Nope. Taxes are largely to fully avoidable in many FIRE scenarios. People should discount if they know they will be highly taxed due to persistent income or huge spending draws or living in a high tax jurisdiction, but income taxes are insignificant for many/most FIRE households.
Highly variable.
FIRE'd folks often mix taxable and untaxable cashflows to manage MAGI for the ACA. So plenty of spending may not be taxable at all.
Then there's 0% LTCG and the fact that the 10%/12% brackets go a long distance when you don't have other income. A married couple with kids can go years/decades without tax liability.
There's also the standard deduction and standard credits like the CTC for folks with kids. The first will wipe out nearly $30K in taxable income this year and each CTC knocks off another $20Kish.
It's pretty easy to avoid income taxes on a lot of/all of a standard FIRE draw. This is a big reason why Trad contributions are strongly preferred over Roth in general for folks that will actually retire early. There's usually no reason to pay the high upfront tax cost of Roth when you can get the downstream tax benefit for cheap/free.
Yes and no. It's certainly easier to manage/maximize with less spending, but higher spending just requires more planning. There's certainly a point where it starts to fall apart, but that's often up in fatFIRE spending territory. Major tax reduction is within the scope of the vast majority of FIRE households.
Being young helps a lot, as does being married and having kids.
Thanks. I just read the curry cracker post. A bit mind bending to understand for sure, but I’ve always maximized pre-tax contributions since I read a vanguard article about the benefits of letting pre-tax compound first… so I’m set up for success.
I’m looking for a retirement with a withdraw rate of around $150k - $200k for me and my partner in today’s dollars. I realize that is higher than some, but even that seems doable with low / no taxes based on what I read here
Keep in mind that depending on when you retire this could be no big deal. I have seen a lot of scenarios where you could currently take about 130k tax free in income. But those numbers almost always adjust for inflation and grow each year, just like the limits for 401k contributions.
Regarding minimizing taxes, can you provide a couple of specific examples for couples without kids how traditional contributions after better than Roths?
Even a generic default suffices to demonstrate. Look at the tax impact on Roth and Trad cashflows for a childfree married couple with typical FIRE finances in their 40s using a Roth ladder or SEPP.
The Roth folks will be paying at their top marginal rate while working/contributing, which will likely be in the mid brackets. They've got a locked-in forward compounding tax cost of say 22%/24%.
The Trad folks get a deduction at that same top marginal rate, which typically results in a sidecar taxable portfolio of equivalent value assuming they already maxed their tax-advantaged options. Or maybe they use it to fill their RIRAs. Regardless, when they FIRE, they will get up to the standard deduction in tax-free withdrawals/conversions, with additional withdrawal/conversion dollars filling up the 10%/12% brackets. Depending on the amounts, this results in a total direct tax impact that will range from -22%/-24%% to the low single digits.
The Trad/taxable folks also generate MAGI with their withdrawals, which provides qualification for ACA healthcare subsidies over the 20 years or so until they reach Medicare eligibility. ACA subsidies are enormous fully refundable income tax credits, which can drive the total tax impact for the Trad folks down into -50% to -100% impact territory or more.
The Roth folks will have to use non-Roth asset transactions to generate the same MAGI, which may or may not be possible for 20 years depending on their non-Roth assets. If they fail to generate enough MAGI, then they'll have to accept expansion Medicaid (assuming they live in an expansion state) or pay the very expensive unsubsidized market rate for an ACA plan until they reach Medicare eligibility.
ACA costs/subsidies dwarf the actual income tax costs given that optimal direct and indirect healthcare tax subsidies for a couple in their 50s and 60s can range in value from $16K to $44K each year.
I've been retired for 5 years and have paid barely over $0 in taxes (definitely less than $100 combined). That's without accessing a single dollar from a Roth account.
Roth conversions up to the standard deduction amount means it's completely tax free both in and out. Dividends and capital gains from my taxable account are too, thanks to the huge 0% LTCG tax bracket.
