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August 01, 2014


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That seems fine BUT I would probably max the Roth IRAs prior to going into the traditional investment account (not sure if the 2.5% is enough to do that, if so, then his approach is perfect).

The potentially inconvenient (?) tax burden of the traditional account is offset by the fact that your gains will get CG treatment whereas withdrawals from the 401(k) will be ordinary income. I wouldn't sweat that piece.

I'm 31 years old so probably in a similar boat. I plan to have 2 kids in the next year or two but I've tried to save as much as possible so far. I have a SEP that my boss maxes out plus I max out a Roth IRA then I save anything additional in a brokerage account. I figure it'll give me a nice mix of pre and post tax money. Definitely get the match or "free money" as you stated. Then Roth IRA then brokerage. I think that's a good mixture. But for early retirement I'd aim for 20-25% at least. I'm saving 30%+ right now but my wife didn't have much saved so we're working together to do as much as possible now to make it easier on ourselves later in life. I think you're on the right track...the more you save now the better off you'll be to retire around age 50. Obviously diversify as well - if you have other income streams like rental property or the like then it'll make things easier on yourself. Good luck!

Don't forget that Roth IRA contributions can be withdrawn at any time without penalty. Depending on how much you will need before 59 1/2, this could be very useful.

The employer account is 8% plus 6% or 14%. Plus 7% in other accounts for a total of 21% being saved. Per the savings chart from Early Retirement Extreme, given an average interest rate of 6-10%, this would require 30-35 years to achieve financial independence IMHO as a conservative estimate.

So given the number of 28 years hinted at to hit 59.5, I'm not seeing a retirement at 50 occurring here unless there is an increase in savings by at least another 10% to about 30%, which drops the estimate to 20 years so now you'd be looking at 50 years of age. This would require an equal payment method from the tax defered account and it certainly doesn't account for any current savings which could offset the savings rate needed. So take these values with a big grain of salt and run some numbers for yourself.

Also, it could be set up to save more, say 20% in the tax defered account and then save ten percent in the taxable accounts if you plan on using the taxable accounts as a bridge you until you can withdraw from the tax defered at age 59.5 versus envisioning the taxable accounts having to last 40+ years. You could run the numbers and see if that makes sense as well.

Put the first 8% into the 401K, then max out the Roth. If there is anything leftover, add it to the 401K (until maxed) and then anything left goes to the investment account. As Jeremy pointed out, the Roth Contributions can be withdrawn penalty free (after 5 years) so if you are looking to bridge yourself from retirement to 59 1/2, that could do it. Given your age, you have plenty of time to build up that bridge in your investment accounts as your salary increased and you surpass the max contributions for your 401K and Roth.

It's prudent to diversify your future tax situation across Roth, deferred, and taxable accounts.

In addition to getting your principal back on Roths, you can also access then entire amount through 72T distributions. There are some arcane rules to it, but basically you can get access to all your money as long as you take it out in pre-defined chunks that are equal every year, without penatly. So take advantage of that as much as you can.

You don't mention your tax bracket, but if it's 25% or under you're likely better off putting as much into Roth as you can - both on the IRA side and if your employer offers a Roth 401(k) option (if they don't, you should lobby them to add it).

Reader plan is sound. My thought is to fund the Roth IRA last, as the 'penalty-free' option is only for first home (up to $10K) and disability; otherwise, regular income tax is paid on the gain.

Reader's age in unclear, but especially if under 45 would attempt to make the 'after-tax' savings equivalent to the 401(k) plus Roth IRA. This will be important if a down payment for a home, having children, an extended period of unemployment, paying for college, etc. is in the future. As the years between 'now' and age 59.5 decrease, you can change the taxed/untaxed savings ratio accordingly.

You have a great plan, continued success to you.

There is way too much information missing to adequately give advice. Goal retirement date, lifestyle requirements pre and post retirement, willingness to take risk, asset allocation, etc must all be considered for a proper answer.

One thing I'll mention since it appears you may not be aware of these options, is that there are ways to access your money prior to 59.5 years old. First is something called "Substantial equal periodic payments" but if you are going for a truly early retirement, I would recommend looking into Roth Conversion Ladders. Say you retire at 50, you would need to have 5 years living expenses saved in an accessible location. Roll over your 401k into an IRA. In your first year of retirement, you would do a Roth conversion on the amount of money needed at age 55. You would be taxed at a low level since you wouldn't have much other income, and after a 5 year period, you could withdraw this money tax free as it is a Roth contribution. At age 51, you would do a conversion for age 56. Do this each year until at least age 55. Post 55, make the decision based on tax considerations. Since you are most likely still at low income levels, there's probably a tax benefit to continuing to convert some at that time. Since it sounds like you're a couple decades off, keep in mind this plan will need to be flexible as there will most likely be changes along the way.

I am so NOT an expert on saving money, but it seems like you are doing a pretty good job overall. I would keep contributing to get the employer match for sure! That's free money right there :)

There needs to be some clarification regarding Roth IRA withdrawals. You can always withdraw your contributions from a Roth IRA penalty-free. Withdrawing income prior to the required age is what results in a penalty. Any withdrawals are treated as coming first out of contributions and then out of income. For example, you contribute 5k in both year 1 and year 2. In Year 4, when the 10k of contributions has grown to 13k, the first 10k you withdraw will be penalty free. Any excess distribution will be subject to penalty since you would be withdrawing income prior to the required age.
You also do Not have to wait 5 years before withdrawing your contributions, as some people have stated here. Mymoneyblog had a good post about this, but the short of it is that if you take withdrawal prior to 5 years it is not a qualified distribution, however, it is still tax & penalty free since you are only withdrawing your basis.
Since you employer has such a good match, you should definitely make sure you fully utilize that match first. Then I would focus on maxing out Roth IRA. Finally, put the rest into 401k.

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