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Re: Retirement Investment Options Help!

There is no income/asset limit on rollover/direct-transfer of 401k into T-IRA on job change or retirement [OP is not close to that].

YBB
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Re: Retirement Investment Options Help!

R48

I just wanted OP to know that there are different opinions on Roth vs Traditional IRA.
Here, the main (but not the whole) focus is whether you will pay higher marginal income tax rate in retirement or not.
OP is on an unusual path of wealth accumulation at a young age.   If he contributes exclusively to tax-deferred and work to near RMD age, he can easily accumulate several millions of this type of asset.   Then, his RMD could become a tax bomb.
If he retires well before RMD time, his best path could be to focus on traditional and do Roth conversion in the period after retirement and before RMD starts.
For most people, tax diversification of contributing to both types makes sense.

I enjoy reading your posts and agree with most of them (SS claiming age, Warren Buffett, and this are differences).

 

 

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Re: Retirement Investment Options Help!


@Saratoga wrote:

R48

I just wanted OP to know that there are different opinions on Roth vs Traditional IRA.
Here, the main (but not the whole) focus is whether you will pay higher income tax rate in retirement or not.
OP is on an unusual path of wealth accumulation at a young age.   If he contributes exclusively to tax-deferred and work to
near RMD age, he can easily accumulate several millions of this type of asset.   Then, his RMD will become a tax bomb.
If he retires well before RMD time, his best path could be to focus on traditional and do Roth conversion in the period after
retirement and before RMD starts.
For most people, tax diversification of contributing to both types make sense.
I enjoy reading your posts and agree with most of them.

 

 


I prefer to evaluate whether to contribute as a pre tax or Roth contribution under the principle of tax arbitrage: maximizing pretax contributions when in highest tax brackets and converting/contributing to a Roth when in lower tax brackets, e,g, after retiring but before RMDs commence at 72. When I was working I made pre tax contributions to the Max by doubling the contributions because I worked  for 2 different employers. Maxing pretax contributions lowered my taxes by about 1/3 . When I retired my income declined by 50% but I maxed out itemized deductions and business deductions to convert 1/3 of my retirement benefits to a Roth over 6 years in the 15% bracket. Converting to a Roth reduces my RMDs by 30k  a year.

My Roth is invested in FAANG , recovery stocks and QQQ. I can take distributions at any time with 0 tax. 

I have advised younger workers in low tax brackets e.g, 12%, to make Roth contributions because of the low tax rate and the long term growth of equity investments that will not be taxed.

One obscure reason for workers in higher brackets to make pre tax contributions is because most states with income tax exclude Retirement contributions from state tax. A worker who retires to a state where there is no Income tax or where retirement benefits are not taxed gets the benefit of both tax arbitrage as well as lower state taxes because the retirement Benefits are not taxed which makes pretax preferable to a Roth contribution. It makes little sense for a worker who lives in a state tax that does not tax Roth contributions and retirement benefits to contribute to a Roth retirement account.

 

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Re: Retirement Investment Options Help!


@Saratoga wrote:

R48

I just wanted OP to know that there are different opinions on Roth vs Traditional IRA.
Here, the main (but not the whole) focus is whether you will pay higher marginal income tax rate in retirement or not.
OP is on an unusual path of wealth accumulation at a young age.   If he contributes exclusively to tax-deferred and work to near RMD age, he can easily accumulate several millions of this type of asset.   Then, his RMD could become a tax bomb.
If he retires well before RMD time, his best path could be to focus on traditional and do Roth conversion in the period after retirement and before RMD starts.
For most people, tax diversification of contributing to both types makes sense.

I enjoy reading your posts and agree with most of them.

 

 


Hi Saratoga.

Note it was pointed out to me that Zach is ABOVE the income limit such that he cannot invest in a Trad IRA.

I agree with intruder...that the range is  0 to 10-12% tax, for buying Roths.  I still prefer Trad for most.  Also, the time to acxcumulate Roths is the time between retirement, and age 72 RMD time, when your income tax rates are lower.  You convert Trads to Roths.  I did this...had no Roth when retired; now have a huge Roth.

Also note Roth has a built in problem...changes in tax laws between now and retirement for Zach.  My grandkids are projected to have $6 million in Roths at their age 60.  Ain't gonna happen.  Society will not let tax free growth and tax free withdrawals to such huge amounts.  Gvt already eliminated the "stretch aspect" of Trad and Roth IRAs.  Expect Roths to be taxed, or limits placed that are tax free, etc.  Brazil enacted a pension/IRA type asset tax on plan values.

R48/Saratoga resident

 

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Re: Retirement Investment Options Help!


@Saratoga wrote:

R48

I just wanted OP to know that there are different opinions on Roth vs Traditional IRA.
Here, the main (but not the whole) focus is whether you will pay higher marginal income tax rate in retirement or not.
OP is on an unusual path of wealth accumulation at a young age.   If he contributes exclusively to tax-deferred and work to near RMD age, he can easily accumulate several millions of this type of asset.   Then, his RMD could become a tax bomb.
If he retires well before RMD time, his best path could be to focus on traditional and do Roth conversion in the period after retirement and before RMD starts.
For most people, tax diversification of contributing to both types makes sense.

I enjoy reading your posts and agree with most of them.

 

 


@Saratoga @Zach2020 @retiredat48 

Saratoga,

There is much to be said for your point about blending options.  

Zach,

Your 401K - while expensive - still allows you to defer 26% .  That's valuable, particularly if you plan on moving to a state that doesn't have income taxes.  That would save 4.5% even if your Federal rate stayed the same in retirement.  

However, you might not want to max out your 401K, but instead do what RICH people do.  That's to do tax-deferred investment the OLD SCHOOL way.  Which is to buy individual growth stocks that do not pay dividends.  Why?  

1.  It's the 80/20 rule.  20 percent of the stocks (if that) are going to provide 80 percent of the benefit.  These are (largely) the growth stocks.  

2.  By not receiving dividends, your growth will not be weighed down by paying taxes each year on those dividends.  Yeah, it adds up to something meaningful.  

3.  Do tax gain harvesting and tax loss harvesting as applicable and prudent.  

4.  When you need to sell those stocks, the gain will be at 15% capital gain rate versus your earned income rate.  

5.  If you don't need to use all those assets in your old age, they go to your heirs and get the step-up and (in the right states) they pay not a dime in taxes upon receipt and you NEVER paid any taxes to make this happen.  

So ... what happens if they eliminate the step-up or do away with the capital gains tax?  You still could take advantage of gifting during your lifetime.  Additionally, if the government goes after the step-up and capital gains, they probably are going after your ROTH and 401K with new taxes too.  You can only control what you can control and can't sweat everything.  

So, rather than put everything in your 401K ... buy stocks for no cost, own stocks for no fees and sell them for a lower tax rate than you probably going to see when it's time to for RMDs on those 401K assets. 

If it turns out differently, you've at least have money in two potentially winning strategies and a very slight chance that both strategies turn out poorly.  

ctyankee   

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