts to begin with. Also, because to do so could require that I sell enough to trigger the extra capital gains tax penalty at a rate higher than my mortgage.

I did not realize that I could do partial roth conversions. For some reason I recalled that if you have a traditional IRA it became complicated if you didn't convert the whole thing. I will look into that after taxes are filed because a laddered conversion seems handy to allow tax deferred growth for 10-15 years before having to tap it.

HomeStretch
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Re: Early Retirement/Efficient Account Use

Post by HomeStretch » Thu Jan 16, 2020 12:37 pm

I don’t see voluntary retirement now for spouse as the best financial option.

Assuming spouse does retire now, do some financial projections of your income/taxes/marginal tax rate by future year using different withdrawal strategies to see which yields the best after tax results for your situation.

Consider starting with a baseline projection that involves (1) not paying off the mortgage (to conserve cash), and (2) withdrawing only from the Taxable account for the next 7 years until the year spouse turns 59-1/2. With a Taxable account of $900k, your annual salary of $28.8k and an annual spend of $140-$150k, 7 years of withdrawals total $777k - $847k leaving a small Taxable account balance. If you become unemployed, your Taxable account with earning may or may not fully cover the 7 years.

Without knowing the gains in your Taxable account, my guess is that your marginal tax rate for the 7 years (withdrawing only from the Taxable account) will be lower than your rate thereafter. You don’t have a large enough Taxable account to pay the tax on Roth conversions too during the 7 years. So it might make sense to also withdraw from the traditional IRA during the 7 years (to level your marginal tax rate over future years) which gets into the 72(t) SEPP scenario. This could be projection scenario #2.

Before a voluntary retirement, you and spouse should consider what happens if you lose employment due to lay-off or health issues, or if one spouse dies (can the sole survivor make the numbers work). Loss of job for you means not only loss of $29k per year wages but loss of benefits. Unsubsidized benefits through the ACA national exchange or state exchange would likely significantly increase your annual spend. Or you would need to “manage” income during the 7 years by withdrawing from the Roth IRA too in order to receive a premium subsidy.

Does your $140-$150k annual spending include income taxes, healthcare and lumpy expenses like home repair or car purchase? Have you priced ACA healthcare coverage (withand without subsidy) for a family of 4 to see the impact on your spend in the event of job loss?
Last edited by HomeStretch on Thu Jan 16, 2020 12:43 pm, edited 1 time in total.

02nz
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Re: Early Retirement/Efficient Account Use

Post by 02nz » Thu Jan 16, 2020 12:42 pm

Colleen wrote:
Thu Jan 16, 2020 12:06 pm
Thanks for that. We also get about 700 a month in dividends in the taxable accounts. Not sure if that impacts the tax buckets any. And of course, that will reduce as we spend those accounts down.
They may be ordinary dividends (taxed like income) or qualified dividends (capital gains). Check previous 1099 forms from your brokerage or look at the one that comes in February for 2019. But either way they'll fill up that low- or zero-tax space every year.
Colleen wrote:
Thu Jan 16, 2020 12:06 pm
I did not realize that I could do partial roth conversions. For some reason I recalled that if you have a traditional IRA it became complicated if you didn't convert the whole thing.
You can convert any amount you like at any time from traditional IRA to Roth IRA, it's reported as taxable income. The complication you're thinking of may be the pro-rata rule, which has to do with the "backdoor Roth." Not an issue for converting some of your tax-deferred IRA balance to Roth.
Colleen wrote:
Thu Jan 16, 2020 12:06 pm
I am reluctant to pay the mortgage only because there is not a ton of cash in the taxable accounts to begin with. Also, because to do so could require that I sell enough to trigger the extra capital gains tax penalty at a rate higher than my mortgage.
If you have only your salary and the dividends in 2020, this is the perfect opportunity to harvest capital gains. Regardless of whether you pay off the mortgage, sell enough of the stock funds (and get out of crypto) in taxable that you fill up the 0% LTCG space. You can always reinvest the money if you don't need all of it (maybe reinvest more of the taxable account in bonds and rebalance the IRAs accordingly).

Topic Author
Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Thu Jan 16, 2020 3:40 pm

02nz wrote:
Thu Jan 16, 2020 12:42 pm
If you have only your salary and the dividends in 2020, this is the perfect opportunity to harvest capital gains. Regardless of whether you pay off the mortgage, sell enough of the stock funds (and get out of crypto) in taxable that you fill up the 0% LTCG space. You can always reinvest the money if you don't need all of it (maybe reinvest more of the taxable account in bonds and rebalance the IRAs accordingly).
Am I correct that if my salary and realized gains top out above $80,000 then there is no point at which any capital gains are taxed at 0%? I'm not sure there is any way to keep our stock sales below the top rate applicable for 0%. Maybe if we sell the savings bonds this year but those will likely be used for college instead.

