Topics

1

Taxes / Tax benefit of putting cash/expenses needs in tax advantaged account

« on: February 10, 2023, 07:58:16 PM »

Hello! I’m working through a tax comparison of having a Treasury bond ladder in spouse and my joint taxable account vs in our IRAs and swapping with VTSAX liquidated funds from our taxable account annually. Unfortunately I found this wiki after I bought a 6yr Treasury ladder in our taxable account a couple months ago to cover our annual expenses in our early retirement years with no pre-59.5 penalties: https://www.bogleheads.org/wiki/Placing_cash_needs_in_a_tax-advantaged_account. So now I’m wondering if there would be value in moving our bond ladder (since yields are getting close to when I bought in) into our IRAs by selling VTSAX by selling the bonds and buying an equal amount of VTSAX in our taxable account.

Here’s my comparison so far: Bond ladder in taxable, we’d have roughly $7k in interest and gains a year. Our taxable income is projected to be $22k (with the bond ladder, other dividends and interest, and reductions from HSA and prior year carryover capital losses), so 10% bracket. Therefore, we’d owe $700 each year in taxes just from the bond ladder and this would take the space of being able to do $7k more in Roth conversions each year a rung of the ladder matures. So over the 6 year ladder, we’d be paying $4200 in income taxes on the ladder instead of paying that amount in taxes on being able to do $42k in Roth conversions. However, the benefit is each year, we know what will be maturing and won’t come up short if VTSAX values drop in the taxable account and we won’t have to be bothered to do the annual buying and selling in our taxable and IRA accounts.

If the bond ladder were in the IRAs instead, I’m having trouble figuring the taxes we’d owe on the long-term capital gains of selling the roughly $70k annually of VTSAX in the taxable account, which would cover our projected annual expenses. I’m thinking if I assume I buy the same amount of VTSAX as I bought for the whole 6 year ladder at roughly $360k (about $60k per year) that would mean I’d have about $10k in capital gains if I cashed out $70k per year. But I’m not sure how I’d show the IRS that $10k should be taxed at the 0% bracket and how that links to the taxable income number on line 15 of my 1040 so that our ordinary income isn’t driven up higher than the 10% bracket. And I’m wanting to see if I actually would gain more space for a larger Roth conversion annually.

Any insights you could share on how I would complete the comparison and any problems you see so far would be greatly appreciated!

2

General Discussion / Deciding when to invest after a transfer

« on: August 15, 2022, 01:09:35 PM »

Hello,
I have a recent transaction that should have been routine that has gone badly. We were consolidating our Roth accounts by transferring my and spouses TSP Roths to our Vanguard Roth IRA. After 6 1/2 weeks, this transfer hasn’t been completed - TSP is still working on it. Had they done the transfer in the 2 weeks it’s supposed to take, it would have been a wash and I planned to invest the funds into VTSAX at about the same amount. However, at this point the market has risen over 10% and it’s still rising- so I figure we’re looking at a $21K loss unless the market drops.

I’m wondering what you think- invest right away even though that will seal the losses or ride it out for a couple of weeks to try to recoup some of the losses? This sounds a lot like market timing but I’m wondering if it’s more like not rushing to make a bad situation worse.

How should I be thinking about this- this  that went badly was a fluke and just do the next and future transfers as planned? I’m trying to learn something from these bad experiences  so I don’t lose more money moving forward.

Thank you for any wisdom you can share!

3

Taxes / IRS and investment documentation

« on: February 22, 2022, 05:22:57 PM »

Hello, I’ve searched for an answer with no luck so am hoping to find the answer here. In late 2006 I “loaned” my uncle a chunk of money so he could take it along with his and another family member’s to invest in a real estate deal. It was a very informal business transaction (not recommended). I wasn’t involved in business decisions. As you know things got rough shortly after that. They hung onto the property hoping it would recover. Needless to say finally there was an offer this winter and we decided to take it, with all of us sharing in the loss. There was a deposit into my bank account upon closing by the title company. I’m figuring I need to file a form with the IRS to show what that deposit was and also I want to do that so they can see there was a loss to help substantiate the max $3k/year I’ll be writing off over several years. What form would that be? Do I need to have my uncle file it with the IRS since he was dealing with the business transactions?

