Why I Hold 100% Of My Equity Investments In A Taxable Account

This post is long overdue, but better late than never. Over the last couple years I’ve answered many questions regarding the status of my equity holdings and whether or not these holdings are in a tax-advantaged account (like an Individual Retirement Account) or in a taxable brokerage account. I hold 100% of my equity investments in a taxable account and I’m going to explain why in this article. Before I get started, however, I’d like to point out that this is one of those very rare occasions where I’d prefer you do not as I do. For almost everyone out there I’d highly recommend maxing out the tax-advantaged accounts you have available to you (401(k), IRA, Roth IRA, etc.). With this article I hope to accomplish a couple things. First, I’d like to have a one-stop resource for anyone who has questions as to the status of my tax exposure, and secondly also provide some insight for any who are considering a similar strategy.

My employer doesn’t offer a 401(k) match. 

If my employer offered a match on the funds I contributed towards a work-sponsored 401(k) retirement account I would likely take advantage of that, as this is essentially “free” money. It’s a guaranteed return on my investment, up to the match. However, my employer doesn’t offer a match. Furthermore, the funds they offer are poor in choice and high in fees. Due to this, I have opted out of investing in any of these funds choosing instead to focus on my Freedom Fund.

I’m going to be accessing my dividend income extremely early in life. 

This is where my situation is extremely unique, and why I don’t recommend you necessarily follow in my footsteps here. I’m likely going to be accessing the passive income my portfolio throws off by the time I turn 40. That’s less than nine years from now. What I’m looking to do is to maximize my chances of retiring early off the dividend income my portfolio can provide, and as such I need to throw every free dollar I have in high quality investments that will provide accessible and liquid passive income in less than a decade. If I were to deviate from the taxable account and start concentrating on an IRA and/or Roth IRA I would have less free cash flow with which to invest in the portfolio that’s actually going to be sustaining me once I’m no longer working full-time.

Furthermore, my investment horizon is rather short. This doesn’t give the tax-advantaged account(s) the full access to the power of tax-free compounding over many decades that investors who otherwise choose to work a traditional 30-40 year career will have. Say I wanted to open a Roth IRA tomorrow. I’d have nine years to contribute the maximum, currently at $5,500 per year. That’s $49,500 that I’d be contributing towards a tax-advantaged account. Certainly not chump change, but just not the kind of capital that is going to make a big difference over the next nine years in terms of tax savings. However, if I instead continue to funnel those funds into my taxable account that’s $1,750 more per year in annual dividend income that I’ll have access to (at a 3.5% yield) if calculated as a lump sum. That income will likely be higher because it’ll be invested over the course of almost ten years. On the absolute low end, that’s an additional $145 in monthly income. For someone who plans to become financially independent on a frugal budget, that makes a big difference for me.

Dividends are tax-efficient all by themselves.

This is something that is rarely discussed, but an important part of my strategy. Currently, if you’re in the 0% or 15% marginal income tax rates here in the U.S. you’ll pay 0% in taxes on qualified dividends. That’s right. 0%, folks. That means even if I have my portfolio exposed to the full force and power of the IRS’s taxing ability, I’ll still pay 0%, or close to 0%, on my dividend income assuming I meet certain income criteria.

Qualified dividends are normally dividends from paid by a U.S. corporation or a foreign corporation that trades readily on a U.S. exchange (such as ADR shares), while also have meeting certain holding periods. REIT dividend income, for instance, is not considered qualified dividend income. 

Currently, in order to cross the 25% marginal income tax bracket you’ll have to earn $36,251 per year. That means as long as I earn under $36,251 per year in qualified dividend income I’ll pay 0%. Now, this is in theory and not reality as I already have some exposure to real estate investment trusts, and the dividends they pay will be taxed as ordinary income. However, my overall income will still be so low that I’ll pay very little in income tax when all is said and done.

I’m currently planning on becoming financially independent by 40 years old so that I can quit the rat race and focus on my passions. As such, I’m not going to have a seven-figure portfolio that I’ll be drawing income from. As it stands, I’m forecasting somewhere around $18,000 in dividend income by the time I’m 40 based on where I’m at right now and the progress I’ve made thus far. That means it’ll likely be many years before I cross that $36,251 threshold to the 25% marginal income tax rate. Even then, qualified dividends are only taxed at 15% (the same as long-term capital gains). Of course, it’s impossible to forecast tax rates and rules over any kind of time period, let alone a decade from now. However, I think it’s safe to say that this tax bracket won’t be lowered significantly.

My exposure to taxes on dividends will be limited.

Again, I have about nine years or so to go before I’m living off my dividend income. Hopefully, it’s an even shorter journey than that. Due to this, the overall time that I’ll be exposed to taxes on my dividends will be the same. So if I live a life equal to the U.S. life expectancy of 76 years, I’ll have about 12 years of exposure to taxes on my dividend income (based on my journey) and about 30 years of non-exposure (from 40 years old on).

Furthermore, and more importantly, the amount of dividends I’ll be receiving as I ramp the passive income up and get closer to living off of it will be much smaller than the amount I’ll actually be receiving once I’m living off of them. One of my goals is to receive $3,500 in dividend income during the calender year of 2013, which I’m on pace for right now. Since I’m over the 25% bracket for some of my income right now, I’ll be exposed to 15% taxes on my qualified dividends. That adds up to about $525.00, factoring out the very little REIT dividend income I’ll be receiving this year. Again, not chump change but I’m looking at the long-term. My dividends will likely increase on the order of $1,200-$1,500 per year until I turn 40. So by the time I’m receiving serious dividend income in the range of $1,000 or more per month I’ll be close to living off of it. And then I’ll be dropping full-time work and hence my income will significantly drop, meaning my tax bracket falls and I’ll be exposed to very little in dividend taxation. Plus, I live in a state (Florida) that does not tax dividend income.

Taking income from a qualified retirement plan before the normal withdrawal age is difficult.

It is possible to withdraw funds from a qualified retirement account like an IRA or Roth IRA before 59.5 years old, however these strategies appear to be a lot easier on paper than in reality. For instance, you can invoke rule 72(t), also known as Substantially Equal Periodic Payment (SEPP), to withdraw funds from a qualified retirement account without having to pay early distribution penalties. However, these withdrawals are still subject to ordinary income tax. Another way to access qualified retirement account funds early is withdrawing Roth IRA contributions. You can withdraw contributions from a Roth IRA at any time penalty-free, however you won’t be able to access any investment gains.

Now, if you’re the type of person who likes to deal with the IRS more than you have to, then a SEPP would probably be right up your alley. If you’re also the type of person who likes to keep extremely accurate records, more paperwork than otherwise necessary and also keep up with your amortization methods, life expectancies and changes in rules that the IRS may publish at any time then the SEPP would probably be the way to go. However, for all intents and purposes I’d prefer not to expose myself to the bureaucracy a plan like this involves, especially when, as discussed above, we’re talking about ~$50,000 in contributions. And although the SEPP is a method you can use to access funds from a qualified retirement account without paying early distribution penalties, this rule could be changed in the future. I’d rather not hinge my early retirement plans on IRS rules like this.

Although I don’t plan on using tax-advantaged account, that doesn’t mean you shouldn’t either. 

I’m on a path that is rather unique. Most people out there don’t share my passion to retire from full-time work so early in life, and there are even fewer who are interested in being as aggressive or extreme as I am. Because of this, I highly recommend tax-advantaged accounts where possible for anyone who has access to them. However, if you do choose to open a Roth IRA, IRA or 401(k) my recommendation is to let those funds compound tax-free until you’re old enough to withdraw them without extra encumberment. The best thing to do would be to save and invest enough to where you could simultaneously fund a taxable account and a tax-advantaged account(s) so that you can retire early and live off the taxable account’s funds until you’re old enough to start withdrawing from the tax-advantaged account(s). Think of this like a rocket. You’ll get the initial explosive momentum to the stratosphere from your taxable account funds, and then that extra boost from the tax-advantaged account(s) to get you into outer space in your older years.

