Today was a good day

Today was a good day.”  – Ice Cube circa 1993

You can start to feel Old Man Winter’s breathe in our neck of the woods.  Today I busted out my favorite goose-down coat as I headed out the door this morning.  I reached into one of its pockets and discovered an unclaimed $20 bill.  Gosh, I love it when that happens.

I had that same feeling earlier this last weekend when I was catching up on my favorite blogs.  I learned of a new resolution to our issue of having too much money tied up in retirement accounts that, in theory, couldn’t be touched without penalty until age 59.5.

Quick History & Timeline

1998 to 2012 – Mrs. Buck and I work our careers maxing out all kinds of tax-advantaged retirement accounts including employer 401k’s, Traditional IRAs, Roth IRAs, and SEP (self-employed) IRAs.

2010 – 2013 – Every year around tax time, Mrs. Buck insists we’ve saved too much in retirement accounts that we can’t touch until age 59.5 and that we should pare back on certain contributions.  I only half-hear her suggestions because I feel we need multiple millions before we can retire and take no action.

April 2013 – I start this blog for accountability reasons after being convinced that by being more careful in our spending that we could conceivably move our retirement date up by years from age 50 to our early 40’s.

August 30, 2013 – Brad from RichmondSavers.com challenges my Wealth Manifesto in the comments of that post that gets me thinking.  To spare you from clicking over, the conversation went something like this:

Brad:  I struggle with popular advice to always max out retirement accounts.  Early retirees like us will need the money to invest in other ways before age 59.5.

Me:  You are right.  I regret having over 85% of our savings for retirement tied-up in accounts that cannot be touched for 20+ years.

Brad:  I just learned about a neat little trick related to Roth IRA conversions that may solve our issue of over-saving in retirement accounts but it almost sounds too good to be true.  I still need to do more research.  What is your strategy?

Me:  Umm, I really don’t have a strategy.  We’ve quit contributing to those retirement accounts entirely and look to build up our regular taxable accounts from this point forward.  Once we have enough saved in taxable accounts to ‘float’ us from our current age to 60, we’ll retire.

October 10, 2013 – I listen to the Mad Fientist podcast that formally introduces me to Roth IRA Conversion Ladder discussion and I’m pumped.  The light-bulb goes on.  “This is what Brad was referring to!”.  At this point I’m thinking that overstocking all that money in retirement accounts may not have been such a bad idea after all but I need more details.

October 26, 2013 – I see on Twitter that one of my favorite travel blogs has published a new post.  Jeremy over at Go Curry Cracker usually tells intriguing stories of their travels through Central America but this latest post is about taxes and how to never pay them again.  Along with a mention of Roth IRA Conversion Ladders, he has other tips to lessen (or eliminate) the bite of taxes.

More to Think About

While I’m still far from an expert on these Roth IRA Conversion Ladders, I’m convinced this is an approach we’ll use once we’re in a lower tax bracket.  I also think this reduces our need to save for 20 years of ‘float’ time and may be able to whittle that down to 5 years of float by operating within the rules of Roth IRA Conversions.

Frankly, there is rarely new information out in the personal finance blogosphere (this site included).  But I get jazzed when really smart people share their knowledge with the rest of us on what I consider ground-breaking strategies in the early retirement realm.  For that, I say thank you to Brad, Brandon, and Jeremy.

Maybe this is all common knowledge and I’ve missed out on it all this time.  Either way, it feels like I just found another extra $20 bill in my pocket.

18 thoughts on “Today was a good day”

  1. That interaction got me thinking quite a bit too! I’ve had this link in my ‘to do’ list ever since:

    http://www.madfientist.com/retire-even-earlier/

    Though I suspect that podcast will give you more info.

