I messed up my FIRE plans

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

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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

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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

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

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.

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you are both right.

I do have it.

Thanks,

tj

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

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

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

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

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

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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)

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

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

My cash bucket is running on close to empty.

My biggest regret is not boosting up my cash reserves when times were good…I’m talking about the 2018-2021 bull market…

I only put aside 2 years of a cash cushion. Should have put 5 years away and paid down more on my mortgage when I had the “excess”

So what is your strategy now? Are you selling some of your portfolio for cash? How do you go about doing that?

I was somewhat lucky since a placed my 5 year cash into high interest holdings. I haven’t taken anything from my portfolio yet despite the 1st half of the year rise. I was hoping that it could continue to rise in the 2nd half but it hasn’t turned out to be so. With interest rate rising, I am looking at how to be more in cash. At the same time, I have the sense that the high interest rates are going to let up eventually- maybe sometimes in 2024? so there needs to be some balance.
One thing that is different now is that I no longer have a salary and I don’t have fresh money to invest. I have to recycle the tired by the fresh but that is difficult to do.

How active are you managing your portfolio? Do you depend mostly on your portfolio for retirement?

tj

Yup,

I will have to sell off some stocks to fund my living expenses.

I am still working, but had “unexpected” expenses this year that drained my cash account. I had to get a new roof installed on my house.

A few days ago, my property tax arrived in my mailbox.

I still have monthly mortgage payments as well…

I will probably comb through my portfolio, selling off my lowest conviction holdings…

Will try and sell as little as possible to stay afloat of any debt…

I have 10 years to go until I reach my intended retirement age of 55.

I haven’t really lived through a prolonged bear market, but this time feels like it is dragging like a 50 pound weight on my portfolio…

for every 2 steps forward, it feels that I go back 3 steps backwards…

or like a truck spinning it’s wheels in the mud going nowhere

The all time highs of Nov 2021 seem so far away…

I have been dollar costing into stocks, but the contributions do not cause much ripple in the ocean…

In most cases, replacing a roof should either be a planned for event, or an event that insurance should mostly pay for. Planning for events like a roof, tires, painting the house, etc. should be considered when determining how much cash on hand is needed.

AJ

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That certainly has been the feeling in the 2nd half of this year. But we are supposed to keep our eyes on the long term. For you since you have a little while before retirement and a salary, you should not fret that much.
Certainly retiring at 55yol is a bit early and you do need a good cushion before taking the step.

I retired last year at 54yol and I intend to extract my income from my portfolio. I am currently living on the cushion I saved and on interests. I figure if I don’t do anything to my portfolio, I live on my 5 years cash cushion. In these next 5 years, I have to see when would be the best to shave my portfolio. I also need to see what to shave.

how do you build conviction in this or that?

It looks like we are going into a recession. It always looks bad. Hopefully the next 5 years are going to be ok.

tj

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Bumper stick seen in Houston:

“Please Lord, just one more oil boom…”

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