mtn said:https://www.madfientist.com/how-to-access-retirement-funds-early/ Note that you do need to plan ahead at least 5 years for this, but you can be doing it with your TIRA before you ever roll over your 401k
Just so I've got this straight - if I, for some reason, had a IRA of $100k by the time I was 25, I could roll that over into a Roth (without limits) then withdrawl from the Roth after 5 years?
The things you wish you knew when you were younger!
pheller said:mtn said:https://www.madfientist.com/how-to-access-retirement-funds-early/ Note that you do need to plan ahead at least 5 years for this, but you can be doing it with your TIRA before you ever roll over your 401k
Just so I've got this straight - if I, for some reason, had a IRA of $100k by the time I was 25, I could roll that over into a Roth (without limits) then withdrawl from the Roth after 5 years?
The things you wish you knew when you were younger!
The money coming in can be from a 401k, another IRA, a 403b, etc. Pretty much any retirement account can be rolled into a Roth IRA. One thing that I'm not sure has been mentioned is that unless the funds are being rolled over from a Roth account (Roth 401k or Roth IRA) you will owe income taxes on the amount rolled into the Roth IRA. So if your household taxable income is 100k and you rolled $50k from a traditional 401k into your Roth IRA, it will increase your taxable income by 50k for that year, and you'll need to be prepared to pay income tax for the increased amount. Your household taxable income just jumped a bunch for that year which may bump you into a higher tax bracket as well which is something that is worth investigating beforehand. I bet it could mess with need based things like financial aid for a kid's college too, although in my example with a taxable income of 100k, you probably wouldn't be eligible for many need based things anyway.
pheller said:My wife and I have a lot of money just chilling in high interest savings accounts, and it's soon time to move it elsewhere. We both have a desire that when our daughter is in school that we'd like to do some extended trips overseas. Like, living in another country for a summer. Having some passive income would be nice for those types of situations, for no other reason than it may require job/career changes.
My question is: if I had $100k sitting around (I don't, yet), and I wanted to live off that the income that it could generate, would I be better off to invest in real estate that requires some amount of work on my part, or an investment account pointed towards index funds?
A clarification: you say you want to live off the income that $100K generates. Do you mean:
1.) You intend to use the $100K to travel the world, you'd like it to last a couple years while you do so, and therefore want to maximize returns? After using up the $100K, you'll go back to work or use other money.
or
2.) You intend to live off $100K principal indefinitely?
If #1, that's probably reasonable. If #2, that...isn't. If you google the "4% rule" it states that you can expect your principal invested (in this case $100K) to generate 7-11%, properly invested. Using the lower number, 3% of that goes to inflation, and the other 4% is yours to use every year. So you can expect $100K to throw off $4000 every year for use. If you expect to retire and live off the interest, a starting point a bit higher (like $1million) would probably be more reasonable, generating an inflation-adjusted $40k pretty much forever.
Of those two, it's the first scenario.
I fully plan on working until retirement age, but I can imagine some gaps in employment while I'm younger.
I also wouldn't plan on using up much of that $100k. My hope would be to live cheaply during these period of sabbatical.
STM317 said:The money coming in can be from a 401k, another IRA, a 403b, etc. Pretty much any retirement account can be rolled into a Roth IRA. One thing that I'm not sure has been mentioned is that unless the funds are being rolled over from a Roth account (Roth 401k or Roth IRA) you will owe income taxes on the amount rolled into the Roth IRA. So if your household taxable income is 100k and you rolled $50k from a traditional 401k into your Roth IRA, it will increase your taxable income by 50k for that year, and you'll need to be prepared to pay income tax for the increased amount.
I imagine that this is because the 401k and IRA are pre-tax accounts, where as the Roth accounts are not.
I guess I still don't understand why most wouldn't just use a brokerage account...
pheller said:I guess I still don't understand why most wouldn't just use a brokerage account...
For the specific situation you're describing, this would be the simplest solution.
