I messed up my FIRE plans

Retirement FIRE Wannabees
#15

Hi Gene:

in your hydraulic analogy, the balloon has to have enough pressure to push out some money to your passbook.

When do you decide your reservoir (portfolio) is full to open the valve? is that mainly on a need basis or you consider certain conditions when you would open more or less the valve? and do you ever pass money from your cash cushion to your portfolio?

On converting IRA to Roth, wouldn’t you have to pay taxes on your capital gains incurred when in the IRA, right?

when you left on this journey in 2005, did you use as you portfolio target to reach min 25X the revenue you thought you needed each year? and you left your job when you reached it?

tj

#16

On converting IRA to Roth, wouldn’t you have to pay taxes on your capital gains incurred when in the IRA, right?

No, that’s not correct. Traditional IRAs are not taxed based on capital gains - they are taxed at ordinary income rates on the amount distributed, whether it’s distributed to a taxable account or converted to a Roth IRA. That’s because most, if not all, of the money in a Traditional IRA typically has not ever been taxed as income. (Note: if you have any after-tax contributions in your IRA, the percent of the distribution that is taxed will be adjusted. But since most IRA owners do not have after-tax contributions in their IRAs, in most cases, the entire distribution will be taxable.)

On the other hand, under current law, tax rates are supposed to revert to the previous (higher) rates in 2026. So converting now could save money compared to waiting to take distributions later.

AJ

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#17

Hi thejusticier,

“in your hydraulic analogy, the balloon has to have enough pressure to push out some money to your passbook.”

It is a magic balloon (not like the one in the 1956 short film “The Red Balloon”). This balloon puts out a steady 45 psi from full to empty. So 5 gallons or 1 ounce in the balloon, 45 psi.

“When do you decide your reservoir (portfolio) is full to open the valve?”

Purely mechanical. If our last all time high was $563,701 and our close today is $571,332, a new high was set by $7,631 and I look through:

  1. Condition of cash cushion, percent of target amount.

  2. Available cash in the portfolio, percent of target amount.

If I believe I want to top off the cushion and I have cash available, I transfer cash to our savings account and log it as a withdrawal.

If I don’t have enough cash, I look at sale candidates for possible trimming.

It still boils down to a judgement call. I may not top it off. I might just send $20,000 instead of the $50,000 it is down and wait for the next all time high.

I balance the value of cash in the portfolio vs the need for the cash in the cushion.

If the cushion is low, like below 50%, I place more emphasis on getting more into it. If the cushion is at 90%, I might let it ride for a bit.

“do you ever pass money from your cash cushion to your portfolio?”

No.

When I get money, I usually use it to top off the cushion first. Depending on how much money remains after that, I may just add the remainder to the cushion, particularly if I have larger payments approaching like property taxes since it would be used shortly.

IIRC, over the last 10 years, our only larger cash income was 3 pipeline easements and 4 drilling/production 3 year leases and some 2 year extensions. In those cases, I topped off our cushion and put the remainder into our portfolio, logged as deposits.

“On converting IRA to Roth, wouldn’t you have to pay taxes on your capital gains incurred when in the IRA, right?”

There is no such thing as capital gains inside of a retirement account for taxes.

From traditional retirement accounts, all withdrawals are taxed as ordinary income. If the “account” has basis, tax paid contributions, then the withdrawals are partly tax free.

I say “account” above since each 401K/403B account is a separate entity, while every IRA account in your name is actually grouped as a single IRA. That is whole different discussion.

Retirement accounts are “black boxes” for taxes. Only one taxable event can occur inside a retirement account, UBIT, and it is rare since most people do not have sufficient assets to trigger it past the $1,000 threshold.

“when you left on this journey in 2005, did you use as you portfolio target to reach min 25X the revenue you thought you needed each year? and you left your job when you reached it?”

Kind of …

Using Quicken planner and a few online planners, I knew I had enough about 2 years before. I chose to wait a bit to pass the 55 threshold and get my little pension. And in 2004, DW had an all-expenses paid vacation to the garden spot of southern Iraq. When she got home, I was ready to leave …

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

1 Like
#18

Retirement accounts are “black boxes” for taxes. Only one taxable event can occur inside a retirement account, UBIT, and it is rare since most people do not have sufficient assets to trigger it past the $1,000 threshold.

When holding MLPs (the most common trigger for UBTI) inside an IRA, that’s no longer correct. While UBTI generated annually may not pass the $1k limit for UBTI, the act of selling the MLP will often generate UBTI in excess of $1000. As long as the IRA could avoid selling the MLP, or moving it in-kind, generating that UBTI could be avoided. Now that IRAs must be fully disbursed, generally no later than 10 years after they pass to a non-spouse beneficiary, it’s no longer going to be possible to avoid that UBTI. So any IRA holding an MLP is likely to end up with a UBTI bill for the IRA at some point.

AJ

#19

I have put already taxed money in the IRA. So I shouldn’t be taxed again on the principal, right?

#20

I believe that’s correct… but there are caveats.

Ask your question on the Tax Strategies Board.

https://discussion.fool.com/tax-strategies-100155.aspx?mid=35108…

You’ll get superb answers there…

:alien:
ralph

#21

Hi thejusticier,

“I have put already taxed money in the IRA. So I shouldn’t be taxed again on the principal, right?”

This is correct as long as you filed IRS Form 8606 with your fed tax filing every year that you made the non-deductible contributions.

If you didn’t file the forms, you will probably have problems if you try to claim the basis on your IRA when you withdraw funds.

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

1 Like
#22

I have put already taxed money in the IRA. So I shouldn’t be taxed again on the principal, right?

