Yeah, not rational. There are at least 100 old paintings, not just 50. And that would still be few enough that it wouldn’t be boring. LOL
AJ
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Hi @RBMunkin —
I won’t duplicate @aj485 when it comes to the topics she covered so well. What I will mention is that my statement included the word “core” in the type of living expenses I expect to target the RMD plus Social Security amount to cover.
By core, I mean “reasonable costs for things like food, clothing, transportation, shelter, utilities, communication, taxes, and ‘normal’ healthcare, along with modest amounts for things like holidays, birthdays, and entertainment.” I hope to have a lifestyle beyond that core, and with flexibility in the tax treatments of my money, I’ll be able to better pick and choose how to cover it based on the conditions at the time.
Social Security, health insurance/Medicare, and inflation are major swing items in that projection. Still, for the sake of discussion, let’s say it’ll cost $1,500 per month ($18,000 per year) above Social Security to cover those core costs.
Using the current RMD table for age 75, that would imply a traditional-style retirement account balance of just under $445,000 at age 75.
Between now and then, there’s a lot of time… And in that time, there are all sorts of age related milestones to pass, opportunities for Congress to change the rules, and chances for market uncertainty to mess up the best laid plans…
Still, with that as a framework, all my current personal retirement contributions are currently Roth-style (either direct or backdoor), and my only option for my employer’s contributions is Traditional-style. The softest part of my plan right now is the after-tax part.
If I get early retired before age 55, there is currently a lot of financial gymnastics, hope, and possibility of at least part time work to make it through to age 59 and a half.
If I retire between age 55 and age 59 and a half, I would likely be tapping my employer-sponsored Traditional style accounts to cover my costs and then figure out taxes and Roth conversions based on the boots-on-the-ground reality at the time.
After 59 and a half, when Roth-style accounts that are at least five years old can be tapped tax-free. the benefits of a flexible strategy can really start to kick in. To take advantage of that, though, I will either need to not retire until reaching that age or dramatically boost the trajectory of my after-tax investments between now and when I do retire…
The key thing to remember about Roth conversions is that they make the most sense in a framework of “pay me now, or you’ll pay me more later.” If I get to the point where my “mandatory” income is Social Security plus $18,000 per year, then I hope it means I’ve done a decent job of controlling the “you’ll pay me more later” part.
Regards,
-Chuck
There are multiple ways to draw funds before age 55 from various types of accounts. From taxable accounts, of course, you can simply use the money. That sometimes results in capital gains taxes though. From Roth accounts, if they are 5 years old or older, and they usually are by that point, you can withdraw contributions tax-free and penalty-free. From traditional IRAs, you can set up a SEPP (section 72(t) of the relevant tax law), which is a relatively simple way to withdraw from an IRA before age 59 1/2 without penalties, and you have to keep those periodic withdrawals going for at least 5 years. From a 401k, you can’t directly withdraw as easily before age 55, you would have to transfer the funds to an IRA first. But there are ways to access funds from all the options.
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In additional to your contributions, you can also withdraw conversions that are at least 5 years old without taxes or penalties. There is a Roth conversion ladder strategy where 5 years before your planned retirement, you convert some money each year. When you retire, you then withdraw the money that you converted 5 years prior.
If you leave your company in or after the year you turn 55 (even if you’re only 54), you can take withdrawals from a Traditional 401(k) with paying the early withdrawal penalty. So that may not be ‘long’ before you reach 55, but it’s still before 55, even though it’s called ‘the rule of 55’.
I will point out that with the rule of 55, you should only plan on taking Traditional funds out of employer plans like 401(k)s, not Roth funds. Roth withdrawals from employer plans before reaching 59 1/2 are required to pro-rate contributions and earnings, and the earnings will be taxed because they are being withdrawn before 59 1/2. The early withdrawal penalty on those earnings is waived due to the rule of 55, but taxes on the earnings are not waived. So for anyone who is planning on using the rule of 55, you need to have enough Traditional funds (including taxes) in your employer plan to meet your withdrawal requirements until you are 59 1/2. Yet one more reason to have some Traditional funds in your employer plan.
AJ
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Yes, this is right. The tax advantage of regular, SEP, and SIMPLE IRAs is that contributions are generally made using pre-tax cash, allowing you to delay taxes until withdrawal. However, when you withdraw money, it is taxed as regular income, regardless of whether the profits were initially capital or interest. This is why it is critical to plan for withdrawals, especially if you expect to be in a higher tax bracket in retirement or have made big gains. Some investors use Roth IRAs to possibly profit from tax-free withdrawals, but each account type has unique rules and perks.
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