However, this all being said if you do really share a passion for becoming financially independent as soon as humanly possible I would recommend eschewing tax-advantaged accounts to focus solely on a taxable account. This way you focus 100% of your available resources on maximizing your potential for building passive income. This could be done via investing in high quality dividend-paying companies like I do, or investing in real estate or even investing in index funds. If you make a middle class income and truly want to become financially free at a very early age (40 or younger) then I believe you’d be best served putting everything you’ve got behind investing in an account that will be accessible to you whether or not the IRA changes tax-advantaged account rules or not. Besides, for every year you can avoid working and instead focus on your passions you’ll be avoiding a lot of taxes on your income anyhow.

For me, it would make no sense to try and simultaneously build a taxable account and tax-advantaged account if it meant I’d have to work for another year or two and face continued taxes on both my earned income via full-time employment and those dividends the taxable account are supplying.

How about you? Focusing on your taxable account or tax-advantaged accounts? Or both?

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Edit: Corrected Roth capitalization.

Comments

  1. says

    Your approach is sensible, given your goals and time horizon. In my case, I don’t have a strong desire to retire by a specific age because it is only now that I’ve entered the main stage of my career. I’d like to take some time to establish myself in this stage and see where it takes me. Thus, I haven’t given much thought to *when* I will retire.

    However, I think my investing strategy will still put me in a position to retire early (if I choose to do that at some point). Even though I have some investments in a Roth IRA, the bulk of my holdings are in a taxable account, and I don’t see that changing anytime soon. If I aggressively grow my taxable account, then I would eventually give myself the *option* of early retirement, which would be a nice option to have available down the road.

    • says

      DGM,

      Having the option of early retirement is definitely a nice option to have, even if it’s something you don’t take advantage of. :)

      I’ve been doing what I do for about 7 years or so now, so the honeymoon phase is long over for me. It’s just the daily grind now.

      I certainly hope that you find more passion in what you do. I tend to find solace or enjoyment in things that pay little or nothing at all, unfortunately. I guess that’s why I’m so aggressively pursuing financial independence.

      Keep up the great work!

      Best wishes.

    • says

      Dividend Mantra,

      I am actually in a somewhat similar situation as you, but I decided to ramp up my 401K, Roth and Sep IRAs to the maximum. I am putting remainder in taxable.

      http://www.dividendgrowthinvestor.com/2013/04/six-dividend-paying-stocks-i-purchased.html

      http://www.dividendgrowthinvestor.com/2013/05/twenty-dividend-stocks-i-recently.html

      The reason – For every dollar I put in 401k and Sep IRA, I save over 30 cents. Plus, I won’t pay tax on dividends/capital gains until I cash out..

      I am different than you, in that I have a decent base in taxable accounts, that pays 50 – 60% of my monthly expenses. Given yields of 3 – 4% and growth of 6 – 7%, plus some contributions, I should be able to be FI/retire/ in 6 years.

      On the other hand however, I would also have another layer of assets (401k, sep ira, roth) to protect me in case things happen – lawsuits, divorces, (or the biggest risk – if I go crazy and do something stupid). I hope not to touch it, but could easily withdraw if I need to..

      Third layer – you might get some partial social security check 25 – 30 years after you retire..

      Fourth layer – you are likely going to earn income from wages/consulting ( 1099) after you retire, easily covering 20 – 50% of expenses. Thus, I highly doubt you would live exclusive off dividends – this is why having funds in tax-deferred accounts makes sense

    • says

      DGI,

      Thanks for stopping by!

      I remember you recently talking about how you just started switching some of your resources towards retirement accounts after focusing exclusively on taxable accounts for quite some time. I see it’s treating you well so far. Glad to hear it. And that’s awesome that you’re only 6 years away from financial independence. You’ve got me beat there for sure! :)

      I’m not too worried about lawsuits or divorces. I plan on not getting married, so I won’t have to worry about a divorce judgement against me or possibly losing half of my assets. That’s not the primary driver behind my decision, but it’s also something that makes it easy to do what I’m doing. As far as lawsuits I think it makes sense to buy umbrella insurance for something like that. I’ll likely look into that once my assets are large enough.

      I agree with you on the layers though. I do plan on receiving some SS income once I’m in my 60′s, in anticipation that the SS administration is still solvent. We’ll see, right?

      I also agree with you on likely earning some income once I’m FI. That’s kind of a wild card. I’m quite confident it will be some time before I cross over $36k in dividend income, but side income could bring me close to that level quicker than I had anticipated. However, this is a good problem to have! :)

      Thanks again for stopping by and sharing your insight. Much appreciated.

      Best regards!

    • says

      DM,

      I used to think exactly like you until it hit me while doing 2012 taxes that my largest expense was not lodging, transportation, flat screen TV’s but taxes. I think that if you discussed your monthly income in gross terms, rather than net, you would see what I am talking about. That’s why i am maxing out 401K and SEP IRA. I am also doing some ROTH. When I put $17,500 in a 401k, I save $5,250 in taxes. Thus, i end up with 22,750 to invest, not 17,500. Paying less taxes, means more money to invest.

      Essentially, by maxing out retirement accounts, I am ending up with 30% in more money, that is compounding tax-free until I need it. I say I might be FI in 6 years, but things can change and I might earn more income.

      What if I write a book on DGI that becomes a bestseller? Or what if I get a show on CNBC about dividend investing (why not)? Or what if I start a low cost dividend mutual fund? Or what if my site become big and earns me some income for a change?

      You also need to think about your life after retirement. You would likely earn $20K dividend income at age of 40. It would likely double by age 50, then double again by age 60. This is when you would have SS, dividend payments etc.. And you might end up paying a lot in taxes..

    • says

      I do understand your point though too. Investing in 401K, and IRA’s seems more restrictive and it is. But I do expect to earn side income if I were to reach FI in 6 years..which would pay a portion of expenses. If I don’t, then I guess I would tap into roth/ira etc..

    • says

      DGI,

      Well, I certainly hope you write that bestseller dividend investing book! I’d love to read it. :)

      I have a question for you. See, for me the 401(k) funds are high in fees (over 1% last I looked), limited in choice and I lack an employer match. Do you get an employer match? Would you still recommend investing in a 401(k) even without the match?

      For me, 401(k)’s are the most limiting account of all, but can be quite useful if you get the “free return” in the form of a match. I think, overall, the ROTH is most flexible of all for someone that is interested in early retirement/early FI.

      Thanks for sharing your thoughts on this. :)

      Best regards.

    • says

      I understand your situation is different, but you should never say never as a rule ;-)

      The thing I hate about 401K investing is that I am limited to low cost index funds. So if I buy S&P 500, Russell 2000 and EAFE, I pay between 0.03 – 0.10%/year. I find investing in mutual funds difficult,because I am essentially only looking at price. I do not have the positive reassurance by dividends directly deposited in my account. The funds do pay dividends, but in a quirky way the dividends paid are immediately reinvested, therefore not giving me the option. The total returns of my SP500 fund are almost identical to SP500 index, so I know they are not cheating me out of the dividends ( and the reports I review show they are not, unless auditors are lying)

      I do get a small match on salary. But I view 401K as a tax arbitrage play you can use in your situation. Say you decide to call it quits on Dec 31, 2013. You do not expect to earn W2 income in 2014, just dividends.

