Late to the Party - Last Minute Retirement Planning

[2daMoon]

One positive that may result from having transferred 44 shares to the Roth is that I could experiment with riskier gambits such as options and the like from a tax free account.

I'd have to scale the learning curve on that first as I'm not the type to dive right in.

 

[Fobble]

The 59-1/2 year rule that allows transfer from a limited 401K to a Rollover IRA. This usually will offer more trading options if TSLA isn't available to select from the 401K choices.This rule also allows more flexibility elsewhere, The annual limit to Roth contribution is increased, as an example.

Are you certain on this? From my understanding, you can only roll over your existing 401k to traditional or Roth IRA after either you quit working, or get a job with a new employer. I did research and did not find any tax clause that allows to roll over to IRA if you are still employed with your current employer, regardless the age.

 

[MP3Mike]

Calculated for 50% / year Rollover gains generate $818,203 after removing 15% Long-term tax at withdrawal.

I could be wrong but I thought that all retirement withdrawals, other than Roth, were considered normal income, not capital gains. So there is no long/short term...

 

[2daMoon]

I could be wrong but I thought that all retirement withdrawals, other than Roth, were considered normal income, not capital gains. So ther is no long/short term...

In case what I wrote was confusing, some of where I mentioned Long term (Scenario 2) was in regard to selling shares from the Investment account to pay taxes on the shares transferred from Rollover to Roth.

The taxes on the transferred shares from Rollover in the napkin math Scenario 1 are represented as taxed as normal income when they are used to cover taxes on the balance of the transfer.

Oddly, when viewing the Rollover share detail on Fidelity it does indicate "Short" for the share purchases. I don't know if this means anything in regard to withdrawal, or, whether it will indicate Long after a year. Once I can get Fidelity on the phone again I'll try to get a better understanding of how taxes are applied on the Rollover IRA.

What you indicate is probably accurate for Scenario 3. Then, the rate would be determined by how the amount withdrawn increases annual income for taxes. If so, that 15% I used in the example will likely be higher. How high would vary. If we used 22% the result would be $771,469 and still greater than the results in the other Scenarios.

I've also read that limited annual contributions can be made to a Rollover IRA, so, those taxed contributions may be subject to the Short and Long term withdrawal rates, even if the pre-tax 401K funds that were rolled in to create the account are only taken out as Income.

 

[2daMoon]

Are you certain on this? From my understanding, you can only roll over your existing 401k to traditional or Roth IRA after either you quit working, or get a job with a new employer. I did research and did not find any tax clause that allows to roll over to IRA if you are still employed with your current employer, regardless the age.

There is the aspect of the "59 1/2" year old rule that loosens the binders on what can be done by geezers, like myself. This is what allowed me to get in on TSLA by creating the Rollover IRA, as the 401K didn't offer TSLA as a choice. I'm still employed and have been for over two decades at this company.

If you qualify for the Rollover from 401K, you can then "transfer shares" from a Rollover IRA to a Roth IRA. I have transferred 44 shares this way using Fidelity.

I think you can also rollover the 401K directly into a Roth, after paying taxes on it, and wish I had done so from the get-go.

 

[ReddyLeaf]

Doing a little back of the napkin math......snip....
It seems most prudent to leave the shares in the Rollover, as in Scenario 3. As always a simple HODL strategy beats the other scenarios, regardless of the annual gains percentage used.

Your description sounds plausible given your situation (little retirement savings, age, just starting). If you had more time, assets, or were wanting the assets to pass to children, then it might make the conversion more appropriate. Really, in your situation, TSLA would need another huge appreciation, like 2019-2020, for the full conversion to make sense now. Imagine the difference if you had done a conversion of 1000 shares in Feb/Mar, paid the taxes on a $350,000 amount, and today having 5000 shares in a ROTH worth $3.5M, tax free. Whoa.

Another caveat could be that I've misunderstood how the tax will be calculated on the Rollover IRA transfer to Roth IRA. For the example above it was simply added to "income" for the 1040 tax table.

No, you got it right for planning purposes.

One caveat might be a scenario where the taxes can be paid with cash on hand (no share dilution). I didn't do the math on that one as it wouldn't be applicable to my situation.

That’s unfortunate. Being able to pay the taxes with cash out of a non-retirement account will really turbocharge the retirement account. I’m in a similar situation and cannot do the full conversion without paying the taxes out of the retirement account, thereby reducing the future benefits.