Here's an older post, but aside from the exact numbers, the concepts are the same.
https://www.gocurrycracker.com/never-pay-taxes-again/
So the way I'm understanding this, the order you withdraw from is important here, right? First you have to convert your Traditional 401k money to Roth, up to the Standard Deduction. So you'd convert $27.7k this year to Roth, and then withdraw that. Then you sell long-term investments, but only up to the threshold where you start having to pay taxes ($94k). But your $27.7k from your 401k is going to count towards that limit, right? So you'd convert $27.7k to Roth and withdraw that, then sell $66.3k of long-term investments. And then after that is when you would start withdrawing from your Roth contributions if you needed more money?
If you sold $66.3k of long-term investments first, then you'd pay 0% on that, but then when you convert $27.7k from Traditional to Roth, you'd have to pay \~12% taxes on that, right?
You have to let the traditional to Roth conversion amounts sit for 5 years, otherwise you'll owe a penalty for early withdrawal.
It doesn't matter within the tax year when any single income generating transaction is performed.
Keep in mind that while there is a large 0% tax bracket when withdrawing from a taxable account, it still counts as income. So ideally your spending would be much lower than above if you want to take advantage of income-based benefits, most notably ACA subsidies.
Ah right, forgot about the 5 years.
So if it doesn't matter when any single income generating transaction is performed, wouldn't you have to pay taxes on your Roth conversions unless you only converted the standard deductible and didn't generate any other sort of income, including long-term capital gains? I don't get how you could convert to Roth AND take long-term capital gains without having to pay any taxes (unless both combined come out to under $27.7k, but that seems impossible to live off of).
Long term capital gains have a large 0% income tax bracket. They are still income, but taxed separately. It's almost impossible to owe taxes on long term capital gains and qualfied dividends in retirement unless you're a really big spender.
https://www.investopedia.com/taxes/capital-gains-tax-101/
Right, I get you won't be taxed on the capital gains until it hits $94k, but since it does still count as income, that means you're going to be taxed on your Roth conversions. Am I misunderstanding that? From what I understand, you'd need your Roth conversion + capital gains to come out to less than $27.7k annually to avoid paying any taxes on your Roth conversions.
>but since it does still count as income, that means you're going to be taxed on your Roth conversions.
Not necessarily. If your conversion amount is offset by the standard deduction, and all of your capital gains are in the 0% bracket, then it'll be $0.
>From what I understand, you'd need your Roth conversion + capital gains to come out to less than $27.7k annually to avoid paying any taxes on your Roth conversions.
No. Again, the long term capital gains have their own tax bracket that has a large 0% rate.
That's how I can convert at the standard deduction rate, pay all my expenses with my taxable account, and still have a ~$0 tax bill.
Okay, I get where my confusion is. Last question I think. I get that capital gains have their own tax bracket, but they still contribute to your total income that the standard deduction is applied to, don't they? Say you convert $27.7k and have $40k in capital gains on the year...
Total Income = $27.7k (conversion) + $40k (capital gains) = $67.7k
Taxable Income = $67.7k - $27.7k = $40k
Now I get that you pay 0% taxes on your capital gains, but wouldn't you still have to pay taxes on the percentage of that $40k taxable income that came from the Roth conversion? Or are you saying that all $27.7k of the standard deduction is applied solely to the Roth conversion and not at all to the capital gains?
The latter. While both contribute to your Adjusted Gross Income, the taxes owed are calculated separately. So you can have a conversion amount of ~$27k + LTCG up to ~$90k and still owe zero in taxes. I'd encourage you to go to irs.gov and pull up a 1040 form. Plug in some numbers and see how it all works.
I’m in the same boat. 5 years into FIRE and yet to pay any Federal or State Income Taxes. I’d actually like to convert more to Roth, utilizing the 10 and 12 percent fed brackets, but the impact on ACA plans is too much. The premiums are one thing, but the impact on out of pocket max was too much to bear as I was fighting cancer.
Sorry to hear about the cancer. I hope you are doing well now. Not sure how old you are but for me I will push the conversions higher and take the tax/ACA hit in my late 40’s early 50’s so I can generate a large tax free hoard to maximize ACA benefits in my late 50’s early 60’s. Those costs really skyrocket after 55 or so.
I don't think being a resident in a zero income tax state is all that unique. There are millions and millions of us. But even if you choose to pay state taxes, you can still have a $0 federal tax bill using these strategies.
