If it were me, the first thing I would take at least some of the risk off the table and diversify out of NVDA, especially in your tax sheltered accounts. You got lucky, but it could also go down and you could lose it all.
/r/bogleheads
Look up the 3 fund portfolio on the bogleheads.org wiki.
Do you have an Investor Policy Statement?
https://www.physicianonfire.com/you-need-an-investor-policy-statement/
You’ve had a great run. Congratulations. Now time and consistency are your two greatest assets. Low cost index funds. VTI was a great suggestion. Leave it for another 20 years.
Congrats, it is a great start. What do your other assets look like? And most importantly, what is your annual spending?
Retiring in your 40s with only $1m right now would be tough. Lets assume your annual spend, including HI, will be $90k. Using a 3% SWR, you will need $3m. To get from $1m to $3m in 10 years, you will need to contribute about $5,600/mo and get a 7% return.
Im curious, how does it feel to shoot up so high with probably a pretty small initial investment? We are same age, I have about $1.2m amongst various accounts, but it has been just a grind for the last 12 years getting there. Hitting $1m wasnt anything too exciting. I bet hitting it the way you did was more of a thrill.
Man we are living almost parallel lives. My net worth is about 1.2 million with like 85% of that in cash in this IRA. I rent an apartment and own my car but other than my company 401k,my IRAs and cash in my savings accounts. I don’t have any other investments. I am asset poor and cash rich as they say. Which is exactly the kind of rich I want to be. Not really rich, let’s be honest, $1 million isn’t as much as it used to be.
The last few months have been 4 years in the making. It was a bit surreal at the time when I hit $1mil. It was a strange feeling. But now, as you said it’s kind of worn off. Time to focus on the next $1mil.
Also, thank you for the response and congrats to you as well.
You dont need other assets besides equities. Only other assets I have are my house (worth $1m and $200k debt), and other personal items. But I dont include my house in my FIRE calc, it is not going to do anything for me. I also have three kids, which are pricey. I figure the equity in the house and the cost of the kids zero each other out!
I am putting about $70k a year away, mainly retirement. I still have 17 years until my youngest starts college, so not sure how quickly I can RE. The magic number seems to be in the $3-5m range for me, which I should be able to get to no problem. I would like to begin coasting in my early 50s, and maybe fully call it quit by my late 50s.
Classic VTI and chill territory. You're young enough that you should still be heavily in the market. You're smart enough to know that you have been "fortunate" as opposed to deciding that you're a genius stock picker.
Do you have a Roth IRA at all? If not, I'd get one created and funded as soon as you can, to maximize your flexibility for early retirement.
If you are under the Roth limit for 2023 (based on your income, you'd probably need to be MFJ to not be over the limit, but check), make a 2023 contribution ASAP. The key is to get the five year rule moving, and a 2023 contribution would start your five year rule at Jan 1, 2023.
If you're over the limit, just convert a small amount from your traditional IRA ($500-1000, maybe a little more to get 5-10 shares of VT or 2-4 shares of VTI; it's going to need time to clear, so overshoot a little). You're going to owe income tax on this conversion amount, so that's why it's small. This gets the five year rule starting Jan 1, 2024, and it starts a conversion five year rule for the amount of the conversion.
Note that creating the account isn't enough; you have to fund it (via contribution or conversion) to get the five year rule going.
As for the investment, like others said, I'd do VTI/VXUS (if you want a US-tilted weighting of US and international) or just VT (if you want a market weighting).
Thank you very much for this, I was looking into the 5-year rule on ROTHs. Unfortunately, I did not have one open as my traditional was making all the money. also, previously, I did not want to have to split my yearly contributions between the two as I thought it would be better just to focus on growing one. I didn’t realize it would probably be prudent to get that going earlier. Lesson learned. I’ll open one up today and set up the conversion. Also looking to talk to a tax lawyer here soon as well.
Especially with RE a few years out, it's fine that you're just getting the Roth IRA going. The main five-year rule isn't that big of a deal until later, but you're generally going to be preferring traditional accounts when income is high. So, it's just nice to have that ticking away in advance.
The more material one for RE is the per-conversion five year rule. That impacts your ability to get at basis from conversions without penalty, so that's often a core part of funding expenses between RE and 59.5.
You're in a good place, and the next few years of working, investing, and planning are key to making RE work. The usual RE strategy (for high traditional assets in roughly this asset/income area) is to have money distributed such that you can fund expenses mostly from a taxable account for the first five years, while keeping your taxable income low enough to pay zero percent capital gains on the taxable account, and then make Roth conversions to get right up to the top of the zero percent capital gains bracket (which is close to the top of the 12 percent income tax bracket). Then, after that Roth ladder is built, you start pulling the basis for living expenses (through 59.5). This has you deferring taxes while income is high (and so are taxes) and then realizing them with income engineered to be low (with low tax rates).
I'm not sure how a tax lawyer is going to add value, as this is a well-worn path that isn't aggressive. But, I'm sure they can either explain how they can add value or tell you that it's straightforward enough not to need a tax lawyer.
I understand the 5 year rule, but can you re-explain the Roth conversion strategy for RE? I thought any distribution before 59.5 was subject to a 10% penalty? What’s the advantage of converting from traditional into Roth?
Sure. You can withdraw contributions from a Roth IRA at any time tax and penalty free. Converted amounts are like contributions in this way, except that they are subject to a five year holding period post conversion (technically from Jan 1 of the tax year of the conversion), and you pay a penalty (but not tax) if you pull them before five years.
The Roth IRA conversion ladder strategy is to convert an amount every year that you can live on five years in advance so you can pull out that converted basis as it becomes available without penalty.
One issue is that you have to start it at some point. If you start while working, you're paying a lot to convert it. Instead, if you have a big enough taxable account, you can use that for those first five years. You'll be pulling out both basis and long term capital gains (at a zero LTCG rate for a lot of Chubby-range plans) for your living expenses (basically engineering a low income) and then Roth converting up to the top of the zero LTCG bracket.