      What you can do, is simply contribute say $10,000 to 401K in 2013. Just buy a stock fund that closely approximates something like an S&P 500 for example. With this exercise, you are saving $2,500 on taxes, which is money which will flow into your other aspects of life. Then in 2014, you can either:

      1) Withdraw the whole $10,000, pay 10% penalty, ($1000), and come up $1,500 ahead ( I assume no wage income, and first $10K is taxfree essentially ( standard deduction + personal exemption)

      2)Roll into IRA, and invest in dividend paying stocks. You can either withdraw dividends or reinvest them. If you withdraw dividends, you can go the SEPP route, or you can simply withdraw them and pay the 10% penalty. Even if you have $100K in 401K, and you withdraw $3K in dividends and pay ordinary income taxes using SEPP or pay 10% penalty, you are still ahead.

      3)Not sure what tax laws say about rolling 401K balance into a Roth IRA on a partial basis, but with a $10K balance, you are unlikely to pay that much in taxes on a Roth IRA rollover. If you have a $100K 401k balance, and decide to roll into a ROTH, I am not sure if you can roll say $10K per year for example, (in order to avoid having the whole $100K taxed at high rates, you want to do it in $10K increments)

      4) You can keep it in 401k, but that’s not the purpose of this exercise

      PS, the $100K figire in 5 years is what I expect to have saved in 5 years by maxing out my 401K.

      PS2: I know it seems like you need to jump through a lot of hoops to get your money. But if you end up with more money, without sacrificing investment quality in the process, I think it is well worth it. You spend a lot of time and stress earning your money. By utilizing tax deferral strategies, you are making your savings process more efficient, and potentially keeping more money for yourself. Why wouldn’t you want to keep more money for yourself?

      You work hard for every dollar man. You moved to a cheaper location closer to bus station to save a few hundred dollars. By being more tax efficient, you can generate savings, which are going to match or exceed the savings you are currently experiencing with the lifestyle choices you had made.

    • says

      DGI,

      Thanks for your elaborate thoughts. I know you stay busy, so I do appreciate it.

      I’ll have to give it further consideration. I did the math once, and it didn’t work out well for me because my employer offers no match and we mainly just have target-date funds available to us with fairly high fees. I remember doing the math and it not working out very well for me, but I was also making a bit less back then. Of course, it’s hard to know exactly how it would all turn out as I don’t know how much I’ll be making years in the future, what my tax rate will be or even what tax rates across the board will be. Tough to forecast something like this. And, of course, I still have the issue where if I start concentrating in other areas I’ll be less and less likely able to retire by 40. You’re a little further ahead than I am in that regard. :)

      Thanks again for the discussion!

      Best regards.

  2. Anonymous says

    Another option would be that after you retire at age 40, you could get yourself a fun little part time gig that pays around 10K per year.

    You could then put the max each year into a Roth IRA for 20-years while living off whats left over and your freedom fund dividens. Then when you 60… Talk about a tax free pay raise!

    Love you blog.

    Scott

    • says

      Scott,

      Well, the problem is finding a fun part-time job that pays $10k/year. The jobs that pay well are typically full-time or nothing at all. Most of the part-time jobs out there are very low paying and are seriously lacking in the fun department. Not to say that they aren’t out there, simply that it’s tough to scale down appropriately and still be rewarded fairly.

      I wouldn’t mind coasting into financial independence with something part-time if the right opportunity came along. Under that plan I wouldn’t retire at 40, but I’d have a lot more time on my hands earlier in my life. I’ve considered partial financial independence at 35 years old or so where I work part-time and start to withdraw my dividends, but again the right opportunity would have to come along and I don’t know if that’s going to happen.

      Thanks for stopping by. And great stuff thinking outside the box. :)

      Best regards!

  3. says

    I’m currently investing my my employer’s 401k up to the match. The rest is going into taxable accounts because I want to build up enough income to cover my basic living expenses as soon as possible. I am thinking about changing up things in the future, but I don’t know which direction I’ll take my savings. On one hand, I might try something traditional like maxing out an IRA and 401k. On the other hand, I might start investing in real estate provided that I can find a reasonable market to invest in.

    • says

      MFIJ,

      I can’t blame you for collecting the employer match. I’d likely be doing the same thing if I could.

      The great thing with your situation is that you have all of these options open to you. You’re flexible and you can take advantage of opportunities as they come, be it real estate or retirement accounts. That’s the flexibility that living below your means and investing intelligently affords.

      Take care!

  4. Scoonie says

    I think Roth IRAs are great and would highly recommend them to most people. I have about $45,000 in my T Rowe Price Roth IRA and will continue to contribute the maximum amount each year. Being able to take out all of that money tax-free after I’m 59 1/2 will be a huge help. By the way, I would highly recommend T Rowe Price, and especially their Health Sciences and New Horizons funds (among quite a few others that oonsistently beat the market).

    I also contribute to my company’s 401K, and take advantage of their 50% match up to 6% of my income. This is an automatic 50% return on my money, no matter what the market does. I will not be able to retire at 40 like Jason, but I do hope to retire in my 50s.

    • says

      Scoonie,

      I’m with you on recommending a ROTH to most. I think they’re a great vehicle to build wealth without the drag of taxes over the long haul.

      That’s great that you have a solid match from your employer. If I had a 50% match up to 6% I’d also take advantage of that, as it’s essentially “free” money.

      I hope you’re able to retire in your 50′s! That would still be below the norm, and you’d be young enough to pursue whatever passions you might have on your plate! :)

      Best wishes.

  5. says

    Thank you for the post. We have contributed to our 401k, 403b (we have great employer matches) and Roth for years. You really made us stop and think since we are retiring early we never considered where the money would be coming from for years 50 – 59 1/2. I certainly do not want to deal with the IRS rules.

    • says

      Ginny,

      If you have sizable assets within retirement accounts you can definitely access some of them early, but it’s easier said than done. That being said, the ROTH is the easiest as you can take out contributions at any time. If your contributions are pretty large it’ll likely be years before you start digging into gains, at which time hopefully you’ll be old enough to withdraw them without penalty.

      Cheers!

  6. says

    Makes perfect sense DM,
    Accessing the money without penalty (before age 59.5) requires you to do what you’re doing. My last employer’s 401k option was horrible, so better to go it alone.

    I know you’re not much for trading, but you may want to take a look at CLMS. The CEO and Board have been buying at higher levels and it’s at the lower end of it’s normal range. It has 5 times as much cash as debt, and trades for roughly twice free cash flow. Plus it has nearly a 5% dividend…..though I think they will likely scale that back by 20% or so.

    I took an initial position today and am looking to add more as it drops below $10. Check it out and keep up the good work.

    fastletter.blogspot.com

    • says

      The Fast Weekly,

      I’ll have to take a look at CLMS. Never heard of it before. Although if they’re interested in cutting the dividend I’ll have to pass on that. Certainly a nice yield, however. I don’t have any exposure to asset management firms, but I’m aware that there can be some solid returns with some of them.

      I wish you the best of luck with this investment! I’m definitely tapped out for the month. :)

      Take care!

    • Anonymous says

      DM,

      Thanks again for all your inspiration! I picked up some ARCP today at $12.97. I’m still in awe about the 0.91 (7%).
      I appreciate you sharing your recent purchases and explaining in laymen terms why you picked a particular stock.

      I’m only contributing to my 401K because there is a match and they have some decent funds to choose from – the funds I’m in are all index funds with very low expense ratios ranging from .05 to .10. I’ve also been contributing to a Roth. I’m hoping to retire by 50 and will use the dividend income from my taxable accounts to live off of and then when I turn 59 1/2 have some additional income from the aforementioned accounts.

      Please don’t ever stop writing! You have a real talent here and I think it will only continue to get better and better.
      Sincerely,
      Nomad

    • says

      Nomad,

      Glad to see you as a fellow shareholder with me in ARCP! May it serve us both well over the long haul.

