On Jul 13, 10:00 am, jIM <noreplysoc...[at]hotmail.com> wrote:

- quote -

Possibly, but AMT can become a problem. Large cap. gains + one or two
deductions and the AMT can beat you like a rented mule. Hopefully,
Congress will make changes so that the AMT actually affects those that
it was intended to, but until then I would be leary of it.

On Jul 13, 8:59 am, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -

You're absolutely right. My fingers got going faster than my noggin'
and I failed to insert the conversion sentence.

Thanks

- quote -

If you can live off dividends or just the capital gains in a taxable
account, that would significantly lower your tax footprint. It would
also allow your portfolio to last longer (because you would not be
touching principal).

kastnna wrote:

- quote -

I thought in a prior thread we had consensus, that Roth deposits may
always be withdrawn penalty free, but Roth as a result of conversions
had to age 5 years.

- quote -

Agreed. An immediate annuity at 50 will likely have a low return, and
not appropriate to bridge this 10 year gap. A designated portion of post
tax money would fill the need, and provide a number of years of large
Roth conversions.

JOE

On Jul 12, 3:43 pm, ChiSaver <hansnel...[at]yahoo.com> wrote:
- quote -

I touched on this above. The Roth CONTRIBUTIONS can be taken out
without penalty or taxation before age 59.5 if the roth account is
more than five years old. That's one reason to contribute at least a
portion of your retirement dollars to a Roth. Tax deferred vehicles
like IRAs and deferred annuities can be accessed before age 59.5
without penalty if the withdrawals are taken as substantially equal
periodic payments (SEPP). This is commonly referred to as an exception
to rule 72(t). The major drawback is that once the SEPPs are started
they cannot be altered until you reach 59.5 or 5 years, whichever is
longer. Hopefully this isn't a big deal in your case (9.5 years at the
most).

If planned properly the 72(t) and the Roths, in conjunction, could be
all you ever need. The 72(t) locks up liquidity, but provides pre-
retirement income. The Roth contribs can provide the liquidity.

I wouldn't head straight for the whole life insurance. Insurance
mitigates risk, but it is not a top option to maximize investment
returns (which is what we are addressing). You may need life, health,
disability, and/or LTC insurance but not under the current scope of
this thread. Once all other tax advantaged accounts have been
exhausted and you feel that you have a comfortable pool of standard
brokerage funds accumulated, MAYBE then I would consider whole life
insurance.

An immediate annuity may serve your needs, but I think the methods
mentioned above will serve your needs just as well or better.

"ChiSaver" <hansnelson[at]yahoo.com> wrote
- quote -

One thought much bandied about by students of the U.S.
economy is that income tax rates must go up, in general, to
pay for the greater population on Social Security, plus the
rising costs of Medicare, added to the burdens of the
national debt. While you may presume a lower income in
retirement, do not be too sure this means lower taxes.

- quote -

After doing some additional research, and reading through your
responses, I have decided to continue maxing out the traditional
401k. I agree with others that it is difficult to imagine a scenario
where our tax bracket would be higher in retirement. Regardless, the
smart bet would be that it will be lower. I really like Tad's
strategy above which should allow us to take advantage of both plans.
For what it's worth, I am in Illinois, which has a 3% income tax.

Follow up question: Given that we want to retire before we can tap
into the tax deferred money, what have people found in this group is
the most efficient way to bridge that gap? I am sure we will have
part time work that will cover a majority of our needs during that 10
year period. Is it smart to use the taxable money first, open an
immediate annuity, some sort of whole life product, what?

ChiSaver wrote:
- quote -


My guess is your marginal dollar is taxed at 45% or more, unless you're
in a state without income tax -- factoring in both the tax bracket and
phase-outs. And you don't have much in the way of pretax dollars in
401ks yet (110k) so aren't facing the "too big an IRA" problem. And
you're planning early retirement (50) and have ample nonqualified assets
to tap into initially (300k+, and growing).

To me all that leans -- heavily -- towards the deductible 401k, for the
known/immediate tax benefit.

And plan on doing partial Roth conversions during the first 20 years of
retirement...live off that taxable account initially, and you may be
able to do them at zero tax. That should leave you way ahead of doing
Roth 401k contributions now (bottom-line, after-tax). It's conceivable
you could enjoy both the advantages of the Roth (tax-free growth, no
RMD) plus the advantages of the deductible 401k (immediate tax deduction).