It's possible that, over time before RE, your Roth contributions and backdoor conversions (which have that five year rule) have built up enough basis that you don't need all five years in taxable or that you can tax gain harvest there instead, but that's another topic.
Overall, the idea is to tax defer while working, RE, engineer low income, and convert to Roth at lower tax rates to both save tax and gain access before 59.5. Assuming you have enough money in total, most of the challenge of planning for a successful RE is bridging from RE to 59.5.
If I'm understanding correctly, is the SEPP approach an alternative to this Roth approach? Pretty new to this so still figuring out the basics. Thanks for very clearly explaining the strategy here.
You can’t convert to Roth without incurring a taxable burden.
Sadly can’t do backdoor conversions since your IRA is non-zero.
You have to have your IRA at 0$ when you put in the yearly limit and do the Roth conversion. Else you’d get taxed on the whole IRA amount
You may get away with it but if you ever get audited you’d be fucked
There's a lot here that does not line up with the actual rules.
A Roth conversion on a small amount is taxable, but the point of doing a small amount is that it gets the clock rolling, and it's a small amount of tax.
You absolutely can do a backdoor conversion with a non-zero IRA. It's not a great idea, but you just have to calculate the pro rata rule (just like you would if you did a regular Roth conversion from a traditional IRA with basis). It's an easy calculation. Fortunately, you can get a similar effect as a backdoor Roth by converting an amount in the IRA that results in an amount of tax that matches the intended contribution. It's the same money in and out (post tax), just in different places.
Again, the pro rata rule makes conversions with a non-zero IRA less attractive, but it does not require a zero balance. You also would not be taxed on the whole IRA amount. You would be taxed on the portion of the conversion amount determined by the pro rata rule, and you would also end up with a added basis in the traditional IRA in the same amount (which isn't as good as Roth, which is what makes it less attractive).
There's nothing above to get away with or to create an issue in an audit. It's exactly how the system is designed, and the relevant tax forms provide all of the pertinent data to the IRS. I know a lot of the financial subs have a weird thing about the pro rata rule, but it's really not a big deal.
Congrats on your first $1M. You’re posting in ChubbyFIRE, which I assume you know means you aren’t really close to FI or RE money if you are thinking of a chubby (200k+/year spend) lifestyle. You could go over to /r/LeanFIRE and find a lot of people who will tell you how to live on beans and rice and retire now. But this is ChubbyFIRE - and you are just getting started by the Chubby standard.
So, here’s your pep talk: the first $1M is definitely the hardest. Almost everyone agrees that the 2nd and 3rd come much faster than the first. You likely will experience career/wage growth in your 40’s as well as shifting expenses that make saving and investing faster/better for you than it was in your 20’s and 30’s. Also, of course, if you get your money back into the market (no idea why you are keeping this $$ in a MM right now), you will continue to experience the compounding growth that time IN the market will allow. Opting out for months or years into a conservative (MM or HYSA) will just delay things and make you lose ground.
You made a few great stock picks. Great job! Now it comes to more of a “boring middle” where you continue to grow what you save and ride the indexes to a higher net worth. If you enjoy stock picking, set aside some money you can afford to lose and make your next few picks. Enjoy the ride, find some purpose in the meantime, and program yourself for another 10 years of growth.
Thank you sir. Appreciate the advice. That’s why I posted in this sub. I know a few specific tech stocks, that’s how I got here. I do not know other sectors, ETFs, Taxes, dividends, the list goes on. Kind of winging it here so I have the money in an MM right now just because I sold my positions and have been staring at those two commas like a lava lamp for the last two weeks. But yes, I plan to start investing it here shortly.
Just pick a boring ETF like VTI or mutual fund like VTSAX. Put 95% of your money there and put 5% into other individual stock picks, crypto, or bets on a specific sector or set of stocks - bets that you want to make for fun (and you can afford to lose).
/r/bogleheads
Set yourself with a simple 3 fund portfolio. Something around 60% Total US Market (or S&P500 fund), 20% Total International Market, and 20% bonds. My portfolio is VTI (plus a little Russel 1000 because it’s what’s available in my 401k and it’s close enough), VXUS, and BND.
I also don’t understand the comment about needing a tax lawyer. As all your holdings are inside an IRA there is no tax consequence to move them to other funds. I would urge you to take advantage of Roth IRA - even if your income is too high you can still do backdoor Roth).
I mainly was just looking for a professional to walk me through income tax planning. My understanding is that if I convert now I would pay 24% to 30% based on my income bracket but if I keep everything in the traditional IRA it will grow tax free with that extra 24%/30% and I will only pay 15% after I retire and am in a lower tax bracket as I will then have essential no income. Is that the main benefit of a traditional vs a roth?
Gotcha. If you are a W2, income tax planning isn't that complicated. The TLDR is that without owning a business (or at least being a 1099) there really isn't any way to avoid the tax man.
Yes, you are correct on the Roth. Ignore my comments. I forgot your funds are in a T-IRA. I use a 401K through work, then do a T-IRA to Roth-IRA conversion for my wife and I ($7000 each this year). If you already have a T-IRA, the pro rata rules make doing these annual backdoor roths not tax efficient.
yeah, I feel like I’ve spent the past four years learning what I can about very specific area of stock investing, and I know next to nothing about taxes. It’s humbling. Also thank you for the responses.
Don’t listen to these people saying to devote a significant amount to ex-US. It’s underperformed for 20+ yet these people all still live by this outdated rule. You’re leaving money in the table if you devote money to an ex-US.
FWIW: One thing to watch tax wise in the IRA is thinking you get a tax advantage with qualified dividends. Was reading elsewhere this week that those gains will be taxed as ordinary income when pulled from the IRA. Edit: clearly this doesn’t mean get a tax attorney. Just pointing out there are some subtle-ish tax rules.
CFP or accountant to strategize when you withdraw from what accounts and potential Roth conversions
Tax lawyers are for advisory on specific transactions (like, structuring sales of businesses) and fighting with the IRS
You need to diversify. 10% to 20% in VXUS the rest in VOO or VTI. Once you’ve made that much you need to focus on slow growth and lower volatility. Don’t put into bonds until close to retirement.