This was a good exercise. I hope it may help someone else considering such a strategy.

Thanks for doing it.

 

[2daMoon]

It is looking more and more as if I will be able to retire after my 62nd birthday in a few months. Which is kinda funny, cuz I set a goal last year that if, and only if, the retirement and investment accounts got to a minimum of 0.5M would I even consider such a plan.

It wasn't something I expected would happen so quickly, but I had hoped that it would.

At the very least I am now in a position to negotiate a higher salary, reduced hours, etc., as I am the sole IT presence for a small manufacturer, and have been for a couple of decades. It might cripple the company if I just bailed with two weeks notice, and they are mostly nice people, except for the HR folks at the parent corporation.

Over several years my requests for salary evaluation in order to match the local norms have been met with crickets and HR-speak that never addressed the issue nor provided examples to justify their carefully crafted responses.

Out of some misplaced sense of loyalty I may give them an opportunity to make this right. Or, I might just wish them well and say adios. Still pondering it all. I have time on my side now.

I've averaged nearly $800/day gains since Nov 15, 2019 by playing the HODL and Couch-diving-for-spare-change game. It is rather addicting.

Couldn't have done this without TSLA, and, without so many reminding me to HODL! Particularly, Steven Mark Ryan, and more recently all of y'all here at TMC.

 

[ReddyLeaf]

Be careful. $500k isn’t large enough from my perspective and I’m very frugal in a low-cost area. Getting a job after 50 is tough , especially with those pesky, smart, fast, 20-something’s who will work for 1/4 your salary.

 

[2daMoon]

Be careful. $500k isn’t large enough from my perspective and I’m very frugal in a low-cost area. Getting a job after 50 is tough , especially with those pesky, smart, fast, 20-something’s who will work for 1/4 your salary.

I'm planning to consult a CFP, but a retirement planning program and Fidelity's retirement tool both indicate it is enough.

Plus, there is an outside chance that it might grow a little more, so I've got that going for me.

 

[X-pilot]

Thanks for the link, don't know how I missed that.
EDIT: the linked document doesn't show tax rates beyond income level of $56,844

Also, interesting about how to apply the rates. I had read that and wasn't certain that was what it implied. Appreciate the clarification. This may task my meager spreadsheet skillz to deal with that. Ought to be a good excuse to play.

For now TSLA still appears to have good fundamentals for growth over the next several years, and the greater market is still behind the curve on what Tesla actually is as a business. I'd have to find something else like this to diversify into. I do have a few shares of ARKK and ARKG and could expand on those, someday.

In the mean time the "Late to the Party" plan is to temper emotions, HODL, and hope what I have will continue to grow to a comfortable level. I'd like to see an SP of 1500 or so, then, I'd be inclined to spread it around more. That, or, begin gambling with options in the Roth, after eclipsing the steep learning curve to wrap my head around the variables and strategies.

There is a lot for me to learn, and my time is constrained until I can leave the job. Not there yet and am hoping to be retired by late 2021 or maybe 2022.

2020 Instruction 1040 TAX AND EARNED INCOME CREDIT TABLES (irs.gov). Check page 15 (ln 16 on form) will take you to tax calculations greater than $518,400. Hope you need that level, as I don't.

 

[2daMoon]

I got off on a wild hair (or is it hare?) and wanted to check my earlier work, so this came at it from a different angle to see if spending Investment shares with a higher cost basis to pay Income Tax on the conversions would offer any advantages.

This set of calculations are based upon an SP of 850, a Rollover value of $150,000 and performing the Rollover IRA conversion to Roth.

This aims to demonstrate how growth in the Roth for 5 years including cost of shares sold to pay the tax compares to doing nothing over the same period.