      That’s great that you’re contributing to your 401(k) and getting the match. If I were looking at a match I would be doing the same thing. It makes no sense to give up free money.

      I really hope you’re able to retire at 50. That gives you probably 30 or so years of freedom with which to do as you please. I wish you the best of luck!

      And thanks for the kind words. I’m glad you enjoy the blog and my writing. I put a lot of time behind this site and the content I provide, and I take a lot of pride in what I produce. So to hear that people really enjoy it makes me very, very happy! I hope you stick around. The best is yet to come.

      Cheers!

  7. Anonymous says

    Hello Jason,

    Thanks for your reply.

    I would recommend straight commission sales, or starting your own business. (But make sure it’s something that can be done from anywhere in the world so you’re not locked into a market so you can travel)

    This way you would be in control of your time, work only as you want, with whom you want, and maximize your earnings as to be not stuck trading your hours for a low wage.

    Something like 50% of retired people have a small work from home type business.
    This blog just might be what takes you there someday.

    -Scott

    PS: Our portfolo’s are neck and neck. I’m 9-years older though. If I would of found div growth investing 10-years ago I’d be set. I set myself back a good bit with investing in rental properties in my for search for pasive income. Never again $5 in the front pocket $6 out the back. One thing that I love about dividend stocks. Coke & J&J dosn’t sue you.

    • says

      Anonymous,

      I hear you on the rental properties. I don’t have much of a desire for rental properties either, which is why I’ve been pursuing REITs on sale lately. I’ll take my monthly “rental” income this way, instead!

      I’ve never really thought of starting my own business, but I suppose this blog could qualify in some way. I’ve got a good friend, and fellow blogger, that is very interested in becoming an entrepreneur. I’ve always been more inclined to let those that are more interested, and, perhaps, more well suited to business to run operations and send me a piece of the profits. That’s why dividend investing works so well for me. But, that could change. You never know, right?

      I appreciate you stopping by!

      Take care.

  8. Spoonman says

    I like the way you wrote this post, it should be abundantly clear to newcomers that your situation can be very different from theirs. Everyone should tailor their decisions to their specific situations.

    Right now my wife and I are contributing enough to our 401k’s to meet out employer’s matching. The other reason why we’re contributing is to lower our tax liability a bit because we are currently in a high tax bracket. We don’t contribute more because our retirement horizon is about 16 months.

    I haven’t yet decided to implement a SEPP or slowly convert my rollover IRA into a ROTH. I am tempted to implement a SEPP because it would provide me with some spending money for occasional “wants”, but I haven’t decided if I am willing to deal with the bureaucratic gymnastics. Maybe in FI I will have enough time to think about a SEPP very carefully.

    • says

      Spoonman,

      Absolutely. We all have unique situations, and we must do what best suits those situations. This strategy works for me, but it likely will not work for many others.

      I’m really jealous of you! Your horizon is now just 16 months out? That’s super exciting stuff. Can’t wait to hear how things go in FI. :)

      I would love to hear of your experiences if you decide to implement a SEPP. It seems overly complicated to me, and even if it’s not I’d rather avoid the egregious paperwork and tracking this plan requires.

      Take care!

  9. says

    I know this may be a bit off topic but it got me thinking. If one retires early are they still eligible for medicare and social security benefits once they reach 65 years of age?

    • Spoonman says

      I think if you’ve accrued enough “points” in your working years, then you can collect SS and medicare. I think you need something like 50 points, but I don’t remember how many points per year you can accrue.

    • Anonymous says

      Here’s the sad part after you paid into your medicare all these years – I read if you go to live abroad you can’t use your medicare outside of the U.S.

    • says

      Captain Dividend,

      You need 40 credits to qualify for Social Security benefits. You earn 1 credit for each $1,160 in net earnings per year, up to a maximum of 4 credits. So, working for 10 years full-time will get you your 40 credits and you’ll be in. However, your payout is based on your highest 35 years of SS-taxed income. So, having a couple decades worth of $0 will hurt your ultimate payout.

      I hope that helped. And I definitely recommend you do a little research on this one, as I could be wrong on that information. That’s as I understand it.

      Best wishes!

  10. Jason says

    I believe you’re making a pretty big mistake by not taking advantage of at least an IRA. I commend your idea of living solely off dividends because it will represent a small withdrawal rate, but don’t lose sight of the big picture. You can get to your FI sooner by taking advantage of an IRA, or have a higher safety margin once you’ve arrived.

    Lets take a look at some numbers. Lets say you need $1500 a month, 3.5% dividend rate, and ignore tax for the moment, that’s just more than $500k needed ($1500 x 12 / 0.035 = 514285). Lets forget how we get there, and pretend you have that $500k. On one hand, you could have $500k in taxable throwing off your dividends directly. On the other hand, you could have $400k in taxable throwing off 80% of your needs and $100k in a IRA throwing off 20% ($3500 – $100k x 3.5%) that’s harder to access. So how do you make up the 20% shortfall? Simple, you sell a stock in taxable equal in value to the dividend and buy that exact stock in your IRA with the dividend. So lets say you have 1000 shares of XYZ at $35 a share in taxable. Sell 100 shares for spending money, use the $3500 of dividends in the IRA to buy 100 shares. You’ve maintained the same assets as the first case, and this shell game moved your dividend outside for you to access it. Yes, it requires selling stock, but in the end, your assets are the same but will slowly drift to being more tax advantaged as time passes.

    So what does this buy you? You can get to FI quicker by not paying taxes on dividends on the path. You can store your least efficient assets in the IRA for maximal gain. All the dividends from the IRA won’t count towards moving you up in the tax bracket. You’re also not relying on that exemption on dividend tax that may or may not be a part of the tax code many years down the road. If you go traditional IRA, you’ll also get the immediate tax deduction, and there are other benefits for the Roth. If your 401k has a self directed option, you can use this strategy with that space as well. This is too much benefit to ignore.

    • says

      Jason,

      I’m confused a bit here. If I’ve already got $500k based on your example, and it’s throwing off $17,500 in annual dividend income (based on the 3.5% yield you used) then I’m already in a tax-advantaged situation, no? I’ll be paying very, very close to $0 on my dividend income. The only exposed taxes will be REIT income. Am I not correct?

      If I am correct, then why would I need to sell shares and then re-buy the same shares in a IRA? Why would I need to shift assets to an account to limit taxes when I’m already paying close to $0?

      Furthermore, selling assets will also trigger a taxable event. And that’s something to be careful with. Depending on how long you’ve owned the stock for and how much you’re selling you could temporarily go over the income mark and expose yourself to more taxes using this strategy.

      Lastly, I’d like to point out that this strategy needlessly includes friction fees in the form of commissions payable to a brokerage just to move assets around. I don’t see how this would improve my situation. I would agree with the fact that the only mistake I might be making is by not investing in a ROTH IRA or IRA on an annual basis right now, but waiting until I’m already FI and then shifting things around doesn’t seem to make sense to me.

      Am I missing something?

      Take care!

    • Jason says

      I’ve tried to adjust part of my total returns strategy to match your dividend only strategy. The point is since you aren’t paying as much tax along the way, you’ll get to FI sooner, and pay less tax once you’re there. The long term capital gains from selling $3500 in stock will be less than receiving $3500 in dividends since it will exclude purchase price. It is exempted from tax in the same way dividends are, though I still hate relying on the tax code to be the same that far down the road. In the long run, by doing dividend only, there’s a large chance your stocks will eventually throw off enough to place you over today’s threshold – and even though I like how you’re being safe by ignoring the eventual benefit of Social Security, when you eventually claim benefits here, they may push you over. You may even be right in the ugly range where your marginal tax rate spikes due to the taxing of social security benefits. Even a worst case scenario of $20 in frictional costs to sell and buy the stock will be way less than the amount of tax you can save in a year by using tax advantaged space, even if you just consider your working years. At current rates, you’ll have spent around $500 in taxes the year before retire on just the dividends of the fictional $100k ($100k x 0.035 x 0.15).

