Anyone else dealing with this issue of "gap years" before retirement?

[Anonymous]

you need to speak to an advisor, but our taxable retirement are huge as well so we are slowly moving them into Roth

[Anonymous]

In the same boat - I wish it was emphasized more to start saving outside of 401ks. We only recently started funding some and I really wished we would have started earlier on this.

[Anonymous]

Hey guys- there is simply no issue. You pay tax now or tax later. There is no "tax bomb" . Money in your 401K is just money you have never paid taxes on. The money inside your brokerage you paid taxes on it before you put it in your brokerage and you will also pay taxes on the gains.

Most people will be in a lower tax bracket when they retire (let's say you take out 200K a year when you retire but make $400K now). For the vast majority of high earners, it makes sense to shelter as much money from taxes now by putting it in your 401K so that the money can grow unencumbered. It doesn't actually make sense to save in a brokerage until you have maxed out your 401K.

[Anonymous]

Early retired law firm partner here.

Just a reminder not to make Roth conversions in a vacuum. Depending on your personal situation, they can cost you more than you realize, especially once you're 65.

For example, if you're 65 in DC, move money from an IRA to a Roth, and your income exceeds $165k for the year as a result, you lose the 50 percent senior citizen discount on your property tax. Some may scoff at that, but for many that's close to $10,000 a year. You also risk exceeding the income caps for the lowest tier of Medicare premiums, and your monthly payments will go up pretty steeply. Finally, you lose the zero percent tax bracket for capital gains on your brokerage account.

In the end Roth conversations more often than not will make sense. But not always. Doing the math is not just a matter of looking at income tax brackets.

[Anonymous]

Stop putting your money into those accounts. Invest your own money in regular investment account.

[Anonymous]

Anonymous wrote:Hey guys- there is simply no issue. You pay tax now or tax later. There is no "tax bomb" . Money in your 401K is just money you have never paid taxes on. The money inside your brokerage you paid taxes on it before you put it in your brokerage and you will also pay taxes on the gains.

Most people will be in a lower tax bracket when they retire (let's say you take out 200K a year when you retire but make $400K now). For the vast majority of high earners, it makes sense to shelter as much money from taxes now by putting it in your 401K so that the money can grow unencumbered. It doesn't actually make sense to save in a brokerage until you have maxed out your 401K.

This is definitely not true for people who will retire with pensions and relatively large social security benefits. My family, which is two government employees with relatively modest incomes (125K and 130K), will have enough income guaranteed between the two that we'll always at least land in the 22% tax bracket.

We have also already oversaved for retirement with 700K in retirement accounts at 40 (plus an additional 160K in brokerage and high yield savings accounts). Expected growth over the next 25 years, even with very conservative growth expectations, results in more money than we'd likely spend given our relatively modest spending and large amounts of guaranteed income.

All of this literally dawned on me in the last year so we're radically changing our plans to avoid OP's situation.
- We're doing in plan conversions in my old TSP account to get most of our money out of my Traditional TSP.* We want to minimize RMDs (and avoid paying taxes on money we're forced to withdraw but don't need), and it will be better for our kids to inherit Roth accounts. Plus having money in Roth accounts lets us retain control over the income we have in retirement and our level of taxation.**
- We'll leave some money in my Traditional TSP because we've always been charitably inclined and we can make contributions directly from our traditional accounts. We won't have to factor charitable contributions into our retirement budget, we'll likely be able to make more generous charitable contributions, and we'll skip paying taxes entirely.
- We are saving only in my new Roth 457(b) account. 457(b) funds can be withdrawn without penalty at any age so long as you've left your employer, so it's serving as our tax free brokerage account.
- We'll "retire" at 55 because there will be no point in working longer at the stressful and demanding jobs we currently have. We can do pro bono work, panel cases, or other work we truly enjoy if we want to keep working or if we need to earn a little bit of extra cash for extras above and beyond our normal everyday expenses. Otherwise we'll live off our cash, brokerage account, and my 457(b) account until 59½, likely fully depleting all of these accounts.
- At 59½, we'll start drawing from our retirement savings in decreasing amounts as we're able to access our pensions and social security benefits. Because we're only dependent on these funds for a short period of time, it will still be safe to withdraw more than 4%. We'll set aside the portion we need to use over the course of 10 or so years conservatively so that we don't have to worry about how the market is performing. We'll leave the rest of our retirement funds invested more aggressively for long term growth so we're not risking depleting everything.
- After we start receiving all of our guaranteed income, we'll drawn most likely less than 4% from our retirement accounts to cover any income gap, so this money will continue to grow without any risk of depletion. We will likely die with more money than we started retirement with.
- There are still many decisions we'll play be ear in this plan as we age. Maybe it will make sense to pay off our outstanding mortgage balance 4 years early at 55 to free up more spending in our budget. Maybe we won't want to wait until 72 to take Social Security because it will be better for us to claim early and reduce the demand on our investment accounts. Maybe we won't need to claim reduced pension benefits to allow for survivor benefits because there will be enough in retirement accounts to support the remaining spouse.

