What type of account

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H20buckeye
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Joined: Mon May 24, 2021 7:04 pm

What type of account

Post by H20buckeye »

Long time reader, first time posting. I have learned a ton from the group and hope to get some guidance on the next phase of life.


My wife and I are in our early 30s. She is a stay at home mom and I have a fairly normal middle class income in a medium cost of living area.

Immediately after college I began buying rental real estate and we have been fortunate to ride the wave of appreciation over the past 10 years. In fact our net worth recently passed $1,000,000 (dumb luck really that I happened to start buying at the bottom of a recession). Our FIRE number is $3,000,000 and if things continue to progress as they have, even conservatively, I should be able to reach our FIRE number prior to age 50.

In sum, we are Real estate heavy (which I am okay with). But I do hope to begin investing in more liquid assets as well as more truly “passive” assets. While I have enjoyed great returns on our real estate I am actually subsidizing the asset with my time and creating a JOB for myself. So I recently opened up a vanguard ROTH and a non retirement brokerage account. This got me thinking....

What type of account would be the best for someone who needs to start distributions prior to age 50? Also, at this point I have no system or plan to use a “x” account till age “y” then.....etc. the idea is I didn’t want to over fund a Roth to save on taxes then have to pay a penalty for early withdrawal. But I also don’t know when I could plan to FIRE (so I won’t know how much I need) so maybe a little in a few places?

Thanks for any and all guidance
Nohbdy
Posts: 329
Joined: Mon May 10, 2021 12:48 pm

Re: What type of account

Post by Nohbdy »

H20buckeye wrote: Mon May 24, 2021 7:26 pm Long time reader, first time posting. I have learned a ton from the group and hope to get some guidance on the next phase of life.


My wife and I are in our early 30s. She is a stay at home mom and I have a fairly normal middle class income in a medium cost of living area.

Immediately after college I began buying rental real estate and we have been fortunate to ride the wave of appreciation over the past 10 years. In fact our net worth recently passed $1,000,000 (dumb luck really that I happened to start buying at the bottom of a recession). Our FIRE number is $3,000,000 and if things continue to progress as they have, even conservatively, I should be able to reach our FIRE number prior to age 50.

In sum, we are Real estate heavy (which I am okay with). But I do hope to begin investing in more liquid assets as well as more truly “passive” assets. While I have enjoyed great returns on our real estate I am actually subsidizing the asset with my time and creating a JOB for myself. So I recently opened up a vanguard ROTH and a non retirement brokerage account. This got me thinking....

What type of account would be the best for someone who needs to start distributions prior to age 50? Also, at this point I have no system or plan to use a “x” account till age “y” then.....etc. the idea is I didn’t want to over fund a Roth to save on taxes then have to pay a penalty for early withdrawal. But I also don’t know when I could plan to FIRE (so I won’t know how much I need) so maybe a little in a few places?

Thanks for any and all guidance
Hello.

My understanding is that there is no penalty with roth to withdraw your contributions. Some people “store” their emergency fund in ROTH. I don’t really prefer to take money out once it is allocated to retirement, but to each their own.

After that I think you need to evaluate your risk tolerance for these investments and then look into a taxable account with an asset allocation (stocks/bonds) in accordance with said risk tolerance.

You may want to provide your tax bracket and state. Some bonds have different tax implications depending …

Many here will suggest I-bonds as a safe, reliable “bond” option with tax deferred gains.

Consider reading this: https://www.bogleheads.org/wiki/Tax-eff ... _placement

And this: https://www.bogleheads.org/wiki/Priorit ... nvestments
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ruralavalon
Posts: 26351
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: What type of account

Post by ruralavalon »

Welcome to w forum :) .

H20buckeye wrote: Mon May 24, 2021 7:26 pm Long time reader, first time posting. I have learned a ton from the group and hope to get some guidance on the next phase of life.


My wife and I are in our early 30s. She is a stay at home mom and I have a fairly normal middle class income in a medium cost of living area.

Immediately after college I began buying rental real estate and we have been fortunate to ride the wave of appreciation over the past 10 years. In fact our net worth recently passed $1,000,000 (dumb luck really that I happened to start buying at the bottom of a recession). Our FIRE number is $3,000,000 and if things continue to progress as they have, even conservatively, I should be able to reach our FIRE number prior to age 50.

In sum, we are Real estate heavy (which I am okay with). But I do hope to begin investing in more liquid assets as well as more truly “passive” assets. While I have enjoyed great returns on our real estate I am actually subsidizing the asset with my time and creating a JOB for myself. So I recently opened up a vanguard ROTH and a non retirement brokerage account. This got me thinking....

What type of account would be the best for someone who needs to start distributions prior to age 50? Also, at this point I have no system or plan to use a “x” account till age “y” then.....etc. the idea is I didn’t want to over fund a Roth to save on taxes then have to pay a penalty for early withdrawal. But I also don’t know when I could plan to FIRE (so I won’t know how much I need) so maybe a little in a few places?