4

General Discussion / Flexible indexed universal life insurance and fixed index annuities

« on: August 30, 2021, 08:42:38 PM »

Hello! I sat through a retirement training at work and the financial advisor was offering free financial plans so I figured I hear out his ideas. He’s selling these 2 products that I’m researching. What are your thoughts on using flexible indexed universal life insurance (his product is Legacy Accel) instead of keeping our 2-3 years of cash living expenses in cash (when we retire at ages 48 and 50 we aren’t planning to have anymore earned income so want a nice buffer)? He’s saying this product will yield at least 2.5% guaranteed, is liquid, and passes to beneficiary. The fixed index annuities (he’s selling Nationwide New Heights) would be used instead of keeping the funds in the TSP so we’d have a guaranteed income at whatever later age we selected (I.e. 65 so as not to interfere with ACA subsidies) and it would come with a death payment unlike the TSPs partner Met Life annuity. This is being suggested to help provide guaranteed income (along with pensions and SS) typical of other deferred annuities. Are there any considerations or red flags you have with these products? We have no heirs.

5

General Discussion / Why not always rollover 401k to Roth IRA?

« on: July 03, 2021, 04:21:39 PM »

Hello! Still trying to learn! I can’t seem to find any rules or restrictions on being able to rollover 401k to Roth IRAs, no matter the age. The Roth ladder and 72T Sepp are options for when under 59.5 years old. But what’s stopping us from continuing to rollover the money into the Roth IRA after that age until the 401k balance is zeroed? Between ages 59.5 and 72 when RMDs will start, we were thinking we should be maximizing rollovers within ACA and tax considerations, and it seems rolling into our Roth IRAs would be better than straight withdrawals to our savings. That way the money could grow tax free in the Roth IRA, instead of us having to pay taxes on interest or dividends in savings or taxable accounts. Plus isn’t a Roth IRA a better vehicle when leaving to heirs (which we don’t have) or leaving our money to charity? What am I missing? Thank you!
M

6

Early Retirement / Roth Ladder and 72T Sepp

« on: July 02, 2021, 05:16:46 PM »

Hello! Soon we’ll be “early” FIRE.  As we continue to refine our withdrawal strategy plan, we’re studying the mechanics of the Roth ladder and 72T Seep from you and other authors. Our goal is to draw down our 401k as fast as we can to help alleviate as high of RMDs, without exceeding around 200% FPL to qualify for a good ACA CSR subsidy, and to move the money into our Roth IRAs to then grow tax free. Questions:

1) Am I understanding the technique correctly is we will move the money from our TSP to our Roth IRAs directly? Or will we need to take an extra step and move from TSP to 401k to Roth IRA?
2)  If we do the ladder every year all the way to ages 59.5 rather than stop at ages 54.5 (as others write about but we can’t figure out why), would that be advantageous so we continue to draw down the TSP while also then have access to the money we paid in the last 4 years all at once at age 59.5 because we met the age requirement?
3) We are hesitant of the 72T Seep because it’s more rigid and might mean we’re needing to do the mandatory money movement when the economy is down/funds are losing. Of course the advantage is immediate access to the funds. What are the best ways to mitigate against this risk? We’ve thought of moving the amount of money we need to meet about $30k in annual transfer to the Roth IRA from the TSP to a separate 401k and then invest that in safe treasury bond type funds. And then to keep our allocation balanced, keep the remaining TSP funds from both accounts invested more aggressively like our Roth IRAs are. Would this work and what else would help mitigate sequence of returns risk?
4) Do you see any issues with just one of us doing the 72T Seep and the other handling the higher RMDs from the high TSP balance account? That way we have just one account to manage and maybe it allows for more flexibility for the other spouse to also do a 72T Seep later, if desired. I was thinking from a mathematical perspective it doesn’t matter if the balance of one TSP account is higher because it’s about the sum, correct?  But am I missing other considerations, early death of a spouse, etc.?