*One other warning as an FYI - it can actually be hard to out-convert a Roth account. If we waited until retirement, the Traditional balance would be much higher and with compound growth, the traditional balance would like grow faster than we can pull money out and stay within the 22% marginal tax bracket and faster than we can build up money outside of our retirement account to pay the taxes for the conversions. For example, I did a conversion earlier this year when the market tanked with the Straight of Hormuz mess and I was cautious and only converted 25% (37K) of what we can afford to convert this year (around 147K). Literally the day after I did the conversion, the market rebounded and the balance grew and it's as if I had never made a conversion at all. The Traditional TSP balance was back to what it was pre-conversion.

**Being able to control your income in retirement is so important - there are actually lots of "tax bombs" lurking, especially if you have a high minimum guaranteed income through pensions and social security. If we did nothing to minimize taxes, we'd have RMDs we didn't need to take, which would force us into higher income brackets, which in turn makes more of our Social Security taxable so we pay more tax on that. Which in turn makes our IRMAA Medicare costs higher. And then when one of us dies, we lose our married filing jointly status, have to file with the lower single deduction and we wind up paying that much more in taxes. I've read so many books and learned so much over the last year that I'm 100% confident that Traditional Roth contributions are a scam, especially if you'll have a high minimum income from pensions, high social security payments, and other guaranteed income (RMDs, annuities, rental income, etc).

Anyways, I really like personal finance (in a different world I would have been a financial planner), and the one thing I learned from readings lots of books about all these things is that this is what a good financial planner (ie one who doesn't just handle investments) is doing for you. They are helping you to figure out what's really going on with your money, and figuring out how to help you life both plan and live a great life. If this weren't my interest/hobby, I would have kept working until 65, always worried that I wouldn't have enough because when the only thing I know is the 4% rule, I would never have enough money.

[Anonymous]

Anonymous wrote:Start shifting all saving to outside of retirement accounts

This is what we did. I was so worried about the tax implications, but oh well. I retired at 50 and my husband will retire at 55. We cut expenses significantly when I retired. Retirement is pretty good

[Anonymous]

Anonymous wrote:

Anonymous wrote:You could take out a home equity line for the few years between retirement and 59.

This might work if rates are low enough, but the interest you pay over the full period of pre-retirement (potentially 5 years or more) likely will wind up being more than the 10% penalty you would pay if you just took the money out of pre-tax accounts.

The fact that HELOC draws aren't considered income and aren't taxed should also be factored into the equation. And the fact that if you're withdrawing funds from a pre-tax account, you need to withdraw even more than you need in order to cover the taxes and the penalty. And you're cutting off growth. Using a HELOC even at a higher interest rate could legit be a much better option once you run the numbers.

[Anonymous]

Anonymous wrote:We’re in this bucket, unfortunately. We maxed our 401ks in our 20s and are projected to have $12m+ at 55 (15 years from now). 40 and 45 now. The kids will be out of college when we are 55 and 60. A few changes I recently made:

- Drop 401k to just get the match
- Switched our 401k contributions to Roth 401k contributions
- redirect what we were contributing to our 401ks to my brokerage account
- look into the Rule of 55 - it allows you to tap your 401k balance at 55 instead of 59 from the employer you retire from.
- I plan on drawing down 401k balances for college funds, or repayment of our kid’s loans, since we have undersaved there. In an effort to reduce RMD before 73.
- haven’t yet, but will do Roth conversions after 55
- generally started living a bit more of a rich life - more family vacations now while our four kids are young

Very interested in other strategies too!

How exactly does a 401k get that high? You generally can’t put more than $15k per year and investment options are usually index funds. How did you have such smashing returns?