If you made after-tax contributions to a Traditional IRA, those form a basis in your IRA. Your distributions will be taxed on a pro-rata basis, with the percentage of the distribution representing the basis being tax-free, and the rest of the distribution being taxed at ordinary income rates, not capital gains rates.

Note: This assumes that you properly filed Form 8606 each year that you made the after-tax contributions. If you did not file Form 8606 for the contributions, then you need to dig up your records and file a Form 8606 for each year that you made after-tax contributions.

AJ

2 Likes
#23

Hi Gene:

I have not done that and I think I have made some IRA contributions (in addition to my fully funded 401K) over the past several years.

Over that time period, I have used H&R Block’s TaxCut and it asks if I want to make after tax IRA contributions. I answer in the affirmative and put the max I can put according to the software. But I don’t recall seeing anything about filling 8606. Can this be done retroactively?

I don’t want to be taxed twice obviously.

tj

#24

Over that time period, I have used H&R Block’s TaxCut and it asks if I want to make after tax IRA contributions. I answer in the affirmative and put the max I can put according to the software. But I don’t recall seeing anything about filling 8606.

Check your tax returns. If the tax software asked you about making after-tax contributions to your IRA, and you answered yes, it should have included Form 8606 in your tax return.

AJ

#25

Check your tax returns. If the tax software asked you about making after-tax contributions to your IRA, and you answered yes, it should have included Form 8606 in your tax return.

And always print your tax returns - the whole works - and keep them around for a few years. Print-to-PDF counts if you have a designated place to put it and keep good backups including both an external-device backup and an off-site backup.

1 Like
#26

you are both right.

I do have it.

Thanks,

tj

#27

I do have it.

Be sure to keep a copy of the last Form 8606 you filed, even if you don’t do any more after-tax contributions. You will need it when you start taking withdrawals and/or doing conversions from your Traditional IRA.

AJ

#28

Note: This assumes that you properly filed Form 8606 each year that you made the after-tax contributions. If you did not file Form 8606 for the contributions, then you need to dig up your records and file a Form 8606 for each year that you made after-tax contributions.

Does that necessitate filing an amended return, or just sending the form 8606?

I’ll have to check if we filed the form in the years we did after-tax contributions. Probably did, but I don’t want to assume anything. I relied on Turbo Tax, not an accountant. Which relies on me not inputting garbage (i.e. GIGO).

1poorguy

#29

Does that necessitate filing an amended return, or just sending the form 8606?

You can just file the Form 8606, but you should probably include an explanation of why you are filing it. Note: The IRS can charge penalties for filing the form late.

AJ

#30

Penalties on monies I’ve already been taxed for? That’s odd.

Probably just being paranoid, but I do want to be sure an 8606 is present every year we did this (which has been the past three or four years, at least).

1poorguy

#31

Penalties on monies I’ve already been taxed for? That’s odd.

No, penalties for filing late.

Probably just being paranoid, but I do want to be sure an 8606 is present every year we did this (which has been the past three or four years, at least).

Yes, in order for the IRS to recognize the basis (i.e. already taxed contributions) in your IRA, there needs to be a Form 8606 filed for each year that you made those after-tax contributions.

AJ

1 Like
#32

I checked, and there was no 8606 this year. First time I used the free online “cash app” service. I can file an amended return. It didn’t say any penalties would apply. Can’t e-file it though. Have to print and mail. I don’t suppose I could just print the 8606 and send that? They probably want a complete amended return.

1poorguy (probably pay to use T-Tax next year to avoid this)

#33

I checked, and there was no 8606 this year. First time I used the free online “cash app” service.

It could be that you didn’t answer a question correctly, as all of the free filing services I’ve seen support Form 8606, although I’m sure I haven’t seen all of them. I would suggest checking the software to see if it supports Form 8606. In fact, before using any free filing software, I would suggest that you pull out 2 or 3 prior year returns and make sure that the software will support all of the forms that those returns used.

Can’t e-file it though. Have to print and mail.

Yep.

I don’t suppose I could just print the 8606 and send that? They probably want a complete amended return.

You can file an 8606 by itself, but I would also include an explanation. That said, here’s a discussion that suggests if you file an amended return that just adds the 8606, rather than filing an 8606 by itself, you’re less likely to be charged a penalty for filing the 8606 late.

https://ttlc.intuit.com/community/retirement/discussion/did-….

AJ

#34

Hi darrellquock,

my portfolio also dropped by ~50%. It has come back up a bit since hitting its lowest point.

I was also wondering what I could have done back in 2021 and in the fall of 2021 to position my portfolio better for retirement mode.

I came to the conclusion that I would not have done anything differently. I would not have sold in big quantity or changed my growth portfolio so it would be less volatile.

I would not have done anything different because of two reasons:

  1. I was not focusing on re-vamping my portfolio for retirement which may need a bit more of a short term stability for income. I think I would still need the long term growth. I have had ideas of retiring for a while now and financially I could have but I never pulled the trigger and activated the final preparations for such an event.
    I was focusing 100% on long term growth.

  2. even if I had been in the frame of mind to retire in 2022, I would have thought that such a growth portfolio could still be appropriate for retirement despite it being mostly in growth stocks. In that I mean, I can draw from it the income I need to cover my expenses.

I have revisited these ideas several times in these past few months and I have not changed my mind. Moreover on 2, I may nevertheless alter some of the composition of my portfolio to tame down growth for a bit less volatility. I think it might still fall hard in the next bear market but that should be (I think and I hope) ok. I need and I want the long term growth to continue even in my retirement age.

So the question is a matter of how big and what is the margin of safety you need. If you don’t have that, it will not work FIRE or not FIRE (I did not know about FIRE until recently), and you would have nothing to regret. It’s just not time yet.

tj