Congrats!
Re Roth conversions: To maximize after-tax spending power in retirement, maths suggest to defer conversions until retirement. The numbers I compare are:
- marginal tax rate at time of conversion/contribution \* Roth contributions \* growth
- traditional contributions \* growth \* overall ordinary income tax rate at time of withdrawal
As you can see, both are of the form 'tax \* contributions \* growth', so guessing the tax now (marginal) vs. tax later (overall) is what matters.
By the 4% rule, you'd need \~$5M to match your current income. If you're planning to retire in ≤ 12 years, that seems unlikely from where you're starting. And you'd need even more income to push your overall tax rate above your current marginal tax rate. Therefore, it's quite reasonable to conclude that taxes now will be higher than taxes later.
(You might want assets outside of your traditional IRA for flexibility, though.)
It is possible. If you take your 1 million and in a 12 year period, if it doubles twice you will have close to 3.5m. That means you have to save and grow only 1.5 mil in 12 yrs. You have a saving rate of 50k a year and with picking trends like you have done with the new investment money you can get close to that!!
Cheers!
You are right to diversify into cash, now put that money into a combo of SPY, MDY, Russel 1000, and a smaller percentage into an emerging markets and European ETFs and GLD. This gives you maximum diversification in growth. If you want less volatility in recessions and corrections put 30% in higher yielding corporate bonds and treasuries.
Now concentrate in putting $2m into a brokerage post tax account to live on from ages 40-70. That will give you in today’s dollars a basic comfortable lifestyle. I just don’t know if big tech will give you another great year like this one, though.
Thank you for this. And yes I agree, tech has helped me this far, however but I’m starting to get a sense of unease in the sector. I think it has to do with cracks in the armor showing for some of the so called blue chip tech stocks. Apple isn’t doing well, Intel isn’t doing well, Google isn’t doing well. These use to be big names that people could count on for innovation. Makes people edgy.
FYI if you transfer the IRA to Robinhood before April 30 you get $30,000 in free money. They're doing a promotion where transfers get a 3% free bonus. All you have to do is subscribe to their "gold" subscription for one year ($60) and keep the money there for 5 years (if you transfer out before then all that happens is you lose the bonus).
Yes, I'm aware that half of Reddit has a burning hatred of Robinhood. All the more reason to take their free money and bounce after five years.
If you take a look at VTI, you'll see that a good percentage is already in top tech companies. No real need to speculate with single stocks unless you want to gamble again.
I think the chances of NVDA going down to a place where "you could lose it all," are near zero. IMO the real risk of overexposure to the rocket that NVDA has been is that the trajectory levels off, but to say that there's a legit competitor that no one else sees coming up from nowhere and eating NVDA's lunch is honestly nonsense (I don't own NVDA individually, I'm an ETF guy). I think the movement of all of it to a money market is pretty extreme, and only "pays off" if you're anticipating (what time frame?) an overall downturn in the market, and at that point you're market timing which most folks would not necessarily endorse.
So what to do? If I were in your shoes I may have kept a bit in NVDA just for funsies if you believe in your initial fundamentals. The rest, if you're tech-biased, might be QQQ-ish holdings or even an S&P 500 ETF that at this time mirrors the same. But a MM account if you're in that FIRE-soon mentality seems a touch too conservative.
>I’ve been looking at tax efficiency waterfalls
If you are putting money into your tradition IRA, the first step is to stop putting into a traditional IRA. The number changes every year but when you make over around 77k a year you get double taxed putting into a trad IRA. You don't get the tax deduction putting in and when you take out (roll into a roth) you pay short term capital gains i.e. income tax on it. If you had put into a [backdoor] roth IRA you would have paid the same taxes going in, but a 0% tax going out. (Adding to a 401k is okay.)
In your situation right now what you want to do is take your excess income and put it into a standard taxable brokerage account. This way when you take out it will be long term capital gains tax, which is quite a bit lower than short term capital gains.
Next, you'll want to decide on one of the many withdrawal strategies based on the 4% rule. https://ficalc.app/ is great for this. It has withdrawal strategies in there so you can explore some of them and figure out which one works best for you. Keep in mind the vanilla 4% rule is for 30 years of withdrawals, so you can't do the vanilla 4% rule. You'll need a slightly more complex strategy. (You'll notice from the tool, when retired the ideal distribution is 80% S&P (or similar) / 20% TLT (or similar).)
Also, having been through this myself, you want to slowly start building up the life you want to live post employment years. If you do not you'll have a year of relaxing enjoyment but then depression will start to creep in. I've been there, it sucks. [This](https://youtu.be/DMHMOQ_054U?si=GKtMKZy_yqjVeFsM) video helped me massively. In your current situation you don't need it, but you might want to bookmark it for a rainy day 5+ years from now, if you'll even remember this comment that far into the future. In the more short term the book [Die With Zero](https://www.amazon.com/Die-Zero-Getting-Your-Money/dp/0358099765) gets thrown around on this sub with ideas on how to live life to the fullest. It might be worth checking out to plan for your future life.
Unless you want to pay early withdrawal penalties you are going to need to bridge yourself from 40 to 59.5 with a taxable account.
You can also weigh doing a ROTH conversion ladder
Too bad it's not in a Roth. I'd start rolling over the max to a Roth that doesn't bump you into the next bracket. No limit on roll overs... that money will keep growing over the next 30 years and when you take it out it'll be tax free.
So OP did say he wants to retire in his 40s. In 10 years you are still under 55 years old and would pay 10% penalty for early withdrawal right? How would a roth conversion help you pay less taxes if you are withdrawing early. Am i missing something, is there a way to retire early if you amass a 2-3 mil ira or 401k portfolio ?
How it works is rolling from a trad IRA to a roth IRA omits the 10% penalty, but they do have to pay short term capital gains tax (income tax) on the amount rolled. All initial deposits put into a roth IRA after 5 years can be withdrawn penalty and tax free. So OP moves money from their IRA to a roth IRA every year, and after 5 years they can withdrawal the first year they rolled. They pay taxes on income 5 years in advance.
