Im jumping in to ask a question for my 23 yo daughter. She has no student loans or car payments and pays her cc off each month. We own a business and she’s been in a Roth IRA since her pre-teen years. She also puts 7% with a 3% match in a 401k.
She is hitting her comfort level of emergency fund. She lives at home right now.
Her one financial goal is to buy a place, but it’s more than 5 years off. She wants to save some money, figure out where she wants to live. She’s in a relationship now that’s serious and they could potentially live together next year.
How would you advise her next savings vehicle?
Not sure where people are getting the zero% bracket from. The rate is 10% on income up to $19,400 for 2019, for income in excess of the standard deduction (or your itemized deductions if larger).
Income at or below your deductions is effectively in the 0% bracket.
Yes but there’s been several mentions that conversion up to $43k can be done with zero tax, and that’s not correct.
I think I was the source of misinformation. Oooops. I didn’t look closely and assumed the lowest bracket was zero. Wasn’t it that way in the old days? So you can convert $24K tax free. If you have a quarter of a million in tIRA, it will take 10 years to convert and you have to maintain zero income for 10 years to make it tax free.
@eyemamom, that’s a good question. It is hard to call the stock market – the question I think is whether Jay Powell resists Trump and we have a near-term recession or capitulates in which we have a much bigger problem later. If I were saving for a certain purchase, I’d think about short-term bonds (corporate or municipal, depending upon her tax rate). I believe that the yield curve is currently inverted – short-term rates are higher than LT rates, which is unusual and typically a predictor of recessions. I prefer actual bonds, which she would hold to maturity, to bond funds, whose value fluctuates with rates. Let’s see if others have a different strategy.
It may not be worth it to go through the gyrations get to a zero income year, though some people are able to get there by retiring or losing their jobs (not always a good place to be). We will get to that zero income by retiring and deferring pension payments, so we’re going to be in that spot anyways, and convert however much will keep us below the 22-24% tax bracket. You could have income and conversions up to $101,400 (married filing jointly, minus the 24K deduction) and stay below the 12% tax bracket, if you like. Then again, you always wonder when this deal is going to go away.
"If you have a quarter of a million in tIRA, it will take 10 years to convert and you have to maintain zero income for 10 years to make it tax free. "
Sure, but you can convert around $100k with an overall rate of about 8.5%, that’s pretty darn low and may be much less than in your later years when you have SS and/or pension income and RMDs.
If you can arrange zero income for two years you can convert most of a a $250k tIRA at a very low tax rate.
^I agree. I was just saying how laborious the tax free scheme is.
If you are living off of savings prior to taking SS, then the first $19.7k of conversions is tax free (MFJ). Then, the next ~$60k of conversions is at 12%. Run the numbers for later in life when RMD’s get much larger. Or, what happens if one spouse dies? Then the tax brackets kick in at a Single rate, so the still combined RMD’s + SS could easily put you in a higher tax bracket (22% over $40k). Doing conversions up to a bracket prior to taking SS is almost a no-brainer, even if you plan to live off of your RMDs.
That would be me! For a millennial starting out, a bond fund would be perfect. Purchasing/redeeming/repurchasing individual bonds is just too much work. IMO, most investors are much better off with the set it and forget it strategy until they become comfortable.
“If you are living off of savings prior to taking SS, then the first $19.7k of conversions is tax free (MFJ).”
Again, not correct, the lowest bracket after you take your standard deduction is 10%, not zero%.
If you are an OLD married couple (OLD = 65 or older) then your combined standard deduction is $27,000 ($12,200 x 2)+($1300x2), so if you had no other income you could convert $27k, take the standard deduction, have 0 taxable income. On top of that you could receive some qualified dividends and capital gains (I don’t know the exact amounts) and still pay zero federal tax. If I accomplished that feat I would still owe some state income taxes.
Haven’t read through, but going back to OP, here. My spouse and I are early/mid 50s now. Here’s our general retirement picture.
– Combined we earn about $220k.
– Combined retirement savings now just over $1 million
– $250k equity in house – if S21 goes to private or OOS public we will use about $175k of this for his college. (We’ve already got rest of $$ we need for his and my D’s college set aside in other savings, mostly from a vacation property I inherited and sold)
– my husband is planning to take early retirement from public service in about 3 years and will get about $50k/year pension. He will probably do consulting, maybe full time job for another 5 to 7 years after retirement. He likes his job/field. That said, I’m sure by early 60s he’d be pretty happy to retire.