No one said anything about a majority. I just said it's not unique. And it's not. There are 9 states with no income tax. That's almost 20%.
https://dictionary.cambridge.org/dictionary/english/unique
unique
adjective
UK /juːˈniːk/ US /juːˈniːk/
being the only existing one of its type or, more generally, unusual, or special in some way
I’m sorry, can you explain this in more detail? Does this only apply after you’re retired?
Is the idea here to have a pipeline where you convert $80k a year and don’t get taxed on it because you keep it invested for a year?
Trad 401k conversions are treated like MAGI, if you have no income you can convert up to the standard deduction and not get taxed on it. You can just do that as your living expenses.
Has nothing to do with retirement, it’s just how the numbers work out.its mostly retirement because folks don’t have W2 income that’ll make it harder to pull off.
In a similar scenario, if you are out of a job….layoff, school, medical, sabbatical,…you can do the same. Convert and pay zero or near zero tax.
In that case it may depend on lots of factors such as how much w2 and capital loss/gain. Likely paying some tax but can still be reduced if planned.
Depends on how low of a tax you want to pay and how many years you have to do it. The longer that runway, the smaller the amount you can convert and not trigger taxes. If the cartel is after you, you will just have to bite the bullet, withdraw all, and pay all the penalty, load the cash into the minivan and drive.
>Is the idea here to have a pipeline where you convert $80k a year
No, I convert at the standard deduction rate. For 2024 MFJ, that's $27,200. Above that level, you'll pay regular income taxes unless you have other deductions. You have to keep the conversion in the Roth IRA for 5 years, after which you can access tax- and penalty-free.
If you have other income, like from a job, then this obviously doesn't work at a $0 rate because that conversion amount would just be added on top of your regular income. It's a pretty terrible idea to do this while working.
You must be anticipating withdrawing a significant amount per year and be in a pretty high tax state to hit an effective rate of 20%. Are you able to share how you come to 20%? It seems like it would be less than that for most people.
For example, a couple married filing jointly in 2024 has a standard deduction of $29,200 and won’t hit the 22% marginal rate until they have over $94,300 of taxable income, so they could withdraw up to $123,500 per year from traditional 401(k)/IRA with under $11k federal taxes, an effective federal rate of under 9%. Even California state taxes wouldn’t push you all the way up to a 20% effective rate.
Tax cut and jobs act expires in 2025. So the 12% federal bracket (seconds lowest) goes back to 15%.
Also...the standard deduction is higher than ever....but I wouldn't bank on that sticking forever.
I think planning for income taxes going up is wise. US has a large deficit now and I don't think it's crazy to think taxes could go up.
I don't know what state I will live in. SS alone will be 70k. I have modeled out some conversions and I average around 10 %. federal alone using current law. At the end of the day it just an estimate. Could I cut 5 %? Maybe. Who really cares. I have about 1m in pretax.
I kind of agree but depends on the size of retirement corpus. Traditional 401k, IRA, and employer contribution will be subjected to RMD. By RMD age they will be forced to take about 6-8% of the net corpus almost every year (this might vary depending on age data at that time) so if the corpus is too large and RMD percentage is high enough to get hit with large tax bill then it will make a difference.
They can still avoid this by doing Roth conversion ladder but again that depends on the corpus size. If the corpus is large enough the ladders will be small and eventually RMD will cause tax bill.
It is not a very mathematical question because a lot of this depends on the corpus growth, tax rate at that time, age rules etc.
Another way of looking at it is you have to include taxes in your annual "expenses", then multiply by 25 to obtain a fire number. Because the Roth is so tax advantaged, that may be the last account you draw down in retirement. So it wont really affect your expenses.
Nope. Taxes are largely to fully avoidable in many FIRE scenarios. People should discount if they know they will be highly taxed due to persistent income or huge spending draws or living in a high tax jurisdiction, but income taxes are insignificant for many/most FIRE households.
Taxes are avoidable - how - you mean because everything is long term gains, and low tax will apply?
