4 ms·

The two biggest reducers he cites are 401k contributions and tax-loss harvesting. #1. 401k. While this is a great idea, if he's trying to retire at 33, puttin

The two biggest reducers he cites are 401k contributions and tax-loss harvesting. #1. 401k. While this is a great idea, if he's trying to retire at 33, putting 17.5k away from his 70k paycheck is not going to help because he can't touch it until he is 59.5 (w/o penalty). #2. Capital losses Tax-loss harvesting means selling securities that are underwater to get a capital-loss deduction. I don't know where to start explaining why this is such a bad idea. I'll pick the two most compelling reasons why this is dumb. First, you can only do this so many times before you've whittled your investment to zero. Second, you are violating the most basic principle of standard-person (non-rich) investing: buy and hold. That's all he's got in his back o' tricks. What an awful post.

stu2b50 5y ago
>because he can't touch it until he is 59.5 (w/o penalty). That's not quite true. With 5 years of preplanning, you can get money out of a 401k without any penalty at any age (although, you will of course pay taxes on it) by doing a backdoor Roth IRA ladder.
- SavantIdiot 5y ago
  I've not heard of that. So it goes from one IRA into another? Why? Plus, ROTHs have yearly limits of $6k. While it can be done I don't see the benefit of doing it, esp. given the tiny amounts (compared to what is needed for retirement).
  - stu2b50 5y ago
    You can rollover 401k money into a Roth IRA (but this is a taxable event and you will pay income tax on that - just a note because "Roth" in the name tricks people up). That money will count as a contribution (ie not a gain). There's also NO limit on how much you can convert. You can withdraw any amount of contributions to Roth IRAs no penalty. But you have to wait 5 years for rollovers. So basically 1. Pick how much money you'll need in 5 years 2. Rollover that much money from your 401k to a Roth IRA (pay taxes in this step) 3. 5 years later withdraw that money from your Roth IRA
    - deleted 5y ago
      [deleted]
    - SavantIdiot 5y ago
      Step two is a big deal. In fact, its kind of a headscratcher. You have to believe you can earn back the lost capital from taxation in your investment horizon for the tax free benefits of the Roth IRA to make sense. Tough computation to make. Or am I missing another benefit?
      - encoderer 5y ago
        You’ll get taxed on the IRA gains regardless. In this case, they grow tax free in the Roth after the conversion. The math works out the same.
      - stu2b50 5y ago
        I think you're confused. 401k withdrawals are always taxed, even when you're over the age limit. The tax advantage is that you aren't taxed on the way in. The benefit is that you don't get hit with the additional 10% penalty for early withdrawal from a 401k. The Roth IRA is irrelevant; it's just a vehicle for you get money out of the 401k without the penalty. You'd do this as you enter early retirement - like with a normal 401k withdrawal, in this hypothetical your tax bracket will be far lower in early retirement (and not working) as you withdraw. Basically, by doing the backdoor Roth ladder you get to pretend there's no penalty on withdrawing early. No penalty. Yes, you still get taxed.
        SavantIdiot 5y ago
        Ah. Good point. It is not a penalty, it is just the tax all at once that you would normally pay over the life of the distribution. Unless that tax isn't capital gains and pushes you into a higher tax bracket, as opposed to a lower tax bracket if you had withdrawn over time in smaller quantities. I don't know if IRA dispursions are taxed as capital gains or income tax.
        5y ago
  - tingletech 5y ago
    $6000 is the annual limit for contributions There is no limit for conversions. See also back door roth and mega back door roth.
- bsorbo 5y ago
  Adding onto this, this article compares various approaches to getting money “early” out of a 401k/tIRA (Roth conversion ladder as said here, 72t SEPP’s, early withdrawal penalty), and has the surprising conclusion that even the “just pay the 10% penalty” comes out ahead of regular taxable contributions, at least in some situations. https://www.madfientist.com/how-to-access-retirement-funds-early/ https://www.madfientist.com/how-to-access-retirement-funds-e...
- jokethrowaway 5y ago
  Sure, but if you're paying taxes you're defeating the purpose of the post of minimising taxes.
  - stu2b50 5y ago
    You're always going to pay taxes on 401k, even if you wait. The point is to contribute to it tax free while you're still working and have a high personal income. You do the Roth ladder when you've going into early retirement - your personal income will be low because you're no longer actively working. And because taxes are progressive you are minimizing taxes.
jamesmeador 5y ago
Most tax-loss harvesting strategies incorporate a re-buy of a similarly-performing but substantially different asset. Of course, selling an asset just to maximize tax losses is unwise, but in the context of diversifying your portfolio, tax loss harvesting has its place.
occz 5y ago
The suggestion in the link was to sell investments that are underwater and replace them with similar assets, in order to remain invested. Not similar enough to be considered a wash sale, though. It's not strictly speaking incompatible with buy-and-hold, from my perspective. I'm not an expert though, I don't even live in the U.S.
tingletech 5y ago
he had a 457 in 2013 when he wrote this. You can draw from that as long as you are no longer working for whoever you had the 457 with.
pembrook 5y ago
That’s not what tax loss harvesting is. Say you own VTI, a total US market etf. Then the stock market drops 20% next week. You can sell VTI and with the proceeds immediately buy VOO (s&p500 etf) within seconds. VOO and VTI are insanely correlated, so you’ve basically triggered a 20% loss for tax purposes, without actually selling any of your exposure. That said, it’s not as big of a value as you might think, since you’ve also stepped down your basis, and need to pay more capital gains taxes when you sell since you “bought” at a lower price now. Generally accepted wisdom is to TLH up to the yearly loss deduction amount (like 3k or so) and stop.

stu2b50 5y ago

>because he can't touch it until he is 59.5 (w/o penalty). That's not quite true. With 5 years of preplanning, you can get money out of a 401k without any penalty at any age (although, you will of course pay taxes on it) by doing a backdoor Roth IRA ladder.