Driven5 said:pheller said:I guess I still don't understand why most wouldn't just use a brokerage account...
For the specific situation you're describing, this would be the simplest solution.
Simplest, yes. Not the most cost effective though.
The aanswer to Phellers question is "you pay more taxes doing it that way"
But from what you're saying, if I were to convert current rollover IRAs to a Roth, I'd pay taxes anyway.
In the case of my money currently in savings accounts, it doesn't sound like there is any way of getting it into a Roth in a lump sum right now.
So my options are either A) large sums sit in savings account earning 2% B) large sums make 8% with 12% tax on gains, and every year we contribute $12k to a Roth.
pheller said:I imagine that this is because the 401k and IRA are pre-tax accounts, where as the Roth accounts are not.
I guess I still don't understand why most wouldn't just use a brokerage account...
Correct about the pre-tax vs post tax accounts.
The brokerage account guarantees that you pay taxes on money going in as well as the gains.
Money going into the Roth will be taxed, but gains won't as long as you don't take them out until age 59.5. And there's the benefit of being able to roll over large sums from a 401k or something without penalty, which you can't do in a brokerage account.
pheller said:In the case of my money currently in savings accounts, it doesn't sound like there is any way of getting it into a Roth in a lump sum right now.
If you haven't already, you can still contribute up to the $6k maximum into IRAs for you and your spouse for the 2019 tax year. This can be done until April 15.
You could make your 2020 contributions at the same time. So you could each start off with $12k in your individual Roth IRAs (24k total) earning interest all year. It may not be the full amount rolled over, but it's a decent start.
Depending on employer, you may also be able to make Post-tax contributions to a 401k (which do not count towards annual contribution limits). That money could then be rolled into a Roth IRA. If that's an option within your plan, you could put everything currently in savings into your 401k, and then do the rollover/Roth conversion immediately. It's worth checking into at least.
mtn said:Simplest, yes. Not the most cost effective though.
The aanswer to Phellers question is "you pay more taxes doing it that way"
For long-term retirement planning purposes, this is all absolutely true. For the specifically noted scenario though, I do not believe it is nearly as cut and dried. The relatively near term access/usage requirements combined with other unknown financials add a number of variables that could very well make the conventional wisdom partially untrue, or at least infeasible, while adding factors that could make some additional costs worthwhile.
STM317 said:pheller said:In the case of my money currently in savings accounts, it doesn't sound like there is any way of getting it into a Roth in a lump sum right now.
If you haven't already, you can still contribute up to the $6k maximum into IRAs for you and your spouse for the 2019 tax year. This can be done until April 15.
You could make your 2020 contributions at the same time. So you could each start off with $12k in your individual Roth IRAs (24k total) earning interest all year. It may not be the full amount rolled over, but it's a decent start.
And the reason to do this instead of just a brokerage account is, again, the taxes. If you go Roth, you've already paid your income tax on it and you'll never have to pay capital gains tax. If you go Traditional, you'll again never have to pay capital gains tax and you'll save $1,440-$2,640 on your income taxes this year. This is assuming you and your wife both contribute the full amount.
Driven5 said:mtn said:Simplest, yes. Not the most cost effective though.
The aanswer to Phellers question is "you pay more taxes doing it that way"
For long-term retirement planning purposes, this is all absolutely true. For the specifically noted scenario though, I do not believe it is nearly as cut and dried. The near term access/usage requirements combined with other unknown financials add a number of variables that could very well make the conventional wisedom untrue, or at least infeasible, in addition to factors that could make some additional costs worthwhile.
For a 5 year period, you're correct.
It sounds like in any case, the Roth IRA should get started. We could get $24,000 in their immediately, and since the whole quitting our jobs and traveling thing isn't for a few years yet, better get on it pronto!
That leaves about the same amount for other venues. Although we're expecting to put $10k into the house over the next year.
In reply to pheller :
That's a very good starting point.
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