This does not work for
everyone, but it works for me, where my plan was to empty my 401k/Pension and buy
dividend stocks in a taxable account. Unfortunately, at 51, I can’t take out my money all at
once without the mandatory 10% penalty and ending up in a higher tax bracket
for a year (or 2 years if I bridge December/January withdrawals).
But what if I could buy all
those dividend stocks after my rollover to a traditional IRA, then take out dividends
every month (or weekly or annually, my choice) without penalty, and only paying
income tax on those dividends, which will keep me in a specific tax bracket during the process?
What if I could keep my money
in those stocks without having to sell them if the market is down, and let it
grow with the market, while dividends grow as well?
Then what if I could change
that amount of money during my trip to 59 ½ years old (alas, only one time
allowed to change the amount disbursed from the IRA).
Please utilize it to fit your situation, or at least poke holes in it, because I haven’t found many at all (cons listed at the bottom).
1. I
retire at 50 or 51. Kids are out of the house, debt-free, big
purchases paid for.
2. I Roll over my 401k and
pension into a traditional IRA with my broker. My
broker said they can help with initiating the rollover 2 months before
retirement.
3. I invest my IRA in the
quality dividend stocks I know and love to earn 4% yield on average (I may adjust up to 5-6% depending on the environment and my annual needs).
4. I leave some cash in the
IRA for the next 3 months of equal disbursements (most dividend stocks are
quarterly, so the ball really needs to start rolling after 3 months). There is room to play with this part, but I don't want to exceed expected dividends on my disbursements expected.
5. I file for a 72(t) (file
early to get equal disbursements each month) using this amortization table
to determine how much I *must* take out each year: https://www.bankrate.com/retirement/calculators/72-t-distribution-calculator/
I suggest a tax advisor setting this up, as if you take out too much or
too little, you will get the early penalty. Keep in mind the
“Reasonable Interest Rate” is 120% of the Fed’s mid-term rate. Right
now the rate is low, so in 3-4 years, it will hopefully bounce up for more
money per year. Fed’s midterm rates can be kept track of here:
https://www.pbgc.gov/prac/interest/historical-applicable-mid-term-rates
You get to choose from the previous 2 months which rate you want to use
(optimally the higher of the two – and even better if you wait for a good
one).
6. The amount I withdraw
each month, is equal to or less than the amount of dividends I receive
that month. That way I don’t need to sell my holdings in a down
market, like most people need to do. Since some months may pay more
than others, you will need to have that cash on hand in your IRA I talked
about in step 4. As long as dividends exceed your disbursements, and they eventually
will, this shouldn't be a problem.
will, this shouldn't be a problem.
7. Keep an eye on midterm
rates once starting the SEPP cycle. As your IRA weight and dividends
increase over time, you get one opportunity to change the amount,
so you can upgrade once during your 72(t) “lockdown”. Adjust
accordingly to stay in the tax bracket you want (https://taxfoundation.org/publications/federal-tax-rates-and-tax-brackets/). You can always
use HSA until 65 to hide money, and of course, charitable contributions,
which can be tricky with the standard deduction already eliminating your
taxable income. Please consult a tax expert for your specific
situation.
8. I continue to live off
these SEPP disbursements and my taxable dividend account with my
brokerage combined income until 59 ½. At that point I have other
options. At 72 I have to start taking money out… even if I don’t
need to.
Pros:
- I avoid the 10% withdrawal penalty. You can do this plan without the SEPP so you have no limitations, and just pay the penalty when you need money, it’s not a big deal sometimes, and I may consider it, so that way I can take out more as my dividends increase, it will depend how much money I need and how much is in my IRA at age 51.
- I never deplete my IRA holdings as long as I receive more dividends than I need to pay out per the IRS. My IRA is untouched until 65, it grows, and dividends increase, which makes it grow more as I reinvest.
- My money is safe from lawsuits in an IRA. This means I don’t have to run a business with ROBS, start an LLC, etc. I might want to get an umbrella insurance policy for my non-IRA holdings and house. Best rule is not to flaunt your wealth, as you become a target. ROBS or an LLC are good if you want to write off your house and expenses (like Musk does).
- I avoid market volatility (as dividends do). Since most people sell their securities to fund a 72(t), I am living off the dividends of my securities, and not at the whim of the value of my securities.
Cons:
- The amount is FIXED, and except in the
case of hardship, that is ALL I can take out. However I think I
figured out a way to work the system with my health share to get money out
for medical purposes from my IRA/HSA.
- Excess
dividends (due to inevitable increases) I can’t pull out, but I can
reinvest them in my IRA, which gives me more when I hit 59 1/2.
- Jumping
to the next tax bracket (in case the brackets change), a nice problem to
have if you have a lot in your 401k/SERP to allow for a large SEPP
disbursement, but depending on your situation, you might be able to use
your one time change to actually *lower* your disbursements.
Externally I could just liquidate a few underperforming dividend
generating shares, or donate a lot to charity.
This works anytime you leave your company: retirement, fired, quit, etc. While I am not yet ready to live with a lower income (kids need to leave the nest first), it is nice to know this is available to help pay the bills between jobs as layoffs can happen. You might be able to do it right now... there's a lot of people out there with larger 401ks than me.
The step my wife and I are working on now is being mentally ready for retirement. This means strengthening relationships (family and friends), planning for lifestyle changes, possible health scenarios, not tying personal worth to a job, etc. I suggest anyone retiring to prepare for the psychology as well! There’s books, read ‘em!
Please comment if you see a hole in my plan.
And now back to my regularly scheduled blog :)
Inflation is increasing. My personal portfolio is on a Bull streak, smashing the previous record of 7 months of increases. That isn't good. That means stock prices keep going up, and yields are going down. So I am taking a breather this month, and for the foreseeable future, from buying too much. I will continue to increase my Verizon holdings to match the others for diversity, then bring up some of the laggards. Meanwhile, I will work on the condo for the last remodel and some outdoor furniture, and pay down debts incurred from this. With my 72(t) plan, I'm feeling a lot better about my retirement income, and surprisingly, my 401k (which I still dislike, and the company that manages it).
The Great Reopening is in full swing, and the market has it already built in. Target, now a major player in the consumer discretionary sector, increased their dividend by 32.4%!! That beats Abbott from before. Truly a beautiful sight! Imagine getting a raise like that from work without a promo or job change. No, I can't imagine it either.
My annual dividend income is officially in the lowest U.S. income tax bracket.
Dividend Increases & Special Payouts
Uh, yeah..
- Target (NYSE:TGT) declares $0.90/share quarterly dividend, 32.4% increase from prior dividend of $0.68. A new record!
June Purchases:
FAST 3
VZ 15
ABT 9
That's all folks
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