What are your 2014 money resolutions?

[gradi]

Save more of my income
spend less and have more fun!!

[Like2Plan]

How is everyone doing with their goals?

DH and I are doing better than I thought with our "retirement stress test". So far we haven't had to pull from savings to cover our expenses, but we haven't done any traveling since New Years (something we both want to do in retirement).

Our test has brought to light some areas that I would like to work on in preparation for when DH does retire, so I am really glad we are doing this.

[autoxer]

For the first time in probably 15 years we will not be maxing my 401K; I've reduced contributions to get the match from my employer. We also won't be contributing to any IRAs for the first time in 10 years.

All savings are going into short term taxable accounts in preparation for early retirement. Should amount to at least $40K.

In your situation, I might still consider using the tax advantaged accounts. Especially if you expect your tax rate in the future to be lower. If you defer taxes while you are in the 25% tax bracket and withdraw them when you are in the 15% tax bracket, then after paying the 10% early withdrawal penalty you would break even. Any money that you end up not needing for your early retirement could be growing tax deferred. But it gets even better, because there are other ways to avoid the early withdrawal penalty. Look up 'roth pipeline' and '72(t)' for some other options.

[feh]

In your situation, I might still consider using the tax advantaged accounts. Especially if you expect your tax rate in the future to be lower. If you defer taxes while you are in the 25% tax bracket and withdraw them when you are in the 15% tax bracket, then after paying the 10% early withdrawal penalty you would break even. Any money that you end up not needing for your early retirement could be growing tax deferred. But it gets even better, because there are other ways to avoid the early withdrawal penalty. Look up 'roth pipeline' and '72(t)' for some other options.

Yes, I have considered still using a Roth, since we could access contributions before 59.5.

We'll see...if I end up having more to save than expected, I may do that.

[autoxer]

Yes, I have considered still using a Roth, since we could access contributions before 59.5

I don't just mean using a Roth, because paying tax on it now in a high bracket doesn't make sense when you know you are going to be in a lower tax bracket in the future.

The Roth pipeline is a long term tax strategy. It involves contributing pre-tax now, then converting a chunk over to Roth every year when you are in a lower tax bracket. The amount you rollover into a Roth would be accessible 5 years from the rollover, instead of waiting until you are 59.5.

What is your current tax bracket? and have you projected yearly spending in your early retirement?

[feh]

I don't just mean using a Roth, because paying tax on it now in a high bracket doesn't make sense when you know you are going to be in a lower tax bracket in the future.

The Roth pipeline is a long term tax strategy. It involves contributing pre-tax now, then converting a chunk over to Roth every year when you are in a lower tax bracket. The amount you rollover into a Roth would be accessible 5 years from the rollover, instead of waiting until you are 59.5.

What is your current tax bracket? and have you projected yearly spending in your early retirement?

Ok, so you're suggesting contributing to tIRA now, and converting it to Roth after we retire. Yes, that makes sense, as I'm planning on doing that with our existing tIRA accounts.

We'll definitely be in a lower tax bracket after I stop working.

Edited to add - although that defeats the purpose of saving for the short term, as tIRA contributions cannot be accessed before 59.5 (outside of 72t)

[Nika]

I don't just mean using a Roth, because paying tax on it now in a high bracket doesn't make sense when you know you are going to be in a lower tax bracket in the future.

You don't really know your tax bracket or even tax tax rates 20-30 years from now.

And, if you have a reasonably long horizon(like 20-30 years), than most of the money in your account will come from growth, not from the original contribution. So having that 30 years of growth not being taxed, that is a big advantage.

You can play around with a calculator.

http://www.bankrate.com/calculators/retirement/roth-traditional-ira-calculator.aspx

[autoxer]

Ok, so you're suggesting contributing to tIRA now, and converting it to Roth after we retire. Yes, that makes sense, as I'm planning on doing that with our existing tIRA accounts.

We'll definitely be in a lower tax bracket after I stop working.

Edited to add - although that defeats the purpose of saving for the short term, as tIRA contributions cannot be accessed before 59.5 (outside of 72t)

That's where the pipeline comes in. The year after you retire, when you aren't showing regular income you start doing rollovers into the Roth. If you rollover $20,000 from a traditional to a Roth, then you will pay ordinary income tax on the conversion, but then that conversion amount only needs to be in the Roth for five years, before it becomes qualified and you can access it without penalty. The conversion principal has different rules than the earnings, so if you have the timing right, you can get around the age rule. If you rollover the amount of your living expenses every year, then you create a pipeline while minimizing your tax liability. This is a good strategy if you are younger and plan on remaining in a low tax bracket. Then your taxable accounts would only need to support you for 5 years.

[feh]

That's where the pipeline comes in. The year after you retire, when you aren't showing regular income you start doing rollovers into the Roth. If you rollover $20,000 from a traditional to a Roth, then you will pay ordinary income tax on the conversion, but then that conversion amount only needs to be in the Roth for five years, before it becomes qualified and you can access it without penalty. The conversion principal has different rules than the earnings, so if you have the timing right, you can get around the age rule. If you rollover the amount of your living expenses every year, then you create a pipeline while minimizing your tax liability. This is a good strategy if you are younger and plan on remaining in a low tax bracket. Then your taxable accounts would only need to support you for 5 years.

Thanks for the info. I'll think about it, although the advantages at this point are rather slim - we're only talking about a couple more years of IRA contributions.

I'm already planning on converting existing tIRA monies to Roth IRA in my 50s.