The Early Retirement Years Strategy

Patrick

Patrick

Overthinking the draft from the basement already
Staff member
We are getting close - i'm 3 years away, wife is 1.5 (maybe sooner.)
She will be full retirement age for SS - i'm a bit short of that - but will be SS eligible.
We have pretax, and post-tax investments, with a few years to go before RMDs kick in.

@Fire Lord Jim wrote about his tax efficient strategy, using IRA withdraws up to the limits of the tax bracket,
combined with ROTH conversions.

What are the thoughts on using pretax or post tax before RMDs are required?

The capital gains rate may be less than the employment tax rate on the IRA.
Post tax also transfers to an heir easier and (much) more tax efficiently.

Moving money to post tax and/or ROTH conversion when it can be controlled seems like a better idea than waiting for the govt to say it has to be done.

Are there pro-forma tax tools to help with this?

I know @rick81721 is going to say hire someone.
While not against this, there has to be a strategy that makes sense, and they are just implementing that strategy.
 
Patrick said:
We are getting close - i'm 3 years away, wife is 1.5 (maybe sooner.)
She will be full retirement age for SS - i'm a bit short of that - but will be SS eligible.
We have pretax, and post-tax investments, with a few years to go before RMDs kick in.

@Fire Lord Jim wrote about his tax efficient strategy, using IRA withdraws up to the limits of the tax bracket,
combined with ROTH conversions.

What are the thoughts on using pretax or post tax before RMDs are required?

The capital gains rate may be less than the employment tax rate on the IRA.
Post tax also transfers to an heir easier and (much) more tax efficiently.

Moving money to post tax and/or ROTH conversion when it can be controlled seems like a better idea than waiting for the govt to say it has to be done.

Are there pro-forma tax tools to help with this?

I know @rick81721 is going to say hire someone.
While not against this, there has to be a strategy that makes sense, and they are just implementing that strategy.
Click to expand...

Unless you are going to offer full disclosure of your finances and your life plan here - I am not sure you are going to get a solid answer.
 
here is a beauty - it takes money to make money.

Convert Traditional to ROTH, and pay the tax out of post tax money.
in other words -

Say 20% tax bracket.
convert $1,000 traditional to $1,000 Roth pay out of post tax, means
the post tax money that would be taxed on any gains is now sheltered from taxes in the roth.
so instead of having $200 in post tax and $800 in roth, there is $1,000 in roth, and $200 less in post tax.

brilliant.
 
Johnny Utah said:
Unless you are going to offer full disclosure of your finances and your life plan here - I am not sure you are going to get a solid answer.
Click to expand...

in a nut shell -
we have many options.
we are healthy atm, and have good insurance lined up
1 heir.

and of course we want to buy a vinyard on a mountain to make wine and mead from our apiculture habits
 
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Cassinonorth said:
Senator Roth was a man not an acronym. ;)

Also, it's pretty simple:

www.choosefi.com

How and Why to Set up a Roth IRA Conversion Ladder | ChooseFI

One problem with retiring early is that you can’t access your tax-sheltered retirement accounts until 59 1/2 without taxes and penalties.
www.choosefi.com www.choosefi.com
Click to expand...

No need to "fund" pre-59.5 - but that is a cool way to do it.
Although where the money to pay the tax came from is not discussed....
I guess if you are retiring early, then there is extra $$ - although, doesn't that mean you'd probably not have to use the pretax to fund pre-retirement?
 
Patrick said:
We are getting close - i'm 3 years away, wife is 1.5 (maybe sooner.)
She will be full retirement age for SS - i'm a bit short of that - but will be SS eligible.
We have pretax, and post-tax investments, with a few years to go before RMDs kick in.

@Fire Lord Jim wrote about his tax efficient strategy, using IRA withdraws up to the limits of the tax bracket,
combined with ROTH conversions.

What are the thoughts on using pretax or post tax before RMDs are required?

The capital gains rate may be less than the employment tax rate on the IRA.
Post tax also transfers to an heir easier and (much) more tax efficiently.

Moving money to post tax and/or ROTH conversion when it can be controlled seems like a better idea than waiting for the govt to say it has to be done.

Are there pro-forma tax tools to help with this?

I know @rick81721 is going to say hire someone.
While not against this, there has to be a strategy that makes sense, and they are just implementing that strategy.
Click to expand...

PS your wife will be 67 in 1.5 years?
 
There are quite a few tax rates to consider with Roth conversions and RMDs. In addition to federal income tax, there is state income tax, tax on social security income, and Medicare premiums, which in reality, are a tax (you paid in your whole life, and now your premium is based upon income). I try not to look at any one tax in a vacuum.

I figure that once I have to start taking RMDs it is game over—I will no longer be in control of my tax rate. That is age 73, but aim for 72 so as not to have to take two RMDs in one taxable year. Once I am collecting Social Security I will have lost the lower income tax brackets, as Social Security income will fill those, and all my marginal income will be at marginal tax rates—22% but those are tax rates set to expire. Which means there are serious planning opportunities before claiming Social Security. There are low tax brackets that we get every year: use them or lose them. You can have an enormous amount of dividends and capital gains and have zero income tax. NJ also has an enormous retirement income exclusion. I am by default in the zero tax bracket, but... do one Roth conversion and that zero percent taxed income becomes 15% taxed. Volunteering to pay more than zero has to be weighed against what the tax rates will be once we are collecting Social Security, RMDs, and the temporary tax rates have expired. I do a Roth conversion every year, and expect to do one up until age 70 when Social Security kicks in.

Here's an idea I have implemented. You do have to do some math. Once RMDs kick in, you can make your charitable giving directly from your IRA. That means you no longer give to charity, instead your trust does. This alone lowers your RMD and maybe your Medicare premiums. I guessed how much I would give to charity between now and age 72 when RMDs kick in. Basically several years of donations. I put that in a donor advised fund, and direct donations (including JORBA) from that fund on a yearly basis. Funding this donor advised fund creates a itemized deduction completely out of proportion to income. Here comes the math. I scale up a Roth conversion to create enough income to fully utilize the charitable donation in the current year. This technique makes the most of itemized deductions and standard deductions, and moves money from pre-tax to Roth, and uses these temporary income tax rates that are set to expire.
 
If you have long term capital gains it’s usually cheaper tax wise to cash in. Or let it ride. Deplete RMDs then pre tax save the Roth for the boy.
 
Johnny Utah said:
@Patrick may already have a thread for that - can you move your post to the “Robbing Banks to fund my Retirement Thread”
Click to expand...

Go with the white collar insurance fraud. Just don't do it across state lines.

w_b said:
If you have long term capital gains it’s usually cheaper tax wise to cash in. Or let it ride. Deplete RMDs then pre tax save the Roth for the boy.
Click to expand...

He gets real estate, and enough money to have 'got junk' empty it.

Fire Lord Jim said:
There are quite a few tax rates to consider with Roth conversions and RMDs. In addition to federal income tax, there is state income tax, tax on social security income, and Medicare premiums, which in reality, are a tax (you paid in your whole life, and now your premium is based upon income). I try not to look at any one tax in a vacuum.

I figure that once I have to start taking RMDs it is game over ...
Click to expand...

This is where i'm thinking there is a good strategy to accept a higher tax bracket to shelter post tax money forever.
Gotta do the math.

It scales well - we know what we "want" to maintain the lifestyle, and can do that from multiple sources - so now it becomes a planning game with a few years lead time.
There may even be a way to use married, filing separate. Get the 5 years going on my side of the equation.
 
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