Messages

1

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

« on: February 15, 2023, 04:47:29 PM »

That makes sense. The last hurdle for us is that in option B if VTSAX loses value in any given year(s) but we need the funds for expenses it would mean we’d have to liquidate at a loss in the bucket we have access to (taxable) unless we did some other maneuvers. (Also, unfortunately we have no use for capital loss because we have enough rollover losses to last many years.) We have enough ibonds to cover a year. And we could move some of our Roth IRA money to cash-like positions to get to our contributions, although I’ll have to look at what that does to our asset allocation. Any other ideas? I’d like to put backup plans in place that have similar surety as the ladder maturing in taxable, if possible, but maybe the answer is we can’t. Thank you again!

2

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

« on: February 12, 2023, 08:17:35 PM »

Thanks so much for those links- it worked out as you said! So it seems keeping the Treasury ladder in taxable means we’ll lose out on $42000 total in additional Roth conversions (roughly equivalent to a year’s worth of Roth conversions for us) which I’m guessing might equate to about $10k in extra state and federal taxes in the future if tax brackets are shifted for example. (Luckily ACA at the moment is very generous and so that’s not an issue right now.) After all this figuring, we are leaning toward keeping it in the taxable mostly because the whole reason we picked Treasuries (vs corporates or even municipal bonds) and a long-term ladder (vs bond fund, etc) was to allocate our bond portion of our asset allocation to be a sure thing to cover our expenses in many of our pre-59.5 early retirement years. So having it in the taxable account has the function of access and there is a trade off for that (more taxes), although that does sting. Am I off-base in my thinking and what would you do? Thanks again for your insights!

3

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!

4

General Discussion / Re: Deciding when to invest after a transfer

« on: August 29, 2022, 07:41:13 AM »

Well it’s been over 8 weeks and the TSP reissued check status is unknown, although after multiple calls and hours spent talking to representatives and supervisors who can’t help, they say the operations team is still working on it. Maybe by the time it gets to Vanguard the market will be back down anyway! Kidding aside, thanks for the answer. I figured that but wanted to make sure I wasn’t missing something.

For me, transferring out of TSP is for a couple of reasons- one is to simplify as it is essentially a duplication of my Vanguard IRA accounts, and the IRA rules are more flexible than the TSP rules, especially related to withdraws (I.e. can choose which investment to withdraw from bs proportional withdraw, etc.). Another advantage is timing. Getting at least some of the Trad TSP to my Vanguard Trad IRA will allow for quicker annual Roth conversions (a day vs at least 2 weeks if things don’t go wrong like this time) so the variability of the market is much less of a factor and I wouldn’t need to go through the cumbersome TSP process annually.
Thoughts?

5

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!

6

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?

7

Early Retirement / Re: Early retirement withdrawal strategy

« on: November 06, 2021, 05:35:35 PM »

Hello! I’ve studied what you are saying and have been wondering if I’m figuring the marginal tax comparison correctly. I’m comparing keeping at 200% FPL vs some other higher income amount. What I’m doing is comparing marginal tax in the early years vs once RMDs start, but I’m uncertain how to count the ACA as a tax and should I also be including Medicare later?  For example:

-For calculation in early years add marginal tax of federal and state taxes and look at ACA
-Do this for both 200% FPL and whatever higher income I’m trying to compare. For ACA include the premium increase in the higher income option and use zero for 200% FPL. Or should I be adding premium to both calculations? I was doing this thinking it would show me the difference in subsidy amount.
-Roughly calculate what the balance will be in TSP/401ks for each of these to calculate the rough expected RMD at ages 72.
-Add Federal and state marginal taxes from RMDs plus pensions plus SS. Then add Medicare premium.
-Compare early retirement vs after RMD marginal tax rates.

Is this correct? Thank you!

8

Early Retirement / Re: Roth Ladder and 72T Sepp

« on: September 10, 2021, 07:38:09 PM »

This was an excellent reply! It has taken me a bit to work through, but it has been a tremendous help to advancing our plan! After refiguring  we may actually need both of our accounts to put into 72T to make it add to enough useable income in the first 5 years.

For question #3 to help reduce sequence of returns risk, this is what I’m thinking… Once I rollover the TSP to Trad IRA I’d be able to have some of the funds in cash, bonds and stock index funds. In any given year I’d decide to withdrawal the mandatory amount  from the cash fund if the markets were down vs the stocks if markets were up. Is this allowed- choosing which funds to withdrawal from within the 72T SEPP Trad IRA in any given year? This isn’t allowed with the TSP- withdrawals are taken proportional across all funds held, which is a major disadvantage (IMO) to keeping funds in the TSP during the withdrawal phase.