02nz
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Re: Early Retirement/Efficient Account Use

Post by 02nz » Thu Jan 16, 2020 4:39 pm

Colleen wrote:
Thu Jan 16, 2020 3:40 pm
02nz wrote:
Thu Jan 16, 2020 12:42 pm
If you have only your salary and the dividends in 2020, this is the perfect opportunity to harvest capital gains. Regardless of whether you pay off the mortgage, sell enough of the stock funds (and get out of crypto) in taxable that you fill up the 0% LTCG space. You can always reinvest the money if you don't need all of it (maybe reinvest more of the taxable account in bonds and rebalance the IRAs accordingly).
Am I correct that if my salary and realized gains top out above $80,000 then there is no point at which any capital gains are taxed at 0%? I'm not sure there is any way to keep our stock sales below the top rate applicable for 0%. Maybe if we sell the savings bonds this year but those will likely be used for college instead.
I think your 80K number overlooks the standard deduction, which is over 24K for MFJ. You really should put some numbers into tax software or at least use Taxcaster (https://turbotax.intuit.com/tax-tools/c ... taxcaster/). When I plug in your ages, 2 kids under 17, 35K in wages/interest income (or IRA distributions/Roth conversions), and the following in LTCG (or qualified dividends, which are treated the same) here's what TaxCaster calculates as your tax liability for '19:

$35K wages/interest + $0 LTCG/qualified dividends: $6479 refund
$35K wages/interest + $10K LTCG/qualified dividends: $2800 refund
$35K wages/interest + $70K LTCG/qualified dividends: $2659 refund

As you can see the first $10K of LTCG really costs you, I think because you then lose the Earned Income Tax Credit. But with the EITC out of the picture, you can have close to $70K in LTCG before seeing another reduction in your refund. The negative tax liability of $2800 is because of the refundable child tax credit. This confirms what I wrote earlier - you have roughly $100K of low- or no-tax space.

Anyway these are just examples, you should play with the numbers in TurboTax or the like (software for the 2020 tax year won't be available until Nov/Dec, but '19 numbers should be close enough) because there are sometimes surprising interactions between various deductions, credits, and tax rates. But these examples underscore that you have considerable opportunity to harvest gains, so you shouldn't necessarily look at capital gains taxes as a problem. You will need to spend some time to really understand your taxes, but the potential reward here is considerable.

There's a much longer thread on "How to pay 0 taxes in retirement with 6-figure expenses" that you should read: viewtopic.php?t=87471

MathIsMyWayr
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Re: Early Retirement/Efficient Account Use

Post by MathIsMyWayr » Thu Jan 16, 2020 6:05 pm

02nz wrote:
Thu Jan 16, 2020 4:39 pm
Colleen wrote:
Thu Jan 16, 2020 3:40 pm
02nz wrote:
Thu Jan 16, 2020 12:42 pm
If you have only your salary and the dividends in 2020, this is the perfect opportunity to harvest capital gains. Regardless of whether you pay off the mortgage, sell enough of the stock funds (and get out of crypto) in taxable that you fill up the 0% LTCG space. You can always reinvest the money if you don't need all of it (maybe reinvest more of the taxable account in bonds and rebalance the IRAs accordingly).
Am I correct that if my salary and realized gains top out above $80,000 then there is no point at which any capital gains are taxed at 0%? I'm not sure there is any way to keep our stock sales below the top rate applicable for 0%. Maybe if we sell the savings bonds this year but those will likely be used for college instead.
I think your 80K number overlooks the standard deduction, which is over 24K for MFJ. You really should put some numbers into tax software or at least use Taxcaster (https://turbotax.intuit.com/tax-tools/c ... taxcaster/). When I plug in your ages, 2 kids under 17, 35K in wages/interest income (or IRA distributions/Roth conversions), and the following in LTCG (or qualified dividends, which are treated the same) here's what TaxCaster calculates as your tax liability for '19:

$35K wages/interest + $0 LTCG/qualified dividends: $6479 refund
$35K wages/interest + $10K LTCG/qualified dividends: $2800 refund
$35K wages/interest + $70K LTCG/qualified dividends: $2659 refund

As you can see the first $10K of LTCG really costs you, I think because you then lose the Earned Income Tax Credit. But with the EITC out of the picture, you can have close to $70K in LTCG before seeing another reduction in your refund. The negative tax liability of $2800 is because of the refundable child tax credit. This confirms what I wrote earlier - you have roughly $100K of low- or no-tax space.

