How much $ to retire and how to fund your lifestyle in retirement

[mongo]

I was thinking yesterday that maybe one of the reasons of why I am not liking my job anymore is that we have been making so much money selling weekly options lately compared to my 40 hours decent paying job that it just seems pointless.

Yeah, going from 'working so you can pay your bills' to 'working even though you can pay your bills' is quite a shift.
Or: 'I need to work, so this job is the best option' to 'I can do anything other than this job'
Jobs do have a level of security though

 

[adiggs]

I was thinking yesterday that maybe one of the reasons of why I am not liking my job anymore is that we have been making so much money selling weekly options lately compared to my 40 hours decent paying job that it just seems pointless.

I've been there.

Then again I first formulated my conscious desire to be financially independent around age 20. It took 32 years to achieve that - missed my target by a couple of years. So retiring from my job let me make a higher quality of test of just how much I liked my job, and more accurately the kind of work that I was doing (data science). Namely - volunteer my time at a non-profit that needs those skills. Do I really like it so much that I'll do it for free? (The jury is still out - I'm volunteering, but I've also been missing a lot of the recent hours in the schedule).


Sometime last fall, a year ago, when I was still relatively new to this but having great results for getting started, we realized that I was replacing or better my previous salary. My wife started asking me "and you're still working why?". That's a pretty good indicator of the next step.

 

[ZeApelido]

I was thinking yesterday that maybe one of the reasons of why I am not liking my job anymore is that we have been making so much money selling weekly options lately compared to my 40 hours decent paying job that it just seems pointless.

Yeah mentality is all messed up now. I just got a new job offer - I don't even bother to negiotate because the salary and options are fair. Do I care about another $10 to $20 k when I can just do the same by moving my put strike price up a little bit?!

Or when I get LinkedIn messages to provide my "expertise" in a 1 hour phone call for $300. Um, no.

 

[cusetownusa]

Most CPAs aren't very familiar with it. This website has been very useful for me: 72tNET – Retire with Confidence. There are knowledgeable people who will answer your questions on that forum. However, a TSLA investor's account size is probably way more than they are used to over there.

It might make sense to have a thread on here just for 72T as there are probably a lot of us who are far from 59.5 and sitting on big retirement accounts that we can't yet access without penalty.

You could also do a Roth conversion ladder.

This write up is one of the best I have seen on how to access 401k money early without penalty. In short, this should not be a concern for anyone and definitely not a reason to post pone retirement:

How to Access Retirement Funds Early

 

[Double-O]

$0 or the absolute minimum your job forces you to put into pension or whatever else. You're not promised tomorrow so I'll enjoy today and plan for a very near future only (3-5 years tops)

 

[MikeC]

You could also do a Roth conversion ladder.

This write up is one of the best I have seen on how to access 401k money early without penalty. In short, this should not be a concern for anyone and definitely not a reason to post pone retirement:

How to Access Retirement Funds Early

I am personally going with SEPP because I am currently "cash poor" and want the money now - I don't want to have to pay tax now and get the money 5 years later. Especially because I am still working and have a high tax rate.

That link is an excellent resource but I strongly disagree with the conclusion that taking the penalty in an IRA is better than investing in a taxable account. They do not consider that long-term capital gains are taxed at 15-20%, but in an IRA everything will be taxed as income, in addition to the 10% penalty. So if someone has a high tax rate and plans to hold positions for more than a year, taxable is the way to go.

 

[adiggs]

I am personally going with SEPP because I am currently "cash poor" and want the money now - I don't want to have to pay tax now and get the money 5 years later. Especially because I am still working and have a high tax rate.

That link is an excellent resource but I strongly disagree with the conclusion that taking the penalty in an IRA is better than investing in a taxable account. They do not consider that long-term capital gains are taxed at 15-20%, but in an IRA everything will be taxed as income, in addition to the 10% penalty. So if someone has a high tax rate and plans to hold positions for more than a year, taxable is the way to go.

I'm going the IRA and pay the penalty route for that particular account, but my use case is also pretty particular. That account represents our pot from which we'll draw should something big come along that we want. Big in this case is more like a down payment on a house - a second, newer, Roadster probably doesn't need anything from here.

So the desirable dynamic is that the money is there when we need it, and we mostly want.


