Greetings!

[spreadsheet_geek]

Hey all,

1st time posting but have been reading the forum (as well as the blog) for months. Was wondering, if I were to post my info, would anyone be willing to offer up their thoughts on my situation? I'm looking to be done working by the end of 2027, and am not sure how best to allocate my savings going forward (and what to do with it at that time), but I didn't want to post up a bunch of info without asking, it felt presumptive!

[gocurrycracker]

Sure thing. That was generally the idea behind the Feedback section. Post away

[spreadsheet_geek]

Great, thanks! So I'm looking to retire end of 2027/beginning of 2028, and I'm trying to figure out how I will finance this. Here's my current stats (all #s approximate):

401k = $390K (90% index funds, 10% bond fund)
HSA = $11K (mostly index funds, $1500 C.O.H. required)
Cash accounts = $35k (checking, savings, cash-on-hand)
House (paid off) = $150k

Debt-free
Single, no kids

Current net worth = $625k (includes home, vehicles, coins/bullion, other assets)
Salary =  $75k/yr
Savings rate =  55-60%

Soc.Sec. if taken @ 62: $1600/mo
Soc.Sec. if taken @ 70: $2900/mo

Current base annual expenses = $22k
Would be very comfortable with $36k/yr

My current thoughts are to continue putting 20% of pay into 401k while working, continue maxing out HSA, but redirect my 'emergency fund' deposits from savings to a brokerage account (which I don't currently have). If I use an estimated ROR of 7%, my account balances when I turn 57 would be approx. $845k in 401k, $270k in a brokerage account, along with whatever the HSA ends up being (haven't calculated that out yet).

My other thought would be to drop 401k contributions to 6% in January 2020 (to get full company match), then put everything into the brokerage account. If I took this route, projections put me at a 401k balance of $725k and a brokerage balance of $365k.

The plan for the 1st scenario would be to live off the brokerage funds and begin withdrawals from the 401k (SEPP, 72T?) up to the top of my current tax bracket ($88K) with the intent of emptying the 401k before RMDs kick in. I'd obviously pay taxes on the withdrawls but would have no earned income during this time. The net 401k proceeds would be placed into the brokerage account as well. If I take this approach, I believe I can live off the brokerage account and delay claiming Soc. Sec until I'm 70.

Does this sound like a reasonable plan? Am I missing something big that I haven't thought of? Thanks for any input!

[gocurrycracker]

It isn't necessary to drive IRA value to zero by age 70.5. If you are already withdrawing $10, it doesn't matter if there is a required minimum of $5. Instead, target a maximum tax rate.

Here are 2 examples:
https://www.gocurrycracker.com/gcc-vs-rmd/
https://www.gocurrycracker.com/reader-financial-review-scared-death-early-retirement/


To decide whether to contribute to 401k or not, compare marginal tax rates. You are getting a 22% tax deduction at present.
Upon withdrawal, you would pay at a rate of 0% - 12%. In addition, if in the US your ACA subsidies would be reduced by 9.5%-15%.

If the contribution tax rate is greater than the withdrawal tax rate, contribute to 401k. If not, don't.

https://www.gocurrycracker.com/obamacare-optimization-early-retirement/
https://www.gocurrycracker.com/obamacare-optimization-vs-tax-minimization/


I'm not aware of a tax bracket that ends at $88k. For single filers, 12% bracket ends ~$50k. 22% bracket ends ~$95k.

Chart in this post: https://www.gocurrycracker.com/tax-reform-early-retiree/
single filers divide by 2

[spreadsheet_geek]

Maybe I'm misunderstanding the RMD calculations, but if I only need 36k per year (for example) and my 401k generates more than that, the balance will continue to climb. At some point I'd be required to withdraw large amounts that might put me into a higher bracket than I'm currently in, wouldn't it? Eventually when I took Soc.Sec. the amount I'd need to withdraw from my 401k would be even smaller, helping the balance to climb, and again increasing the eventual RMD. The RMDs are recalculated annually, aren't they, based on balance and life expectancy?

I'll read through your links again (as I'm sure I've read them before), but maybe I'm just missing something? Thanks for reposting them!

By the way, here is the chart I'm using for my calculations. It's the IRS chart used for calculating taxes on your paycheck (revised 2019). Maybe this set of brackets is the wrong one to use for conversion tax calculation?

...As I'm apparently not able to attach images to this post, the tax bracket to which I'm referring is located on page 47 of the pdf form at the link below, annual salary table. 88k is the cutoff for the 22% tax bracket.

https://www.irs.gov/pub/irs-prior/p15--2019.pdf

[gocurrycracker]

You want to use the tax rate schedule (p15 is for employers doing withholding)
See page 105 on this doc (still in draft form)
https://www.irs.gov/pub/irs-dft/i1040gi--dft.pdf

add the standard deduction ($12,200) to go from taxable income to total income
https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2019

22% bracket for single ends at 12,200 + 84,200 = 96,400. I said ~$95k because I didn't do the math I just blinked at it.

if I only need 36k per year (for example) and my 401k generates more than that, the balance will continue to climb. At some point I'd be required to withdraw large amounts that might put me into a higher bracket than I'm currently in, wouldn't it? Eventually when I took Soc.Sec. the amount I'd need to withdraw from my 401k would be even smaller, helping the balance to climb, and again increasing the eventual RMD. The RMDs are recalculated annually, aren't they, based on balance and life expectancy?