Anyway these are just examples, you should play with the numbers in TurboTax or the like (software for the 2020 tax year won't be available until Nov/Dec, but '19 numbers should be close enough) because there are sometimes surprising interactions between various deductions, credits, and tax rates. But these examples underscore that you have considerable opportunity to harvest gains, so you shouldn't necessarily look at capital gains taxes as a problem. You will need to spend some time to really understand your taxes, but the potential reward here is considerable.

There's a much longer thread on "How to pay 0 taxes in retirement with 6-figure expenses" that you should read: viewtopic.php?t=87471
OP may also have to consider a state income tax depending on the state in NE. Many states tax dividends and LTCG as ordinary income. The marginal NY income tax rate appears over 6% in the above example. Well, still not as bad as CA.
Last edited by MathIsMyWayr on Thu Jan 16, 2020 6:16 pm, edited 2 times in total.

02nz
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Re: Early Retirement/Efficient Account Use

Post by 02nz » Thu Jan 16, 2020 6:06 pm

MathIsMyWayr wrote:
Thu Jan 16, 2020 6:05 pm
OP may also have to consider a state income tax depending on the state in NE. Many states tax dividends and LTCG as ordinary income.
Hence my suggestion re: tax software.

Topic Author
Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Thu Jan 16, 2020 6:52 pm

I think that what I will do is play out various scenarios using tax software and see how different scenarios play out. :)

Thank you for all of your help

livesoft
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Re: Early Retirement/Efficient Account Use

Post by livesoft » Thu Jan 16, 2020 7:00 pm

Note that if you sell taxable account asset, that return of capital is tax-free and does not appear on your tax return. So if you sell $50,000 worth of shares with a cost basis of $40,000, then only $10,000 will show up as income on your tax return ... unless you have some offsetting [carryover] capital losses.

With the kids, I would guess that tax software would show that you would pay no income taxes up to about $115,000 of the right kind of taxable income. You may even consider Roth conversions.
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Topic Author
Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Thu Jan 16, 2020 7:18 pm

livesoft wrote:
Thu Jan 16, 2020 7:00 pm
Note that if you sell taxable account asset, that return of capital is tax-free and does not appear on your tax return. So if you sell $50,000 worth of shares with a cost basis of $40,000, then only $10,000 will show up as income on your tax return ... unless you have some offsetting [carryover] capital losses.

With the kids, I would guess that tax software would show that you would pay no income taxes up to about $115,000 of the right kind of taxable income. You may even consider Roth conversions.
I understand that only the gains are taxable. We just happen to have a lot of gains. Of course when we sell in the taxable accounts we will give due consideration to tax lots and such.

If it doesn't matter that we have roth IRA's now, I will definitely look into doing conversions from the Rollover IRA to the Roth IRA (can that be withdrawn and deposited to an existing roth, or should we create a new one? I do like the idea of paying some tax now and having 10 years of growth that isn't taxed. Of course, I like that idea when the markets have been skyrocketing. Won't know if it was a good idea for another 10 years. :)

02nz
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Re: Early Retirement/Efficient Account Use

Post by 02nz » Fri Jan 17, 2020 12:56 am

Yes you can do Roth conversions into an existing account, no need to open another Roth IRA.

EfficientInvestor
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Re: Early Retirement/Efficient Account Use

Post by EfficientInvestor » Fri Jan 17, 2020 7:49 am

Good job on saving well up to this point. There have been a number of good responses so far on efficient tax management and trying to reduce expenses. I'll try to add a few things that haven't been discussed.

1. Would your husband quit working entirely, or is there a lower wage, lower stress job he would consider? Perhaps something that is in line with his hobbies? For instance, if he really enjoys home improvement projects, he could get a job on the floor at Lowes or Home Depot. It wouldn't bring in the same kind of money that it seems he was bringing in before, but it would go a long way to offset your expenses. The key would be finding a job that is something he would enjoy doing anyway and would be relatively stress-free. So then it would feel like a semi-retirement of sorts.

2. How would you plan to invest the money in order to give yourselves the best chance of producing the ~4% withdrawal that you need to be able to pull out your $150k every year? As it stands, you appear to be very stock-heavy in taxable and close to 60/40 across the retirement accounts. Even if you were to pull back to 60/40 across the board, you would still have close to 85% of your risk in stocks. During 2008, you still would have experienced a 30% drawdown (see backtest image below) and would have had a 10-year period that only had a 1.9%/year return (see Rolling Returns below). If you are looking to maintain decently high returns in order to produce the cash flow you need but want to reduce your downside risk, you could consider a risk parity investing style. This would more evenly spread your risk between stocks and bonds by increasing the effective duration on your bonds so that the risk/return profile of your bond allocation is more equal to that of your stock allocation. In your case, this could be potentially be accomplished with unleveraged longer duration bonds, moderately leveraged medium duration bonds, or more leverage on shorter term bonds. The latter option has proven to be most efficient and also tends to be not as susceptible to rising interest rate environments as longer duration bonds.