    • says

      Jason,

      I’m lost on this:

      “The long term capital gains from selling $3500 in stock will be less than receiving $3500 in dividends since it will exclude purchase price.”

      Long-term capital gains tax and tax on qualified dividends are the same right now. So why would, in your example, the capital gains method be preferable from a tax standpoint?

      I appreciate your thought process here. Maybe I’m confused?

      Best wishes!

    • Jason says

      I’m a numbers guy, so I apologize if my words aren’t always the clearest. Selling $3500 of stock you bought 10 years ago for $2000 is only $1500 in capital gains, but still gives you $3500 to live off of.

      I’m rooting for you, so I’m bringing this up hoping to help you find an easier path if one exists. Though I’m confident the way you are going will get you there, even if slightly later or a slightly higher tax burden.

    • says

      Jason,

      Oh. Okay, I see what you’re saying now. I’m definitely looking to avoid selling positions and having to re-buy later if I can, but I can see the merits in a ROTH along the way.

      Thanks for rooting for me. I’m rooting for you and all the other readers here. I’m here to share, learn, inspire and hopefully we can all see our wealth grow together!

      Best regards.

  11. says

    I understand your reasoning. But just as stock diversification is important, so is tax diversification and the unpredictability of the future. There may be time, after you turn 59.5, that having access to capital without tax consequence is necessary (Roth). I know that is not part of your plan. In life, stuff happens that is not part of the plan. Think of it as insurance.

    I am on the same path as you. I should be able to retire in 2 years, 4 months, and 13 days (but who is counting?) You write extremely well, so I have no doubt that you will not “retire” at 40 but merely transition into what you were meant to do, and make money doing it.

    • says

      Second Half,

      Less than 3 years? That’s awesome, man. Keep up the great work! I’m sure you have a whole list of things you want to take on once you have the time. :)

      I certainly hope you are right about transitioning into writing once I’m financially independent. I really enjoy writing and if I can inspire people, well, that’s just icing on the cake!

      I actually think my assets will grow faster than I can spend them once I am financially independent. Like you said, there is the opportunity to earn money concentrating on passions. But beyond that, I’m willing to bet my income will grow faster than I can spend it. If my income grows by 7% per year, but my spending increases by 2% per year, that’s a fairly large spread that will only grow as compounding becomes much more powerful than my ability to spend. I guess we’ll see. Good problems to have! :)

      Best wishes.

  12. says

    Question to you (DM or certified CPAs): You mentioned that if you lived in Florida you are not liable to pay taxes on qualified Dividend income. I’m assuming that’s because there’s no state income tax. But, you still have to claim the dividend income on you federal taxes (i.e. 1040, 1040a)?

    Thanks in Advance!

    DMo

    • Scoonie says

      I’m a former CPA. Yes, you definitely have to claim your dividend income on your federal tax return (1040 or 1040A).

      But qualified dividends are treated like capital gains and are taxed at lower rates than wage income or short-term capital gains.

      Where I live (New Hampshire), we have no state income tax but we do have an Interest and Dividends Tax of 5% for any div/interest income over $2,400 if you’re single or $4,800 if you’re married. No big deal overall and it affects few people. My goal for this year was to have to pay that tax, and I’m on track to do that!

    • says

      Dtmheat,

      Scoonie answered your question correctly. Dividend income must be reported to the IRS and included on your tax return regardless of where you live, and taxes will be based on a number of factors.

      Many states tax dividends to various degrees, but Florida abolished dividend taxes a number of years ago. Go Florida! :)

      Take care.

  13. Anonymous says

    I agree with Jason that you are making a mistake by bypassing the tax advantaged options out there. What I plan on doing is maximizing my 401(k) and Roth IRA contributions in the time before I retire. Remember that I can withdraw those Roth contributions any time I please.

    Once I retire, I will roll some or all of my 401(k) balance into a Roth IRA. This will be a taxable event but I will only roll an amount to which I can limit my tax liability for that year. Once these funds have been rolled over, I will be able to withdraw them penalty free once they are “seasoned” i.e. have been in the Roth for 5 years. During those first 5 years after retirement (assuming I am not 59.5 yet), I will live off of my initial contributions to my Roth IRA (again, withdrawn penalty free). The 401(k) funds which were rolled over to the Roth IRA will compound tax free (and remember I never paid taxes on them in the first place either!)

    I will continue to roll over portions of my 401(k) every year so as to minimize my tax exposure and free up additional funds which will be accessible penalty free 5 years down the road. Following this strategy I will be able to grow my investments to their maximum potential due to keeping nearly all gains under a tax shelter.

    The main drawback here is that I will not have the same infinite selection of investment choices in my 401(k) as I would if they were in a taxable account. To me, the tax advantage outweighs this inconvenience. I will be able to buy the dividend producing stocks I prefer once the funds are rolled over to to the Roth IRA after I retire.

    • says

      Anonymous,

      Well, it sounds like you have picked a strategy that works well for you. We all have individual circumstances. And that’s what’s really great about all of this. There is no “one-size-fits-all” approach to investing or taxes, and maximizing your potential is part of the fun. For me, I have decided to take a path that leads to the quickest payoff. Remember, if it was all about money for me I’d continue to work for another 5 or so years and bank another $250,000. And, of course, I’d also pay a lot more in taxes that way too. But, again, it’s not all about the money. It’s about the time. And I feel that giving everything I’ve got to the accounts that will be easiest to access at a young age is the best way to go.

      Thanks for stopping by and sharing. Sounds like you’re on the right path!

      Cheers!

  14. Craig says

    DM,

    I’m 20 years older than you and looking to retire when I’m 60. I’m charged up about that because 1) it’s seven years earlier than my full retirement age according to SSA, and 2) I won’t have to depend on SS to put food on the table.

    I could probably retire a few years earlier, but the bulk of my savings are in tax-advantaged accounts. Could I use the techniques you and others suggest to get at that money earlier? Yes. But I don’t want to mess with it and I’m at peace with that decision.

    I think too many people get their panties in a wad when it comes to reducing their tax bill. Don’t get me wrong…I’m as conservative as they get. But agonizing over additional IRS paperwork and scrutiny is far from worth it to me.

    If I was your age and in your situation with the same ambitions, I would do the same thing. Keep up the good work.

    Craig

    • says

      Craig,

      I’d be charged up about retiring at 60, too. Way to go!

      I’m with you on taxes. I think people sometimes spend a little too much time worrying about how to avoid taxes. People seem to forget that by retiring at 40 I’ll be accidentally avoiding a crapload of taxes, and yet the focus is on tax-advantaged vs. taxable accounts. Maybe I’ll end up paying $4,000 or so in extra taxes by focusing on a taxable account on the way to early retirement, but I’ll avoid paying $200,000 or so in taxes on the $1 million I would have earned by working an extra 25 years. So, the glass is half full on my end. :)

      Take care!

  15. Anonymous says

    This was a good post. I also invest mostly in a taxable account, for just this reason. I do take advantage of a 401k company match, but only up to the match. I do this for many of the reasons you listed, in addition to the possibility of never even living long enough to collect on your retirement accounts. Wouldn’t that be a drag?

    People also put a lot of faith into the idea that the marginal tax rates will not increase by the time they can cash out their 401k. We’re currently in an unprecedented low tax rate environment. Pre-tax money invested into a 401k today has the possibility of being taxed at a higher rate upon withdrawal.