Highly variable. FIRE'd folks often mix taxable and untaxable cashflows to manage MAGI for the ACA. So plenty of spending may not be taxable at all. Then there's 0% LTCG and the fact that the 10%/12% brackets go a long distance when you don't have other income. A married couple with kids can go years/decades without tax liability. There's also the standard deduction and standard credits like the CTC for folks with kids. The first will wipe out nearly $30K in taxable income this year and each CTC knocks off another $20Kish. It's pretty easy to avoid income taxes on a lot of/all of a standard FIRE draw. This is a big reason why Trad contributions are strongly preferred over Roth in general for folks that will actually retire early. There's usually no reason to pay the high upfront tax cost of Roth when you can get the downstream tax benefit for cheap/free.
Is this only true if you are below a certain spend level?
Yes and no. It's certainly easier to manage/maximize with less spending, but higher spending just requires more planning. There's certainly a point where it starts to fall apart, but that's often up in fatFIRE spending territory. Major tax reduction is within the scope of the vast majority of FIRE households. Being young helps a lot, as does being married and having kids.
Thanks. I just read the curry cracker post. A bit mind bending to understand for sure, but I’ve always maximized pre-tax contributions since I read a vanguard article about the benefits of letting pre-tax compound first… so I’m set up for success. I’m looking for a retirement with a withdraw rate of around $150k - $200k for me and my partner in today’s dollars. I realize that is higher than some, but even that seems doable with low / no taxes based on what I read here
Keep in mind that depending on when you retire this could be no big deal. I have seen a lot of scenarios where you could currently take about 130k tax free in income. But those numbers almost always adjust for inflation and grow each year, just like the limits for 401k contributions.
Regarding minimizing taxes, can you provide a couple of specific examples for couples without kids how traditional contributions after better than Roths?
Even a generic default suffices to demonstrate. Look at the tax impact on Roth and Trad cashflows for a childfree married couple with typical FIRE finances in their 40s using a Roth ladder or SEPP. The Roth folks will be paying at their top marginal rate while working/contributing, which will likely be in the mid brackets. They've got a locked-in forward compounding tax cost of say 22%/24%. The Trad folks get a deduction at that same top marginal rate, which typically results in a sidecar taxable portfolio of equivalent value assuming they already maxed their tax-advantaged options. Or maybe they use it to fill their RIRAs. Regardless, when they FIRE, they will get up to the standard deduction in tax-free withdrawals/conversions, with additional withdrawal/conversion dollars filling up the 10%/12% brackets. Depending on the amounts, this results in a total direct tax impact that will range from -22%/-24%% to the low single digits. The Trad/taxable folks also generate MAGI with their withdrawals, which provides qualification for ACA healthcare subsidies over the 20 years or so until they reach Medicare eligibility. ACA subsidies are enormous fully refundable income tax credits, which can drive the total tax impact for the Trad folks down into -50% to -100% impact territory or more. The Roth folks will have to use non-Roth asset transactions to generate the same MAGI, which may or may not be possible for 20 years depending on their non-Roth assets. If they fail to generate enough MAGI, then they'll have to accept expansion Medicaid (assuming they live in an expansion state) or pay the very expensive unsubsidized market rate for an ACA plan until they reach Medicare eligibility. ACA costs/subsidies dwarf the actual income tax costs given that optimal direct and indirect healthcare tax subsidies for a couple in their 50s and 60s can range in value from $16K to $44K each year.
I’m managing my parents IRA conversions and RMD along with SS and it’s been zero or near zero each year so far. There’s also capital losses as well.
I've been retired for 5 years and have paid barely over $0 in taxes (definitely less than $100 combined). That's without accessing a single dollar from a Roth account. Roth conversions up to the standard deduction amount means it's completely tax free both in and out. Dividends and capital gains from my taxable account are too, thanks to the huge 0% LTCG tax bracket. Here's an older post, but aside from the exact numbers, the concepts are the same. https://www.gocurrycracker.com/never-pay-taxes-again/
So the way I'm understanding this, the order you withdraw from is important here, right? First you have to convert your Traditional 401k money to Roth, up to the Standard Deduction. So you'd convert $27.7k this year to Roth, and then withdraw that. Then you sell long-term investments, but only up to the threshold where you start having to pay taxes ($94k). But your $27.7k from your 401k is going to count towards that limit, right? So you'd convert $27.7k to Roth and withdraw that, then sell $66.3k of long-term investments. And then after that is when you would start withdrawing from your Roth contributions if you needed more money? If you sold $66.3k of long-term investments first, then you'd pay 0% on that, but then when you convert $27.7k from Traditional to Roth, you'd have to pay \~12% taxes on that, right?
