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Last week, I came across a very interesting post over at physicianonfire.com about the value of money. Physician on Fire, or PoF as he likes to call himself, correctly pointed out that some money is more valuable than others. Here’s how he summed up this crucial point.
“If you’ve been earning and investing for a while, you most likely have money in a variety of account types. Some of those dollars are inherently worth more than others, depending on the current and future tax treatment.”
And as I read the rest of PoF’s post and marveled at how the concept of unequal money had heretofore eluded me, I began to feel a bit uneasy. Up until I read this post, I used to look at our portfolio and assume it was all ours. But that assumption was an appalling fiction. Some of our money is in accounts that we own exclusively, and some of it is in accounts that we share ownership with the government (i.e., the money in these accounts is taxed).
So how much of our portfolio does the government own? Is it 10%? 20%? Gulp, 30%?!
To find out, I delved into our portfolio using PoF’s superb value of money analysis as a guide.
Here we go.
How Much of Our Portfolio Do We Really Own?
In PoF’s value of money post, he ranks the value of money based on the account type. Money in accounts with less tax exposure, and thus less marred by co-ownership with the government, is deemed more valuable than money in accounts with more tax exposure. Here are his rankings from most valued to least valued.
Roth IRA Dollars: Money in a Roth is tax free when it comes to dividends, capital gains, and withdrawals. This is the most valuable money to have. No government taxation = no government ownership.
Health Savings Account Dollars: Money in an HSA, like a Roth, is tax free when it comes to dividends, capital gains, and withdrawals. There’s one important caveat, though. Withdrawals are tax free as long as they are used for healthcare. If they’re not, they’re taxed as regular income. Because there is a slight possibility that the government might be entitled to some of this money, it is ranked below Roth money.
Taxable Dollars: For our purposes, there are two kinds of taxable dollar accounts: savings and brokerage. Money in savings accounts is subject to income taxes (yes, interest is considered income). Money in brokerage accounts is subject to dividend and capital gains taxes. Fortunately, money in neither a savings account nor a brokerage account is subject to a tax when it is withdrawn. According to PoF, this is the second least valuable money to have. Any time interest, a dividend, or a capital gain is derived from money in a taxable dollar account, it’s time to pay for the cost of civilization.
Tax Deferred Dollars: Money in traditional IRAs, rollover IRAs, and workplace retirement accounts (401(k) and 403(b)) is not subject to dividend and capital gains taxes. It is, however, subject to regular income taxes once it’s withdrawn. This is the least valuable money to have. Any time you take money out, the state and federal governments get a cut. And depending on where you live and what your tax bracket is, that cut could be substantial.
And here’s what the Groovy portfolio looks like according to PoF’s money rankings.
| Money Type - Ranked Most Valuable to Least Valuable | % of Portfolio | Tax % on Dividends/Interest | Tax % on Capital Gains | Tax % on Withdrawals | True % of Portfolio Ownership |
|---|---|---|---|---|---|
| Roth IRAs | 17.42 | 0 | 0 | 0 | 17.42 |
| HSA | 1.09 | 0 | 0 | 0 | 1.09 |
| Savings | 10.48 | 15.75 | 0 | 0 | 10.48 |
| Brokerage Accounts | 39.42 | 15.75 | 5.75 | 0 | 38.29 |
| Rollover IRAs | 31.59 | 0 | 0 | 20.75 | 25.04 |
| 100 | 92.32 |
At first blush, the Groovy portfolio looks a little troublesome. Only 18.51% of our money is in accounts with the most favorable tax exposure. Over 80% of our money is in accounts with the least favorable tax exposure. And, horror of horrors, over 31% of our portfolio is in an account with the harshest tax bite. Ouch!
But upon further review, the Groovy portfolio holds up remarkably well. Thanks to being in the 10% tax bracket, we own a little more than 92% of our portfolio. The government owns a little less than 8%.
Let’s see how I came to this determination.