    • says

      Anonymous,

      I’d take advantage of the company match as well if I had access to one, so good move on that!

      It would definitely be a drag to never live long enough to access some of the money you put away for old age. I wrote a while back that I’m actually planning on a short life. Not to be morbid, but even if I only live to 60 (well below the average life expectancy) I’ll still have 20 years of retirement to enjoy all that life has to offer. How cool is that? And a life that is normal than the average? Well, that’s icing on an already delicious cake!

      I’m not sure where tax rates are going to go. Certainly they (the government) could decide to tax dividends more aggressively. But, even so my overall income will likely be low enough to where taxes won’t affect me too much in early retirement. However, if I make more than I had planned on…well..that’s just a good problem to have. I think people look at a big tax bill like a nightmare. I look at it like I’m doing well. I’d rather not pay in any more than I have to, but at the same time I try to keep perspective.

      Best wishes!

  16. Anonymous says

    I have a feeling you’re making a small mistake not putting the max each year into a Roth IRA, for two simple reasons (1) it grows tax free, and (2) you can withdraw at any time without penalty your contributions.

    You say you can only contribute $5500 per year to a Roth IRA, correct? And that would give you $49,500 in pretax contributions by the time you turn 40? If you contributed $458 a month (which works out to roughly $5500 a year), and that earned/returned 7% interest each year, that would grow in 9 years to $65,831, approximately. (And that’s probably VERY conservative, as contribution minimums increase regularly, and there are always rumors of Congress lifting them even higher to encourage more saving)

    Now, ALL of that growth (unlike your current accounts) is tax free. The dividends are not taxed. Your capital gains are not taxed. Each penny that portfolio earns is shielded from any taxes (unlike your taxable accounts).

    Now, here’s the great part — you could take out over time/all at once the $49,500 you contributed to it (still leaving behind over $16k just working for you tax free) and not pay a SINGLE DIME OF TAX. Obviously, you live on FAR less than that a year right now (and will have plenty in your taxable Freedom Fund to cover your expenses), so even better…..but that’s shielding a significant long-term source of growth from taxes for you, making your long term retirement plan even MORE secure.

    I think you’re making a mistake ignoring the tax benefits (even for an early retiree like you) of a Roth IRA.

    • says

      Anonymous,

      You are right that all of the growth in the ROTH would be tax-free. However, not all of the growth in my taxable account is taxed, either. For instance, I rarely sell holdings. And I plan on selling even less going forward. So, most of the compounded gains through capital gains won’t be taxed (unless I sell).

      And looking at the taxes that the ROTH would save me on the dividends is not some extraordinary number. A 3.5% yield on the first $5,500 in contributions is $192.50. A 15% tax on that is $28.88. You can double that for the second year and add a little in the case of organic dividend growth. Point being, that the numbers are actually quite small because my time horizon is so short. As I mentioned in the post, I would highly recommend tax-advantaged accounts where available for most everyone else. It is only for people looking for extremely early retirement that one should be so aggressive in a taxable account.

      I may be missing out on a little capital by avoiding a tax-advantaged account, but as I was pointing out in an earlier comment I’ll also be avoiding the ~$200,000 in taxes on the ~$1 million in earnings I would otherwise earn if I chose to keep working until 65.

      I appreciate you stopping by and doing the math. I love me some good math. I do agree with you that I’m missing out on a little cash, but I think the plan is, overall, extremely sound for my strategy.

      Best regards!

    • Anonymous says

      Fair enough, but that $28.88 in tax that you’re giving away to the government compounds TREMENDOUSLY when you factor in the amazing power of compound interest.

      Let’s keep this simple for the time being, and assume your ROTH has no capital gains (i.e. no growth in the value of the stock) and instead is just $49,500 by the end of year 9, but with 3.5% yield each year.

      In year 1, you lose $28.88.
      In year 2, you lose $57.76.
      In year 3, you lose $86.64
      In year 4, you lose $115.52
      In year 5, you lose $144.40
      In year 6, you lose $173.28
      In year 7, you lose $202.16
      In year 8, you lose $231.04
      In year 9, you lose $259.92

      Combined total: $1299.60 that you gave up for absolutely no reason.

      Now, you’re 40. $1299.60 compounded at 7% a year for 20 years (40-60, when you can take the money out of the ROTH) is $5,029.04. That’s THREE MONTH of “freedom” (if not more) on your current budget.

      And keep in mind that this calculation is EXTREMELY conservative. I’m ignoring capital gains (which would increase your dividends because the yield would be higher, etc.). I’m ignoring any compounding during those first 9 years. I’m assuming there isn’t ANY annual increase in ROTH IRA contribution limits. We’re ignoring the taxes for ages 40-60 that you’ll be paying under your plan (say $259.92 a year minimum, but probably MUCH more) that you wouldn’t be paying under mine.

      And why are you giving up this amount? What does it gain you (in regards to liquidity/early access)? I mean, as I can explained, you can ALWAYS take out your contributions to a ROTH (but not the earnings until you’re 59.5)….so you’re losing access to the roughly $16k your ROTH might earn over those 9 years. So what? Your plan was set up to have enough for your lifestyle FOREVER, so just live off the taxable accounts for years 1-20 of your retirement, and then you can get back to access to that $16k.

      I mean, you could get this benefit, and it costs you NOTHING to your plan. So why not limit your taxes if you can, and it doesn’t impact your “freedom” plan?

    • Anonymous says

      Also, I feel like it’s worth noting, your excellent Financial Freedom plan is built in no small part on relentless efficiency in reducing your costs – no cable, riding the bus, eating cheaply (but hopefully healthily), not buying fun/useful but ultimately unnecessary items or gadgets, living in Florida to avoid state income taxes, etc.

      Why, then, would you not want to apply that same efficiency to tax-shielding a (small) part of your investments each year? Particularly when (as noted above) it does not deprive you of any access to the contributions (only the earnings until 59.5)? I mean, ultimately it’s your decision, and you’ve obviously got a VERY strong plan and are doing EXCELLENT work at reaching freedom early, but this seems like you’re leaving easy money/profits/an earlier path to freedom on the table for no good or rational reason.

    • Anonymous says

      One more thing — I cannot invest in a ROTH IRA (my wife and I’s combined income puts us over the limit….I know, this is a GREAT problem to have), but I really WISH I could, simply because all the growth is tax free, forever. That’s why I’m a bit bewildered why you wouldn’t take that tax-free growth….

    • says

      Anonymous,

      I really appreciate the commentary. And although I didn’t do the math myself, your math looks sound to me.

      I have admitted somewhere in these comments that I’m likely giving up a little money by avoiding tax-advantaged accounts. But giving up $5k over the course of most of my life (until 60, based on your math), to me, is worth having 100% full access to my capital at any time I want, without having to jump through any hoops…no matter how seemingly small the hoops (withdrawing contributions from a ROTH).

      I’ve long countered that money is not the main motivation behind anything that I do. If losing that $5k was really a huge problem for me, I’d likely just work for an extra month or two past my 40th birthday and I’d then not only be even-steven, but also have full flexibility with the funds.

      Think about it this way. What if I need all of my money because I want to open a restaurant one day? Obviously unlikely, but having all of my capital available to me for whatever in the world my heart desires is important to me. Also, I’ve mentioned that I’d be interested in traveling. The last thing I’d want to do if I’m living halfway across the world is jump through bureaucratic hoops to access some of the money I need for my living expenses. Keep in mind that my plan requires 100% of my resources. By having any of them, even in the form of gains in a ROTH, not available to me means I may have a problem fulfilling the goals I’m working so hard for.