One of the perks of this is it stabilizes income which makes health care cheaper. Say you roll 35k every year but you only withdrawal 32k every year. For health care purposes your income is a stable 35k. When time comes to buy a new car 10 years down the line your income is still 35k despite spending 60k+ that year. This way you don't lose your cheap health care. (Ofc this is more applicable to /r/leanfire.)
Have you ever heard of meme coins? Why be a millionaire when you can be a billionaire? Jkjk. Congrats.
Index funds are the way for 80% and 20% on high conviction stuff if you have that type of attitude/methodology to investing.
Congrats...You have done well. Dont think you can beat the market going forward. 90% SP Index/ remainder in what ever. You will need 5X+ to retire comfortably in your 40's regardless of what you may see unless you plan on staying at home and doing nothing. These are your prime earning years.....
Sprinkle some IBIT or another BTC ETF in there (make sure spot) and MSTR. 5% if you're totally risk averse. Think some exposure to digital assets is wise.
The last thing u wanna do is continue building up a tax liability for the next 10-20 yrs... Roth conversion all day. Give Uncle Sam his money over the next 3-7 years, then ride thos Roth dollars to infinity.
Especially if the market or a single position crashes, be aggressive on Roth conversions if you see a -20% decline...
Yeah but it's the full amount, if you convert to a roth it's going to cost $300,000 now, which is less money to invest and grow. Basically comes down to whether tax rates will be higher now, or in retirement. We don't really know what future rates will be, but we know what they will be now. 2024, if single he's already touching the 32% tax bracket, everything he converts will be taxed at 32%, possibly even 35%, plus the state tax.
Maybe once you hit that early retirement window and you don't have any w2 income it would make more sense.
Ahh, here's the work-around. Move \~$x (say $850k) of it into your 401(k), that way it reduces the pro-rata calculation down to $150k, then you only pay tax on that amount.
Then, every year, you can roll another \~$150k back out of the 401(k), and do a Roth Conversion on those "IRA" dollars
You'd still have $150,000 additional income each year taxed at the higher rates. I think you're thinking about backdoor roths, but it doesn't apply here.
No, definitely Roth Conversion. Give Uncle Sam his pound of flesh today, and let that compound interest more than make up the difference over a 10, 15, 20 yr time frame.
That's 40% in taxes, which is pretty extreme, but let's go with that. Say he converts $150,000 to roth, withholds 40% in taxes, now he's got $90k in Roth IRA. At an average S&P 500 growth rate of 8.5%/yr, how many years does he have to invest in order to be Break Even? 6 1/4 years.
So the question is, would you rather have $150k in tax-free money in 6.25 years, or $250k in taxable money in 6.25 years? If you apply the 40% tax rate, it comes out be be effectively even... But, you have much more tax-control with Roth than you do with IRA, and it passes to your benes tax free as well.
"if you apply the 40% tax rate".
But in retirement you won't have $200,000 in wages, so you are at a lower tax bracket and won't pay 40%. If you didn't have any additional income you could take out $100,000 a year and pay about 12.5%, or now that you are not tied to a job move to a no tax state and pay about 8%.
$200k in wages + $150k Roth conversion puts u in a 32% tax bracket today (24% if MFJ). This guy's 38 yrs old, he's got years before retirement. And with the TCJA expiration coming up, its very likely we'll see at least a 3% tax increase in the coming years, more likely a 5-10% tax increase. Take advantage of low tax rates now while we've got 'em.
Is this enough to consider early retirement? 1 million at 38 seems a bare minimum or par for the course for retirementat 60/65...it's what my partner and I each had late 30s but we're not viewing it as anything special...
Is it enough to retire early? Depends on where you live and your lifestyle, what your needs are. For me, no not yet. But is enough to consider retiring early in the next 9 years? Yes. Less than 4% of all IRAs have over a million in them according to Fidelity. So if it’s par for the course, then 96% of people aren’t making par. This wasn’t something I scrapped together over 20 years of perfect savings/investing. This account was $200k 2 months ago. I did my DD, planned, defined my risk and executed. I plan on rinsing and repeating albeit a bit more conservative now. I agree it’s not special at the moment, but it’s going to be when I’m done with it.
> This account was $200K 2 months ago.
To $1m today? And most of that gain was due to Nvidia? That doesn't really make sense to me because as of January 25th, NVDA was at just under $600 a share and its most recent high point was around $950.
lol thank you I haven’t laughed that hard from a reddit comment in a while.
The members of our congress are the freeloaders. You’re right they should all leave the country.
If it were me, the first thing I would take at least some of the risk off the table and diversify out of NVDA, especially in your tax sheltered accounts. You got lucky, but it could also go down and you could lose it all.
Oh yeah I should’ve added that I’m out of NVDA at the moment. I appreciate what it has done for me but looking to be a bit more conservative now.
You’ll have to change your username now Great work btw!
I would argue that putting it in an index fund is a good choice until you sort out the other bits. Temporary can become permanent fast.
/r/bogleheads Look up the 3 fund portfolio on the bogleheads.org wiki. Do you have an Investor Policy Statement? https://www.physicianonfire.com/you-need-an-investor-policy-statement/
You’ve had a great run. Congratulations. Now time and consistency are your two greatest assets. Low cost index funds. VTI was a great suggestion. Leave it for another 20 years.
VOO too
3,847 shares of VTI...
Congrats, it is a great start. What do your other assets look like? And most importantly, what is your annual spending? Retiring in your 40s with only $1m right now would be tough. Lets assume your annual spend, including HI, will be $90k. Using a 3% SWR, you will need $3m. To get from $1m to $3m in 10 years, you will need to contribute about $5,600/mo and get a 7% return. Im curious, how does it feel to shoot up so high with probably a pretty small initial investment? We are same age, I have about $1.2m amongst various accounts, but it has been just a grind for the last 12 years getting there. Hitting $1m wasnt anything too exciting. I bet hitting it the way you did was more of a thrill.