Thanks so much for your excellent blog and forum!

7

Early Retirement / Early retirement withdrawal strategy

« on: February 19, 2021, 06:59:51 PM »

Hi All, wanting to see what you think of our withdrawal plan for when we start our ER in a year with no further expected additional work income after that. Shooting to stay in <=12% federal  bracket all throughout retirement. Want to use ACA so aiming to keep under cliff.

Draft Withdrawal Plan
-Right away make Yr 1 of Roth ladder conversion to stay within 400% FPL and 12% federal tax bracket.
-In years 1-5 live on Cash, supplement with Roth IRA contributions and maybe 72T SEPP to get to year 6. If we don’t do 72T, in yrs 6-10 primarily live off the Roth ladder conversions made from yrs 1-5 and supplement with Roth IRA withdrawals of contributions if needed.
-When spouse reaches age 59.5 until 401k is depleted- withdraw roughly annual expenses. When pensions start reduce 401k withdrawals to just cover remainder of annual expenses. Do the same when SS kicks in. Once 401k is depleted then live off Roth IRA and HSA.

Questions:
1) Do you see any red flags or have suggestions on this withdrawal strategy, in particular to minimize taxes, still be eligible for ACA subsidies, and of course have enough money for life?
2) In our situations do you have concerns with using 72T SEPP in addition to Roth ladders?
3) We had wanted to take SS as early as possible to lock it in, but this doesn’t help with drawing down our 401ks  as quickly as possible. What considerations are most important for deciding when to take SS?

Thank you!

8

General Discussion / How to figure FI with pension and SS

« on: March 01, 2020, 06:10:22 PM »

Hello! I’ve studied this blog/archives along with many others and can’t seem to find if it is appropriate (and if so how) to account for expected pension (and to a lesser extent SS) that will start years after ER? If I just use the 4% rule then I’m not quite there (especially when I boost expenses to add a buffer). But I’ve created a year by year spreadsheet and once pension and SS kicks in, I don’t need to spend retirement savings near as much, thereby showing I’ll die with too much money. Or is pension and SS not included due to the unknowns of whether they’ll actually happen (mine would be from a federal job so who knows what Congress will do to change the deferred retirement rules). Thanks ahead of time for any ideas!

9

Taxes / Tax strategy when not enough brokerage acct funds

« on: February 14, 2020, 03:46:34 PM »

Hi Again! I went back and read even more and reworked my plan. Three questions: 1) Are you saying that you think it would be less favorable to stay in the 12% bracket (for us that would be from our 72T, Roth conv ladder and TSP Roth contribution withdrawals in early retirement to cover our expenses, then pension, SS and Roth IRA withdrawals later in retirement) in all the years of early and regular retirement and instead you’d consider it more favorable to have some years, even if just 5 years, at the 10% bracket (before our SS kicks in added to our pensions) recognizing this may put some years at a higher level in the 12% bracket? Unfortunately we don’t have many brokerage funds to draw dividends from. Our strategy was putting our savings into retirement accounts- maxing out TSP and Roth IRAs (including backdoor), paying off debt (mortgages), and we made the mistake of investing $90k post tax money into private REITs which we’ll be lucky to get all our principal back eventually. 2) If I could go back 10 years, would you have said we should max the TSP but not the Roth IRA and instead done a brokerage? We still have 2 years to adjust this I think. We are 46 and 48 and are pretty sure we’re FI and could ER now. But if we work 2 more years I’ll get to draw a $43k pension vs a $38k pension 2 yrs earlier (60 vs 62). To make now work we’d have to draw down all of our Roth’s and TSP until our pensions and SS kicks in. This seems risky to us since we’d be taking a deferred retirement 14 years after job separation and who knows what Congress will do to us federal workers. We wouldn’t have enough funds without the pensions. We likely would if we worked 2 more years because the bulk of our good paying earnings now will go into a brokerage account after funding the retirement accounts because we now have no debt (but if pensions stay viable we’ll die with too much). 3) Any thoughts on our situation?