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Retiring Early: Taxable Accounts

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  • Retiring Early: Taxable Accounts

    Hello All,

    My wife and I are planning on retiring within the next 10-15 years. We will be in our mid 40s at that time. Given our planned early retirement, would you still suggest maxing out our 403(b) given the ten percent withdrawal penalty before age 59.5. The other option would be to invest a taxable account so we can withdraw without penalty.

    What have you guys done for this? My order for investing would be:

    1. Get any available match in 403(b)

    2. Max out Backdoor Roth

    3. Invest the rest in a fully taxable account


    Many thanks,

    PD

  • #2
    Yu never know if you will retire in 10-15 years. Life can bring many surprises such as divorce and health issues to name a few, but I don't want to sound negative.

    Given the fact that you are probably on your peak earning years you should take advantage of maximizing tax deferred accounts first for tax purposes and for asset protection. Then after funding roth you should consider taxable accounts.

    In addition there's a way to get your money before age 59.5 but you will have to withdraw the same amounts for many years (you can check in the blog as WCI had a post on this).

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    • #3
      Withdrawal penalties dont necessarily apply if youre not working and dont have income. There are several ways to get around these things, I'd bone up on them if this is your plan since youll want to utilize them all.

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      • #4
        I sadly don't have any match in my 401k

        Otherwise my plan is the same as yours:

         

        1) max out Roth 401k

        2) contribute to backdoor Roth IRA

        3) everything else goes to taxable

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        • #5
          Absolutely max out pension savings. I am retired- with a military pension- and not currently drawing from our retirement savings. (Will do so when pension doesn't cover our expenses, and as we get more comfortable increasing our expenses!) However every dollar my husband makes at his hobby job (5 shifts a month at Best Buy- his idea of fun) I sock away in his Roth IRA- and if he ever earned more than $6500 a year I'd do a spousal Roth contribution as well. I'll do that even when we are drawing down our taxable savings (though not, I presume, when we're drawing down our IRAs and 401 equivalents).

          However consider whether Roth better if you'll really retire so young and drop tax brackets at that time. I am hedging my bets- keep some in Roth, converting a bit to it each year we are lower brackets just up to top of bracket, and that will still leave us plenty we'll owe tax on when we take it out if we do.

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          • #6
            I'm with the others.  I don't know your income or marginal tax bracket, but it's generally best to maximize your tax deductions now while you have a high income.  Start taxable after the 403(b) and backdoor Roth are funded.

            If you plan things out properly and keep your taxable income below about $75,000 in retirement (2015 numbers) you can be in the 0% capital gains bracket.  Best of luck and good for you for planning ahead!

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            • #7
              There really isn't enough information in your post to allow others to offer specific advice.  It would be helpful to know your marginal tax rate right now, and what you expect it to be in early retirement.  I will assume that you have made peace with having much less money in retirement than if you worked longer, which implies a much lower marginal tax bracket.  Since that is likely the case, I would contribute the maximum to every tax-deffered account between now and the day you retire.

              If your marginal tax rate is 35% right now, but you can live on $75k/year in retirement, which would only be taxed at 15% (federal for MFJ), then contributing to tax-deffered now is a clear win even with the 10% penalty.

              Of course, you shouldn't plan on paying the penalty.  There are a few different ways to get at the money without paying the penalty, which WCI has written about here: https://www.whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/

              Although his blog post mentions that Roth IRA contributions can be accessed early without penalty, it doesn't mention that the conversion principal from Roth IRA conversions can be accessed penalty-free after 5 years.  This would allow you to perform yearly Roth conversions (staying in lower tax brackets) where you could use the conversion principal after 5 years.  If you have enough taxable savings to get you through the first 5 years, this could be a good plan.

              You should read more about this here: https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/  (specifically, read under the heading "The Second 5-Year Rule, For Roth Conversions")

               

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              • #8
                Your order is correct, imo. Since you are a resident and plan to retire in 10 - 15 years, I will presume you will be making $500k or so a year once you are employed. That means you'll be at or next to the top tier tax bracket of 39.6% plus state and local taxes, if applicable. By all means, get whatever tax break you can from your 403b. I would strongly suggest working with a fee-only financial planner to ensure that you'll be able to afford the standard of living you are planning in your mid-40s so you will work long enough to not have to worry if you retired too early. For example, I'm sure you've thought about this, but you'll have to self-insure until age 65 or until you are old enough for whatever retirement insurance benefits are available if you are working a government job.

                As for SEPP (Series of Equal Periodic Payment) withdrawals, I wouldn't recommend counting on this after investing for only about 15 years. Let this account grow tax-deferred and make strategic Roth conversions when you are in the 15% bracket. You can have gross income up to around $90k (today) to fill out the full 15% bracket, and it will be higher when you retire. Aim to take money out of the taxable account to supplement whatever other income you have (I'm assuming there is some other income that we're not privy to for you to accomplish these ambitious goals). Happy planning!
                Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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