Author Topic: Is it bad that I have too much of my retirement funds in 401ks?  (Read 911 times)

CEM

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I have started to really look into this whole FIRE thing and it seems like I could be closer than I originally thought.  Problem is all these years of maxing out my 401ks (had a few different jobs in the last decade) and my Roth IRA, I was just letting the rest of my money go to my checking account like a chump. 

I recently got on the Vanguard train (just in time to take a hit from the CoronaVirus news, but I'm not scared!) to get that checking account money to do some work. 

I am in my mid 30's and I know there are rollover options to get the 401k money early, but should I just look at all my investments as one giant pool of retirement money when calculating how much I need to retire (4% rule)?  Or should I wait to get more liquid funds?

Some rough numbers to maybe help make more sense:

401k: $449k
Roth:  $48k
Vanguard: $75k

Some FIRE calculators are showing I could retire within 5 years living off 25-30k (which I am sure I can do, have made some lifestyle changes and I was pretty close to that before I made these changes), but not sure how I could with the investments like this.  Am I over thinking this?  I have this (possibly irrational) fear (hey, it's a big step!) that I'd run out of Roth and Vanguard money before any 401k rollovers completed to avoid penalties.

To put it another way, does the 4% rule care about how my retirement money is split up between 401k/roth/personal?

Thank you in advance!

gocurrycracker

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Re: Is it bad that I have too much of my retirement funds in 401ks?
« Reply #1 on: March 03, 2020, 03:31:07 AM »
The 4% rule doesn't care where the money is. It's one big pile.

Taxes might be higher on 401k/TIRA withdrawals than on Roth or brokerage so plan that into expenses.

You can access all of those 401k funds penalty free at any time using the 72t / SEPP option  (Substantially Equal Periodic Payments.) Google it for a quick synopsis, but feel free to ask questions here.

Generally speaking, this is a better option for people closer to 60 than 30, as the withdrawal option requires you continue to withdraw for 5 years or until age 59 1/2, whichever is LONGER. If you start one in your mid-30s, a lot can change over the course of 25 years.

If you are withdrawing <$50k/year from the 401k, then your highest tax bracket would be 12% (single filing.) If your tax rate is higher now (probably the case) then you should continue to contribute to 401k, then IRA, then personal account.

CEM

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Re: Is it bad that I have too much of my retirement funds in 401ks?
« Reply #2 on: March 03, 2020, 04:58:35 PM »
Thanks for the reply and clarifying how the 4% rule applies. 

I am still unsure what to do about having a majority of the retirement funds locked up in 401k funds.  I would rather not do the 72t for the reasons you mentioned.  I am also currently hovering around the 22-24% tax bracket edge so converting 401k to Roth IRA now may not be the best move tax wise (although while I find your tax free lifestyle awesome, I am willing to pay a bit if needed, just not with my current salary). 

Should I start the Roth conversion ladder and just pay the higher taxes, or work a few more years and build up the personal accounts (then start converting yearly with presumably less of a tax burden)?

gocurrycracker

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Re: Is it bad that I have too much of my retirement funds in 401ks?
« Reply #3 on: March 04, 2020, 11:29:11 PM »
Should I start the Roth conversion ladder and just pay the higher taxes, or work a few more years and build up the personal accounts (then start converting yearly with presumably less of a tax burden)?

Could be neither, potentially, but working longer does mean more $.

When comparing tax now vs tax later, look at the marginal rate. Why pay 24%+ when you can pay 0-12% later?

This applies to both Roth conversions and making/not making contributions to 401k.

If your tax rate is higher now (probably the case) then you should continue to contribute to 401k, then IRA, then personal account.

You can also just make IRA/401k withdrawals and pay the 10% penalty. 10% is less than 24%.

Simplified example:

Year 1 to 5 - spend $25k + $1.2k penalty + $1k tax
15.2k from personal account
12k from 401k (pay $1.2k penalty @ 10% (better than 24% saved on contribution))
10k Roth conversion (pay $1k tax @ 10%)

Taxable income ~$25k  (200% FPL for single filer, so good ACA subsidies)

Year 6 to 10 - spend $25k
personal account depleted
10k from Year 1 Roth conversion
17k from 401k (pay 10% penalty, $1.7k, pay 10% tax on amount>12k, $500 - 13% effective tax rate)


Year 11 - age 59.5
SEPP (less risk as 10 years closer to 59.5.)

This could be goosed even higher if you are willing to spend a year or 2 abroad to avoid ACA impact
https://www.gocurrycracker.com/kickstart-your-retirement/

Could also do Roth conversions in the US in Year 1-5 at 12% tax rate if getting good ACA subsidies

CEM

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Re: Is it bad that I have too much of my retirement funds in 401ks?
« Reply #4 on: March 05, 2020, 11:18:52 PM »
Thanks for breaking it down so nicely (as you often do!).