If you could implement something similar to what is shown in portfolio 2 and have a worst 3 or 5 year period of 4.8%, you should be just fine. The big caveat to mention though is that bond interest rates are lower than those that created this backtest (or at least the first 20 years of this backtest). Therefore, you might not expect quite the returns of what are shown here. But even if you knock a couple % off the average results of Portfolio 2, I think you could still manage.

Backtest - https://www.portfoliovisualizer.com/bac ... on5_2=-320

Image
Image

Topic Author
Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Fri Jan 17, 2020 9:13 am

I have one additional question, the answer to which I assume is yes, but I am not sure.
Should I make a Roth contribution this year? This is the first year I can do so directly, but of course if I do that we will just have to draw down on stock accounts in the same amount and pay gains tax on the gains. (Note, in case he does get re-employed, we will likely do a backdoor again anyway so we don't get tripped up on the income limits)


As for our investment allocation, which is now 65% stocks, I think we will knock that back to 60% primarily by selling stocks this year to live on.

It's hard to just sell stocks just for the sake of rebalancing at this point since the market is returning $4000-$10,000 a day in returns this year.
I recognize there could be a steep decline at any moment and that while we have weathered such storms in the past, "this time" is different because we no longer have an income. Still, we were 100% in stocks for 25 years and the new cash and bond portion of the portfolio will be there to buy into any steep declines.

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willthrill81
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Re: Early Retirement/Efficient Account Use

Post by willthrill81 » Fri Jan 17, 2020 9:33 am

Have you gone to the Social Security Administration's website to determine both your husband's and your estimated benefits? I'll bet that you are both well past the second bend point already, meaning that you wouldn't gain much in additional benefits from continuing to work. It's quite possible that by full-retirement age, your combined benefits could be $50k or more.

I would recommend laying out your anticipated expenses, including college expenses for your kids, in a spreadsheet. Include SS benefits and any other non-portfolio income sources. Also, if you anticipate downsizing your current home after the kids move out, include that as well. My instinct is that if you'll be able to rein in your spending a bit that you'll be in good shape.

It might be most efficient to start SEPP for his traditional accounts, which will be less than what you need in total, and to supplement that with withdrawals from your taxable accounts.
Last edited by willthrill81 on Fri Jan 17, 2020 9:34 am, edited 1 time in total.
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aristotelian
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Re: Early Retirement/Efficient Account Use

Post by aristotelian » Fri Jan 17, 2020 9:34 am

If you pay off ypur mortgage, what does that do to your expense?

I would think $3M+ with at least one income should be fine for anyone, period. If your husband needs/wants to retire, you may need to make some different choices, but can he retire? Yes, absolutely.

02nz
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Re: Early Retirement/Efficient Account Use

Post by 02nz » Fri Jan 17, 2020 10:59 am

Colleen wrote:
Fri Jan 17, 2020 9:13 am
I have one additional question, the answer to which I assume is yes, but I am not sure.
Should I make a Roth contribution this year? This is the first year I can do so directly, but of course if I do that we will just have to draw down on stock accounts in the same amount and pay gains tax on the gains. (Note, in case he does get re-employed, we will likely do a backdoor again anyway so we don't get tripped up on the income limits)
Yes you should do a Roth contribution if income allows. Keep in mind that you have enough earned income that even if your husband doesn't earn a dime in 2020, you can also put $7K into a Roth IRA (or traditional IRA and then backdoor, but see note below) for him.

If there's uncertainty over income you can either wait until tax season next year to make contributions for 2020, or just do the backdoor now. Note though the large traditional (rollover) IRA would be a problem - this is where the pro-rata rule comes in. The rule applies only per-person even if married filing jointly, so if you don't have your own traditional/rollover IRA you can still do the backdoor for yourself.

02nz
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Re: Early Retirement/Efficient Account Use

Post by 02nz » Fri Jan 17, 2020 11:56 am

willthrill81 wrote:
Fri Jan 17, 2020 9:33 am
Have you gone to the Social Security Administration's website to determine both your husband's and your estimated benefits? I'll bet that you are both well past the second bend point already, meaning that you wouldn't gain much in additional benefits from continuing to work. It's quite possible that by full-retirement age, your combined benefits could be $50k or more.

I would recommend laying out your anticipated expenses, including college expenses for your kids, in a spreadsheet. Include SS benefits and any other non-portfolio income sources. Also, if you anticipate downsizing your current home after the kids move out, include that as well. My instinct is that if you'll be able to rein in your spending a bit that you'll be in good shape.