How I Determined the Government’s Ownership of Our Portfolio
Before I determined the government’s ownership, I made three assumptions regarding our brokerage and rollover IRA accounts. Here they are.
- We will never generate a capital gain in our brokerage accounts that is large enough to trigger a federal capital gains tax.
- We will never withdraw money from our rollover IRAs until we’re 59½.
- We will never withdraw enough money from our rollover IRAs to push us into the 25% tax bracket.
Okay, with these assumptions in mind, here’s how I determined the government’s ownership of our portfolio.
Roth money. This was easy. No taxes on dividends, capital gains, and withdrawals. The government has no claim on any of this money. Its ownership is zero percent.
HSA money. Again, easy. Because our HSA money is such a small amount (only 1.09% of our portfolio), it’s safe to say this money will only be used for healthcare in the future. The government will therefore have no claim on any of this money. Its effective ownership is zero percent.
Savings account money. This money generates very little interest, and the taxes on this interest is so trivial, it’s fair to say the government has no real claim on any of this money. Its effective ownership is zero percent.
Brokerage account money. This money generates roughly $10K a year in dividends. Again, the combined federal and state tax on these dividends ($470) is so trivial, it’s almost fair to say the government has no real claim on any of this money. And I say almost because unlike our savings account, our brokerage account money is subject to a capital gains tax.
The capital gains tax makes things very complicated. At the federal level, it’s highly unlikely that we will ever pay a capital gains tax on this money. Why? Because as long as our taxable income plus our capital gain is less than $75,900 (the top of the 15% tax bracket), the federal tax on this capital gain is zero. Right now, we have about a $65K spread between our taxable income and $75,900 threshold. In fact, if we sold every stock and bond fund in our brokerage accounts right now, we would realize a capital gain of about $30K. Well below the $65K spread.
At the state level, however, capital gains are treated like ordinary income. So if we sold a portion of a stock or bond fund and realized a capital gain, we would owe North Carolina 5.75% of that gain. Again, however, there’s very little capital gain potential in our brokerage accounts right now. But let’s say half of what we ever sell from our brokerage accounts is a capital gain. This would then mean that North Carolina owns 2.875% of our brokerage accounts. But since our brokerage account money is only 39.42% of our portfolio, North Carolina effectively owns 1.13% of our portfolio.
Rollover IRA money. We’ll make this simple. Even though some of the money taken from this account will face a 10% federal income tax, most will face a 15% tax. So we’ll just say any money taken from this account will incur a 15% federal income tax. Add to this the 5.75% North Carolina income tax, and any money withdrawn from this account will be hit with a 20.75% combined income tax. The federal government and North Carolina effectively own 20.75% of our rollover IRAs. But since our rollover IRA money is only 31.59% of our portfolio, the federal government and North Carolina combined own an additional 6.55% of our portfolio.
What Percentage of the Least Valuable Money Should Be in Your Portfolio?
Whew! That hurt.
Making reasonable assumptions about future withdrawals from our brokerage accounts and our rollover IRAs, and then using those assumptions to gauge the overall tax liability of our portfolio was freakin’ hard. Too many damn variables. And don’t forget, my analysis didn’t consider future Social Security payments and the oodles of money (haha!) this blog will soon be earning. Throw those two money streams into the picture, and the extent of our portfolio’s tax liability becomes even more complicated.
So what’s the takeaway? How much of the least valuable money should be in your portfolio?
If you’re going to be in the 10% or 15% tax bracket in retirement, try to keep your traditional and rollover IRA money to a third or less of your portfolio. Do that and you’ll be in good shape. You’ll own roughly 90% of your portfolio.
If you’re going to be in the 25% tax bracket or higher in retirement, try to keep your traditional or rollover IRA money to a quarter or less of your portfolio. PoF, for instance, has 17% of his portfolio in traditional or rollover IRA money. Failing to abide by this guideline will likely cede too much ownership of your portfolio to the government.