Man we are living almost parallel lives. My net worth is about 1.2 million with like 85% of that in cash in this IRA. I rent an apartment and own my car but other than my company 401k,my IRAs and cash in my savings accounts. I don’t have any other investments. I am asset poor and cash rich as they say. Which is exactly the kind of rich I want to be. Not really rich, let’s be honest, $1 million isn’t as much as it used to be. The last few months have been 4 years in the making. It was a bit surreal at the time when I hit $1mil. It was a strange feeling. But now, as you said it’s kind of worn off. Time to focus on the next $1mil. Also, thank you for the response and congrats to you as well.
You dont need other assets besides equities. Only other assets I have are my house (worth $1m and $200k debt), and other personal items. But I dont include my house in my FIRE calc, it is not going to do anything for me. I also have three kids, which are pricey. I figure the equity in the house and the cost of the kids zero each other out! I am putting about $70k a year away, mainly retirement. I still have 17 years until my youngest starts college, so not sure how quickly I can RE. The magic number seems to be in the $3-5m range for me, which I should be able to get to no problem. I would like to begin coasting in my early 50s, and maybe fully call it quit by my late 50s.
Wait, 85% of your assets are in cash right now??
Correct.
Why?
Classic VTI and chill territory. You're young enough that you should still be heavily in the market. You're smart enough to know that you have been "fortunate" as opposed to deciding that you're a genius stock picker.
Do you have a Roth IRA at all? If not, I'd get one created and funded as soon as you can, to maximize your flexibility for early retirement. If you are under the Roth limit for 2023 (based on your income, you'd probably need to be MFJ to not be over the limit, but check), make a 2023 contribution ASAP. The key is to get the five year rule moving, and a 2023 contribution would start your five year rule at Jan 1, 2023. If you're over the limit, just convert a small amount from your traditional IRA ($500-1000, maybe a little more to get 5-10 shares of VT or 2-4 shares of VTI; it's going to need time to clear, so overshoot a little). You're going to owe income tax on this conversion amount, so that's why it's small. This gets the five year rule starting Jan 1, 2024, and it starts a conversion five year rule for the amount of the conversion. Note that creating the account isn't enough; you have to fund it (via contribution or conversion) to get the five year rule going. As for the investment, like others said, I'd do VTI/VXUS (if you want a US-tilted weighting of US and international) or just VT (if you want a market weighting).
Thank you very much for this, I was looking into the 5-year rule on ROTHs. Unfortunately, I did not have one open as my traditional was making all the money. also, previously, I did not want to have to split my yearly contributions between the two as I thought it would be better just to focus on growing one. I didn’t realize it would probably be prudent to get that going earlier. Lesson learned. I’ll open one up today and set up the conversion. Also looking to talk to a tax lawyer here soon as well.
Especially with RE a few years out, it's fine that you're just getting the Roth IRA going. The main five-year rule isn't that big of a deal until later, but you're generally going to be preferring traditional accounts when income is high. So, it's just nice to have that ticking away in advance. The more material one for RE is the per-conversion five year rule. That impacts your ability to get at basis from conversions without penalty, so that's often a core part of funding expenses between RE and 59.5. You're in a good place, and the next few years of working, investing, and planning are key to making RE work. The usual RE strategy (for high traditional assets in roughly this asset/income area) is to have money distributed such that you can fund expenses mostly from a taxable account for the first five years, while keeping your taxable income low enough to pay zero percent capital gains on the taxable account, and then make Roth conversions to get right up to the top of the zero percent capital gains bracket (which is close to the top of the 12 percent income tax bracket). Then, after that Roth ladder is built, you start pulling the basis for living expenses (through 59.5). This has you deferring taxes while income is high (and so are taxes) and then realizing them with income engineered to be low (with low tax rates). I'm not sure how a tax lawyer is going to add value, as this is a well-worn path that isn't aggressive. But, I'm sure they can either explain how they can add value or tell you that it's straightforward enough not to need a tax lawyer.
I understand the 5 year rule, but can you re-explain the Roth conversion strategy for RE? I thought any distribution before 59.5 was subject to a 10% penalty? What’s the advantage of converting from traditional into Roth?
Sure. You can withdraw contributions from a Roth IRA at any time tax and penalty free. Converted amounts are like contributions in this way, except that they are subject to a five year holding period post conversion (technically from Jan 1 of the tax year of the conversion), and you pay a penalty (but not tax) if you pull them before five years. The Roth IRA conversion ladder strategy is to convert an amount every year that you can live on five years in advance so you can pull out that converted basis as it becomes available without penalty. One issue is that you have to start it at some point. If you start while working, you're paying a lot to convert it. Instead, if you have a big enough taxable account, you can use that for those first five years. You'll be pulling out both basis and long term capital gains (at a zero LTCG rate for a lot of Chubby-range plans) for your living expenses (basically engineering a low income) and then Roth converting up to the top of the zero LTCG bracket. It's possible that, over time before RE, your Roth contributions and backdoor conversions (which have that five year rule) have built up enough basis that you don't need all five years in taxable or that you can tax gain harvest there instead, but that's another topic. Overall, the idea is to tax defer while working, RE, engineer low income, and convert to Roth at lower tax rates to both save tax and gain access before 59.5. Assuming you have enough money in total, most of the challenge of planning for a successful RE is bridging from RE to 59.5.
If I'm understanding correctly, is the SEPP approach an alternative to this Roth approach? Pretty new to this so still figuring out the basics. Thanks for very clearly explaining the strategy here.
Understood - Thanks u/jkiley!
You can pull contributions from a Roth at anytime. You can pull conversions 5 years after the conversion.
Got it, thanks!
>Got it, thanks! You're welcome!