– we both will be eligible for SS, of course. Right now at 67 I’d get $2500/mo. I imagine husband is same.
– finally, my FIL is in mid 80s (MIL already passed).He’s in excellent health now so who knows he could live another 10 years or more. I expect one day we’ll inherit mid six figures from him, maybe more?
We will downsize when S21 goes to college and hope to get mortgage from current $2300 to more like $2000 or maybe even less. (My motto is smaller house, bigger travel budget). We have no debt other than mortgage. Drive old cars. Live in not super cheap, but certainly not NY or CA type expensive city. Would like to travel but don’t need to do so at 5 star hotels.
Writing this now b/c I’m self employed and doing well now but would love to scale back soon and devote my time on non-paid things I’m interested in. Maybe not totally stop working but scale back from current $110k to much less. But 55 is pretty early to (semi) retire and my husband thinks I’m crazy. Not that he’s run the numbers, but I think in his head you just keep working til at least 60 and he doesn’t think twice about it.
Bottom line, if I (semi) retired in 3 years or so, we’d have income from our retirement investments, his $50k pension + his second career money to live off of, plus my smaller income. Ten years down the line or so we’d also have social security and perhaps inheritance.
I know it’s impossible to say when you don’t know our full situation, but am I wrong to think this might be doable? At least semi-retiring in 3 years sounds dreamy, but it could be just that – a dream!
@AlmostThere2018 – I think it is impossible to respond to your question w/o knowing your annual spending. Will your H be eligible to participate in an employer-paid retiree medical plan? If not, you need to add a sizable figure to your annual expenses for health insurance.
When you say you will have income from your retirement investments, I am guessing that some of that $1 million is not in IRAs?
@CT1417 - Yes, we will both be able to stay on his health insurance when he retires. The premium for me is $700/mo – and subject to change. (We pay this now too plus a little more b/c of the kids. ) Goes down to $200 when I hit 65 and go on Medicare.
Most of the retirement money is in 401k and SEP. I have one very small IRA I inherited from my Mom. We also have some savings not in a 401K – but only like $75k. I see your point b/c of early withdrawal penalty b4 age 59 1/2? But husband will be 59 in five years. . . Seems like we’d be able to get to that point w/o having to withdraw as it’d only be 2 years and he’d still be working plus pension…
Current spending averages $9 or $10k mo? This is with one in HS and one in college (excluding tuition, etc., of course)
Alright, so if you are in early/mid 50’s and your H plans to retire with $50K pension in three years, but w/o guarantee of new employment, will you need to spend $700/month x 2 for health insurance until age 65? And provide some coverage for the college students (although those $2500-$3000/year student health plans can offer terrific benefits…varies my college).
If you scale back significantly and your H cannot find another job, you won’t be able to live on his $50K pension, especially with additional health insurance costs.
I don’t see how your retirement assets will create cash flow, since I assume you don’t want to touch that money now. Or are you thinking that since the combination of SS & pension will be more than you need post-67, that you should tap the retirement funds now? (I do not know the rules…but are you even allowed to before age 59 or so?)
If you are spending $110-$120K/year now, you have a large shortfall to cover with only the pension income. I may be missing something…
First, thanks so much for weighing in!
Health insurance is $700/mo total (not X 2) b/c as the retiree his is paid for.
My husband won’t do early retirement UNLESS he has something else lined up. In fact, it’s likely he’ll earn more post-retirement in a private sector gig than his current gov job which is why he’s considering early retirement in the first place – well, that and being ready for a change. It’s a bit of a "I’ve been working in gov and earning less than private sector peers but now I can ‘cash in’ for 5 to 7 years’ strategy. (He’s an attorney with a national profile in a very specialized field of law.)
Now that I think about it, I guess the simplest way to think about it is if his pension would replace some of my income…We’ve always been 50/50 income earners so I wonder how he’ll feel about that, lol!
Yes, you can tap 401K early – but 10% penalty so not advised! I think if we planned ahead we could wait to tap until my husband is 59.5
I think AlmostThere is assuming her husband will definitely get that new job/consulting. Since we don’t know the job prospects, hopefully that is a likely scenario, with health benefits…seems doable if he can get that extra income.
Edit to add, sounds like he’s very employable, who knows, it could be a raise overall?
@busdriver11 – Yes, he still likes his work and has mountains to climb and will keep working; I’m rather burned out and would love to scale back.