Rollover IRA = $150,000
Income Tax Due = $ 64,045

Calculations to pay Income Tax from selling shares held in an Investment Account

64045/850SP = ~75 Shares
75 Shares at SP $850 = $63,750 (plus some out of pocket)
Cost Basis on most recent 75 Shares held = $33,732
25% Tax on the Capital Gains = $7504.5
Sell 9 more shares to cover the above (Shares = $7650) + ($830 CapGains Tax) = $8480
​

Grand Total to pay Income Tax on Roth Conversion = $ 79,735 (63750 + 7505 + 8480)


Gains in either the Roth or Rollover* at 25%/year for 5 years = $457,764

Gains on 84 Investment Account shares at 25%/year for 5 years = $243,332

Rollover* Income Tax cost (based on 2020 Tax Table) over 5 years if not converted? $154,262
The Rollover Gains after Income Tax = $303,502 (457,764 - 154,262)

Add to that the gains 89 Shares make over 5 years @25%/yr (less15% Cap Gains Tax on amount > basis) = $178,160
Total gains after taxes "just letting it ride" = $481,662 (303,502 + 178,160)

Roth Gains less the cost of Shares sold to pay Income Tax on Rollover conversion (including CapGains tax) = $378,029

The Roth still came out in arrears for total gains over such a short period (@25%/year) by a margin of -$103,633 (457,764 - 303,502)

I really thought that selling shares with a higher cost basis to pay Income Tax might have made a difference, but, TANSTAAFL rules again. (There ain't no such thing as a free lunch)

Coming into the dance late, it is clear how "Just letting it ride" is still the "Winner, winner, chicken dinner!" bet for me by a wide margin.

If any math junkies find errors in the madness above, let me know.
Oh, and I promise not to do this again.

 

[2daMoon]

When I Should Take Social Security Payments
(and others whose situation fits this thread's profile)​

Trying to work around a system that is designed to punish good retirement planning by diverting significant amounts of retirement savings into Income Tax as a reward for the retiree's hard work is quite the challenge.

After looking into details about when to file for Social Security benefits (USA) it became clear there was a taxing aspect of SS and the Rollover IRA (+RMD) that would take some planning to work out a path through the minefield.

The IRA just seems to be a giant F U to retirees who get to watch their assets grow, only to be placed into the highest tax bracket of their lifetime after they are no longer working and begin to take money from it.

Once the SS payment is coming there is a level of income that, when exceeded, portions of the SS payment will be subject to Income Tax. Up to 85% after eclipsing income levels well below many folk's retirement scenarios. (~$40K)

This is compounded by how the "deferred tax IRA" withdrawals are reported as "Income" for tax purposes, getting you to that level of losing some of the SS reward for a lifetime of work to a burdensome tax scheme.

If a retiree at 62 takes SS (minimum level) and IRA withdrawals simultaneously it is likely that the Income Tax on those combined will significantly negate any potential to minimize Income Tax extracted from these savings intended for retirement.

Originally, I had planned on applying for SS early on, maybe at 62. After consideration of how the IRA's Required Minimum Distribution (RMD) rule will eventually force IRA withdrawals it now seems like a better strategy for me is to spend only from IRA withdrawals initially and postpone application for SS benefits.

The goal being to significantly reduce or eliminate the contents of the IRA before reaching Full Retirement Age (FRA), as defined by Social Security. This has the double advantage of letting me control the Income Tax Rate, based upon my withdrawals, while also increasing the monthly payment amounts on SS, once application is made. Though it also depletes TSLA holdings in the process.

By using the IRA first, any "overage" needed for fun and games can be withdrawn from tax-free ROTH, or, Long-term (15% Tax) Investment Account that won't affect the "Income" level for annual tax reporting as significantly.

I'm considering keeping post-retirement Income Tax as low as possible, in the 12% - 24% range until reaching FRA. Hopefully the IRA will be significantly depleted by the time FRA is reached and RMD is forced. Though, with IRA investment mostly in TSLA it may be challenging to take money out faster than the share gains increase without bumping into the more exorbitant tax levels (32% and above). If that is the case, it is no longer so important to be miserly as the available assets would be enough that higher taxation won't be a significant concern.

Because I have yet to reach Teslanaire status, the strategy at this time is based upon what is in the IRA now and balancing this against my desire to retire this year. It might be tight, though, by estimating the future based on a 25% annual TSLA gain (hopefully conservative) this should be doable if initial retirement spending is kept low in order to maximize gains in the stonks.

I welcome thoughts on this strategy.

 

[ReddyLeaf]

^^^^ Agree absolutely. When you retire, no matter what age early or late, always spend down the taxable accounts first. These are the ones that everyone should have, regular checking/savings/emergency/vacation/Christmas/whatever funds. It’s mentally hard to do because those have always been there for “emergencies”, but now a portion of the retirement accounts should be considered for emergency.