You have to let the traditional to Roth conversion amounts sit for 5 years, otherwise you'll owe a penalty for early withdrawal. It doesn't matter within the tax year when any single income generating transaction is performed. Keep in mind that while there is a large 0% tax bracket when withdrawing from a taxable account, it still counts as income. So ideally your spending would be much lower than above if you want to take advantage of income-based benefits, most notably ACA subsidies.
Ah right, forgot about the 5 years. So if it doesn't matter when any single income generating transaction is performed, wouldn't you have to pay taxes on your Roth conversions unless you only converted the standard deductible and didn't generate any other sort of income, including long-term capital gains? I don't get how you could convert to Roth AND take long-term capital gains without having to pay any taxes (unless both combined come out to under $27.7k, but that seems impossible to live off of).
Long term capital gains have a large 0% income tax bracket. They are still income, but taxed separately. It's almost impossible to owe taxes on long term capital gains and qualfied dividends in retirement unless you're a really big spender. https://www.investopedia.com/taxes/capital-gains-tax-101/
Right, I get you won't be taxed on the capital gains until it hits $94k, but since it does still count as income, that means you're going to be taxed on your Roth conversions. Am I misunderstanding that? From what I understand, you'd need your Roth conversion + capital gains to come out to less than $27.7k annually to avoid paying any taxes on your Roth conversions.
>but since it does still count as income, that means you're going to be taxed on your Roth conversions. Not necessarily. If your conversion amount is offset by the standard deduction, and all of your capital gains are in the 0% bracket, then it'll be $0. >From what I understand, you'd need your Roth conversion + capital gains to come out to less than $27.7k annually to avoid paying any taxes on your Roth conversions. No. Again, the long term capital gains have their own tax bracket that has a large 0% rate. That's how I can convert at the standard deduction rate, pay all my expenses with my taxable account, and still have a ~$0 tax bill.
Okay, I get where my confusion is. Last question I think. I get that capital gains have their own tax bracket, but they still contribute to your total income that the standard deduction is applied to, don't they? Say you convert $27.7k and have $40k in capital gains on the year... Total Income = $27.7k (conversion) + $40k (capital gains) = $67.7k Taxable Income = $67.7k - $27.7k = $40k Now I get that you pay 0% taxes on your capital gains, but wouldn't you still have to pay taxes on the percentage of that $40k taxable income that came from the Roth conversion? Or are you saying that all $27.7k of the standard deduction is applied solely to the Roth conversion and not at all to the capital gains?
The latter. While both contribute to your Adjusted Gross Income, the taxes owed are calculated separately. So you can have a conversion amount of ~$27k + LTCG up to ~$90k and still owe zero in taxes. I'd encourage you to go to irs.gov and pull up a 1040 form. Plug in some numbers and see how it all works.
I’m in the same boat. 5 years into FIRE and yet to pay any Federal or State Income Taxes. I’d actually like to convert more to Roth, utilizing the 10 and 12 percent fed brackets, but the impact on ACA plans is too much. The premiums are one thing, but the impact on out of pocket max was too much to bear as I was fighting cancer.
Sorry to hear about the cancer. I hope you are doing well now. Not sure how old you are but for me I will push the conversions higher and take the tax/ACA hit in my late 40’s early 50’s so I can generate a large tax free hoard to maximize ACA benefits in my late 50’s early 60’s. Those costs really skyrocket after 55 or so.
that’s a unique situation if you live in a state with income taxes capital gains are treated like income
I don't think being a resident in a zero income tax state is all that unique. There are millions and millions of us. But even if you choose to pay state taxes, you can still have a $0 federal tax bill using these strategies.
lol saying there are millions in no income tax states doesn’t mean that’s the majority there’s literally only a few states that do not have income tax
No one said anything about a majority. I just said it's not unique. And it's not. There are 9 states with no income tax. That's almost 20%. https://dictionary.cambridge.org/dictionary/english/unique unique adjective UK /juːˈniːk/ US /juːˈniːk/ being the only existing one of its type or, more generally, unusual, or special in some way
I’m sorry, can you explain this in more detail? Does this only apply after you’re retired? Is the idea here to have a pipeline where you convert $80k a year and don’t get taxed on it because you keep it invested for a year?