[Anonymous]

Anonymous wrote:

Anonymous wrote:Hey guys- there is simply no issue. You pay tax now or tax later. There is no "tax bomb" . Money in your 401K is just money you have never paid taxes on. The money inside your brokerage you paid taxes on it before you put it in your brokerage and you will also pay taxes on the gains.

Most people will be in a lower tax bracket when they retire (let's say you take out 200K a year when you retire but make $400K now). For the vast majority of high earners, it makes sense to shelter as much money from taxes now by putting it in your 401K so that the money can grow unencumbered. It doesn't actually make sense to save in a brokerage until you have maxed out your 401K.

This is definitely not true for people who will retire with pensions and relatively large social security benefits. My family, which is two government employees with relatively modest incomes (125K and 130K), will have enough income guaranteed between the two that we'll always at least land in the 22% tax bracket.

We have also already oversaved for retirement with 700K in retirement accounts at 40 (plus an additional 160K in brokerage and high yield savings accounts). Expected growth over the next 25 years, even with very conservative growth expectations, results in more money than we'd likely spend given our relatively modest spending and large amounts of guaranteed income.

All of this literally dawned on me in the last year so we're radically changing our plans to avoid OP's situation.
- We're doing in plan conversions in my old TSP account to get most of our money out of my Traditional TSP.* We want to minimize RMDs (and avoid paying taxes on money we're forced to withdraw but don't need), and it will be better for our kids to inherit Roth accounts. Plus having money in Roth accounts lets us retain control over the income we have in retirement and our level of taxation.**
- We'll leave some money in my Traditional TSP because we've always been charitably inclined and we can make contributions directly from our traditional accounts. We won't have to factor charitable contributions into our retirement budget, we'll likely be able to make more generous charitable contributions, and we'll skip paying taxes entirely.
- We are saving only in my new Roth 457(b) account. 457(b) funds can be withdrawn without penalty at any age so long as you've left your employer, so it's serving as our tax free brokerage account.
- We'll "retire" at 55 because there will be no point in working longer at the stressful and demanding jobs we currently have. We can do pro bono work, panel cases, or other work we truly enjoy if we want to keep working or if we need to earn a little bit of extra cash for extras above and beyond our normal everyday expenses. Otherwise we'll live off our cash, brokerage account, and my 457(b) account until 59½, likely fully depleting all of these accounts.
- At 59½, we'll start drawing from our retirement savings in decreasing amounts as we're able to access our pensions and social security benefits. Because we're only dependent on these funds for a short period of time, it will still be safe to withdraw more than 4%. We'll set aside the portion we need to use over the course of 10 or so years conservatively so that we don't have to worry about how the market is performing. We'll leave the rest of our retirement funds invested more aggressively for long term growth so we're not risking depleting everything.
- After we start receiving all of our guaranteed income, we'll drawn most likely less than 4% from our retirement accounts to cover any income gap, so this money will continue to grow without any risk of depletion. We will likely die with more money than we started retirement with.
- There are still many decisions we'll play be ear in this plan as we age. Maybe it will make sense to pay off our outstanding mortgage balance 4 years early at 55 to free up more spending in our budget. Maybe we won't want to wait until 72 to take Social Security because it will be better for us to claim early and reduce the demand on our investment accounts. Maybe we won't need to claim reduced pension benefits to allow for survivor benefits because there will be enough in retirement accounts to support the remaining spouse.

*One other warning as an FYI - it can actually be hard to out-convert a Roth account. If we waited until retirement, the Traditional balance would be much higher and with compound growth, the traditional balance would like grow faster than we can pull money out and stay within the 22% marginal tax bracket and faster than we can build up money outside of our retirement account to pay the taxes for the conversions. For example, I did a conversion earlier this year when the market tanked with the Straight of Hormuz mess and I was cautious and only converted 25% (37K) of what we can afford to convert this year (around 147K). Literally the day after I did the conversion, the market rebounded and the balance grew and it's as if I had never made a conversion at all. The Traditional TSP balance was back to what it was pre-conversion.

**Being able to control your income in retirement is so important - there are actually lots of "tax bombs" lurking, especially if you have a high minimum guaranteed income through pensions and social security. If we did nothing to minimize taxes, we'd have RMDs we didn't need to take, which would force us into higher income brackets, which in turn makes more of our Social Security taxable so we pay more tax on that. Which in turn makes our IRMAA Medicare costs higher. And then when one of us dies, we lose our married filing jointly status, have to file with the lower single deduction and we wind up paying that much more in taxes. I've read so many books and learned so much over the last year that I'm 100% confident that Traditional Roth contributions are a scam, especially if you'll have a high minimum income from pensions, high social security payments, and other guaranteed income (RMDs, annuities, rental income, etc).