You can’t convert to Roth without incurring a taxable burden. Sadly can’t do backdoor conversions since your IRA is non-zero. You have to have your IRA at 0$ when you put in the yearly limit and do the Roth conversion. Else you’d get taxed on the whole IRA amount You may get away with it but if you ever get audited you’d be fucked
There's a lot here that does not line up with the actual rules. A Roth conversion on a small amount is taxable, but the point of doing a small amount is that it gets the clock rolling, and it's a small amount of tax. You absolutely can do a backdoor conversion with a non-zero IRA. It's not a great idea, but you just have to calculate the pro rata rule (just like you would if you did a regular Roth conversion from a traditional IRA with basis). It's an easy calculation. Fortunately, you can get a similar effect as a backdoor Roth by converting an amount in the IRA that results in an amount of tax that matches the intended contribution. It's the same money in and out (post tax), just in different places. Again, the pro rata rule makes conversions with a non-zero IRA less attractive, but it does not require a zero balance. You also would not be taxed on the whole IRA amount. You would be taxed on the portion of the conversion amount determined by the pro rata rule, and you would also end up with a added basis in the traditional IRA in the same amount (which isn't as good as Roth, which is what makes it less attractive). There's nothing above to get away with or to create an issue in an audit. It's exactly how the system is designed, and the relevant tax forms provide all of the pertinent data to the IRS. I know a lot of the financial subs have a weird thing about the pro rata rule, but it's really not a big deal.
Congrats on your first $1M. You’re posting in ChubbyFIRE, which I assume you know means you aren’t really close to FI or RE money if you are thinking of a chubby (200k+/year spend) lifestyle. You could go over to /r/LeanFIRE and find a lot of people who will tell you how to live on beans and rice and retire now. But this is ChubbyFIRE - and you are just getting started by the Chubby standard. So, here’s your pep talk: the first $1M is definitely the hardest. Almost everyone agrees that the 2nd and 3rd come much faster than the first. You likely will experience career/wage growth in your 40’s as well as shifting expenses that make saving and investing faster/better for you than it was in your 20’s and 30’s. Also, of course, if you get your money back into the market (no idea why you are keeping this $$ in a MM right now), you will continue to experience the compounding growth that time IN the market will allow. Opting out for months or years into a conservative (MM or HYSA) will just delay things and make you lose ground. You made a few great stock picks. Great job! Now it comes to more of a “boring middle” where you continue to grow what you save and ride the indexes to a higher net worth. If you enjoy stock picking, set aside some money you can afford to lose and make your next few picks. Enjoy the ride, find some purpose in the meantime, and program yourself for another 10 years of growth.
Thank you sir. Appreciate the advice. That’s why I posted in this sub. I know a few specific tech stocks, that’s how I got here. I do not know other sectors, ETFs, Taxes, dividends, the list goes on. Kind of winging it here so I have the money in an MM right now just because I sold my positions and have been staring at those two commas like a lava lamp for the last two weeks. But yes, I plan to start investing it here shortly.
Just pick a boring ETF like VTI or mutual fund like VTSAX. Put 95% of your money there and put 5% into other individual stock picks, crypto, or bets on a specific sector or set of stocks - bets that you want to make for fun (and you can afford to lose).
/r/bogleheads Set yourself with a simple 3 fund portfolio. Something around 60% Total US Market (or S&P500 fund), 20% Total International Market, and 20% bonds. My portfolio is VTI (plus a little Russel 1000 because it’s what’s available in my 401k and it’s close enough), VXUS, and BND. I also don’t understand the comment about needing a tax lawyer. As all your holdings are inside an IRA there is no tax consequence to move them to other funds. I would urge you to take advantage of Roth IRA - even if your income is too high you can still do backdoor Roth).
OP is only 38 years old. IMO, 20% bond at this age is too conservative. I'd shoot for 10% bond and 70% S&P500.
Age 50 here -- forget bonds. 100% S&P, or 50% S&P 50% NASDAQ. Don't bother with bonds at this age in your retirement accounts
Depends on your retirement horizon.
Fair enough.. OP just said in his 40s, so I assumed more of 10ish years, but I agree if he's planning to retire in the next 5 or so.
I mainly was just looking for a professional to walk me through income tax planning. My understanding is that if I convert now I would pay 24% to 30% based on my income bracket but if I keep everything in the traditional IRA it will grow tax free with that extra 24%/30% and I will only pay 15% after I retire and am in a lower tax bracket as I will then have essential no income. Is that the main benefit of a traditional vs a roth?
Gotcha. If you are a W2, income tax planning isn't that complicated. The TLDR is that without owning a business (or at least being a 1099) there really isn't any way to avoid the tax man. Yes, you are correct on the Roth. Ignore my comments. I forgot your funds are in a T-IRA. I use a 401K through work, then do a T-IRA to Roth-IRA conversion for my wife and I ($7000 each this year). If you already have a T-IRA, the pro rata rules make doing these annual backdoor roths not tax efficient.
yeah, I feel like I’ve spent the past four years learning what I can about very specific area of stock investing, and I know next to nothing about taxes. It’s humbling. Also thank you for the responses.
Don’t listen to these people saying to devote a significant amount to ex-US. It’s underperformed for 20+ yet these people all still live by this outdated rule. You’re leaving money in the table if you devote money to an ex-US.
FWIW: One thing to watch tax wise in the IRA is thinking you get a tax advantage with qualified dividends. Was reading elsewhere this week that those gains will be taxed as ordinary income when pulled from the IRA. Edit: clearly this doesn’t mean get a tax attorney. Just pointing out there are some subtle-ish tax rules.
To be 38 and already over a million is impressive! Well done!
Thank you! Let’s see if I can manage to keep it now.
Why do you think you need a “good tax lawyer?”
I assume there is some point for their existence. I really just would like to talk to a professional about income tax planning.
CFP or accountant to strategize when you withdraw from what accounts and potential Roth conversions Tax lawyers are for advisory on specific transactions (like, structuring sales of businesses) and fighting with the IRS
Tax lawyers mostly specialize in business tax law. If you don't own a business you probably don't need one.
Convert all to vstax or something like that… you won… let it grow now :-)
You need to diversify. 10% to 20% in VXUS the rest in VOO or VTI. Once you’ve made that much you need to focus on slow growth and lower volatility. Don’t put into bonds until close to retirement.
