No wife 401k to build cash for early retirement?

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Topic Author
fatherjames
Posts: 64
Joined: Sat Dec 05, 2020 11:01 am

No wife 401k to build cash for early retirement?

Post by fatherjames »

Hello,

We are both 51 and trying to make a final push toward early retirement. We have three kids ages 16, 15, and 13. We decided my wife would leave her career years ago to be the primary care giver for the kiddos. I posted a few months ago about my job drying up in a year or two. My wife had a job opportunity present itself so she took the gig so our calculus has changed.

She is making 60k and her employer 401k offers 3% match and you vest in 4 years. Just didn't seem all that generous and I really hope she doesn't make it to the 4 year mark as I want us to be retired.

Current financials
800k at Vanguard all in highly appreciated mutual funds (300k cost basis and 500k LTCG)
2.5M 401k
500k Roth
100k Cash
No debt
Our AGI will be right at 250k with the addition of my wife's salary.
We spend 75k per year

I am trying to figure out the best way to prepare for retirement in hopefully two years. We want to build up cash reserves of at least 300k to prepare for that. So the thinking with my wife's job was to just take the cash and not worry about putting more money into a 401k as I put 40k per year into mine.

My other problem is the Vanguard taxable account. I would like to take some money off the table to prepare for retirement. I guess the NIIT will catch me as we will be over 250k AGI. So just bite the tax bullet and be happy about the gains? I guess it makes me nervous to try to leave all of that on the table until after we retire. After we retire the tax situation would be much better though.

Thanks,

James
MrJedi
Posts: 3538
Joined: Wed May 06, 2020 11:42 am

Re: No wife 401k to build cash for early retirement?

Post by MrJedi »

You have plenty saved and if you are retiring in early 50s, it seems you will many years with low income in order to perform Roth conversions before RMDs or tax gain harvest your taxable account at favorable rates. Especially since your spending is only 75k. Tax deferral still seems like a good deal to me if your AGI is 250k.

Also about you wanting to sell from taxable. If possible you can rebalance your 401k or IRA accounts instead to take the appropriate amount of risk. If you can wait until you're retired you could then offload those taxable shares more tax efficiently.
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1210sda
Posts: 1865
Joined: Wed Feb 28, 2007 7:31 am

Re: No wife 401k to build cash for early retirement?

Post by 1210sda »

What about your 3 teenagers? Are you planning on paying, fully or partially, for their college?
Topic Author
fatherjames
Posts: 64
Joined: Sat Dec 05, 2020 11:01 am

Re: No wife 401k to build cash for early retirement?

Post by fatherjames »

MrJedi wrote: Thu Apr 22, 2021 10:18 am You have plenty saved and if you are retiring in early 50s, it seems you will many years with low income in order to perform Roth conversions before RMDs or tax gain harvest your taxable account at favorable rates. Especially since your spending is only 75k. Tax deferral still seems like a good deal to me if your AGI is 250k.

Also about you wanting to sell from taxable. If possible you can rebalance your 401k or IRA accounts instead to take the appropriate amount of risk. If you can wait until you're retired you could then offload those taxable shares more tax efficiently.
My primary goal is to build up a cash position north of 300k. That would be my retirement buffer to use if the market tanks right after we retire. We are in the 24% tax bracket. So it might make more sense to use the 401k after all. I could just sell an equal amount of taxable which would be taxed at 18.8% with the NIIT so we would come out ahead.

I am a bit leery of having all of that taxable account in stocks. Want to take some off the table but the tax man loves me.
1210sda wrote: Thu Apr 22, 2021 10:25 am What about your 3 teenagers? Are you planning on paying, fully or partially, for their college?
We do have 529's that are 120k, 100k, and 80k presently.

Thanks!

James
MrJedi
Posts: 3538
Joined: Wed May 06, 2020 11:42 am

Re: No wife 401k to build cash for early retirement?

Post by MrJedi »

fatherjames wrote: Thu Apr 22, 2021 12:22 pm
MrJedi wrote: Thu Apr 22, 2021 10:18 am You have plenty saved and if you are retiring in early 50s, it seems you will many years with low income in order to perform Roth conversions before RMDs or tax gain harvest your taxable account at favorable rates. Especially since your spending is only 75k. Tax deferral still seems like a good deal to me if your AGI is 250k.

Also about you wanting to sell from taxable. If possible you can rebalance your 401k or IRA accounts instead to take the appropriate amount of risk. If you can wait until you're retired you could then offload those taxable shares more tax efficiently.
My primary goal is to build up a cash position north of 300k. That would be my retirement buffer to use if the market tanks right after we retire. We are in the 24% tax bracket. So it might make more sense to use the 401k after all. I could just sell an equal amount of taxable which would be taxed at 18.8% with the NIIT so we would come out ahead.

I am a bit leery of having all of that taxable account in stocks. Want to take some off the table but the tax man loves me.

What's wrong with the taxable? If you have too much in stocks, you can reduce stocks in tax advantaged so that it is not a taxable event. This still reduces risk in your portfolio as a whole. Wait to unwind the taxable when you can control your income.
Topic Author
fatherjames
Posts: 64
Joined: Sat Dec 05, 2020 11:01 am

Re: No wife 401k to build cash for early retirement?

Post by fatherjames »

MrJedi wrote: Thu Apr 22, 2021 12:35 pm What's wrong with the taxable? If you have too much in stocks, you can reduce stocks in tax advantaged so that it is not a taxable event. This still reduces risk in your portfolio as a whole. Wait to unwind the taxable when you can control your income.
There is nothing wrong with taxable account. I just want to build up some cash.

So am I thinking correctly about this? My wife could defer 26k in 401k with catch-up included. This 26k would have been taxed at 24%. I could sell 26k from taxable and pay 15% cap gains on about 16k of that amount.

I guess that is the smart money move?

James
marcopolo
Posts: 8411
Joined: Sat Dec 03, 2016 9:22 am

Re: No wife 401k to build cash for early retirement?

Post by marcopolo »

fatherjames wrote: Thu Apr 22, 2021 1:35 pm
MrJedi wrote: Thu Apr 22, 2021 12:35 pm What's wrong with the taxable? If you have too much in stocks, you can reduce stocks in tax advantaged so that it is not a taxable event. This still reduces risk in your portfolio as a whole. Wait to unwind the taxable when you can control your income.
There is nothing wrong with taxable account. I just want to build up some cash.

So am I thinking correctly about this? My wife could defer 26k in 401k with catch-up included. This 26k would have been taxed at 24%. I could sell 26k from taxable and pay 15% cap gains on about 16k of that amount.

I guess that is the smart money move?

James

You are getting too hung up on building up cash in your taxable account.

If you feel you need cash reserves, you can build it up in your tax deferred account (401k). This can be done with no tax consequence.

If you need to access the cash because the market crashed, sell some in taxable at that time. With your spending level, you will probably pay 0% cap gain rate. Then use some of the cash you built up in the tax deferred account to purchase equities (to keep same risk profile).

Magic! you have used your cash cushion (in tax-deferred account) without any tax consequences. No reason to pay additional taxes now to build up that cash position in taxable account.

Max out your wife's 401k now, look at at current vs. future marginal tax rates to see if trad or Roth makes more sense.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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