One risk of this, which is present with any tax-focused strategy, is a
change in tax law. For example, changing rules on Roth conversions.

-Tad

- quote -

What is most tax efficient on way in, is not the tax efficient on the
way out.

Being in 33% tax bracket suggests you want to defer taxes as much as
possible (the likelhood you will be in 33% tax bracket during
retirement is low, IMO, considering you live off a fraction of this
now. The 120k per year you "live off of" is in 25% bracket, almost in
28% bracket.

Using traditional 401k saves you 33% now, and costs you 25% later (if
tax brackets hold).

Tax efficient going in:

1) 401k/ traditional IRA accounts
2) Roth accounts
3) taxable accounts

Tax efficient coming out**
1) Roth
2) taxable accounts
3) 401k/ traditional IRAs

** when withdrawing, consider capping out tax bracket with withdraws
from 401k, converting the excess to a Roth to improve tax efficiency
in subsequent years

Using qualified dividends as part of strategy can allow you to have
income taxed at 15% as opposed to higher 25, 28 or 33% tax brackets.

On Jul 12, 4:04 am, ChiSaver <hansnel...[at]yahoo.com> wrote:

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Agreed. I commend both of you on your success. No additional
retirement options are worth burning yourself out for.

On Jul 11, 5:46 pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -


I was probing to see if she could convert a hobby into additional
income and use that income for a SEP or solo 401(k) in which she could
manage fees, expenses, and investment options herself. I wasn't
suggesting she take on a new employ. Some people work on computers on
the weekend, or tune up cars. If you can find a way to make money at
it, you open up your retirement options. I usually wouldn't go that
route because of the employer match from the primary job is tough to
beat, but that is not the case here.

ChiSaver wrote:

- quote -

Take a look at this spreadsheet. http://www.joetaxpayer.com/saving.xls
You are well ahead of target. The 4% withdrawal allowed at retirement
indicates to replace one's income, 25 times final year salary is needed.
In current dollars, you wish to have 3/8 final salary, so if you retired
today, 9-3/8 times current income. Plugging in your salaries and current
savings balance, along with just 25% savings rate (I think yours is
higher, closer to 30%), and assuming an 8% return, you reach that goal
in less than 17 years.

Given your current high income and tax rate, deep into the 33% bracket,
I lean more toward traditional 401(k) and IRA. Don't forget, you can
still put $4000/yr, each, into a non-deductible IRA, and can convert to
Roth with upcoming tax laws changing in 2009-10, or when you retire.

JOE

- quote -


Thanks again to everyone providing advice. I think I am leaning
towards splitting my contributions and my wifes into the Traditional
and Roth. I hadn't thought of the estate consequences of doing one or
both in total, so this helped.

Some additional information/clarification given some of the questions
in this post:

- Present household income is 320k before bonus
- Desired retirement income is 120k in today's dollars
- My company matches 50% of the first 6% (not 3 as previously stated)
- 401k balance around 110k for each of us (220 total)
- We have a taxable account for retirement as well. Current value is
around 300k with additions of $4,500 a month.
- My wife will definitely not be picking up another job or hobby.
Working 60 hours a week and raising us 3 boys is work enough .

ChiSaver wrote:
- quote -


As you've keyed into, the choice hinges on an unknown/unknowable
variable: your tax rate during retirement. A near-retiree at least has a
sense of this, but it's very hard for you to even guess.

If you're DQ'd from the Roth your AGI is north of $160k. What is your
taxable income, and your marginal tax rate (meaning the combined state +
federal tax on your last dollar earned)? In addition to being DQ'd from
Roths, do you have other high-AGI effects on your tax return, such as
phase-out of your itemized deductions? Did you pay AMT in 2006?

That's a good first step, looking at that stuff, because it tells you
the tax benefit for the pre-tax 401k...

-Tad

kastnna wrote:

- quote -

See the original post. They live off her income and bank his. I think
she's doing fine working, I doubt she needs a hobby.
You are right about 401(k) expense impacting the decision on her
account, for both of them, the expense is a good probing question.
JOE

ChiSaver wrote:

- quote -

In my perfect world, the tax structure would be consistent enough so the
numbers today could be adjusted for inflation, and I could give you a
forecast for your tax bracket that would have some level of accuracy. I
do not live in that world.