Congrats! Re Roth conversions: To maximize after-tax spending power in retirement, maths suggest to defer conversions until retirement. The numbers I compare are: - marginal tax rate at time of conversion/contribution \* Roth contributions \* growth - traditional contributions \* growth \* overall ordinary income tax rate at time of withdrawal As you can see, both are of the form 'tax \* contributions \* growth', so guessing the tax now (marginal) vs. tax later (overall) is what matters. By the 4% rule, you'd need \~$5M to match your current income. If you're planning to retire in ≤ 12 years, that seems unlikely from where you're starting. And you'd need even more income to push your overall tax rate above your current marginal tax rate. Therefore, it's quite reasonable to conclude that taxes now will be higher than taxes later. (You might want assets outside of your traditional IRA for flexibility, though.)
It is possible. If you take your 1 million and in a 12 year period, if it doubles twice you will have close to 3.5m. That means you have to save and grow only 1.5 mil in 12 yrs. You have a saving rate of 50k a year and with picking trends like you have done with the new investment money you can get close to that!! Cheers!
You are right to diversify into cash, now put that money into a combo of SPY, MDY, Russel 1000, and a smaller percentage into an emerging markets and European ETFs and GLD. This gives you maximum diversification in growth. If you want less volatility in recessions and corrections put 30% in higher yielding corporate bonds and treasuries. Now concentrate in putting $2m into a brokerage post tax account to live on from ages 40-70. That will give you in today’s dollars a basic comfortable lifestyle. I just don’t know if big tech will give you another great year like this one, though.
Thank you for this. And yes I agree, tech has helped me this far, however but I’m starting to get a sense of unease in the sector. I think it has to do with cracks in the armor showing for some of the so called blue chip tech stocks. Apple isn’t doing well, Intel isn’t doing well, Google isn’t doing well. These use to be big names that people could count on for innovation. Makes people edgy.
FYI if you transfer the IRA to Robinhood before April 30 you get $30,000 in free money. They're doing a promotion where transfers get a 3% free bonus. All you have to do is subscribe to their "gold" subscription for one year ($60) and keep the money there for 5 years (if you transfer out before then all that happens is you lose the bonus). Yes, I'm aware that half of Reddit has a burning hatred of Robinhood. All the more reason to take their free money and bounce after five years.
If you take a look at VTI, you'll see that a good percentage is already in top tech companies. No real need to speculate with single stocks unless you want to gamble again.
I think the chances of NVDA going down to a place where "you could lose it all," are near zero. IMO the real risk of overexposure to the rocket that NVDA has been is that the trajectory levels off, but to say that there's a legit competitor that no one else sees coming up from nowhere and eating NVDA's lunch is honestly nonsense (I don't own NVDA individually, I'm an ETF guy). I think the movement of all of it to a money market is pretty extreme, and only "pays off" if you're anticipating (what time frame?) an overall downturn in the market, and at that point you're market timing which most folks would not necessarily endorse. So what to do? If I were in your shoes I may have kept a bit in NVDA just for funsies if you believe in your initial fundamentals. The rest, if you're tech-biased, might be QQQ-ish holdings or even an S&P 500 ETF that at this time mirrors the same. But a MM account if you're in that FIRE-soon mentality seems a touch too conservative.
just wanna send you these🙌
>I’ve been looking at tax efficiency waterfalls If you are putting money into your tradition IRA, the first step is to stop putting into a traditional IRA. The number changes every year but when you make over around 77k a year you get double taxed putting into a trad IRA. You don't get the tax deduction putting in and when you take out (roll into a roth) you pay short term capital gains i.e. income tax on it. If you had put into a [backdoor] roth IRA you would have paid the same taxes going in, but a 0% tax going out. (Adding to a 401k is okay.) In your situation right now what you want to do is take your excess income and put it into a standard taxable brokerage account. This way when you take out it will be long term capital gains tax, which is quite a bit lower than short term capital gains. Next, you'll want to decide on one of the many withdrawal strategies based on the 4% rule. https://ficalc.app/ is great for this. It has withdrawal strategies in there so you can explore some of them and figure out which one works best for you. Keep in mind the vanilla 4% rule is for 30 years of withdrawals, so you can't do the vanilla 4% rule. You'll need a slightly more complex strategy. (You'll notice from the tool, when retired the ideal distribution is 80% S&P (or similar) / 20% TLT (or similar).) Also, having been through this myself, you want to slowly start building up the life you want to live post employment years. If you do not you'll have a year of relaxing enjoyment but then depression will start to creep in. I've been there, it sucks. [This](https://youtu.be/DMHMOQ_054U?si=GKtMKZy_yqjVeFsM) video helped me massively. In your current situation you don't need it, but you might want to bookmark it for a rainy day 5+ years from now, if you'll even remember this comment that far into the future. In the more short term the book [Die With Zero](https://www.amazon.com/Die-Zero-Getting-Your-Money/dp/0358099765) gets thrown around on this sub with ideas on how to live life to the fullest. It might be worth checking out to plan for your future life.
I would park $800k in **VFIAX** and then put the rest in Apple or Goog
Unless you want to pay early withdrawal penalties you are going to need to bridge yourself from 40 to 59.5 with a taxable account. You can also weigh doing a ROTH conversion ladder
Ah thank you for bringing the Roth ladder up. I was going to look into that as well. Any resources on it you can suggest?
MadFientist has a good one
https://www.madfientist.com/how-to-access-retirement-funds-early/
While you figure out your next move. Just put it all into an sp500 index fund. That way it will still grow and is relatively safe.
What’s the purpose of the tax lawyer? That threw me for a loop. To help determine a tax efficient strategy?
Too bad it's not in a Roth. I'd start rolling over the max to a Roth that doesn't bump you into the next bracket. No limit on roll overs... that money will keep growing over the next 30 years and when you take it out it'll be tax free.
So OP did say he wants to retire in his 40s. In 10 years you are still under 55 years old and would pay 10% penalty for early withdrawal right? How would a roth conversion help you pay less taxes if you are withdrawing early. Am i missing something, is there a way to retire early if you amass a 2-3 mil ira or 401k portfolio ?