Then, as those become depleted, transfer small amounts from the normal IRA in monthly/bimonthly/semiannually or annually as is easy or comfortable, into the checking account. Most financial institutions allow easy automatic distributions based on a chosen fixed dollar amount or age-based RMD. One and done, set it and forget it.

A further optimization, if you don’t need the full RMD to live on, is to convert some of the IRA distribution into the ROTH IRA account. Also, always annually convert some excess amounts, up to the next tax rate. For example, if you need $50k to live and the 15% tax rate goes from $40k to $100k, then convert $50k to ROTH plus the other $50k living expenses for a $100k distribution. These were just made up numbers. The point is to pay the taxes at the lower rate, as early as possible, to reduce future requirements to remove higher RMD at higher tax rate.

Finally, when/if all of the taxable and regular IRA funds are exhausted, then start spending ROTH IRAs tax free. Also, since the astute investor will necessarily have more money than needed, always defer taking social security until the last possible date (roughly age 70-72, depending on birth date). SS is just that, security for society, so that no person should be forced to live in poverty, in our great country with such excess wealth. It is the last safety net, so don’t use it until absolutely necessary. If savings and investments were done correctly, no one should care about paying taxes on SS. Unfortunately, as my late uncle who owned his own business for 50 years and retired very wealthy discovered, everyone MUST eventually take SS. It was a requirement (but may change in the future, since it really makes no sense that Bill Gates is forced to accept SS while giving away billions).

FYI, in my case I was fortunate enough to build a 6+ year CD ladder, in taxable accounts, in anticipation of early retirement. That way I can live off of the CDs, essentially tax free and below the poverty line, because the interest (at +/-2%) is less than $4000/yr. For my further optimization, I’m planning to convert about $50k/yr from my regular to ROTH IRA, for the next 20 years. That’s essentially $1M tax-free. I haven’t done a detailed spreadsheet calc in decades mostly because it is intuitive, but also because I accidentally over-saved due to TSLA.

Paying lots of taxes in retirement is a great reward for proper planning and I’m looking forward to it. These tax-deferred retirement accounts were the easiest and best way to generate huge savings, without lifting a finger. Real estate is another good way to defer taxes, but that’s definitely more work than watching my TSLA investments skyrocket.

 

[2daMoon]

The Evil Scheme Expands​

Continuing upon the theme, I built a quick and dirty spreadsheet to show how different levels of IRA withdrawals will look over time, when measured against projected annual TSLA Gains at various %/yr levels. From this, I boiled down a retirement plan to maintain spendable income at ~$100/month below current working income.

If the annual TSLA gains are set at 20%, the spreadsheet shows the IRA being depleted when I'll be applying for SS at FRA. Perfect! I'll minimize taxes on the IRA by keeping within the 22% tax bracket, and have a higher SS payment that will be unlikely to ever be taxed at all. Yay!

In this scenario, I could withdraw $30K this year, after retirement beginning in June/21, and withdraw $60K/year for the following four years based upon TSLA maintaining 20%/year gains. Higher gains would only mean that the IRA will not be depleted before reaching FRA. So sad.

If I don't touch (HODL) the Roth or Investment accounts they would total very close to Teslanaire status when I reach Full Retirement Age, based only upon a 20%/year projected TSLA gain scenario, which I consider conservative, if not down-right pessimistic. But, "market" and all that, so better to aim low, right?

At that point Long-Term Cap Gains Tax will be all that can whittle away at the remaining Investment assets when withdrawn, and the Roth will be gravy.

 

[2daMoon]

Based upon @ReddyLeaf reply above, I will have to consider taking a 15% hit on Investment share gains to add the minimum contribution to the Roth each year as well. But, only if I think I can make more than the 15% tax cost back before I withdraw the asset from the Roth.

As I understand it, once a Roth account is funded there is a five year waiting period from Jan 1 of the tax year the account was created. As I understand this, after that initial five years all funds can be withdrawn tax free regardless of when they were contributed. (with an exception for IRA Conversion to Roth that has its own rules)

So, subsequent annual contributions to the Roth follow that initial Roth opening date for their countdown to Tax and Penalty free withdrawal. If this isn't the way it works, let me know.

 

[ReddyLeaf]

Based upon @ReddyLeaf reply above, I will have to consider taking a 15% hit on Investment share gains to add the minimum contribution to the Roth each year as well.