Anyways, I really like personal finance (in a different world I would have been a financial planner), and the one thing I learned from readings lots of books about all these things is that this is what a good financial planner (ie one who doesn't just handle investments) is doing for you. They are helping you to figure out what's really going on with your money, and figuring out how to help you life both plan and live a great life. If this weren't my interest/hobby, I would have kept working until 65, always worried that I wouldn't have enough because when the only thing I know is the 4% rule, I would never have enough money.

This is helpful. What books did you find most useful?

[Anonymous]

Anonymous wrote:

Anonymous wrote:We’re in this bucket, unfortunately. We maxed our 401ks in our 20s and are projected to have $12m+ at 55 (15 years from now). 40 and 45 now. The kids will be out of college when we are 55 and 60. A few changes I recently made:

- Drop 401k to just get the match
- Switched our 401k contributions to Roth 401k contributions
- redirect what we were contributing to our 401ks to my brokerage account
- look into the Rule of 55 - it allows you to tap your 401k balance at 55 instead of 59 from the employer you retire from.
- I plan on drawing down 401k balances for college funds, or repayment of our kid’s loans, since we have undersaved there. In an effort to reduce RMD before 73.
- haven’t yet, but will do Roth conversions after 55
- generally started living a bit more of a rich life - more family vacations now while our four kids are young

Very interested in other strategies too!

How exactly does a 401k get that high? You generally can’t put more than $15k per year and investment options are usually index funds. How did you have such smashing returns?

Sorry, PP. The limit hasn’t been 15k/year since like 2006. So we have been putting in the max (24.5k this year), then company match, stock market growth and x2 for spouse. It probably would end up being more like 70k a year. It adds up but having too much was never on my radar until a couple years ago. Everyone just says to max out 401k.

[Anonymous]

If we have 3m in 401k, adding 63k per year or the next 4 years, all is in s&p 500 ( best case %10 gain yearly). Early retirement will use taxable account. We will start to withdraw the money 2% starting at 65 years old. We are mid 50. Will we have the tax bomb? Thx

[Anonymous]

People worry too much about RMD’s, you have to pay the tax on the way in or on the way out. RMD’s start at 4% at age 75, which is a typical recommended withdrawal rate. At 80 they are still only 5%. Only once you get past 85 do the percentages start getting significant.

For example I’m in the 35% tax bracket, so there really isn’t incentive to pay the tax now with a Roth. The top bracket is 37%, so what’s the risk?

[Anonymous]

Anonymous wrote:People worry too much about RMD’s, you have to pay the tax on the way in or on the way out. RMD’s start at 4% at age 75, which is a typical recommended withdrawal rate. At 80 they are still only 5%. Only once you get past 85 do the percentages start getting significant.

For example I’m in the 35% tax bracket, so there really isn’t incentive to pay the tax now with a Roth. The top bracket is 37%, so what’s the risk?

I disagree unless you are very sure your tax rate will be materially lower when you are taking RMDs. RMDs can put you in the higher tax rate from the outset. Then you have to factor in one spouse dying, which will put the remaining spouse in the much higher tax rate for a single person. In addition, there is far more risk that tax rates will rise in the future than there is for them falling.

Roths are a bird in the hand as far as taxes are concerned. I recommend that everyone seriously consider putting all of their 401 contributions into Roth and do a backdoor Roth as well. The employer contribution will always be in the non-Roth 401k, so use that for your tax diversification strategy.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Hey guys- there is simply no issue. You pay tax now or tax later. There is no "tax bomb" . Money in your 401K is just money you have never paid taxes on. The money inside your brokerage you paid taxes on it before you put it in your brokerage and you will also pay taxes on the gains.

Most people will be in a lower tax bracket when they retire (let's say you take out 200K a year when you retire but make $400K now). For the vast majority of high earners, it makes sense to shelter as much money from taxes now by putting it in your 401K so that the money can grow unencumbered. It doesn't actually make sense to save in a brokerage until you have maxed out your 401K.

This is definitely not true for people who will retire with pensions and relatively large social security benefits. My family, which is two government employees with relatively modest incomes (125K and 130K), will have enough income guaranteed between the two that we'll always at least land in the 22% tax bracket.