Later on there is (apparently - I haven't studied this deeply) a mechanism for donating IRA money directly to a charity. That way it doesn't show up as income, nor does it show up as a tax deduction. Since that's what we'll be doing with that money (most likely) then this is a particular use case that works well for us.


I looked into SEPP / 72t withdrawals for that account, and decided against. If I were cash or income poor(er) then the 72t withdrawals look perfect to me - you can arrange them so that they become your regular income. That makes a ton of sense to me.

 

[mongo]

That link is an excellent resource but I strongly disagree with the conclusion that taking the penalty in an IRA is better than investing in a taxable account. They do not consider that long-term capital gains are taxed at 15-20%, but in an IRA everything will be taxed as income, in addition to the 10% penalty. So if someone has a high tax rate and plans to hold positions for more than a year, taxable is the way to go.

The account balance used to create gains is already reduced by taxes though. So you pay taxes reducing the amount, get gains on that, then pay taxes on the gains. So the gains are effectively double taxed.

Which is better depends on the specific situation.
X dollars pre tax, tax rate of t
IRA: X
Post tax trading: X*(1-t)
Investment return: r
Gains:
IRA: X*r
PTT: X*(1-t)*r
Withdraw of gains:
(t+10%) for IRA (if the same tax rate, doing that for convenience)
15% for capital gains in PTT
IRA: X*r*(1-t-0.1) = X*r*(0.9-t)
PTT: X*(1-t)*r*(1-15%)=X*(1-t)*r*0.85=X*r*(0.85-0.85*t)
Difference: IRA - PTT
X*r*(0.9-t) - X*r*(0.85-0.85*t) = X*r*(0.9-t-(0.85-0.85*t))
=X*r*(0.9-t-0.85+0.85t)=X*r*(0.05-0.15t)
If 25% tax rate:
0.05-0.15*0.25=0.05-0.0375=0.0125=1.25% better return from IRA
If 37% tax rate:
0.05-0.15*0.37=0.05-0.0555=-0.0055=0.55% worse with IRA

20% cap gains:
PTT: X*(1-t)*r*(1-20%)=X*(1-t)*r*0.8=X*r*(0.8-0.8*t)
Difference: IRA - PTT
X*r*(0.9-t) - X*r*(0.8-0.8*t) = X*r*(0.9-t-(0.8-0.8*t))
=X*r*(0.9-t-0.8+0.8t)=X*r*(0.1-0.2t)
If tax rate is 25%: 0.1-0.2*.25=0.1-.05=0.05=5% higher return from IRA with penalty .
If tax rate is 37%: 0.1-0.2*.37=0.1-.074=0.026=2.6% higher return with IRA
So, in a high income situation, the penalized IRA gives better returns. Esp given the IRA contributions are at the marginal rate.

 

[MikeC]

The account balance used to create gains is already reduced by taxes though. So you pay taxes reducing the amount, get gains on that, then pay taxes on the gains. So the gains are effectively double taxed.

Which is better depends on the specific situation.
X dollars pre tax, tax rate of t
IRA: X
Post tax trading: X*(1-t)
Investment return: r
Gains:
IRA: X*r
PTT: X*(1-t)*r
Withdraw of gains:
(t+10%) for IRA (if the same tax rate, doing that for convenience)
15% for capital gains in PTT
IRA: X*r*(1-t-0.1) = X*r*(0.9-t)
PTT: X*(1-t)*r*(1-15%)=X*(1-t)*r*0.85=X*r*(0.85-0.85*t)
Difference: IRA - PTT
X*r*(0.9-t) - X*r*(0.85-0.85*t) = X*r*(0.9-t-(0.85-0.85*t))
=X*r*(0.9-t-0.85+0.85t)=X*r*(0.05-0.15t)
If 25% tax rate:
0.05-0.15*0.25=0.05-0.0375=0.0125=1.25% better return from IRA
If 37% tax rate:
0.05-0.15*0.37=0.05-0.0555=-0.0055=0.55% worse with IRA

20% cap gains:
PTT: X*(1-t)*r*(1-20%)=X*(1-t)*r*0.8=X*r*(0.8-0.8*t)
Difference: IRA - PTT
X*r*(0.9-t) - X*r*(0.8-0.8*t) = X*r*(0.9-t-(0.8-0.8*t))
=X*r*(0.9-t-0.8+0.8t)=X*r*(0.1-0.2t)
If tax rate is 25%: 0.1-0.2*.25=0.1-.05=0.05=5% higher return from IRA with penalty .
If tax rate is 37%: 0.1-0.2*.37=0.1-.074=0.026=2.6% higher return with IRA
So, in a high income situation, the penalized IRA gives better returns. Esp given the IRA contributions are at the marginal rate.