SavantIdiot 5y ago
I've not heard of that. So it goes from one IRA into another? Why? Plus, ROTHs have yearly limits of $6k. While it can be done I don't see the benefit of doing it, esp. given the tiny amounts (compared to what is needed for retirement).
- stu2b50 5y ago
  You can rollover 401k money into a Roth IRA (but this is a taxable event and you will pay income tax on that - just a note because "Roth" in the name tricks people up). That money will count as a contribution (ie not a gain). There's also NO limit on how much you can convert. You can withdraw any amount of contributions to Roth IRAs no penalty. But you have to wait 5 years for rollovers. So basically 1. Pick how much money you'll need in 5 years 2. Rollover that much money from your 401k to a Roth IRA (pay taxes in this step) 3. 5 years later withdraw that money from your Roth IRA
  - deleted 5y ago
    [deleted]
  - SavantIdiot 5y ago
    Step two is a big deal. In fact, its kind of a headscratcher. You have to believe you can earn back the lost capital from taxation in your investment horizon for the tax free benefits of the Roth IRA to make sense. Tough computation to make. Or am I missing another benefit?
    - encoderer 5y ago
      You’ll get taxed on the IRA gains regardless. In this case, they grow tax free in the Roth after the conversion. The math works out the same.
    - stu2b50 5y ago
      I think you're confused. 401k withdrawals are always taxed, even when you're over the age limit. The tax advantage is that you aren't taxed on the way in. The benefit is that you don't get hit with the additional 10% penalty for early withdrawal from a 401k. The Roth IRA is irrelevant; it's just a vehicle for you get money out of the 401k without the penalty. You'd do this as you enter early retirement - like with a normal 401k withdrawal, in this hypothetical your tax bracket will be far lower in early retirement (and not working) as you withdraw. Basically, by doing the backdoor Roth ladder you get to pretend there's no penalty on withdrawing early. No penalty. Yes, you still get taxed.
      - SavantIdiot 5y ago
        Ah. Good point. It is not a penalty, it is just the tax all at once that you would normally pay over the life of the distribution. Unless that tax isn't capital gains and pushes you into a higher tax bracket, as opposed to a lower tax bracket if you had withdrawn over time in smaller quantities. I don't know if IRA dispursions are taxed as capital gains or income tax.
        5y ago
- tingletech 5y ago
  $6000 is the annual limit for contributions There is no limit for conversions. See also back door roth and mega back door roth.
bsorbo 5y ago
Adding onto this, this article compares various approaches to getting money “early” out of a 401k/tIRA (Roth conversion ladder as said here, 72t SEPP’s, early withdrawal penalty), and has the surprising conclusion that even the “just pay the 10% penalty” comes out ahead of regular taxable contributions, at least in some situations. https://www.madfientist.com/how-to-access-retirement-funds-early/ https://www.madfientist.com/how-to-access-retirement-funds-e...
jokethrowaway 5y ago
Sure, but if you're paying taxes you're defeating the purpose of the post of minimising taxes.
- stu2b50 5y ago
  You're always going to pay taxes on 401k, even if you wait. The point is to contribute to it tax free while you're still working and have a high personal income. You do the Roth ladder when you've going into early retirement - your personal income will be low because you're no longer actively working. And because taxes are progressive you are minimizing taxes.

jamesmeador 5y ago

Most tax-loss harvesting strategies incorporate a re-buy of a similarly-performing but substantially different asset. Of course, selling an asset just to maximize tax losses is unwise, but in the context of diversifying your portfolio, tax loss harvesting has its place.

occz 5y ago

The suggestion in the link was to sell investments that are underwater and replace them with similar assets, in order to remain invested. Not similar enough to be considered a wash sale, though. It's not strictly speaking incompatible with buy-and-hold, from my perspective. I'm not an expert though, I don't even live in the U.S.

tingletech 5y ago

he had a 457 in 2013 when he wrote this. You can draw from that as long as you are no longer working for whoever you had the 457 with.

pembrook 5y ago

That’s not what tax loss harvesting is. Say you own VTI, a total US market etf. Then the stock market drops 20% next week. You can sell VTI and with the proceeds immediately buy VOO (s&p500 etf) within seconds. VOO and VTI are insanely correlated, so you’ve basically triggered a 20% loss for tax purposes, without actually selling any of your exposure. That said, it’s not as big of a value as you might think, since you’ve also stepped down your basis, and need to pay more capital gains taxes when you sell since you “bought” at a lower price now. Generally accepted wisdom is to TLH up to the yearly loss deduction amount (like 3k or so) and stop.