Final Thoughts
Okay, groovy freedomists, that’s all I got. How much of your portfolio do you really own? What percentage of your portfolio is comprised of PoF’s least valued money? And what do you think about my traditional and rollover IRA money guidelines? Is keeping this kind of money to a third of your portfolio or less a reasonable goal? I’d love to hear your thoughts. Peace.
You’ve truly opened a new perspective on how we view our portfolio and the government’s share in it. The insight you share, guided by PoF’s enlightening analysis on the value of money, brings a fresh and necessary light to the understanding of tax implications on different types of accounts. It’s shocking, the revelation that not all money holds the same value after tax involvement.
We have no money invested in Roth. We didn’t get financially savvy until after we had crossed over to the high income group. And no chance of starting one until we retire.
However, if we are actually paying more than nominal tax rates in retirement, it will be because we are earning some then. Not so bad in that case, I guess.
Agreed, BM. Not being eligible for the Roth and being hit with slightly higher tax rates in retirement are problems many people would love to have. Thanks for stopping by. The financially savvy, regardless of what age their savviness arrived, are always welcome here. Cheers.
Have you read “The Power of Zero” by David McKnight? I would highly recommend it. The book details strategies to get into the 0% tax bracket in retirement, including how to deal with social security payments. Getting to the 0% tax bracket isn’t feasible for everyone, but the concepts on how to lower your tax liability are super interesting.
Thank you, Live Free. Just added “The Power of Zero” to my reading list.
Good approach to knowing the true ownership costs. What I do is that I simply “deduct” a fixed percentage of my pre-tax assets based on estimated tax bracket in financial tracking spreadsheet so the government portion is already considered. Also, for MFJ status, you can shield upto $90K of dividends and capital gains practically federal tax free. That’s a lot of dough and if you are pushing beyond that figure, you must have a massive portfolio. Then, you ought to pay!
Thank you, TFR. It was a fun exercise. And great point about MFJ status. The capital gain loophole is awesome if you’re in the 15% tax bracket or less. Top of the 15% tax bracket ($75,300) minus your AGI equals the tax-free capital gains spread. Next year, Mrs. G and I will have an AGI of approximately $10K. This means we could have a capital gain up to $65K and owe zero federal taxes on that gain. Pretty groovy.
Running through my math it looks like the government can tax 60% of our portfolio while 40% of our portfolio has already paid taxes 🙂
Hopefully being in the 15% tax bracket that means that we own 91% while the government owns 9%. My math may be shaky but it’s a little early in the morning for me 🙂
Great post btw…really enjoyed reading it and really got me thinking!!!
Thanks, MSM. Agreed. It’s a nice exercise to run your portfolio through. I think as long as you’re in the 15% tax bracket or lower, you’re in good shape. What really complicates matters is when Social Security is thrown into the mix. My analysis didn’t go there. Perhaps I’ll do a follow up post and see how Social Security affects my portfolio ownership. I gut feeling is that the government will own more of my portfolio, but not a devastating amount. We’ll see. Thanks for stopping by, my friend.
When are they going to really up the IRA contribution totals for the year? This $500 every year or two is not sufficient. I would rather this go up than the 401(k). Great presentation of the data.
Excellent question, Brian. Mrs G has been saying that for years. Why is the IRA allowance so much smaller than the 401(k) allowance? The IRA allowance, including the catch provision, is less than a third of the 401(k) allowance–and that’s not even taking account of the company match. Hello! McFly! We supposedly have a savings crisis in this country.
Exactly. Forget about employer-sponsored retirement accounts (401k, 457b, etc.). Just give everyone an “Individual Retirement Account”, allow pre-tax contributions to some high level like 50K per year, and maybe we could reduce the need for social security.
Love the cut of your jib, Live Free. I don’t get it. Does our government want us to be dependent serfs?
I caught PoF’s article, and agree with you that it was original. Great “add” by applying the math to your $$.
Unfortunately, I didn’t have a Roth in my 401(k) for my first ~20 years, so I’m over-weight on Traditional IRA. Trying to make up for it now, but hurts contributing to a Roth while in a high tax bracket. Ah well, regardless, great way to look at your portfolio!
