Hi all,
I have a big percentage of my retirement portfolio invested in a taxable brokerage about 22-23 years out from my planned retirement . In short, I saved a lot of post tax money while not contributing enough to workplace retirement accounts.
I was planning to sell a bunch of it to buy Roth space (doing backdoor for both me and my wife for this year and next, and maybe again the year after), and just take a small tax hit now rather than a big one in 22 years. But then I realized it might make sense to hold onto the taxable space to give me flexibility in buying bonds during early retirement. I’m curious what you all think about this choice.
The larger context is this. I am 34 right now and would like to retire around age 57. I have a government job where I get low cost health insurance for life starting at 55, and a pension starting at 63. The pension would probably be about 70k if I retired at 57 and waited to collect until 63. Apart from that, I have like 84k in a taxable right now, 45k pre tax in a 457b, and just 7k in a Roth IRA. My wife has like 100k pretax in a 403b and will keep contributing something like 20k a year to that. My contributions are smaller because I also have pension deductions, and come out to more like 10k for now, more over time.
I would like a fixed income based retirement for psychological reasons.
So I was thinking it make make sense to spend the time from 57-63 strategically selling stocks from the taxable and 457b to buy bonds during early retirement—- picking moments when yields are best, and spreading out the sales to ease the tax Burden. I figure the 457b pretax and taxable would end up being worth about 500k by that time, enabling me to buy bonds generating 20 something thousand, to supplement the pension once I hit 63. Assume I have some low key part time job and income from my wife during that period that keeps me alive.
I would stop contributing to both taxable and pretax now, focusing on Roth only until my retirement, instead of selling anything from the taxable now. The idea is that Roth is a good idea in post-63 retirement for tax reasons, given all the federally taxable bond and pension income.
Does this make sense?
Hold on to taxable space to buy bonds in early retirement?
byu/himyprettyfriends inpersonalfinance
Posted by himyprettyfriends
2 Comments
No… makes no sense to be prioritizing Roth over tax deferred *now* while you are exposed to high marginal income tax brackets.
If you’re serious about retiring at 57, then you really need to be taking advantage of tax deferred space. You would then utilize the access to lower tax brackets during early retirement to *strategically convert* to Roth.
The other part that makes no sense is:
> I would like a fixed income based retirement for psychological reasons.
If this means that your portfolio will be 100% bonds (or similar), then you’re intentionally concentrating your risk to fixed income assets.
It’s fine if you have more assets than you know what to do with.
It’s not fine for someone with your assets and wants early retirement.
That’s a lot other unpack and you don’t mention your current marginal tax rate, but here are a few guidelines we used (newly retired):
Biggest risk in retirement is SORR in first couple years of retirement. At retirement, we bought some fixed-end date bond efts to provide predictable dividends and cash infusion (when they mature) and cash equivalents (SGOV, treasuries, CD, HYSA) that cover 5-10 years of the gap between income (pension, SS, PT) and expenses. If your wife continues working after you retire, the gap you need to cover will be less.
When you take pension/SS will depend on(after you are able to do so) on when you need the funds. Using savings to wait on the belief you get more total is IMO questionable (cross over is pretty far out). Otoh, if your wife is still working, you may be able to delay comfortably.
I think people underestimate how much tax-deferred retirement impacts taxes and IRMMA, plus the required RMDs can be an issue, especially if you inherit tradIRAs while you are retired. Roth avoids all of those issues, even if you pay a little higher marginal rate now, you can still be better off. At the same time, Roth is much better for inheritors than tradIRA (which has no step-up and is taxes as ordinary income). Your tradIRA is money you WANT to spend during your (and your spouse’s) lifetime. So, our approach is to spend taxable to fill lower bracket, then use tax-deferred when taxable runs low, and top off with Roth as needed. Right now, our retirement accounts are mostly equities since we don’t really need them for the next 5-10 years. We will convert equities in our taxable account to more fixed-income as we draw down our current fixed-income/bonds. Money that we don’t need in the next 10+ years can stay in equities (if they drop, they’ll have time to recover), and money we need in the nearer term is in fixed/bonds. YMMV, but I’ve found thinking in terms of WHEN we need to access which funds and how many years-worth of bonds makes more sense to me than percentages of assets.