    I asked Justin at RootofGood.com (good site if you haven’t checked it out) a similar question and he had a very informative answer and link to another comment:

    http://rootofgood.com/early-retirement-at-33-an-overview/#comment-395

    Hope that provides you some additional info. Glad I could challenge your thinking a little bit and that it might work out for the best!! I’m headed over to Go Curry Cracker as we speak…

    1. Good stuff, Brad. I had heard of the 72t rule option before. My initial take was that once you invoke it, you are pretty well committed – it didn’t feel like I had the flexibility and control that the Roth Conversion ladder seems to offer. Both warrant a lot more research from my perspective. I’m just glad to have heard of a couple more options that I can take advantage of beyond my original plan of basic brute force (taxable) saving.

      Thanks for stopping by and planting this seed in my mind.

      1. I agree that the 72t sounds extremely complicated and I hate that it locks you in like that. The Roth conversion ladder seems to be the best way to go from what I’ve seen to date. Sorry, I know just enough to be able to ask the questions here, but not enough to provide any insight at all.

        It’s not impossible to imagine someone like you with a family of four using this early retirement strategy to pay zero in tax, close to zero in health insurance thanks to the ACA (see MMM’s most recent post), and possibly even zero for college.

        I know here in Virginia we have two of the top 60 or so ranked colleges in the nation (Washington & Lee and University of Richmond), who are also two of the richest, offering huge discounts to lower-income families. UR offers full tuition and room and board to a Virginia family with under $60,000 of income (not sure if there’s an asset test. Again, I haven’t looked into it enough) and W&L offers full tuition (but not R&B which is expensive) to families with less than $75,000 income. I know other top schools like Harvard have similar arrangements. My kids are quite young, so I have’t spent the hours needed to research, but this might be worth your while…

        1. Yeah, it’s really dawning on me that much of the tax code, healthcare system, etc. lean (or will lean) very beneficial for those of us planning to ER assuming we’re aware of some of these lessor known approaches and are able to take advantage of them.

          Interesting comments about upper education. I always thought a lot of those schools did an asset test along with an income check. Either way, we’ve piled a bunch into 529’s for our boys starting at birth that I think will be pretty suitable once they are at that age.

          I appreciate the conversation, Brad.

          1. It would be great to see someone (like Jeremy or the Mad Fientist) tackle the best way to save on college education for early retirees. That could be a very valuable article indeed! Even if you’ve aleady saved in 529s, that can be used for grad school if you can get undergrad for free for the boys.

            I did a quick google search and found this article that said:
            http://www.savingforcollege.com/financial_aid_basics/financial_aid_and_your_savings.php
            “•A good type of asset to own when applying for financial aid is a retirement account such as an IRA or 401(k). These qualified retirement accounts, whether owned by you or by your child, are not counted at all in determining EFC (Brad: Expected Family Contributions) for purposes of federal financial aid.”

            I read that to mean 401k’s, IRA’s, etc. do not count as “assets.” I’m currently scheduling an interview with someone at the University of Richmond, so I’ll keep you updated.

            1. It would be great to see someone (like Jeremy or the Mad Fientist) tackle the best way to save on college education for early retirees.
              Agreed, although I do wonder how much they’ve thought about it as I don’t think either have kids (although I could be wrong).

              I’m really interested to see what college looks like and how much it costs in another 10 years. I don’t think traditional institutions can continue to inflate costs as they have the last 10-15 years. I think there will be other competition (online or otherwise) that will force their hand. I do think there is value in the “college experience” but it will be interesting to see what that looks like by the time my boys get there.

              1. I’m not familiar with college savings options. Since we don’t have children, I never studied it. I paid for my own college degree via savings, scholarships, student loans, and working part-time during the school year and full time in the summer, but college is a different today… I think the cost / value relationship is much worse than when I attended 20 years ago. If I were 18 today, I would strongly consider skipping the University and going straight to starting a business

                I’m intrigued by some of the informal education options that exist today, as well as the great opportunities for entrepreneurs (both the educated and uneducated variety.)