Thank you again for your excellent posts and replies!
M

9

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

« on: September 02, 2021, 07:09:34 PM »

Oh darn, it sounds like such a good deal! Of course- I can tell they are salesmen and am skeptical. But in all seriousness, if I make 2.5% guaranteed, which is more than any high yield savings account, what am I missing?! I had a strong feeling it was a scam but I can’t pinpoint why. Can you tell me the secret?

What are your thoughts on the annuity? In some ways I’m drawn to it because I know how thrifty we can be. Even though I’m fairly certain we have enough in investments, I think we will be tempted to continue to scrimp and save for the unknown. Vs with pension, SS and an annuity, we would not be making a killing, but it would be a known that we’d feel free to spend. I was just thinking enough to cover expenses beyond what the pension and SS would be expected to over and then leave the rest invested.  Can you share your thoughts  on this thinking and on the particular type of annuity that’s best?

Thank you for your idea and welcome back to the US!

10

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.

11

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

« on: August 01, 2021, 08:02:22 AM »

This helps me refine the scenario better! In the years from ages 62-65 when we’re collecting pensions, they will push us into a higher FPL. During those years we’ll plan not to do any conversions no matter what tax bracket we land in so we don’t further reduce the ACA subsidies. From ages 65-67 when we’re just receiving pensions but have Medicare (not ACA), if we land in the 10% bracket, we’d just stay there. But it is likely we will land in the 12% bracket with just our pensions and then once SS is added at ages 67 we will be. At the point when we’re not on ACA and we’ve reached a higher income tax bracket (in this example 12%) from pensions and SS, that’s when it would be to our advantage to max out that bracket, right?

12

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

« on: July 29, 2021, 06:41:26 AM »

Thank you for these answers. I think I’m so driven to get money out of the 401k and save money in the Roth IRA because it’s been emphasized so much elsewhere to save the Roth IRA until last. We know we’ll have to pay taxes but I think your approach of not rushing makes sense for us.

You’ve helped me in another post to back off early conversions to stay below ACA limits - we landed on targeting 200% FPL so we can meet our income needs while we should be able to get a good plan. This will put us in the 10% income tax bracket. Once pensions and then later SS starts, we’ll be in the 12% income tax bracket (hopefully). We should still have space to max out that bracket. We should max that bracket out with the conversions, correct?

With QCDs, is the main idea for our application that we essentially give the money away to charity and don’t have to count it as income? So if with our pensions and SS we’ll be in the 12% bracket and I max out that bracket with conversions that count as income (which we will use to live), and if our RMDs are more than that then we give it to charity without taxes? And if we need that money to live then we’ll just have to pay the higher taxes on it?

I think I’m catching on, hopefully! Thank you again for making this easier to understand!

13

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

14

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!

15

Early Retirement / Re: Early retirement withdrawal strategy

« on: February 28, 2021, 08:05:39 PM »

Thank you so much for your reply and for challenging me to think of this different option! It took me a while to digest all of your info and to run a comparison scenario. I kept expenses and other assumptions as close as possible and here’s how it turned out to keep MAGI at 250% FPL.

-ACA- Silver Plan 250% FPL $4500/yr vs 400% FPL $6600. Doesn’t seem that CSR is an option or if it is it’s not obviously better. But that’s a savings of roughly $2k x 15 yrs = $30k plus any earnings.

-Taxes- This option ends up paying roughly about $123k more until death in taxes, however the timing is roughly $4k/yr less for the first yrs when MAGI is less and then more later not only because of higher income from the need to draw down 401k but also because MAGI is too high so taxes are owed on SS annuities.

-Portfolio- Despite higher overall taxes owed, the new option portfolio ends roughly $140k more at death. This option used more Roth IRA sooner and almost depletes it by the time we start to take Medicare. Of course the 401k acct. grows more longer until RMDs force more aggressive withdraws.


Questions:
1- I see what points you are making come true in this option. Essentially we can save $6k/yr in healthcare and tax expenses in ER. However, by keeping such large 401k balances, doesn’t this interject a higher element of risk for a small overall gain ($140k total) especially when considering future taxes have a good chance of going up and death of one spouse would leave an even higher tax burden?
2- The overall tax burden being higher and yet the portfolio growing larger was a surprise to me. My explanation is it has to do with timing- the earlier savings of ACA premiums and taxes allows that roughly $90k to be invested and earning. Is that the reason?
3- I’ve read your writings and gather you value taking breaks when they are available. I’ve done that sometimes.I’m hesitant in this case to take the full breaks leaving the 401k growing and depleting the Roth IRAs early when the potential beneficial margins seem low as compared to the locked in certainty. Am I wrong to think this way and what am I missing?

Thank you again!