Tax Question - Roth vs. Non-Roth

[Figuring It Out]

Say I decide not to save/invest in a Roth IRA, but in taxable accounts instead. Say that I save/invest in such a way that I don't take any dividends or capital gains along the way, so that at age 60, for example, I have $500,000 saved and no income from a job.

I'd be in the lowest tax bracket with no income -- do my long-term capital gains get taxed no matter what if I then tap into that money?

Also, I suppose rather than trying to "live off the interest," one should sell shares instead, to reduce capital gains in any given year?

[Pointedstick]

This is pretty similar to my question in http://gyroscopicinvesting.com/forum/ht ... ic.php?t=5

The short answer is that IF you invest entirely in stocks and ETFs with no dividends and IF you never rebalance or take any capital gains along the way and IF you retire to a state with no tax on capital gains and IF you don't take enough income each year to kick you into the 25% bracket and IF the 0% tax on capital gains for people in the 10% and 15% tax brackets is eternally renewed or brought back at that time, then yes, in your scenario the taxable investment account is basically the same as a Roth with the added flexibility of not needing to wait until you're 60. But that's a lot of Ifs. IMHO the question becomes much more pertinent and complicated if you're looking to start living off this income not when you're 60 (and therefore past the Roth penalty cut-off point), but say when you're 40.

[Figuring It Out]

How did I miss that interesting thread?

A small response to your points, the money could be in the PP mutual fund and never rebalanced, or a mutual fund such as Wellesley with all dividends reinvested.

I guess I'm wondering lately what price we pay when we give up flexibility with our money and lock it into these accounts that have withdrawal conditions. For awhile, I've been frustrated concerning the money I have in traditional IRAs and 401K accounts, knowing I'm locked into paying income taxes vs. capital gains on the withdrawals -- although I suppose the strategy could be to lower my income to the point where I wouldn't pay tax on it, or hardly any, perhaps by...living off the non-tax-deferred investments...?

[Pointedstick]

I completely agree. My financial goal is to retire super early, so locking up the cash until I'm 60 isn't very palatable to me either, hence the same questions.

Right now I'm in a high tax bracket, and after I retire I plan to continue living close to the ERE lifestyle in a very low tax bracket, so the 401k makes sense and I'm maxing it out, expecting to use SEPP when I'm ready to retire. The Roth is something that, like you, I'm also rethinking, since right now I'm paying the 25+9.3+1.6+5.65% income tax up front and just avoiding a 15% capital gains tax in the future, as opposed to the 401k which allows me to substitute that 41.55% current tax for a (hopefully) 10% future tax.

It's clear that the 401k is better if you plan to retire poorer than you are now, subject to congress not doing something idiotic with the tax rates (always a possibility). But after you max out your 401k, should you put additional money into the Roth anyway to avoid future taxes despite its inflexibility, or put it in taxable and take the capital gains tax hit when you later sell, in exchange for the ability to cash out 100% rather than just your contributions (which is in effect using that part of the Roth as a 0% interest, non-inflation-adjusting account)?

[notsheigetz]

Say I decide not to save/invest in a Roth IRA, but in taxable accounts instead. Say that I save/invest in such a way that I don't take any dividends or capital gains along the way, so that at age 60, for example, I have $500,000 saved and no income from a job.

I'd be in the lowest tax bracket with no income -- do my long-term capital gains get taxed no matter what if I then tap into that money?

Also, I suppose rather than trying to "live off the interest," one should sell shares instead, to reduce capital gains in any given year?

My 17-years-younger wife just got her first two-week paycheck > $2k and along with the social security check I'm eligible for at age 63 we have officially reached the point where there would be enough coming in that I wouldn't even have to touch what I have saved in the PP and we would do fine for a long time, as all the charts tell me.

So mathematically I could probably retire tomorrow.

But I have to also factor in how long it would be before I put a bullet in my head (even though I don't own a gun).

If you have something worthwhile planned beyond the super early retirement more power to you (and I don't doubt that you do - just rambling) but for me right now it would be no different than those who won the lottery and said it ruined their lives.

[Pointedstick]

notsheigetz, retiring early doesn't necessarily mean no longer working, it just means not needing to exchange your labor to bring in a regular income to live. You can still keep doing that of course, you just don't need to if you don't want to. Personally, I plan to be doing a truckload of work in the form of raising my child(ren) and building earthbag houses with my own two hands for my nuclear family and then as many members of my extended family as would like them. I may even buy plots of land for them too. The goal is to allow as many of them as possible to live rent-free during retirement or pre-retirement life.

Other post-retirement ideas include getting into furniture-making, building a private shoothouse, raising goats, growing/raising/making/slaughtering/hunting 100% of our food for as long as possible, and learning how to build and building a biodiesel rocket pack.

[Figuring It Out]

I was highly, highly influenced by Your Money Or Your Life back when I was just out of college, and credit it with allowing me (us) the lifestyle we have now. Nearly mid-forties, no mortgage, one parent works and the other (me) is home for the kids (now tween/teen) and gets to work in a creative (writing) field in which the pay has been good some years, not so good other years, and it doesn't matter because we don't need the money and it's the work I'd do whether I got paid for it or not. In fact, the last couple years have been non-high income producing and I enjoy the work more because it's more pure -- writing for the sake of writing, not for a paycheck.

We were all about retiring early when we were in our 20s and just starting out. Now, our expenses are low and our income decent, and our quality of life very, very high, so we have no good reason to rush my spouse to an early retirement...but, he could walk away from his job at any time and we'd be fine. This seems to me to be the perfect balance.

[WiseOne]

Other post-retirement ideas include getting into furniture-making, building a private shoothouse, raising goats, growing/raising/making/slaughtering/hunting 100% of our food for as long as possible, and learning how to build and building a biodiesel rocket pack.

PointedStick, I always enjoy your posts, but this one goes into the top ten list.  I hope you'll elect to elaborate on the above sometime.

The goal of early retirement and the PP complement each other so well, that I'm surprised they aren't mentioned together more often.  I've been saving for this also, except that the goal is to be able to continue doing what I do already but without the worry of needing NIH grants for income support.

Roth IRAs can work very well for early retirement, because you can withdraw contributions (not earnings) after 5 years.  If you have a 401K or traditional IRA, you can start doing Roth conversions once your income goes down, to keep the pipeline going.  Here is the relevant IRS publication:

www.irs.gov/pub/irs-pdf/p4530.pdf