It might be most efficient to start SEPP for his traditional accounts, which will be less than what you need in total, and to supplement that with withdrawals from your taxable accounts.
Note however that SSA's benefit estimates assume that you'll continue working and earning what you've been making, so if your husband retires now the benefits will be lower, though probably not by a great deal since as willthrill81 notes your husband is probably past the second "bend point." There are calculators where you can plug in the earnings record (copy from ssa.gov), use zeroes for future years and get an estimate that way.

On SEPP: I would just emphasize again that it's almost entirely inflexible once set up, so only go that route if your husband is sure he won't work before age 59.5. The penalties for breaking an SEPP are stiff and cannot be waived, so you really need to understand every last detail before committing.

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luminous
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Re: Early Retirement/Efficient Account Use

Post by luminous » Fri Jan 17, 2020 12:15 pm

02nz wrote:
Fri Jan 17, 2020 11:56 am
Note however that SSA's benefit estimates assume that you'll continue working and earning what you've been making, so if your husband retires now the benefits will be lower, though probably not by a great deal since as willthrill81 notes your husband is probably past the second "bend point." There are calculators where you can plug in the earnings record (copy from ssa.gov), use zeroes for future years and get an estimate that way.
This is a good one: https://ssa.tools/
50/20/30 US stock/international stock/bonds. Hope to semi-retire in 2022.

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Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Fri Jan 17, 2020 12:15 pm

02nz wrote:
Fri Jan 17, 2020 10:59 am
Colleen wrote:
Fri Jan 17, 2020 9:13 am
I have one additional question, the answer to which I assume is yes, but I am not sure.
Should I make a Roth contribution this year? This is the first year I can do so directly, but of course if I do that we will just have to draw down on stock accounts in the same amount and pay gains tax on the gains. (Note, in case he does get re-employed, we will likely do a backdoor again anyway so we don't get tripped up on the income limits)
Yes you should do a Roth contribution if income allows. Keep in mind that you have enough earned income that even if your husband doesn't earn a dime in 2020, you can also put $7K into a Roth IRA (or traditional IRA and then backdoor, but see note below) for him.

If there's uncertainty over income you can either wait until tax season next year to make contributions for 2020, or just do the backdoor now. Note though the large traditional (rollover) IRA would be a problem - this is where the pro-rata rule comes in. The rule applies only per-person even if married filing jointly, so if you don't have your own traditional/rollover IRA you can still do the backdoor for yourself.
Thanks. My husband is the old one, so I can put $6,000 into my Roth (yes, I have my own and thank you for the pro-rata comment as that was what worried me previously. Good to know it won't apply if I contribute the $6,000 to my own IRA and then convert it. Maybe I'll wait to do so until I know if I can make a standard roth contribution, if only because it feels weird to "lock away" the free cash I know I need to spend at the moment. Once we start selling stocks it'll be easier from a cashflow point of view to do so.

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Re: Early Retirement/Efficient Account Use

Post by Colleen » Fri Jan 17, 2020 12:22 pm

willthrill81 wrote:
Fri Jan 17, 2020 9:33 am
Have you gone to the Social Security Administration's website to determine both your husband's and your estimated benefits? I'll bet that you are both well past the second bend point already, meaning that you wouldn't gain much in additional benefits from continuing to work. It's quite possible that by full-retirement age, your combined benefits could be $50k or more.

I would recommend laying out your anticipated expenses, including college expenses for your kids, in a spreadsheet. Include SS benefits and any other non-portfolio income sources. Also, if you anticipate downsizing your current home after the kids move out, include that as well. My instinct is that if you'll be able to rein in your spending a bit that you'll be in good shape.

It might be most efficient to start SEPP for his traditional accounts, which will be less than what you need in total, and to supplement that with withdrawals from your taxable accounts.
I have not done so, but will. One thing we were worried about was having all of the zero years in their. I couldn't tell from the website what the exact impact would be but I will look at the calculator there and third party as well to confirm. I have no idea what second bend is, but he's been fairly high income for at least 20 years.

I understand that if he does a SEPP it only has to cary him to 59 1/2 before he can stop it without penalty. The advantage to the SEPP is just that we can tap some of the roll over IRA money now, pay income tax on it but avoid the penalty? If we can live off the unsheltered money for the next 7 years is there any benefit to tapping the rollover IRA? (I intuitively understand that the income tax on the rollover money will be higher than the capital gains tax on the unsheltered funds, so that seems like a bad idea until we run out of the unsheltered money).

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Re: Early Retirement/Efficient Account Use

Post by 02nz » Fri Jan 17, 2020 12:35 pm

Colleen wrote:
Fri Jan 17, 2020 12:22 pm
I have no idea what second bend is, but he's been fairly high income for at least 20 years.