      Also, as I’ve mentioned elsewhere I’m not a glutton for punishment. I’m not a big fan of paying taxes that I wouldn’t otherwise have to pay. However, by retiring early in life I’ll likely be avoiding paying hundreds of thousands of dollars in taxes over the course of my life. Furthermore, for anyone who really hates paying taxes I’d content that early retirement is the best possible move you can make!

      Best wishes!

    • says

      Anonymous,

      I wanted to add one more point.

      The way I’m approaching frugal living, dividend growth investing, tax planning and early retirement is all extremely replicable. This is one of the things I take great pride in.

      There is nothing that I’m doing that’s complicated. It’s all very old-school stuff here. I’m not using options, I’m not using leverage, I’m not advocating complicated tax moves and the companies I invest in are easy to understand. I think this makes my plan quite robust. And if I do make it to early retirement I plan on pointing out how easy it is to do it if you plan ahead. I’m not doing anything that’s hard to understand or requires much of a learning curve. Even avoiding tax-advantaged accounts and focusing on taxable accounts only makes it easier.

      Take care!

  17. says

    You touched on this a bit, but I’m curious why you decided not to contribute to a Roth IRA, knowing you could withdraw the contributions at any time. Any earnings in the Roth would compound tax-free until you are 59.5 years old. And the contributions are yours to return to your taxable account whenever you decide to retire (at age 40 or whenever).

    My wife and I also plan to retire well before age 59.5. We’re contributing to our Roth IRAs yearly, and will probably withdraw the contributions at the time we decide to stop working. But even if we do that, we’ll have tens of thousands of dollars in earnings which we can leave behind in the Roths to continue compounding for the rest of our lives (or whenever we need to draw upon them after age 59.5).

    • says

      The Executioner,

      I gave some serious thought to opening a ROTH because the contributions can be pulled out at any time. But I decided to stick to the taxable account because it gives me the greatest amount of flexibility and freedom. The earnings on the ROTH will compound tax-free for many decades, but the earnings (in the form of dividends) on the taxable account will be exposed to taxes very minimally. I’ll be looking at taxes on ordinary dividends only, which I plan on being a small part of my portfolio. And the earnings (in the form of capital gains) will only be taxed if and when I sell, which will likely be very rarely. And if that doesn’t hold true, how am I to know which companies are more likely to require selling so that I can put them in the ROTH?

      Again, the absolute numbers we’re talking about are relatively small. If I were to open a ROTH tomorrow, the end result of it would be approximately 10% of my portfolio, and some of the funds would be inaccessible until I’m 59.5 years old. To me, it simply makes sense to give everything I’ve got to retiring early and having the most flexibility and freedom with the capital I’ve worked so hard to attain.

      I hope that helps?

      Cheers!

    • says

      Thanks for the explanation. As long as your plan makes sense to you, you don’t necessarily have to convince the rest of us.

      My wife and I are just focused on very broad-based (index) investing in our Roth IRAs. That way we don’t have to pick and choose from among our investments when deciding which to put in the tax-sheltered account.

      Over time, the contributions can really add up, though. Between the two of us, we have almost $90K of Roth contributions which we could pull out at any time without paying taxes or penalties. This would be a nice boost to our taxable accounts when it’s time for early retirement.

      By the way, “Roth” isn’t an acronym, so there’s no need to put it in all caps…

  18. says

    DM,

    I used to think a similar thought on how I could extract the value of my 401(k), which is now a rollover IRA if I retired early. I figured it out using Rule 72(t) and wrote a big post on it. http://www.financialsamurai.com/2013/05/06/rule-72t-to-withdraw-money-penalty-free-from-ira-for-early-retirement/

    Check it out! I HIGHLY recommend you try and max out your pre-tax accounts and THEN save more in after tax. It will compound much quicker. I amassed about $200,000 in my 401K by age 32, and it has grown to about $450,000 now at 35. It’s totally worth it!

    Best,

    Sam

    • says

      Sam,

      Thanks for stopping by.

      Well, you’re working with a lot more capital than I’ll ever have. And you had a lot more at my age than I have currently. In your situation, it probably made sense to diversify between accounts and also minimize your taxable income.

      I’m not quite as fortunate, however.

      I did talk about rule 72(t) in the post. However, I think the bureaucracy involved in that rule is far more than I’d ever feel comfortable immersing myself in. If I were to open a tax-advantaged account it would be a ROTH IRA because it offers the most flexibility and I don’t have to worry about future tax rates. I’d also be interested in a 401(k) if I had a match at work, which I don’t.

      Best wishes!

    • says

      Hi Sam,

      Have you actually withdrawn money from a 401k or IRA using rule 72 (t)? I am asking, because I can find a lot of theoretical information on using this rule, but never really read from anyone about their practical application of the rule. If you have done so, could you please share the mechanics of withdrawing funds from this account?

      Thank you!

      DGI

    • Anonymous says

      My mom’s friend used 72(t) when she needed to access IRA funds during the years she battled terminal cancer. It gave her some much-needed income and a way to tap the funds without paying the penalty. I believe she left the remainder to her children when she died. I don’t recall the exact rules but it has to do with equal payments over some specific time period. irs.gov should have info on this.

  19. says

    My approach is slightly different… I am self-employed so there is no match either, but I am contributing 15-20% of gross income into SEP and have been doing this for about 8 years now. It’s reducing my tax liability now that I am making good money, which is always helpful. At some point I should have enough $$ in that account to support us after 60+ and I will need to stop contributing and concentrate on my taxable account. The trick is to figure out when that point is reached!

    • says

      insourcelife,

      Sounds like you’re in a great spot! Congratulations.

      It does sound like you need to figure out when to gear up your taxable account(s) for the time period between when you retire and when you’re old enough to access the capital in your tax-advantaged account(s). That’s a critical area, and one I’m obviously focusing on like a laser. :)

      Take care!

  20. steve says

    DM,

    While I generally agree with most of your analyses, I’ll second the opinion that you’re leaving money on the table unnecessarily by not maxing out your IRA and ROTH.

    I ER’ed 7 years ago and live on about your projected budget of $1500/month. While the advantages of having retirement accounts might not be significant now, they give you lots of extra options once you ER and your taxable income drops. Because of tax deductions on rental property I actually show a negative taxable income every year, and use this paper loss to transfer money (tax free) from my IRA to my ROTH. The contributions to the ROTH can then be withdrawn tax free on an as-needed basis. This has a couple of great advantages:

    1) You can use the money you pull out of the ROTH to fund investments that would be difficult to do within a retirement account (like real estate).
    2) You can withdraw money regularly from the ROTH (instead of 72(t) withdrawals from the IRA) but without any of the IRS paperwork or limits. One of the big problems I discovered after ER was that it became almost impossible to obtain/refinance a mortgage because my taxable income was so low (income/payment ratio). If you can show a long term income stream from your ROTH some banks will consider this income when calculating the mortgage ratios. In my case it was instrumental in being able to refinance the mortgage on my 4-plex.

    • says

      steve,

      That’s strange. Your bank considers withdrawals from your ROTH as income, but dividend income from a taxable account is not considered? Is that just because your dividend income from the taxable account was low and you had a lot more assets within the ROTH, and therefore could draw a lot more from it?

      On a projected budget of $1,500 per month and dividends at, say, $1,800 per month the tax bill would be pretty close to $0 or at $0 (if all dividends are qualified). So, how would a tax-advantaged account help in this case? My point in the article was that dividends are tax-efficient all by themselves. I would agree that I’m leaving a little money on the table on my way to ER/FI, but once I’m there I think the money left on the table is very little, if at all.

      Best regards.