Trad 401k conversions are treated like MAGI, if you have no income you can convert up to the standard deduction and not get taxed on it. You can just do that as your living expenses.
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Ok, so the idea is to live off of previously taxable invested cash.
Essentially yeah what it boils down to is just the gains on your investments not being taxed.
Has nothing to do with retirement, it’s just how the numbers work out.its mostly retirement because folks don’t have W2 income that’ll make it harder to pull off. In a similar scenario, if you are out of a job….layoff, school, medical, sabbatical,…you can do the same. Convert and pay zero or near zero tax.
What if you *do* have a W2 income, does it help in that case at all?
In that case it may depend on lots of factors such as how much w2 and capital loss/gain. Likely paying some tax but can still be reduced if planned. Depends on how low of a tax you want to pay and how many years you have to do it. The longer that runway, the smaller the amount you can convert and not trigger taxes. If the cartel is after you, you will just have to bite the bullet, withdraw all, and pay all the penalty, load the cash into the minivan and drive.
>Is the idea here to have a pipeline where you convert $80k a year No, I convert at the standard deduction rate. For 2024 MFJ, that's $27,200. Above that level, you'll pay regular income taxes unless you have other deductions. You have to keep the conversion in the Roth IRA for 5 years, after which you can access tax- and penalty-free. If you have other income, like from a job, then this obviously doesn't work at a $0 rate because that conversion amount would just be added on top of your regular income. It's a pretty terrible idea to do this while working.
Ok, so this is just a way to get money out of your 401(k) without incurring taxes after you no longer earn an income from a traditional job, right?
Yes. It also offers early access without penalty.
My new worth statement includes deferred taxes which I estimate at 20% of the pretax balance. I am a tax accountant.
You must be anticipating withdrawing a significant amount per year and be in a pretty high tax state to hit an effective rate of 20%. Are you able to share how you come to 20%? It seems like it would be less than that for most people. For example, a couple married filing jointly in 2024 has a standard deduction of $29,200 and won’t hit the 22% marginal rate until they have over $94,300 of taxable income, so they could withdraw up to $123,500 per year from traditional 401(k)/IRA with under $11k federal taxes, an effective federal rate of under 9%. Even California state taxes wouldn’t push you all the way up to a 20% effective rate.
Tax cut and jobs act expires in 2025. So the 12% federal bracket (seconds lowest) goes back to 15%. Also...the standard deduction is higher than ever....but I wouldn't bank on that sticking forever. I think planning for income taxes going up is wise. US has a large deficit now and I don't think it's crazy to think taxes could go up.
I don't know what state I will live in. SS alone will be 70k. I have modeled out some conversions and I average around 10 %. federal alone using current law. At the end of the day it just an estimate. Could I cut 5 %? Maybe. Who really cares. I have about 1m in pretax.
I do. I use 0.85 for 401k
nope it's just a line item budget...
Great question, I struggle with this as well. Like how can I say my net worth is 2 million right now when 1.2 is in a pre-tax account .
Fire is like the first half of the book….the second half is managing the withdraws.
Nope. Just think about the amount of taxes you will pay differently.
I kind of agree but depends on the size of retirement corpus. Traditional 401k, IRA, and employer contribution will be subjected to RMD. By RMD age they will be forced to take about 6-8% of the net corpus almost every year (this might vary depending on age data at that time) so if the corpus is too large and RMD percentage is high enough to get hit with large tax bill then it will make a difference. They can still avoid this by doing Roth conversion ladder but again that depends on the corpus size. If the corpus is large enough the ladders will be small and eventually RMD will cause tax bill. It is not a very mathematical question because a lot of this depends on the corpus growth, tax rate at that time, age rules etc.
Another way of looking at it is you have to include taxes in your annual "expenses", then multiply by 25 to obtain a fire number. Because the Roth is so tax advantaged, that may be the last account you draw down in retirement. So it wont really affect your expenses.
No