As I understand it, once a Roth account is funded there is a five year waiting period from Jan 1 of the tax year the account was created. As I understand this, after that initial five years all funds can be withdrawn tax free regardless of when they were contributed. (with an exception for IRA Conversion to Roth that has its own rules)

So, subsequent annual contributions to the Roth follow that initial Roth opening date for their countdown to Tax and Penalty free withdrawal. If this isn't the way it works, let me know.

I haven’t done a full reading of the IRS pub 560 or 590 in years, so don’t trust me. But..... I “think” that 5 yr rule goes away after some age (70-1/2?).

 

[2daMoon]

From what I understand, once the 5 years after initial account funding has passed the assets are available for tax-free withdrawal, and, the dates of subsequent contributions have no additional bearing on qualifying a withdrawal.

In my case I opened the Roth in 2020, and I think this is the first taxable year. So, January 1, 2025 should be the qualifying date.

IIUC from reading elsewhere, a Roth created on December 31 would count the whole of that taxable year as the first of five years, and in actuality would qualify for withdrawal in four years and a day. (doesn't seem like something the IRS would do)

Here's the scoop from IRS for Roth IRA Qualified Distributions
(I underlined the pertinent parts for emphasis)

What Are Qualified Distributions?
A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
   
   
2. The payment or distribution is:
   
   
3. Made on or after the date you reach age 59½,
   
   
4. Made because you are disabled (defined earlier),
   
   
5. Made to a beneficiary or to your estate after your death, or
   
   
6. One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

​

 

[2daMoon]

I haven’t done a full reading of the IRS pub 560 or 590 in years, so don’t trust me. But..... I “think” that 5 yr rule goes away after some age (70-1/2?).

All I could find for that age related to Roth IRA was how the max contribution limit is removed at that time. Wouldn't mean much to me unless they also lifted the Capital Gains Tax on the bucket I'd draw from to make the contribution. For someone still earning a wage it could be useful.

 

[2daMoon]

After honing the latest spreadsheet and playing with the numbers, my retirement date will be determined by when the SP has raised itself comfortably above $1000. Using existing balances, current SP, and an expected return of the S&P Average of 13.5% for future calculations the future is looking so bright I'll have to wear shades. Being as there is an offhand chance TSLA might beat the S&P each year for near future, using 20% and more to calculate by makes some tasty gravy. Optimally, an $1100 SP, holding for a month or so, will be enough to inspire notice being provided.

My optimism for the continued SP rise across the next several years has me feeling strongly about how I could bail on work at the drop of a hat and watch in retirement as the gains fill in (and exceed) the gaps that still exist in this plan beyond 2036. The IRA that I must spend first in limited amounts to meet an optimal IRS tax rate will support me comfortably for three years.

This past year as a TSLA fan-boi has made it tough to stay motivated to keep working, while thinking about how retiring will finally be providing the raise they have acquiesced to offer, despite several campaigns on my part over the past decade. Looking forward to tell them how they'll have to beat my retirement income if they want to get me interested in being available in any capacity going forward.

For 24 years in March I've been the only IT person. Dealing with users, servers, networks, and all the unpaid time on weeknights, weekends, holidays, and countless interruptions while on vacation to keep things running smoothly. I have no plans to stick around to make it 25.

 

[2daMoon]

Made a modification to the spreadsheet so it will calculate using different % Gains each year based upon a randomly generated number within a specified range.

What with TSLA being up 20% for the year and not out of January yet it is challenging not to want to see what slightly bolder estimates might reveal.

I've set the years 2022-23, to generate numbers in a range of 30-40% gains, and all of the following years using random percentages from a range of 6-10% through 2039. Then, adjust the SP and hit F9 multiple times to cycle the random Gains percentages and see how each year's balance plays out, taking distributions over time from the accounts.

Considering two more gigafactories will come online this year, plus 4680 production, FSD/Robotaxi, Energy/Autobidder sales increasing, along with the 25K cars, each are poised to be positive factors near term. Using 30-40% for each of the next two years may very well be conservative.

Gosh, it is fun to speculate. Anyhow, with this formula a SP of 900 looks solid, and I understand that there are no guarantees and that the market can remain irrational longer that I can remain solvent. Logic tells me to be cautious and my gut says roll the dice and see what comes of it.

For now, I'll have time enough to scheme and dream of retirement domination in my secret lab as I watch the future unfold. Time to start crafting that letter to the boss. I may want it sooner than I was expecting.

Bwahahahahaha