SEPP was always a backwards solution for me. If someone is able to retire early why would they be putting all their savings into retirement accounts? Surely, they would have some more liquid/penalty-free accounts to draw upon until they retire.
Sometimes retiring early can happen due to a set of accelerating financial circumstances, at which point you just need to withdraw your money and be done with it.
In the past two years alone major indices, were up anywhere from 50-100%.
As far as I understand you can withdraw the principle from a roth ira after five years (of starting the account?). So contribute to an after-tax 401k, do the backdoor into a roth ira, then you have pentaly-free withdrawals of the principle.
For pre-tax 401k you also can roll this over into a roth ira and make pentalty-free principal deductions. The only problem is that you have to pay tax on the amount rolled over using your tax bracket in that year. Here is what you do. There are several states with no income tax, and the lowest federal marginal tax bracket for long term cap gains for a married couple filing jointly is $80,800. Standard deduction for the couple is $25,100. That's $106k per year in tax free _gains_, the real dollar amount can be much higher. If you can live on a fraction of this you are golden because you have access to a 0% tax bracket. Start rolling over your pre-tax 401k into an after-tax roth ira tax-free, using that bit of head-room each year. Once done you can start making penalty free principal withdrawals. Then start doing tax _gain_ harvesting in your taxable accounts using the free 0% tax bracket headroom.
Note: although there is an after-tax 401k, there is also a roth 401k. so along with pretax 401k that makes a total of 3 kinds
For whatever reason, the online personal finance space has rallied behind the ira and roth ira products
but I cant find any benefit of the ira over the 401k. whats important to me is how the 401k has multi-year low interest borrowing possible, as well as 10x higher contribution limits than an IRA.
To me it seems more like the SEO ambiguity makes the roth 401k more obscure than it is, it is hard to google because of the after tax, roth, and redirection to roth ira discussions pollute the search results
In addition, it seems like people just figured out how to create their own iras but havent figured out they can do the same with 401ks? One can roll from other plans and other employers 401ks into your own self directed 401k including roth 401k
> The only problem is that you have to pay tax on the amount rolled over using your tax bracket in that year. Here is what you do...
To be clear: When you roll pre-tax 401k dollars over to Roth IRA dollars, you pay income tax rates, not capital gains rates. There's no 0% bracket to take advantage of. To do it tax-free, you can roll over only what you deduct each year, i.e. the $25,100 standard deduction in your example. Otherwise you're paying taxes.
The point of Roth conversions is to avoid the 10% penalty on withdrawals from other retirement accounts before you're 59.5 years old, not to avoid taxes. You can minimize your taxes by doing the conversions in chunks over years rather than all at once, though, also known as a Roth conversion ladder.
The usual plan here is to live on after-tax capital gains and qualified dividends (which have a 0% bracket, as you say) in the early years of retirement while slowly moving money from 401k and traditional IRA accounts to a Roth IRA. When the non-retirement accounts are exhausted, the Roth takes over.
Disclaimer: I created https://fiers.co (financial independence site)
My focus has been on financial independence instead of needing emergency funds (for which retirement accounts should be a last resort).
I wish more people understood just how feasible financial independence is and the different strategies of how to invest money to reduce tax burdens. The IRS rule 72(t) that is mentioned in this article is one of those. I don't believe many people understand that you can access your retirement accounts tax free.
In a FI/RE (financial independence/retire early) sense - these are strategies you plan ahead for and when the time comes you execute on that plan and it could very well be to start tapping into your retirement account consistently before you get to retirement age.
6 comments
[ 3.1 ms ] story [ 26.6 ms ] threadIn the past two years alone major indices, were up anywhere from 50-100%.
For pre-tax 401k you also can roll this over into a roth ira and make pentalty-free principal deductions. The only problem is that you have to pay tax on the amount rolled over using your tax bracket in that year. Here is what you do. There are several states with no income tax, and the lowest federal marginal tax bracket for long term cap gains for a married couple filing jointly is $80,800. Standard deduction for the couple is $25,100. That's $106k per year in tax free _gains_, the real dollar amount can be much higher. If you can live on a fraction of this you are golden because you have access to a 0% tax bracket. Start rolling over your pre-tax 401k into an after-tax roth ira tax-free, using that bit of head-room each year. Once done you can start making penalty free principal withdrawals. Then start doing tax _gain_ harvesting in your taxable accounts using the free 0% tax bracket headroom.
For whatever reason, the online personal finance space has rallied behind the ira and roth ira products
but I cant find any benefit of the ira over the 401k. whats important to me is how the 401k has multi-year low interest borrowing possible, as well as 10x higher contribution limits than an IRA.
To me it seems more like the SEO ambiguity makes the roth 401k more obscure than it is, it is hard to google because of the after tax, roth, and redirection to roth ira discussions pollute the search results
In addition, it seems like people just figured out how to create their own iras but havent figured out they can do the same with 401ks? One can roll from other plans and other employers 401ks into your own self directed 401k including roth 401k
To be clear: When you roll pre-tax 401k dollars over to Roth IRA dollars, you pay income tax rates, not capital gains rates. There's no 0% bracket to take advantage of. To do it tax-free, you can roll over only what you deduct each year, i.e. the $25,100 standard deduction in your example. Otherwise you're paying taxes.
The point of Roth conversions is to avoid the 10% penalty on withdrawals from other retirement accounts before you're 59.5 years old, not to avoid taxes. You can minimize your taxes by doing the conversions in chunks over years rather than all at once, though, also known as a Roth conversion ladder.
The usual plan here is to live on after-tax capital gains and qualified dividends (which have a 0% bracket, as you say) in the early years of retirement while slowly moving money from 401k and traditional IRA accounts to a Roth IRA. When the non-retirement accounts are exhausted, the Roth takes over.
My focus has been on financial independence instead of needing emergency funds (for which retirement accounts should be a last resort).
I wish more people understood just how feasible financial independence is and the different strategies of how to invest money to reduce tax burdens. The IRS rule 72(t) that is mentioned in this article is one of those. I don't believe many people understand that you can access your retirement accounts tax free.
In a FI/RE (financial independence/retire early) sense - these are strategies you plan ahead for and when the time comes you execute on that plan and it could very well be to start tapping into your retirement account consistently before you get to retirement age.
Here's an overview of the model that's used on fiers.co - https://fiers.co/article/how-it-works