Whoa. Can you help me understand that with an example?

Say you have $100,0000 to bet on TSLA and ten years later the investment is 10x. Assume the tax rate is 37% at the time of deposit and withdrawal and 15% is the LTCG rate.

-In the IRA, you will deposit $100k which becomes $1M. You withdraw it and owe $370k as tax and $100k as penalty, netting $530K.

-In a taxable, you will deposit $63,000 which becomes $630,000. You owe 15% on the profit ($567k x 0.15 = $85.05K), netting $544,950.
-At 20% LTCG, it would be (567k x 0.2 = 113.4K), netting $516K.

Is that correct? It does come out to much closer than I thought. In effect, the tax rates wash out and the difference is the 10% penalty x $1M vs 15% or 20% LTCG x $567,300. So it seems that at LTCG 17.6% (10% x 1M = 17.6% x 567,300), the strategies are equivalent with these parameters.

This makes me feel better about having all my TSLA in an IRA instead of a taxable. Other advantages with trading in an IRA are the freedom to buy and sell without incurring taxes, and it seems that you are able to sell more covered calls using the extra pre-tax capital in an IRA.

 

[mongo]

Whoa. Can you help me understand that with an example?

Say you have $100,0000 to bet on TSLA and ten years later the investment is 10x. Assume the tax rate is 37% at the time of deposit and withdrawal and 15% is the LTCG rate.

-In the IRA, you will deposit $100k which becomes $1M. You withdraw it and owe $370k as tax and $100k as penalty, netting $530K.

-In a taxable, you will deposit $63,000 which becomes $630,000. You owe 15% on the profit ($567k x 0.15 = $85.05K), netting $544,950.
-At 20% LTCG, it would be (567k x 0.2 = 113.4K), netting $516K.

Is that correct? It does come out to much closer than I thought. In effect, the tax rates wash out and the difference is the 10% penalty x $1M vs 15% or 20% LTCG x $567,300. So it seems that at LTCG 17.6% (10% x 1M = 17.6% x 567,300), the strategies are equivalent with these parameters.

This makes me feel better about having all my TSLA in an IRA instead of a taxable. Other advantages with trading in an IRA are the freedom to buy and sell without incurring taxes, and it seems that you are able to sell more covered calls using the extra pre-tax capital in an IRA.

Looks right. Lack of intermediate taxing is fir sure another huge benefit.
IRAs can also be accessed via a SEPP to avoid the penalty (though with other strings). I also haven't found a reason why you couldn't roll from an IRA to a Roth (paying the taxes) and then pull from the Roth (paying the penalty). This improves things from X(1-(t+0.1))=X(0.9-t) to X(1-t)(1-.1)=X(.9-0.9*t), a reduction of 10% of the tax rate.
Of course if you can wait 5 years (4 and change if you rollover late in the year) then the Roth withdrawal of conversion money is penalty free. One could set up a Roth ladder with their IRA gains this way.

 

[strago13]

I'd like to hear about it as well. Last I heard they dropped the required investment from 500K Euros to 300K.

Also curious @pz1975 if you got some information, would love to learn. When we lived in the UK, we spent a TON of time in Portugal on the Algarve coast and my wife talks about this option all the time.

I have given myself 4-5 more years of working and then settling down before our oldest is in 6th grade. I could technically retire now and I am doing quite well with options -- but I enjoy my job and it would be hard to walk away right now.

 

[pz1975]

Also curious @pz1975 if you got some information, would love to learn. When we lived in the UK, we spent a TON of time in Portugal on the Algarve coast and my wife talks about this option all the time.

I have given myself 4-5 more years of working and then settling down before our oldest is in 6th grade. I could technically retire now and I am doing quite well with options -- but I enjoy my job and it would be hard to walk away right now.