Tax Diversification. Important stuff!
I love your spirit, Fritz. And something tells me that despite your portfolio being heavily weighted with Traditional IRA money, you’ll handle this retirement thingy with tremendous aplomb. Tax diversification surely complicates retirement planning. The real complication as you’ve so eloquently expressed before, however, is healthcare. The next couple of decades should be interesting, my friend. Thanks for stopping by.
Oh gosh…why did you need to break it down like this. I must’ve missed that post by PoF. This does not make me feel good about our progress. Thanks for opening up my eyes to this. We will definitely incorporate this kind of thinking into our future financial steps.
Mrs. Mad Money Monster
Agreed Mrs. MMM. Saving is still a lot better than not saving. So tax-deferred accounts aren’t total villains. They’re just, as you commented, something to keep in the back of your mind. If you can manage to put more savings into a Roth or a brokerage account, great. If you can’t, not the end of the world. PoF’s post was a real eye-opener. Glad I caught it too.
I continue to be confused by Roths and Traditional IRA’s. I have both – accidentally. I opened the Roth and my dad yelled at me and was all like “WRONG! Never have faith in future tax breaks!” So now my money is mostly in a traditional IRA. Which is better… money taxed on the way in, or on the way out?! Presumably I am in a higher tax bracket now. So confusing!
I can’t say your dad is wrong. Government at all levels is deeply in debt and will therefore always be looking for new things to tax. How long will it be before the government turns its covetous gaze upon Roth IRAs? It’s such a damn juicy target! But then again, the American people can only take so much. Start taxing Roth IRAs and the Whiskey Rebellion might look like a game of tiddlywinks in comparison. If I were a betting man, I would say Roth IRAs are safe. A country that put Donald Trump in office is itching for a fight, and the politicians know this.
This post reminds me why I put as much into a Roth as I can. My wife & I need to start putting money away into an HSA as well, but, haven’t quite made it there yet.
Hey, Josh. HSAs are great, especially if you’re young and healthy. I wish I had access to one when I was younger. With just a little forethought and effort I could have easily put $500 a year into an HSA. Had I done that for 30 years, I would easily have $50K available to supplement Medicare. Meh.
I’m not terribly educated on investments, but I’ve always loved the Roth and the HSA. Now I know why. Thanks, Mr. Groovy. 🙂
LOL! A similar thing happened to Mrs. G and me. When we started investing we put a majority of our money into Roths and a brokerage account. Don’t ask me why we did this. We didn’t start loading up on our 401(k) and 403(b) until four or five years ago. Again, we have less than 1/3rd of our portfolio in tax-deferred accounts because of dumb luck.
Great analysis, and an important thought. Most of our investments are in brokerage and IRA. Or they are in real estate, which is harder to nail down the worth. We get taxed on profit but can claim depreciation and mileage when Jon does repairs, etc. I guess we need to do some math.
As long as one can stomach being a landlord, I think real estate would be a nice addition to one’s portfolio. As you and Michael point out, its peculiar tax advantages can definitely reduce the government’s overall claim on your portfolio. And more importantly, it’s a stream of income that is never going away. How handy will that be if the feds are forced to reduce Social Security and Medicare benefits in the future! Thanks for stopping by, Emily. I’m curious to see where you and Jon stand vis a vis the taxman. Let us know when you find out. Cheers.
Very interesting perspective. Currently, my goal is to defer taxes. So, we try to max out our 401k contributions.
Investing in real estate is a good alternative. If one purchases a property for $100K and it appreciates to $200k in a 20 year period and the individual dies and the kid gets the property, the cost basis for the property would be reset to $200k for the kid. Thus no capital gain taxes.
Now, the property would however become part of the estate and would be subject to estate taxes which is non existent for assets below ~$5M in value.