We have also already oversaved for retirement with 700K in retirement accounts at 40 (plus an additional 160K in brokerage and high yield savings accounts). Expected growth over the next 25 years, even with very conservative growth expectations, results in more money than we'd likely spend given our relatively modest spending and large amounts of guaranteed income.

All of this literally dawned on me in the last year so we're radically changing our plans to avoid OP's situation.
- We're doing in plan conversions in my old TSP account to get most of our money out of my Traditional TSP.* We want to minimize RMDs (and avoid paying taxes on money we're forced to withdraw but don't need), and it will be better for our kids to inherit Roth accounts. Plus having money in Roth accounts lets us retain control over the income we have in retirement and our level of taxation.**
- We'll leave some money in my Traditional TSP because we've always been charitably inclined and we can make contributions directly from our traditional accounts. We won't have to factor charitable contributions into our retirement budget, we'll likely be able to make more generous charitable contributions, and we'll skip paying taxes entirely.
- We are saving only in my new Roth 457(b) account. 457(b) funds can be withdrawn without penalty at any age so long as you've left your employer, so it's serving as our tax free brokerage account.
- We'll "retire" at 55 because there will be no point in working longer at the stressful and demanding jobs we currently have. We can do pro bono work, panel cases, or other work we truly enjoy if we want to keep working or if we need to earn a little bit of extra cash for extras above and beyond our normal everyday expenses. Otherwise we'll live off our cash, brokerage account, and my 457(b) account until 59½, likely fully depleting all of these accounts.
- At 59½, we'll start drawing from our retirement savings in decreasing amounts as we're able to access our pensions and social security benefits. Because we're only dependent on these funds for a short period of time, it will still be safe to withdraw more than 4%. We'll set aside the portion we need to use over the course of 10 or so years conservatively so that we don't have to worry about how the market is performing. We'll leave the rest of our retirement funds invested more aggressively for long term growth so we're not risking depleting everything.
- After we start receiving all of our guaranteed income, we'll drawn most likely less than 4% from our retirement accounts to cover any income gap, so this money will continue to grow without any risk of depletion. We will likely die with more money than we started retirement with.
- There are still many decisions we'll play be ear in this plan as we age. Maybe it will make sense to pay off our outstanding mortgage balance 4 years early at 55 to free up more spending in our budget. Maybe we won't want to wait until 72 to take Social Security because it will be better for us to claim early and reduce the demand on our investment accounts. Maybe we won't need to claim reduced pension benefits to allow for survivor benefits because there will be enough in retirement accounts to support the remaining spouse.

*One other warning as an FYI - it can actually be hard to out-convert a Roth account. If we waited until retirement, the Traditional balance would be much higher and with compound growth, the traditional balance would like grow faster than we can pull money out and stay within the 22% marginal tax bracket and faster than we can build up money outside of our retirement account to pay the taxes for the conversions. For example, I did a conversion earlier this year when the market tanked with the Straight of Hormuz mess and I was cautious and only converted 25% (37K) of what we can afford to convert this year (around 147K). Literally the day after I did the conversion, the market rebounded and the balance grew and it's as if I had never made a conversion at all. The Traditional TSP balance was back to what it was pre-conversion.

**Being able to control your income in retirement is so important - there are actually lots of "tax bombs" lurking, especially if you have a high minimum guaranteed income through pensions and social security. If we did nothing to minimize taxes, we'd have RMDs we didn't need to take, which would force us into higher income brackets, which in turn makes more of our Social Security taxable so we pay more tax on that. Which in turn makes our IRMAA Medicare costs higher. And then when one of us dies, we lose our married filing jointly status, have to file with the lower single deduction and we wind up paying that much more in taxes. I've read so many books and learned so much over the last year that I'm 100% confident that Traditional Roth contributions are a scam, especially if you'll have a high minimum income from pensions, high social security payments, and other guaranteed income (RMDs, annuities, rental income, etc).

Anyways, I really like personal finance (in a different world I would have been a financial planner), and the one thing I learned from readings lots of books about all these things is that this is what a good financial planner (ie one who doesn't just handle investments) is doing for you. They are helping you to figure out what's really going on with your money, and figuring out how to help you life both plan and live a great life. If this weren't my interest/hobby, I would have kept working until 65, always worried that I wouldn't have enough because when the only thing I know is the 4% rule, I would never have enough money.

Can you explain this more? Are you talking about the TSP Roth option being a scam? Is it better to only put up to the match in TSP and then invest the rest in a brokerage account?