Yes, to all of that.

That doesn't mean you magically pay more if you don't get all the funds out before age 70.5.

Rephrasing what I said prior: don't arbitrarily pick age 70.5 as your IRA = $0 date. Pick a tax rate you want to stay under and then figure out the IRA values you need to hit at age 70.5 and beyond. Getting it all out by age 80-85 could be sufficient because RMDs start small and only get prohibitively large in 10-15 years.

See these 2 posts as a reference:
(there is an example in the comments somewhere about how to adjust the curves for SS income.)
(single filers divide by 2)
https://www.gocurrycracker.com/is-your-401k-too-big/
https://www.gocurrycracker.com/is-your-401k-too-big-part-2/

[spreadsheet_geek]

Ah, I see, thanks for linking the correct tables, I'll have to go update my spreadsheet to reflect these numbers. I wasn't actually aiming at emptying the 401k account by 70, just filling up to the (now) 84k bracket, but I didn't know to included the standard deduction, so maybe I can drop to the lower bracket if I include that. As it sits now with the new numbers (without the std. ded.), it looks like the 401k would be depleted by the time I'm 83.

I'll stop back one I've updated things, to see if I'm on the right track - thanks so much for the input!

[gocurrycracker]

based on your user id, you will probably get it all sorted now

some things to consider:
- an alternative to 72t/SEPP is the Roth conversion. This will get you additional tax-free growth
- if you Roth convert to top of 22% tax bracket:
-- 100% of capital gains / qualified dividends will be taxed at 15%. If any of those gains/divs would have been taxed at 0%, you have created a 37% marginal tax rate, something you would never see with an RMD
-- you will have income >400% FPL and will get $0 in ACA health insurance subsidies. If income is <400% FPL, each $ of IRA withdrawal will have an additional "tax" of 9.5% to 15%.

Compare your current 22% marginal rate to these to help decide what to do with future 401k contributions beyond company match.

If you target an annual income of 399% FPL (~$48k for single) to get health insurance subsidies, you are looking at a marginal tax rate of ~22%+ with ACA (9.5%-15%) and IRS (12%.)

[spreadsheet_geek]

Ok, so, trying to wrap my head around capital gains taxes combined with 401k distributions after early retirement.

If I pull money from a brokerage account as my only 'income' (no earned income), I have room to withdraw 401k funds to fill up the 12% bracket, yes? I've found this in recent reading (please correct me if I'm wrong):
⦁   Capital gains are added onto agi at the end, to determine capital gains tax, doesn't affect income bracket.
⦁   401k withdrawl acts as income.
⦁   Capital Gains formula = (P1 – P0) / P0
⦁   Any CG amount within the 12% bracket is tax-free
⦁   Any CG amount that enters the 22% bracket is taxed at 15%

I assume capital gains are only a portion of the brokerage withdrawl, as my contributions to it have already been taxed, correct? Assuming this, I made the following calculatiions (if they don't come through as a table, I'll re-write them out). Also, I realize that I would have to combine any 401k withdrawls with social security once I start taking that.

Does this look to be correct? Am I missing anything? (I realize this is, of course, only federal taxes.)

Earned Income=0
12% Bracket Cap=39475
Room Left @ 12% Bracket=39475
Brokerage Withdrawl=37500
% of Withdrawl = Cap.Gains=25%
Capital Gains Amount=9375
401k Max Withdrawl=30100
Standard Deduction=12200
Taxable as income=17900
Tax from Lower Tiers=970
Tax within Current Tier=984
Total 'Income' Tax=1954
Cap Gains Tax=0

P.S. This forum is frustrating - I can neither attach images, nor insert tables. Makes posting very difficult!

[gocurrycracker]

Yes, correct. The math is also correct ($1,954 tax)

Minor thing:
after the TCJA, the 0%/15% capital gain tax bracket is no longer tied exactly to the 12%/22% income tax brackets. They are about the same, but no longer exactly the same. ($39375 vs $40125 in 2019)
https://www.gocurrycracker.com/capital-gains-tax-rates/
https://www.gocurrycracker.com/federal-income-tax-brackets/

Some small tweaks:
You might get some interest and nonqualified dividends in the taxable account, which are taxed as ordinary income (same as IRA withdrawal.) Reduce IRA withdrawals accordingly

You will also get qualified dividends, which are taxed the same as LTCGs. Reduce LTCGs accordingly

re: capital gains
You have it right. Only the gain above your purchase price is income
See this: https://www.gocurrycracker.com/long-term-long-term-capital-gains/

----
the easiest way to include an image is to attach it as a file. This wasn't working, but I just fixed it. Sorry about that

The other option is to put a link between a BBcode img tag, like this:

Example

Code: [Select]

[img]https://www.gocurrycracker.com/wp-content/uploads/2018/01/logo_rgb_13k.png[/img]

For a table, there is also BBCode to build a table manually but easier to screen capture it and attach it as an image