Thanks for any and all guidance
Do you have any W2 income from regular employment? If so does your employer offer a plan like a 401k, 403b, 457b, SEP IRA, SIMPLE IRA, or TSP? Contributions to most employer plans can be withdrawn at age 55 with no penalty, if no longer employed with the company providing the plan

Regular contributions to a Roth IRA (but not gains) can be withdrawn at any time for any reason without tax or penalty.

For withdrawal before age 50 another account to use is a regular taxable brokerage account.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Wash.Invest
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Joined: Sat Jun 13, 2009 1:25 am

Re: What type of account

Post by Wash.Invest »

Consider the most tax efficient investments now (earning years)

Then... Needing income stream @age 50.... You can either use rental or income, or liquidation of some properties, or.... A 72t from your taxable qualified funds (systematic equal withdrawals, no penalty, but significant rules). This move will reduce your future RMD obligation, and preserve your Roth. You can set aside or split off IRA / 401k into smaller accts and do the 72t from that smaller acct or use multiple accts as a ladder, if needs change.(a pension of sorts).

Consider 1031 exchanges for your individual RE holdings to eventually get to a more passive RE investment. Land lease or commercial NNN. Some 1031 into. REIT, but I prefer tangible RE, as friends have weathered failed REITs. It's Not pretty.

By retirement age, I found I had too many residential income properties for the amount of effort it took (all were rural view props, so lots of work, but easy to sell). The deductions of RE were wonderful during income years, and deductible travel between props great during active retirement. Gladly selling props at the moment. (Weathered too many RE crashes in the past)
Wash.Invest
Posts: 703
Joined: Sat Jun 13, 2009 1:25 am

Re: What type of account

Post by Wash.Invest »

Duplicate post
DIYtrixie
Posts: 384
Joined: Sun Sep 13, 2020 12:11 pm

Re: What type of account

Post by DIYtrixie »

Nohbdy wrote: Mon May 24, 2021 8:29 pm
My understanding is that there is no penalty with roth to withdraw your contributions. Some people “store” their emergency fund in ROTH. I don’t really prefer to take money out once it is allocated to retirement, but to each their own.

(snip)

Consider reading this: https://www.bogleheads.org/wiki/Tax-eff ... _placement

And this: https://www.bogleheads.org/wiki/Priorit ... nvestments
+1!
Topic Author
H20buckeye
Posts: 5
Joined: Mon May 24, 2021 7:04 pm

Re: What type of account

Post by H20buckeye »

Do you have any W2 income from regular employment? If so does your employer offer a plan like a 401k, 403b, 457b, SEP IRA, SIMPLE IRA, or TSP? Contributions to most employer plans can be withdrawn at age 55 with no penalty, if no longer employed with the company providing the plan

I do have a employer provided pension. but i believe i would not be eligible for withdrawls unit age 62. i need to double check on this. i also have a 457 that IS eligible for withdrawls immediately following the separation from employer
Topic Author
H20buckeye
Posts: 5
Joined: Mon May 24, 2021 7:04 pm

Re: What type of account

Post by H20buckeye »

Consider 1031 exchanges for your individual RE holdings to eventually get to a more passive RE investment. Land lease or commercial NNN. Some 1031 into. REIT, but I prefer tangible RE, as friends have weathered failed REITs. It's Not pretty.

By retirement age, I found I had too many residential income properties for the amount of effort it took (all were rural view props, so lots of work, but easy to sell). The deductions of RE were wonderful during income years, and deductible travel between props great during active retirement. Gladly selling props at the moment. (Weathered too many RE crashes in the past)
this is something I have been looking into for the past 12 or so months. but the rising tide has raised all ships and NNN seems to be out of reach for me currently. but 1031 is the plan.

i too feel that retirement may not feel like retirement if i just substituted my W2 for a JOB i created. and i agree i prefer the tangible real estate. so i guess i am looking for types or accounts and/or strategies on WHERE to park money such that it is the most efficient place to be withdrawn "early" (at age 50)
Topic Author
H20buckeye
Posts: 5
Joined: Mon May 24, 2021 7:04 pm

Re: What type of account

Post by H20buckeye »

You may want to provide your tax bracket and state. Some bonds have different tax implications depending …

Many here will suggest I-bonds as a safe, reliable “bond” option with tax deferred gains.

Consider reading this: https://www.bogleheads.org/wiki/Tax-eff ... _placement

And this: https://www.bogleheads.org/wiki/Priorit ... nvestments
thanks for the links i read through it last night and i will keep the WIKI in mind. that will be the next step once i decide what types of ACCOUNTS to use.... then it will be what FUNDS to hold within those accounts.

24% tax bracket, OHIO
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markjk
Posts: 540
Joined: Wed Oct 07, 2020 6:01 am

Re: What type of account

Post by markjk »

H20buckeye wrote: Mon May 24, 2021 7:26 pm What type of account would be the best for someone who needs to start distributions prior to age 50? Also, at this point I have no system or plan to use a “x” account till age “y” then.....etc. the idea is I didn’t want to over fund a Roth to save on taxes then have to pay a penalty for early withdrawal. But I also don’t know when I could plan to FIRE (so I won’t know how much I need) so maybe a little in a few places?