                All of that said, I would probably think of it the same as any planned major expense, e.g. we are considering buying a house for cash. If there are options that minimize/eliminate taxes, I would use them, but otherwise I would just save as normal. It only took us about 10 years to save for a 60+ year retirement. When saving a high percentage of income, the time period required to save for a college education can be small as it is a 1-time expense (in theory)

                1. “If there are options that minimize/eliminate taxes, I would use them, but otherwise I would just save as normal.”

                  This has been our approach. The 529 college savings plans are kind of like a Roth in that you contribute after-tax dollars into an account and let them grow tax free when you distribute and pay for qualifying school expenses including tuition, room & board, books and supplies. We’ve contributed to our state-run program since our boys’ birth and have been able to deduct local state taxes for our contributions up to $3000 per child per year. I know there are a couple of ways to save for college (UGMA, etc) but I can’t imagine any are more beneficial or flexible than the 529’s.

  2. Well, I’m sure that the value is actually a bit bigger than those $20. Being able to move the retirement date even closer is surely great news. Too bad we don’t have things like the Roth IRA here in Romania to have reasons to be happy too :))

    1. Yes, the value is much greater than $20 but the feeling of elation was similar! Funny how that works sometimes. Do you have any sort of formal retirement accounts available to you in Romania? Or any other tax-advantaged savings accounts?

  3. I’m glad I was able to provide a bit of the spark to light the light bulb!

    The Roth IRA conversion ladder strategy is the main reason I happily max out every tax-advantaged account I am able to contribute to. While it will be a bit more work getting access to that money during early retirement, the thousands and thousands of dollars of tax savings will more than compensate me for the additional effort.

    1. Yeah, we cut back on contributing to tax-advantaged accounts pretty much cold turkey earlier this year (other than to get my employer’s match in my 401k). I’m now reconsidering that decision. We can still contribute to my wife’s SEP if we so choose yet this year. Much to think about and I certainly appreciate you stopping by, Mad Fientist. Keep up the good work.

  4. Hi Buck,

    That does sound like a good day! And you didn’t even have to use your A.K. 🙂

    Like Mad Fientist, we took advantage of every tax-advantaged account we could while working. I always wished the annual contribution limits were higher. All of our spending at present is out of taxable accounts (qualified dividends, long-term capital gains, and cash), and I’m hoping to be able to convert all of the old 401ks into ROTH IRAs before the taxable accounts run out.

    Good luck, and ;let us know what you decide to do

    Jeremy

    1. And you didn’t even have to use your A.K.
      Haha. I was waiting for someone to mention this. I was in college the last time I heard this song and replayed it recently on YouTube. I was going to link to a clean version, but half the song was rubbed out. Some of the lyrics, yikes!

      Interesting you mention going straight from 401k to Roth. Another thing I didn’t know was possible. I think I’m going to be done with work in about 6 months time while the Mrs. continues to work. I don’t think it will make much sense to roll my 401k into Roth at that point. I suspect I’ll roll into a Traditional and wait until we’re in a super low tax bracket to start converting over to Roth at that point after the Mrs. stops working as well.

      I appreciate you taking the time to stop by and comment, Jeremy. Enjoy the rest of your time in Mexico and be sure to keep the posts coming. No amount is too much from my perspective!

      1. Hi Buck, sorry for not being clear, but I meant from 401k-> IRA upon quitting work, and then IRA -> ROTH over time. The old 401ks are currently Traditional IRAs and I’ll convert them to ROTHs a little each year up to the point where we pay no tax

        1. I see. Makes sense. I didn’t think you would still be holding funds in your former employer’s 401k plan – presumably limited to their (usually) slim pickings / high cost options. I never understood folks who leave them there after moving on to another job (or retiring).

  5. Great thread…looks like you “messed around and got a triple double” by adding G.C.C. and M.F. to your all-star line up. The Roth Conversion Ladder made famous by the M.F. ( I believe) as well as the method of giving heavy taxes the “Heisman pose” by G.C.C. give me a lot of hope and excitement as a fella in his 40’s looking to retire sooner rather than later. Great work to all…

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