Whitecoat Faceoff: Unballing your Yarn

One of the most valuable things about writing regularly, is that it frequently brings into stark relief my own biases.

Many of the errors that I make come from a place of utter blindness.

Although I’d like to think of myself as a fairly empathetic dude, it becomes clear that I spend all of my time staring out at the world from my own unique lenses.

(The Hanson brothers stole my lenses.)

My understanding of the tax code is admittedly skewed towards the world of high earned-income earners.

My budgetary priorities are those of someone in the early accumulation phase of their life.

My idea of frugality, is pretty minor league.

And the list goes on.

But publishing my own little thoughts in this format opens me up to challenges from people with different perspectives.

Which is like trying on their lenses for a while and snapping out of my own unconscious myopia.

And one of my biases is that I’m an accumulator. So Right now I’m overly focused and saving more and investing it wisely.

As a result I post about legal tax avoidance, and saving money with travel hacking, and the variable value of spending.

But the supposed point of all of this saving is to one day build up a large enough nest egg to live off of the passive income that it will provide.

So what about then?

Which brings me to the Whitecoat Investor’s reason number six why you shouldn’t retire early.

You’ll have to figure out how to get your money out of retirement accounts before age 59 1⁄2. Both IRAs and 401Ks have a 10% surcharge if you want your money for early retirement. Now there are several ways to get at least some of your money out without the penalty, but a traditional retiree doesn’t have to deal with any of them.

Which is a good point. After all, as you know, I advocate for saving every dollar possible in tax-advantaged retirement accounts. (Because untaxed money is more valuable than taxed money and is thus able to more grow more efficiently and compound over time, which means you will need less time to reach financial independence saving pretax dollars.)

But how do you get your money out of your tax advantaged accounts, once retired,  without paying penalties?

The best article I’ve seen on the subject is this one from Mad Fientist. 

In it he focuses on two strategies.

1. The Roth conversion ladder. 

This approach involves converting a standard amount of money each year into a Roth IRA.

(And remember that if you keep your spending under control in retirement this conversion will be entirely tax-free.)

After five years, assuming that you keep the yearly conversions up, that same amount of money can then be withdrawn tax-free from the Roth  each year until age 59 1/2 (when the money can be withdrawn without penalty, regardless.)

Of course you will need enough accessible money your expenses during your first five years of retirement either in a taxable account or a 457 retirement account (my plan.)

2. Substantially Equal Periodic Payments.

It turns out the IRS allows you divide your retirement savings over the rest of your life expectancy into a series of equal payments.

As long as you withdraw precisely this amount of money at regular intervals until you turn 59 1/2 , you will not have to pay any penalty on it.

-Other ways of accessing your retirement money not mentioned in The Mad Fientist article are:

3. Withdrawing from your 457 plan. (There are no penalties for withdrawing from this type of plan once you have separated from your employer. )

4. Withdrawing from your health savings account for previously deferred qualified medical expenses.

5. Withdrawing (at least 5 years old) principle from your  backdoor Roth IRA.

6. Withdrawing principle from your (at least 5 year old) conventional Roth IRA.

7. Withdrawing from previously accumulated cash value life insurance policies. (If you don’t know what this nasty financial product is pretend you never read this. It is a terrible product to invest in. Really.)

So as Whitecoat Investor admits, there are a lot of ways of accessing your money penalty free.

Which leaves us with really only the-“but the traditional retiree doesn’t have to deal with any of them”-part of his argument.

Which I think is pretty easy to pick apart.

Point 1: Unlike the yet-to-be-59.5 year old traditional retiree, the early retiree does not work anymore.  Given this fact, I think It’s safe to assume that he has plenty of time to spare a few hours of each year managing backdoor Roth conversions.

Point 2: The early retiree is flipping financially independent! Complaining about the burden of managing your own stash in early retirement reminds me of the high school girl who loudly complains to her friends about being “too thin.” Everybody resented that girl.

So the key points here are,

• There are many clever ways to access your tax-advantaged retirement funds prior to age 59 1/2.
• From this realization it follows that you should load up your tax advantaged retirement accounts while young and employed to the greatest extent possible for you.
• There still aren’t too many convincing reasons not to aspire to achieve early financial independence.

If you’d like to see the prior posts in this series:

https://www.milesdividendmd.com/white-coat-faceoff-too-much-saving/

https://www.milesdividendmd.com/whit-coat-face-off-social-security/

https://www.milesdividendmd.com/white-coat-face-off-obamacare/

https://www.milesdividendmd.com/death-with-benefits/

 https://www.milesdividendmd.com/white-coat-face-off-playing-catch-up/