Nothing yet. Still hoping someone will eventually stumble across my post with knowledge.

 

[astrotoy]

Looks right. Lack of intermediate taxing is fir sure another huge benefit.
IRAs can also be accessed via a SEPP to avoid the penalty (though with other strings). I also haven't found a reason why you couldn't roll from an IRA to a Roth (paying the taxes) and then pull from the Roth (paying the penalty). This improves things from X(1-(t+0.1))=X(0.9-t) to X(1-t)(1-.1)=X(.9-0.9*t), a reduction of 10% of the tax rate.
Of course if you can wait 5 years (4 and change if you rollover late in the year) then the Roth withdrawal of conversion money is penalty free. One could set up a Roth ladder with their IRA gains this way.

If you have non IRA funds to pay the taxes on the Roth conversion, this allows you to maximize the amount inside the Roth. The additional great benefit of a Roth is that you can use it as an estate planning vehicle, since there is no RMD as in an IRA. It also continues to grow tax free for 10 years after your death to further benefit your heirs. You still have the option of taking out money from the Roth with no tax consequences (over the age/time limits) in case you need the money.

The new proposed changes to the IRA/Roth in the BBB legislation under consideration have a huge effect on individuals with large MAGI ($400k ind/$450 couple) and very large Roth/IRAs (greater than $16M). With my all in TSLA investment in my Roth back in late 2013-early 2015, I am finding myself currently very close to the Roth limit, although quite far from the MAGI limit with my pension. I just read this in the main investor thread. I am watching the legislation (it is in the same bill as the EV credit) with interest.

 

[mongo]

The new proposed changes to the IRA/Roth in the BBB legislation under consideration have a huge effect on individuals with large MAGI ($400k ind/$450 couple) and very large Roth/IRAs (greater than $16M). With my all in TSLA investment in my Roth back in late 2013-early 2015, I am finding myself currently very close to the Roth limit, although quite far from the MAGI limit with my pension. I just read this in the main investor thread. I am watching the legislation (it is in the same bill as the EV credit) with interest.

Something I'm not in position to be affected by, but would the propsed required distributions be a help in terms of early retirement? Seems like it would allow access without penalty from an IRA. Nesses up the tax brack though.
MAGI includes retirement withdrawls, doesn't it? So one could end up triggering repeated drain downs if they pull out enough. Rollovers normally count toward MAGI too.

 

[Jetpad]

If you've been considering a Roth Conversion and have TSLA in your IRA, the anticipated drop on Monday from Elon's latest "selling 10%" comments might be a good time to convert at a lower basis.

 

[SageBrush]

the anticipated drop on Monday from Elon's latest "selling 10%" comments might be a good time to convert at a lower basis.

Elon is making a point. You can bet that the overriding result of the poll will be "keep your stocks!"

 

[Zaxxon]

Elon is making a point. You can bet that the overriding result of the poll will be "keep your stocks!"

A million votes in, selling has a 54-46 lead.

 

[mongo]

If you've been considering a Roth Conversion and have TSLA in your IRA, the anticipated drop on Monday from Elon's latest "selling 10%" comments might be a good time to convert at a lower basis.

Roth conversions can be done piecemeal to control the effective tax rate. Of course, the more growth after conversion the better.

 

[astrotoy]

Something I'm not in position to be affected by, but would the propsed required distributions be a help in terms of early retirement? Seems like it would allow access without penalty from an IRA. Nesses up the tax brack though.
MAGI includes retirement withdrawls, doesn't it? So one could end up triggering repeated drain downs if they pull out enough. Rollovers normally count toward MAGI too.

I think that withdrawals from pre tax accounts are counted in MAGI, but not withdrawals from Roths. So there wouldn't be a cascade effect from a Roth withdrawal, a non Roth IRA withdrawal could be a cascade. Also if you have other investments outside a Roth or IRA that generate capital gains or dividends, they could push you into the range for forced withdrawals. We are thinking about gifting strategies that lower our non-Roth assets so they don't trigger a MAGI limit problem.

TSLA stock has started to trigger potential big first world tax issues.

 

[SageBrush]

A million votes in, selling has a 54-46 lead.

I saw 100k, but right on the proportions