I understand that if he does a SEPP it only has to cary him to 59 1/2 before he can stop it without penalty. The advantage to the SEPP is just that we can tap some of the roll over IRA money now, pay income tax on it but avoid the penalty? If we can live off the unsheltered money for the next 7 years is there any benefit to tapping the rollover IRA? (I intuitively understand that the income tax on the rollover money will be higher than the capital gains tax on the unsheltered funds, so that seems like a bad idea until we run out of the unsheltered money).
Social Security retirement benefits are calculated by taking an indexed average of your highest 35 years of earnings (indexed means that $1 in earnings in 1990 count for more than $1 of earnings in 2020, because of rising wages/prices) and then applying this formula:
(a) 90 percent of the first $960 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $960 and through $5,785, plus
(c) 15 percent of his/her average indexed monthly earnings over $5,785.

This is what people mean by "bend points," and as you can see SS is progressive, in that high earners get a relatively smaller portion of what they pay in than lower earners. Your husband is likely well into segment (c), so several years of zero earnings likely won't reduce his benefits dramatically (and not even proportionally) from the SS benefit estimate.

With SEPP you can indeed tap the money without penalty, paying only income tax. Because of its inflexibility and the stiff penalties, if you can get by for 7 years on your taxable account (or for 5 years and do a Roth conversion ladder in the meantime), then I would avoid the SEPP route.

Income tax may or may not be higher than the capital gains tax. Your first 24.4K of income every year is tax-free, because of the standard deduction. As noted earlier you want to make sure to use up the 100K or so of low- and no-tax space every year.

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Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Fri Jan 17, 2020 12:39 pm

luminous wrote:
Fri Jan 17, 2020 12:15 pm
02nz wrote:
Fri Jan 17, 2020 11:56 am
Note however that SSA's benefit estimates assume that you'll continue working and earning what you've been making, so if your husband retires now the benefits will be lower, though probably not by a great deal since as willthrill81 notes your husband is probably past the second "bend point." There are calculators where you can plug in the earnings record (copy from ssa.gov), use zeroes for future years and get an estimate that way.
This is a good one: https://ssa.tools/
That is a great site, thank you! Turns out he has exactly 35 years, with summer jobs from college. Looks like his benefit will be 2748 if he retires at 67. And, $3407 if he waits to 70. It isn't a tremendous amount in the overall scheme of things, but it is a good chunk of change nonetheless.

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Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Fri Jan 17, 2020 12:46 pm

02nz wrote:
Fri Jan 17, 2020 12:35 pm
Colleen wrote:
Fri Jan 17, 2020 12:22 pm
I have no idea what second bend is, but he's been fairly high income for at least 20 years.

I understand that if he does a SEPP it only has to cary him to 59 1/2 before he can stop it without penalty. The advantage to the SEPP is just that we can tap some of the roll over IRA money now, pay income tax on it but avoid the penalty? If we can live off the unsheltered money for the next 7 years is there any benefit to tapping the rollover IRA? (I intuitively understand that the income tax on the rollover money will be higher than the capital gains tax on the unsheltered funds, so that seems like a bad idea until we run out of the unsheltered money).
Social Security retirement benefits are calculated by taking an indexed average of your highest 35 years of earnings (indexed means that $1 in earnings in 1990 count for more than $1 of earnings in 2020, because of rising wages/prices) and then applying this formula:
(a) 90 percent of the first $960 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $960 and through $5,785, plus
(c) 15 percent of his/her average indexed monthly earnings over $5,785.

This is what people mean by "bend points," and as you can see SS is progressive, in that high earners get a relatively smaller portion of what they pay in than lower earners. Your husband is likely well into segment (c), so several years of zero earnings likely won't reduce his benefits dramatically (and not even proportionally) from the SS benefit estimate.

With SEPP you can indeed tap the money without penalty, paying only income tax. Because of its inflexibility and the stiff penalties, if you can get by for 7 years on your taxable account (or for 5 years and do a Roth conversion ladder in the meantime), then I would avoid the SEPP route.

Income tax may or may not be higher than the capital gains tax. Your first 24.4K of income every year is tax-free, because of the standard deduction. As noted earlier you want to make sure to use up the 100K or so of low- and no-tax space every year.
Gotchya. I suppose I'll need to better understand how much of the money we spend will be from realizing long term gains. Maybe if its substantially less than $85,000 it would make sense to do the SEPP for the difference, assuming income tax rates stay 22% for amounts above that. But that may be cutting things too fine.

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Re: Early Retirement/Efficient Account Use

Post by PQ12$ » Fri Jan 17, 2020 12:57 pm

Hi Colleen -- what great questions you ask, and answers you are getting here! This is as good as this site gets.