Thanks for any and all guidance
You can pull your Roth principle contributions penalty free at any time so it's a great way to get a tax break (on the earnings) but still have access to the money. You really can't overfund a Roth since you can pull that principle out any time. I think it's a good move to go Roth. The after-tax brokerage account is a good idea as it gives you max flexibility with your money and earnings. Yes, you pay taxes on earnings. But, if you plan this appropriately you can minimize the tax hit. Make sure to invest long term and don't sell shares until you hit long-term capital gains. If you can work it so your earned income in the years you start drawing on your brokerage account money is as low as possible, you will really minimize the taxes you pay on the earnings. So, it's not a bad deal at all. The general guidance is to use retirement accounts to maximize growth and tax savings. But, if you do it right, the brokerage can still be used effectively with minimal tax hit and gives you access to your money. To me, that tax if minimized is a fair trade-off to have access to the money. I'm a fan of having accounts I can access in the event I do want to pull back at work and/or retire early some day.

You still want to maximize your traditional retirements account as well, especially the 401k if you get an employer match. You can get access to this money earlier than 59 1/2 but for simplicity sake, I wouldn't make that part of the base plan. If you can make it work with your brokerage account alone, that would be the way to go. You could for example plan to use the brokerage from 50 - 59 1/2. At that point you can start pulling from the IRA/401k accounts. You'd always have the Roth principle as a fall back if needed prior to 59 1/2 if the brokerage started coming up short.

There are more well defined strategies people follow and I'm sure you can get some specific approach/framework to follow. I don' do the real estate thing so I'm not sure how that would best play into this.
Nohbdy
Posts: 329
Joined: Mon May 10, 2021 12:48 pm

Re: What type of account

Post by Nohbdy »

H20buckeye wrote: Tue May 25, 2021 5:00 am
You may want to provide your tax bracket and state. Some bonds have different tax implications depending …

Many here will suggest I-bonds as a safe, reliable “bond” option with tax deferred gains.

Consider reading this: https://www.bogleheads.org/wiki/Tax-eff ... _placement

And this: https://www.bogleheads.org/wiki/Priorit ... nvestments
thanks for the links i read through it last night and i will keep the WIKI in mind. that will be the next step once i decide what types of ACCOUNTS to use.... then it will be what FUNDS to hold within those accounts.

24% tax bracket, OHIO
The (2nd) article on prioritizing investments is a good place to start for which ACCOUNTS to use. I probably should have provided the links in reverse order.

Even though you want to retire before most retirement assets are conventionally available, I still think it makes sense to set aside funds basically in reverse order from when you will need them (as described in the article) with HSA being the exception due to dual tax advantage. It is optimal to fill your tax advantaged accounts early for the tax free growth, and then fill your taxable account last because it is not tax advantaged. To pay less tax one would want to fund taxable after the other options to minimize taxation on growth.

For example if you fund your taxable (bridge to 55) account first, say age 30, then you would be paying tax on 20 years of growth while missing out on the tax advantaged growth for later years. If you fill the taxable account last, say age 45, then you only have to pay taxes on 5 years of growth.
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ruralavalon
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Location: Illinois

Re: What type of account

Post by ruralavalon »

H20buckeye wrote: Tue May 25, 2021 4:50 am
Do you have any W2 income from regular employment? If so does your employer offer a plan like a 401k, 403b, 457b, SEP IRA, SIMPLE IRA, or TSP? Contributions to most employer plans can be withdrawn at age 55 with no penalty, if no longer employed with the company providing the plan

I do have a employer provided pension. but i believe i would not be eligible for withdrawls unit age 62. i need to double check on this. i also have a 457 that IS eligible for withdrawls immediately following the separation from employer
Is the 457b plan with a government employer or government agency? Or is it with a charity or non-profit? It makes a difference for a 457b plan. Do you make the maximum annual employee contribution to the plan?

"Government 457(b) plans are subject to income tax upon withdrawal but are not subject to the 10% early withdrawal penalty. Funds can be withdrawn at retirement, upon severance from the employer, upon death, upon disability, and under stringent hardship withdrawal rules. Funds must be withdrawn at age 70 and 1/2 (unless you are still working) and are subject to the required minimum distributions [12],rules. Different rules apply if you work for a tax-exempt organization (you must see the employer plan document for the details.) [13]" Wiki article 457(b).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
tashnewbie
Posts: 4284
Joined: Thu Apr 23, 2020 12:44 pm

Re: What type of account

Post by tashnewbie »

Welcome to the forum.

Definitely check out this: https://www.bogleheads.org/wiki/Priorit ... nvestments

And this might be helpful: https://www.madfientist.com/how-to-acce ... nds-early/

In general, as a priority of the types of accounts to use:

1. Contribute to workplace plan (401k, 403b, etc) to get full employer match, if any.
2. HSA (if you have an eligible high-deductible health plan).
3. Roth IRA
4. Go back to workplace plan to max it.
5. Mega Backdoor Roth (depends on your employer's plan rules; many employers don't offer this option)
6. Taxable brokerage account
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