Looks like real estate would resolve most of the government’s ownership issue. And great point about the stepped up cost basis for your children. That’s a great way to mitigate the government’s tax bite. Thanks for stopping by, Michael. I really appreciate your perspective. It will definitely give people hope.
We’re hoping we can tuck our savings away and it will grow enough that the taxes will be irrelevant. If we withdraw less than 4% (ideally 0% for the first decade at least. We’ll make enough for our expenses but stop saving extra) then there’s a good chance that we’ll die with more than we have when we stop saving.
The best laid plans… well, one can hope, right?
I love it, Julie. If you can withdraw 0% for the first decade of your retirement, I don’t see how any conceivable government ownership of your portfolio will hurt you. That’s freakin’ fantastic.
I have very little in traditional myself, but let’s not kid ourselves, if the government needs revenue because the RMD withdrawal well dries up, they will find a way to tax the Roth’s or tax the taxable accounts more.
Maybe I’m just cynical. 😀
Not cynical at all, my friend. That $19 trillion and growing debt looms large. My suspicion is that they’ll do away with the Roth or cap the contributions to it before they start to tax it. We’ll see, of course. The next couple of decades should be interesting.
Nice analysis! The real value of course is when you compare this to actual $$ and the future value of all of these accounts a they keep growing. The actual relative % of government ownership will change based on your variable tax rate (based on the quantity of the investments you full out during retirement). A long way of saying that you can effectively significantly lessen the “government burden” based on how you withdrawal the money! Given that I am 32 I have done a similar analysis (thanks PoF! and FIG!) and the actual “government ownership” ranges between 4%-31% depending on how I would withdrawal the money. Great exercise for all of us nerds!
Haha! This is definitely a nerdy exercise. Excellent point about how government ownership is affected by withdrawal rates. And as long as you’re conscious of this variable, you should be able to take advantage of it. Thanks for stopping by, MM.
Excellent calculation! I think this is a good way to look at your portfolio, with the future in sight. I like the hands on calculation applied from PoF’s post. Thanks for burning an afternoon to show us how it’s done! Now I’ve got to find some time to look at my portfolio this way.
Thank you, Kraken. I just hope I got the calculations right. I was even going to provide another table with our projected Social Security benefits factored in. But my mind was fried. Perhaps I’ll revisit this topic in six months and deal with Social Security. What fun! I can’t wait!
There is some great software from LifeYield (https://www.lifeyield.com/) that can help you harvest and rebalance in a tax efficient manner. They have the world class capability in the space, but you’ll likely need to find one of the advisors they work with to get access. I can vouch for the principals and one of the founders is the son of a Nobel economist and brilliant.
Great piece and well dissected!
Thanks for the your kind words, Ian. And thank for the tip. Hopefully more financial advisers will make this kind of analysis standard practice for their clients. There are just too many moving parts for the average person to minimize the government’s claim on his or her portfolio. We really need the professionals to step up and fill this void.
Not sure how I missed that PoF post, but thank you for this one. I’m suddenly nervous about my allocation, although I do live in WA which has no state income tax, so that should ease the blow a bit.
Still shaking my head though – how have I never looked at money through this lens before??
“Still shaking my head though – how have I never looked at money through this lens before??”
You and me both, Ty. It seems so obvious now. PoF definitely deserves a pat on the back for this one.
OMG!! I totally never thought of it this way and missed PoF’s post on it. This is having me rethink my strategy.p – I want all the money to be MINE!! I have both a Traditional and Roth 401k at work. I used to split continuations then last year switched to all Traditional thinking it would save my taxable income and later I would convert it. But now I think I will switch to all Roth. I can keep what’s in the Traditional for the years I am past 60. I should have plenty to cover me in my Roth until then…especially with FI and that little 4% rule…I may never have to touch the trad anyway! Great post – mind blown.
“OMG!! I totally never thought of it this way and missed PoF’s post on it.”
^ Me too – time for some calculations and possible strategy adjustments.
Thanks Mr. Groovy for highlighting this.