I am sort of stuck on the question "should" he retire vs. can he. A lot we don't know of course but he could be in a very different place in 6 months after de-toxing from his previous gig. I went thru something similar at 52 and went from never wanting to work again to being excited to work in a slightly different capacity by 55. At this age, if we exit too completely it can be tough to maintain the career equity that allows us to do the stuff we are good at in a more agreeable context. Unplug too completely for too long and you become vapor.

Maybe you don't need to solve financially for the next 40 years, and instead should be focussed on the next 12 months - at which point you'll know a lot more than you do now. The good news is you are in a great place financially compared to most and can probably do whatever you want with some adjustments.

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Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Fri Jan 17, 2020 1:00 pm

aristotelian wrote:
Fri Jan 17, 2020 9:34 am
If you pay off ypur mortgage, what does that do to your expense?

I would think $3M+ with at least one income should be fine for anyone, period. If your husband needs/wants to retire, you may need to make some different choices, but can he retire? Yes, absolutely.
Thanks. Of course we can retire if the expenses are brought down, and that might mean moving south. I'm just trying to crunch numbers based on expenses we typically see. And, I see that last year was kind of anomolous because we used a high deductible health plan and incurred $16,000 in expenses most of which we won't see again. I think we'll budget $120,000 a year and see how that goes!

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Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Fri Jan 17, 2020 1:02 pm

PQ12$ wrote:
Fri Jan 17, 2020 12:57 pm
Hi Colleen -- what great questions you ask, and answers you are getting here! This is as good as this site gets.

I am sort of stuck on the question "should" he retire vs. can he. A lot we don't know of course but he could be in a very different place in 6 months after de-toxing from his previous gig. I went thru something similar at 52 and went from never wanting to work again to being excited to work in a slightly different capacity by 55. At this age, if we exit too completely it can be tough to maintain the career equity that allows us to do the stuff we are good at in a more agreeable context. Unplug too completely for too long and you become vapor.

Maybe you don't need to solve financially for the next 40 years, and instead should be focussed on the next 12 months - at which point you'll know a lot more than you do now. The good news is you are in a great place financially compared to most and can probably do whatever you want with some adjustments.
You nailed it. He's had 7 months to look for a job with no success and is considering going out on his own but he also likes not working, which he's gotten used to for the past 6 months. He's only been without a paycheck though, since 2020. The kids love having him home; he would probably be better off working but, sure, we will see how things work out. Maybe he'll start his own firm just so the resume looks like he's not on a break.

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Re: Early Retirement/Efficient Account Use

Post by Wiggums » Fri Jan 17, 2020 1:12 pm

I’m assuming that you will not have retiree medical.

Once you know your projected retirement expenses, I would create a spreadsheet by year, showing your annual expenses and sources of income. Thst way you can add social security on the year you project you will start it and indicate which accounts the money will get pulled from.

The IRS Rule of 55 allows an employee who is laid off, fired, or who quits a job between the ages of 55 and 59 1/2 to pull money out of their 401(k) or 403(b) plan without penalty. 1 This applies to workers who leave their jobs anytime during or after the year of their 55th birthdays.

As an slternstive, an IRS-approved rule distribution method might be just what you need. Put simply, 72t is an Internal Revenue Service (IRS) rule that allows for penalty-free, early withdrawal from an individual retirement account, 401k, TSP, 403(b), or 457 plan, when certain criteria are met.

Good luck to you...

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Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Fri Jan 17, 2020 1:20 pm

I guess he can get a job at 55 and get fired from it... :)

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Re: Early Retirement/Efficient Account Use

Post by Church Lady » Fri Jan 17, 2020 2:01 pm

Paying off the mortgage is an option (eliminating $18,700 a year in expenses at a cost of $275,500) but we’d need to sell securities, pay the tax and probably pay some of the NIIT tax as a result.
I wouldn't pay NIIT to pay off a mortgage, I myself have not paid capital gains to pay off my mortgage, and I don't know if your mortgage payment is onerous. One possibility you could investigate is recasting your mortgage. You'd pay a lump sum to reduce your monthly payment. My mortgage provider has a 50K minimum to recast, so you should check with your provider. Search the web for examples. All this applies only if you decide to stay put in your house.

Don't forget to plan for child care expense.
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity.

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Re: Early Retirement/Efficient Account Use

Post by willthrill81 » Fri Jan 17, 2020 9:30 pm

Colleen wrote:
Fri Jan 17, 2020 12:22 pm
willthrill81 wrote:
Fri Jan 17, 2020 9:33 am
Have you gone to the Social Security Administration's website to determine both your husband's and your estimated benefits? I'll bet that you are both well past the second bend point already, meaning that you wouldn't gain much in additional benefits from continuing to work. It's quite possible that by full-retirement age, your combined benefits could be $50k or more.