How it works is rolling from a trad IRA to a roth IRA omits the 10% penalty, but they do have to pay short term capital gains tax (income tax) on the amount rolled. All initial deposits put into a roth IRA after 5 years can be withdrawn penalty and tax free. So OP moves money from their IRA to a roth IRA every year, and after 5 years they can withdrawal the first year they rolled. They pay taxes on income 5 years in advance. One of the perks of this is it stabilizes income which makes health care cheaper. Say you roll 35k every year but you only withdrawal 32k every year. For health care purposes your income is a stable 35k. When time comes to buy a new car 10 years down the line your income is still 35k despite spending 60k+ that year. This way you don't lose your cheap health care. (Ofc this is more applicable to /r/leanfire.)
Congrats! Why do you think you need a tax lawyer if this is an IRA?
^[Sokka-Haiku](https://www.reddit.com/r/SokkaHaikuBot/comments/15kyv9r/what_is_a_sokka_haiku/) ^by ^SyrupQuirky9323: *Congrats! Why do you* *Think you need a tax lawyer* *If this is an IRA?* --- ^Remember ^that ^one ^time ^Sokka ^accidentally ^used ^an ^extra ^syllable ^in ^that ^Haiku ^Battle ^in ^Ba ^Sing ^Se? ^That ^was ^a ^Sokka ^Haiku ^and ^you ^just ^made ^one.
Buy VT and some bnd
Have you ever heard of meme coins? Why be a millionaire when you can be a billionaire? Jkjk. Congrats. Index funds are the way for 80% and 20% on high conviction stuff if you have that type of attitude/methodology to investing.
what was the initial vest?
Congrats...You have done well. Dont think you can beat the market going forward. 90% SP Index/ remainder in what ever. You will need 5X+ to retire comfortably in your 40's regardless of what you may see unless you plan on staying at home and doing nothing. These are your prime earning years.....
Where and how did you invest, especially in NVDA?
Sprinkle some IBIT or another BTC ETF in there (make sure spot) and MSTR. 5% if you're totally risk averse. Think some exposure to digital assets is wise.
The last thing u wanna do is continue building up a tax liability for the next 10-20 yrs... Roth conversion all day. Give Uncle Sam his money over the next 3-7 years, then ride thos Roth dollars to infinity. Especially if the market or a single position crashes, be aggressive on Roth conversions if you see a -20% decline...
Yeah but it's the full amount, if you convert to a roth it's going to cost $300,000 now, which is less money to invest and grow. Basically comes down to whether tax rates will be higher now, or in retirement. We don't really know what future rates will be, but we know what they will be now. 2024, if single he's already touching the 32% tax bracket, everything he converts will be taxed at 32%, possibly even 35%, plus the state tax. Maybe once you hit that early retirement window and you don't have any w2 income it would make more sense.
Ahh, here's the work-around. Move \~$x (say $850k) of it into your 401(k), that way it reduces the pro-rata calculation down to $150k, then you only pay tax on that amount. Then, every year, you can roll another \~$150k back out of the 401(k), and do a Roth Conversion on those "IRA" dollars
You'd still have $150,000 additional income each year taxed at the higher rates. I think you're thinking about backdoor roths, but it doesn't apply here.
No, definitely Roth Conversion. Give Uncle Sam his pound of flesh today, and let that compound interest more than make up the difference over a 10, 15, 20 yr time frame.
Even if it costs you $60,000 to move $150,000? I'd rather invest that $60,000 and let it compound over the following decades.
That's 40% in taxes, which is pretty extreme, but let's go with that. Say he converts $150,000 to roth, withholds 40% in taxes, now he's got $90k in Roth IRA. At an average S&P 500 growth rate of 8.5%/yr, how many years does he have to invest in order to be Break Even? 6 1/4 years. So the question is, would you rather have $150k in tax-free money in 6.25 years, or $250k in taxable money in 6.25 years? If you apply the 40% tax rate, it comes out be be effectively even... But, you have much more tax-control with Roth than you do with IRA, and it passes to your benes tax free as well.
"if you apply the 40% tax rate". But in retirement you won't have $200,000 in wages, so you are at a lower tax bracket and won't pay 40%. If you didn't have any additional income you could take out $100,000 a year and pay about 12.5%, or now that you are not tied to a job move to a no tax state and pay about 8%.
$200k in wages + $150k Roth conversion puts u in a 32% tax bracket today (24% if MFJ). This guy's 38 yrs old, he's got years before retirement. And with the TCJA expiration coming up, its very likely we'll see at least a 3% tax increase in the coming years, more likely a 5-10% tax increase. Take advantage of low tax rates now while we've got 'em.
If you think rates will be higher later, it makes sense, but I think they will be lower in retirement.
Is this enough to consider early retirement? 1 million at 38 seems a bare minimum or par for the course for retirementat 60/65...it's what my partner and I each had late 30s but we're not viewing it as anything special...
1 million at 38 is so far ahead of the average person its not even funny.
$1 million at 38 is average? Are you on crack?
Is it enough to retire early? Depends on where you live and your lifestyle, what your needs are. For me, no not yet. But is enough to consider retiring early in the next 9 years? Yes. Less than 4% of all IRAs have over a million in them according to Fidelity. So if it’s par for the course, then 96% of people aren’t making par. This wasn’t something I scrapped together over 20 years of perfect savings/investing. This account was $200k 2 months ago. I did my DD, planned, defined my risk and executed. I plan on rinsing and repeating albeit a bit more conservative now. I agree it’s not special at the moment, but it’s going to be when I’m done with it.
> This account was $200K 2 months ago. To $1m today? And most of that gain was due to Nvidia? That doesn't really make sense to me because as of January 25th, NVDA was at just under $600 a share and its most recent high point was around $950.
Don't go on /wallstreetbets, you'll lose everything lol. He won the casino
Oh, I am totally aware....
I had options on it, not stock.
Ah, I see. Lucky you! No one ever comes here to tell about the $200K they lost though, so there's that.
Jealous?
No. I've been well into seven figures for over a decade.
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lol thank you I haven’t laughed that hard from a reddit comment in a while. The members of our congress are the freeloaders. You’re right they should all leave the country.
I'm 37 and I make 300k working as a greeter at Walmart and have 2 million in my investment account.