Couldn’t agree more, Wes. PoF nailed it with his unequal money post. So glad I found it. The concept definitely wasn’t on my radar.
Haha! I love your rebellious spirit, Miss M. Obviously, Roths, savings, and brokerage accounts give you the best shot at keeping your tax exposure manageable. So if you can go all Roth, it something to seriously consider. Your ultimate nest egg will be smaller, but it will be ALL YOURS!
This is a nice exercise to see all your accounts from the viewpoint of taxes. Over time it looks like ours will change a bit like yours because of capital gains taxes, Roth IRA laddering, and moving things around in the future. It’s good to keep this in mind as you get close to retirement! I’m not keen on the government owning any of my money, but something we have to work with. Hopefully the tax code will still be favorable to early retirees when we get there!
I kind of knew there were tax ramifications to my portfolio, but they were always in the back of my mind. I think everyone should try this exercise at least once to see where they stand. When I began it, I was a little worried. I don’t like the idea of the government owning any of my money as well. But when I was done, I saw that the government’s cut was relatively small. It was also nice to see that I had some control over my tax exposure by timing capital gains and limiting withdrawals. But, man, did my head hurt. So many variables. And in 10 years, when we start to collect Social Security, it will be even more complicated. I have my fingers crossed. I think the tax code will remain favorable to early retirees, providing they have a low income. Thanks for stopping by, SS. I really appreciate your thoughts.
Great point! Many investment accounts are taxed (in different ways and at different rates), which makes some of that money “not really yours.” I prefer to invest in my Roth IRA. I’m not able to max it out yet, but I like its flexibility. I also don’t know what taxes are going to look like when I’m ready to withdraw those funds, so I prefer dealing with the devil I know and paying taxes upfront.
Unfortunately Mr. Picky Pincher’s job just switched their HSA to an FSA, so we have to re-learn the rules for that type of account. Now that we’re homeowners I’m looking for different ways to decrease our taxable income. I hate that we went up an income bracket this past year, so that means we’re taxed at a higher rate, which totally sucks.
Once we pay off our debt we’ll start to heavily invest. I’m leaning more towards index funds and real estate for our passive income.
Sorry to hear about Mr. PP’s HSA. I love the HSA. My company finally gave us that option three years ago. If I had it 20 years ago I’d really be set. Roths too are great if you can forego the immediate tax savings. Mrs. G and I gave real estate a try for a couple of years and decided it wasn’t for us. I think being a landlord is more about managing people than managing property. My supervisor at my government job was heavily into real estate and loved it. He was a great reader of people and loved dealing with problems big and small. Keep me posted on your real estate adventures. I’m curious to see how you find it.
Bummer on the switch from an HSA to a FSA.
FSAs (Flexible Savings Accounts) are not nearly as advantageous as HSAs. If you don’t use up your FSA each year, you will lose all the funds. Therefore, they cannot be used as an investment vehicle like HSAs.
Exactly, Live Free. I love the HSA. I’ve had it for 3 years now and I have over $13K in my account. If I had it my whole working life I’d easily have $100K in it. Sigh.
Almost all our investments are in Roth’s and Mr. Mt’s military pension is tax free. But we would take a big tax bite if we sold our rentals, and we still have to pay taxes on the rental income. Although with 5 kids, and such low taxable income, it’s a wash at this point. =)
Hey, Ms. M. It’s good to hear that our government is still taking good care of our vets. The feds could probably do a little better with the tax credits for children, though. Sigh. Quick change of subject. I’m not rubbing it in, but it was 69% here in Charlotte today.
Thanks for breaking this down, PoF post was great and got me thinking along similar lines. It’s to early for us to do the calculations, but we can keep playing the tax advantage game now and plan to be in the lowest tax bracket at retirement.
Hey, AE. I agree. The key is to save as much money as you can. If you can keep the tax-deferred portion of your portfolio below 33%, great. If you can’t, it’s not the end of the world. Tax-deferred money is still pretty much protected from the government’s ravenous maw if you’re income poor in retirement.