I would recommend laying out your anticipated expenses, including college expenses for your kids, in a spreadsheet. Include SS benefits and any other non-portfolio income sources. Also, if you anticipate downsizing your current home after the kids move out, include that as well. My instinct is that if you'll be able to rein in your spending a bit that you'll be in good shape.

It might be most efficient to start SEPP for his traditional accounts, which will be less than what you need in total, and to supplement that with withdrawals from your taxable accounts.
I have not done so, but will. One thing we were worried about was having all of the zero years in their. I couldn't tell from the website what the exact impact would be but I will look at the calculator there and third party as well to confirm. I have no idea what second bend is, but he's been fairly high income for at least 20 years.
In that case, working ten more years is unlikely to significantly increase his SS benefits. But I would suggest that you check out the SSA's calculators to estimate the impact.
Colleen wrote:
Fri Jan 17, 2020 12:22 pm
I understand that if he does a SEPP it only has to cary him to 59 1/2 before he can stop it without penalty. The advantage to the SEPP is just that we can tap some of the roll over IRA money now, pay income tax on it but avoid the penalty? If we can live off the unsheltered money for the next 7 years is there any benefit to tapping the rollover IRA? (I intuitively understand that the income tax on the rollover money will be higher than the capital gains tax on the unsheltered funds, so that seems like a bad idea until we run out of the unsheltered money).
The advantage of pulling funds from the traditional IRA is that it can 'fill up' the lower tax brackets (i.e. standard deduction, 10%, 12%), and you can then use withdrawals from taxable accounts to supplement this. Depending on how much capital gains you realize (remember that you are only taxed on the gains and not the full amount sold), you might be able to manage avoiding the 22% tax bracket completely yet still have the income you need.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Sun Jan 19, 2020 10:42 am

So, let us say that I can realize about $45,000 in long term gains before I fill up my 0% bucket.

Is there a good mathematical reason why I would wan to do that by selling $100,000 of investments with $45,000 in gains versus selling $200,00 of investments with $45,000 in gains?

To make this easier, assume I'm picking lots from VTI and have this flexibility, and that I only plan to spend $100,000

If I sell the $200,000 for 0 tax liability, I get more cash, reduce my exposure to the market more, and thereby reduce my upside and my downside as a result.

Do people do that only if they need to use the extra cash to rebalance?

edited: I can see that one thing I might do is shrink the bucket by converting $10,000 of my IRA to a roth and then realizing gains of only $35,000 from the higher cost basis investment.

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Re: Early Retirement/Efficient Account Use

Post by Pinotage » Sun Jan 19, 2020 11:25 am

PQ12$ wrote:
Fri Jan 17, 2020 12:57 pm
Hi Colleen -- what great questions you ask, and answers you are getting here! This is as good as this site gets.

I am sort of stuck on the question "should" he retire vs. can he. A lot we don't know of course but he could be in a very different place in 6 months after de-toxing from his previous gig. I went thru something similar at 52 and went from never wanting to work again to being excited to work in a slightly different capacity by 55. At this age, if we exit too completely it can be tough to maintain the career equity that allows us to do the stuff we are good at in a more agreeable context. Unplug too completely for too long and you become vapor.

Maybe you don't need to solve financially for the next 40 years, and instead should be focussed on the next 12 months - at which point you'll know a lot more than you do now. The good news is you are in a great place financially compared to most and can probably do whatever you want with some adjustments.
Agreed! Excellent post.

This is a great thread. Lots of value in the critical analysis of how various investment accounts can be accessed, and the relative tax efficiency of different approaches. Much more relatable than the "I'll never spend my stash" posts as well :beer

To the OP: I agree with PQ12$ - what if this is a short term plan vs a rest-of life plan? Given the resources you've managed to accumulate, and the savvy questions you've asked here, it is very likely you and your husband will find a solid plan forward. Perhaps this pause is just a planning opportunity in disguise.

Best wishes!

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Colleen
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Re: Early Retirement/Efficient Account Use

Post by Colleen » Sun Jan 19, 2020 4:41 pm

I had forgotten about being able to do a spousal IRA contribution, and it raises the question -- do we open up two traditional IRA's for a total of $13,000 for the 12% tax savings or do we open up Roth's for $13,000 and forgo the savings?

Is there a benefit to opening traditional IRA's for the tax savings while converting a portion of the traditional rollover IRA (Say, $13,000 to offset the money saved with the deductible IRA)?

Of course we Need the cash from somewhere and I am not sure it makes sense to put money into an IRA to save 12% and sell stocks and pay 15% taxes on those gains. I suppose I just need to see how much I need to sell to get $13,000.

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