Stop investing in tax sheltered accounts?

[krishan]

If you think you have enough in retirement accounts (SEP, IRA, ROTH) to live comfortably once you hit retirement age is there any reason to continue to use them as tax shelters? It seems like it would be more useful to invest in non-retirement accounts so you can use the money you are investing whenever you need it. Theoretically if you save enough you could retire early on your personal account. Then you could live off of it until you reeach an age when you can access your regular IRA type investments.

Does this make sense? If so, how much would you need right now invested in retirement accounts to feel comfortable that you won't need to continue to invest in IRAs. Please give the number of years to retirement and assume a standard return of 10% per year. Thanks,

Krishan

[SlowHabit]

Only you know the answer for this question.

For me, it's never enough.

[punkass]

[ QUOTE ]

For me, it's never enough.

[/ QUOTE ]

This is probably the correct thinking. Sure, if you save too much for retirement, that's not a problem. ROTH IRAs are easily handed down to loved ones after death. If you don't have enough for retirement, you're SOL. I would error on the side of oversaving by 100% before I began to think "I've saved too much".

[gull]

There's no such thing as too much in a Roth IRA. You can withdraw all contributions penalty-free.

[krishan]

[ QUOTE ]
[ QUOTE ]

For me, it's never enough.

[/ QUOTE ]

This is probably the correct thinking. Sure, if you save too much for retirement, that's not a problem. ROTH IRAs are easily handed down to loved ones after death. If you don't have enough for retirement, you're SOL. I would error on the side of oversaving by 100% before I began to think "I've saved too much".

[/ QUOTE ]

Well, let's assume you have stumbled upon internet poker and have become quite a solid player. Oversaving by 100% might not be too difficult. So if you think you'll need 2M at 59.5, saving enough with average returns to make 4M by 59.5 would mean you could start investing exclusively in non-IRA accounts right?

Krishan

[alekhine8]

With standard IRA/401(k) accounts, all you are doing is basically deferring taxes to some later point in your life. Your best decision is all based on your earnings and tax rates now versus in retirement. I am planning on being filthy rich when I am 60+ and assuming my tax rates are lower now than in retirement, so I am not taking advantage of these types of accounts (plus I get no 401k match at work and am electing to put money in standard taxable accounts so I can retire before 60 when retirement accounts can be tapped. Of course, if you are getting a 401(k) match at work, you'd be an idiot not to take advantage of that.

With Roth IRAs, you never pay tax on earnings and I would take advantage of these to the full extent allowable.

[zimmer879]

One thing to note Krishan is that taxes can have a profound impact on your CAGR depending on what type of investor you are. Let's say you're a frequent trader in the 33% tax bracket, with a $100k in a taxable account and a $100k in an IRA. Both accounts earn 10% annually. At the end of 30 years the IRA account will have a little over 1.5 million in it, and the taxable account will have roughly $650K., simply beacuse the money that you're paying in taxes every year isn't allowed to compound with the rest of your investment. Huge drag. If you aren't a frequent trader and employ a buy-and hold strategy then taxes will be much less of a factor.

Also note that you do have the option of making penalty free withdrawals from an IRA in certain situations (education, insurance premiums, etc) and can choose to withdraw early at a 10% penalty. Long story short, it's impossible to give you a complete answer because there are quite a few variables at work here.

[krishan]

[ QUOTE ]
With standard IRA/401(k) accounts, all you are doing is basically deferring taxes to some later point in your life. Your best decision is all based on your earnings and tax rates now versus in retirement. I am planning on being filthy rich when I am 60+ and assuming my tax rates are lower now than in retirement, so I am not taking advantage of these types of accounts (plus I get no 401k match at work and am electing to put money in standard taxable accounts so I can retire before 60 when retirement accounts can be tapped. Of course, if you are getting a 401(k) match at work, you'd be an idiot not to take advantage of that.

With Roth IRAs, you never pay tax on earnings and I would take advantage of these to the full extent allowable.

[/ QUOTE ]

Interesting philosophy. I think the tax advantages of being able to invest in pretax dollars are huge. I can't imagine not socking away enough to feel at least comfortable at 59.5.

Krishan

[krishan]

[ QUOTE ]
One thing to note Krishan is that taxes can have a profound impact on your CAGR depending on what type of investor you are. Let's say you're a frequent trader in the 33% tax bracket, with a $100k in a taxable account and a $100k in an IRA. Both accounts earn 10% annually. At the end of 30 years the IRA account will have a little over 1.5 million in it, and the taxable account will have roughly $650K., simply beacuse the money that you're paying in taxes every year isn't allowed to compound with the rest of your investment. Huge drag. If you aren't a frequent trader and employ a buy-and hold strategy then taxes will be much less of a factor.

Also note that you do have the option of making penalty free withdrawals from an IRA in certain situations (education, insurance premiums, etc) and can choose to withdraw early at a 10% penalty. Long story short, it's impossible to give you a complete answer because there are quite a few variables at work here.

[/ QUOTE ]

All excellent info. Also we should consider that the 100K IRA is pretax money and the 100K taxable account is posttax.

I'm planning on being a value investor. I was intrigued by Greenblatts magic forumla. I think in the end I'll just use his screen as a starting point for value investing. So the yearly capital gains shouldn't be too onerous.

I've already withdrawn from an IRA to buy my first house. It's not likely that I'll have a need to legally withdraw penalty free in the future.

I'm currently 28. After putting the rest of my SEP money into funds I'll have 110K invested in IRAs by the end of the year. Assuming 10% and 30 years I should have 1.5 Million by the time I can withdraw. How much more am I really going to need at 59.5? I know it's pretty ridiculous to guess at my needs when I'm retired. Number of children (currently 0), desires to travel, health problem can all play a huge part.

But I'm pretty sure there is a point at which trying to save money that I can use before I turn 59.5 outweighs the tax advantages of retirement accounts.

Krishan

[zimmer879]

[ QUOTE ]
I'm planning on being a value investor. I was intrigued by Greenblatts magic forumla. I think in the end I'll just use his screen as a starting point for value investing. So the yearly capital gains shouldn't be too onerous.

[/ QUOTE ]

You might find this interesting. Second link down is video of Greenblatt speaking at Columbia.

http://www6.gsb.columbia.edu/cfmx/we...munity/videos/