This is a good question to ask.
Same here in Belgium: some accounts are not mine until a certain age (and some taxation at that age). Things can change fast. Just recently, they started taking an advance on what I need to pay in 2043… Talk about a trustworthy government.
That is why I stopped a certain investment that has tax advantages, and thus disadvantages.
Hey, AT. You’re experience doesn’t surprise me. Western governments are heavily in debt and it’s getting worse. So they’ll always be tweaking the tax code in effort to eke out just a little more revenue. At some point I think they’ll shut down the Roth IRA over here. Sigh.
Very interesting analysis. I’ve never thought about my retirement money quite that way, but it makes a lot of sense. One of the “benefits” of having multiple health conditions is that your medical expenses provide a nice deduction to counterbalance your taxes. As a result this hasn’t been a big issue for me, but in the planning stages I can see where it would be important.
Hey, Gary. I never thought about this either. Kudos to PoF. It’s not a bad exercise if you got an afternoon to kill. Thanks for stopping by, my friend. Sorry about the health conditions. But at least you can use the expenses for those health conditions to counterbalance your taxes. Every once in a while, our government gets something right.
This is a very important analysis to run, no doubt, because the tax man will still get his. We’ll hopefully avoid some capital gains tax by staying in the 15% tax bracket and maybe consider living in a state that doesn’t tax retirement income. A lot of our money today is going into traditional retirement accounts that will be subject to income tax eventually though.
Agreed. It is a very important analysis. I only just started looking into this, so what I’m about to say in coming out of certain part of my anatomy. But I think as a general rule, the average person should limit his or her 401(k) balance to thirty-three percent of his or her portfolio or less. Once this threshold is reached, he or she should shift retirement contributions into Roths and brokerage accounts. I’m curious what the FI community thinks about this guideline. Thanks for stopping by, TGS.
I wouldn’t necessarily recommend against limiting tax deferral while working. Particularly for physicians and others in the higher tax brackets, it’s worthwhile to defer all the tax you can. For me, that’s $18,000 in a 401(k), $18,000 in a 457(b) and $6,750 in an HSA.
If you can do that, and still put enough away in Roth and taxable to make the tax deferred investments 1/3rd of your holdings, that’s a great thing, but to do so requires a generous salary and a high savings rate.
Thanks for the clarification, PoF. While keeping tax deferred investments to 1/3rd of your holdings is preferable, it may not be feasible.
I currently estimate the tax on my accounts at my current marginal rate. I realize it’s way conservative but this gives me both a margin of error and avoids the complex questions that are too complex for now (rates can change between now and then for example.). It’s highly unlikely you’ll be in your current bracket if you retire early since you can structure your pay outs as you have done. There are even some states that don’t tax retirement income.
Agreed. Better to be way conservative than be deluded about your true net worth. Having a comfortable margin of error in today’s environment is more important than ever. Our government is pretty ravenous and it’s always on the prowl for fresh prey (i.e., something that’s not already taxed). Thanks for stopping by, FTF. Always a pleasure.
Love the way you applied the concept to your portfolio and did the math, Mr. Groovy!
There’s a good chance we’ll land in the 15% tax bracket in retirement, too, making those qualified dividends and LTCG (mostly) tax-free. There are a couple states we could end up calling home – it’s worth looking at the state tax treatment of each. Bummer that NC taxes all of it.
Stay Groovy!
-PoF
LOL! Thanks, PoF. I got a headache this past weekend trying to figure it all out. But all kidding aside, I really liked your post on unequal money. It was an eye-opener for me. When we started our investing careers, we just put more money into our Roths and brokerage accounts than our workplace retirement plans. Don’t ask me why we did this. We just did. And thankfully it worked out. Tax-deferred accounts are great, but their tax bite hits you at the most inopportune time–retirement! And I hear ya about researching states for more favorable tax treatment. Mrs. G already has her eye on Tennessee. Thanks for stopping by, my friend.