Since you talk about early retirement, my remarks about the Social
Security Trap® can be put aside for the moment. Let's talk about now for
a second. See http://www.fairmark.com/refrence/index.htm
Now, a couple can have income of $63,700 +$6800 exemptions +$10,700 STD
deduction, total, $81,200. To generate this sum with the 4% rule, one
would need $2.03M. So, I surmise that you are above that income level
(and in the 25% bracket) today. If so, you may be well into the 25%
bracket, in which case 50/50 can be good, or you may be on track to save
well above the present value of $2.03M, risking a higher bracket at
retirement. Not knowing those two figures, present income, and targeted
retirement income, I can't complete a response. Just share my thoughts.
Retiring today, you'd want the $2M in a traditional account, to stay at
15%, and anything over that to be in Roth or post tax accounts.

I hope that helps get you closer to your answer.
JOE

On Jul 11, 11:55 am, jIM <noreplysoc...[at]hotmail.com> wrote:

- quote -


Agreed, but with the new roth rules, I have moved the taxable
brokerage account farther down my list. The Roth contributions can be
taken out between age 50 and 59.5 without tax concern and the roth
earnings will be tax free after 59.5 whereas the taxable account will
not. I cannot say whether the Roth contribs will be sufficient to
cover the 9.5 years with the info available. In addition there is also
the 72(t) option to access funds pre-retirement.

He could begin make non-deductible IRA contribs for him and his wife
and then convert in 2010. This would bulk up the Roth balances
available. Even an intelligently shopped variable annuity would
provide tax deferral. Of course all of this brings us back around to
the "tax now" vs "tax later" argument.

If all of these things are accounted for then perhaps any excess
savings should be put into a taxable brokerage account. Hey, its
better than the mattress (usually).

To the OP, you mentioned using your wife's account as solely for Roth
and your solely for IRA (or vice versa). I would hesitate to do this
if inheritance and/or estate planning will ever be a concern. Roths
and traditional IRA differ in tax treatment when it comes time to pass
them on (even in RMDs before death). Roths can continue on quite
easily after death, but IRAs have stretch provisions and distribution
rules that may not fit your families plan. Loading up on one type over
the other may complicate things after one (or both) of you pass away.
The pain will probably go unnoticed until your kids become the heirs,
but by then its too late. 401(k)s, whether Roth or not, are largely
dependent on the individual plan and can make things even more
complicated. What are you goals for your estate?

One last note on your wife: It sounds like there is nothing available
to your wife that can compete with the contribution limits of the
401(k). However, because there is no match, pay close attention to the
fees, expenses, and investment choices in your wife's plan. Other than
high contribution limits, 401(k)s are largely revered because of the
match ("free money"). This is not the case for her. Does she have any
other income, side job, or hobby that could be income producing?

- quote -


Combination of both is a good thing.

Consider what you have now as the basis for the IRA/ traditional 401k
(which will be taxed at retirement).

I would open the Roth so it grows to more than the 10k you have now.
You may also want to consider opening a taxable account because you
will need income between age 50 (early retirement age) and standard
retirement age (59.5 for access to IRAs).

- quote -

Thanks Joe.

My company matches 50% of the first 3% of salary. My wife maxes out
her 401k as well and also just received the choice of going Roth.
Would you recommend an even split (i.e. 7750 this year) to each for
both of us? Or would you suggest one of us goes all Roth and one goes
all traditional? My wife does not receive a match at all if that
matters.

ChiSaver wrote:
- quote -

Big IF is right. Traditional 401(k)(or IRA) withdrawals can impact
Social Security payments, when half of your Social Security benefits and
other income exceed $32,000, your benefits become taxable. So while you
plan to be in a lower bracket at retirement, there exists a phantom
46.25% bracket that for a single person can kick in at $30K/yr
withdrawal. I haven't done the math for couples, it's my next project.
By retiring at 50, I trust you're not counting too heavily on SS anyway?

Roth money is denser® than non-Roth. By that I mean $15,500 in a Roth is
worth $15,500, but in the standard 401(k) it's worth as little as
$10,000 or less. I'd favor a mix. You did not mention what your employer
matches (or what plan your wife has available), but the match will be in
a traditional side of your 401(k). I'd say for you to choose Roth, with
matching going traditional. You can always change from year to year if
you choose or the projected numbers point you the other way.

JOE