  21. says

    I have been pretty much single minded about contributing to tax deferred accounts whenever possible, and of late I’ve started concerning myself with ER and how it is necessary to have a plan for income to handle the medium term period between ER and typical access to the tax deferred/SS money. I have a decent foundation for the long term but am not very well situated for the medium term. So this article has at least prompted me to question my assumptions and start considering potentially scaling back on long term contributions, paying more taxes up front but also accumulating the near/medium term taxable account faster. Just scenario planning right now without actually committing to changing what I’m doing (maxing out the 401k annually).

    • says

      Unknown,

      I’m glad this article got you thinking about the term between early retirement and the age when the tax-advantaged capital becomes accessible.

      It sounds like you already have a really good base of traditional retirement money set aside. Maybe playing with the numbers a bit gets you to where you want to be.

      Best of luck!

      Take care.

    • Anonymous says

      Unknown, I am struggling with the same questions and plan to retire at age 58. 401K and Roth are well funded and I am maxing out both, but the rest of my assets are tied up in real estate and farm equipment. Unless I sell off some assets I think I will need to ratchet down my 401K contributions in that last year or so and put that money in savings, so I have something I can live off of until I hit 59.5, after which time I can tap my 401K or IRA. Otherwise I will need part time work or side business income. Farm can generate about $1,000 – $1500 a month net, sans depreciation, if I am industrious about getting business. Farm will be paid off by then so I can live well off of $1500-2000 a month, including health insurance costs. Gonna need to get rid of a horse or two though, to lower expenses!!!

    • says

      Anonymous,

      It sounds like you’re in a pretty good situation. You could either sell off your farm assets – which seems reasonable if you’re serious about retiring – or you could still work the farm for $1,500/mo. You say you could conceivably live on that much, so you’re squared. No need to continue funding your retirement accounts if they’re already as healthy as you say, so you don’t need to save for the 18 months between 58 and 59.5.

      If you don’t want to sell assets (passing to the family?) then you would need to save up about $27k in liquid low-risk assets to get you by for the 18 months.

      Either way, I think you’re doing very well!

      Best wishes.

  22. Anonymous says

    DM,

    I happen to agree with Jason. Assuming that you stick with your plan, you will still be able to access your cash and using a ROTH you will have MORE $ ! Jason’s approach or similar seems very reasonable. More $$$ can’t be a bad thing :)

    My guess is that you won’t actually stick with your plan.
    - Will you be FI @ a very young age? Certainly
    - Will you spend time traveling the world with your parents? Absolutely
    -living in foreign countries? Oui oui Monsieur
    -doing what many dream? Most definitely

    But maybe, just maybe at some point after you retire you will generate income and having more in a tax advantaged account will mean even more dough. Don’t they pay people big $$$ to write books or give financial seminars?

    Roger H

    • says

      Roger H,

      I agree with you. I honestly didn’t think about earning extra income on the side when I wrote this article. That was pointed out above, and that’s something that could change things.

      However, I still contend that the overall change will be small since the contributions to a ROTH IRA would only amount to about 10% or so of my portfolio. So even if I were to open a ROTH IRA tomorrow and start maxing it out, I’d still be left with about 90% of my funds in a taxable account.

      I do hope you’re right about the plan. Sometimes I get so busy writing about it, dreaming about it and planning for it that it gets lost in my thoughts. It almost seems like some of this is some dream that gets lost in the fog sometimes. Thanks for bringing it a little closer to reality. :)

      Cheers!

  23. says

    Jason,

    I totally see your point and wish you well on your quest. I’m also curious as to why no one has answered your question about paying nearly zero taxes on qualified income less than the ~$35k you mention…seems to make sense to me, and then you’re in the same tax free boat, with 100% access to all your money. The main issue being that you’d be taxed if you wanted to free up capital gains, which might be significant if you sell a stock held for a while if you needed to.

    I personally am trying to max out my 401k, then am putting a few thousand in a roth, and about another thousand in taxable accounts, but you’ve got me thinking about cutting down the 401k to my company match and dumping everything into a taxable account to grow that cash faster. BUT as some other commenters have mentioned, I don’t see why it would hurt to max out the ROTH IRA along the way as this money can be pulled out tax free at any time, and in the meantime is sheltered, It’s almost like free insurance…something to think about…thanks for the post.

    s

    • says

      s,

      Thanks for the warm wishes. Much appreciated!

      I’m not quite sure why the point 0% on qualified dividends below $36k seems to get missed. However, I would agree that I missed the fact that I might end up making more income than I’m planning for in early retirement. I honestly didn’t consider that, and would agree with anyone who wants to argue that I made a mistake there. I think my dividend income is likely to be accurate to what I’m planning, but side income (like the income this blog provides) could be higher than I’m forecasting. However, this is a great problem to have! :)

      I think that what I’m talking about probably sounds pretty crazy to a lot of people, because most people seem to invest much more than necessary in the tax-advantaged accounts and may end up neglecting the taxable accounts. So, I’m on the opposite extreme of that. That comes across as crazy to some. I’m a pretty reasonable person and I’ve thought about this with intense detail and I’m quite confident about my plan. We’ll see how it turn out. The great thing is that this blog is a proving ground, so we’ll see how avoiding tax-advantaged accounts works out for me.

      Take care!

  24. says

    DM,

    Given your personal circumstances you described in your post, it does appear sensible to tilt mostly toward taxable accounts. I appreciate that you elaborated your personal factors and that you mentioned that others with different circumstances would be better served with other strategies. The world needs more articles with that perspective! One size most certainly does not fit all in finance.

    My circumstances are significantly different. I receive substantial 401(k) matching (8%) and have access to a variety of really low cost funds. My income is also a lot higher, and more importantly, is likely to be a lot lower when I retire. I’m also retiring later (50 hopefully), which means there is less of a gap between retirement age and 59.5 years old. Thus, I’ve got a mixture of taxable, traditional, and Roth.

    Best of luck on your continued financial progress. I always enjoy reading your blog.

    • says

      S.B.,

      Thanks! I agree that personal finance needs the “personal” side of it stressed more often. We all have unique situations, and we must all do what fits those individual circumstances best. I’m in an extremely unique situation, and I’m taking on an equally unique strategy. Naturally, this won’t apply to everyone else, or even many others at all.

      That’s a wonderful match you have there. If I had an 8% match available to me I’d be all over that. Unfortunately, I get none. I also get $0 for a pension. My retirement is basically up to me, and so I guess I’m taking quite an interest in it!

      Thanks for your readership and kind words. I’m glad you enjoy reading. You have a very sizable asset base, so to hear that someone as experienced as you enjoys reading is really gratifying.

      Best wishes!

  25. says

    DM, I have the exact same reasons for investing in taxable accounts. Although I invest in 401k, ROTH and taxable. My biggest reason is that I also plan on taking my income earlier (hopefully, as I haven’t started this early as you did and cannot invest almost 80% of my income as you do) but I still hope I will be able to leverage my account to generate cash before I turn 60.

    • says

      Martin,

      I hope you can leverage your taxable account to generate the cash before 60 as well! And as has been discussed here, the ROTH contributions will be available to you as well before 59.5 in cash you need the extra cash flow.

      May we continue to grow our wealth together. :)

      Cheers!

  26. says

    DM,

    I use a 403b pre tax and ROTH, a ROTH IRA, and a taxable account. I am in the same situation as you with regards to no match, but still have been contributing.

    I’m starting to wonder now if I should lower the % in it and focus more on the taxable account and ROTH IRA more specifically.

    • says

      SWAN,

      It sounds like you are pretty diversified there in terms of accounts. Very nice! Sounds like a very reasonable approach to me.

      As far as percentages go, you’ll have to really run the numbers and see what makes sense for you as far as how early you plan to access the taxable funds and how large of a capital base you’ll have to work with.

      Best of luck to you!

      Take care.

  27. Anonymous says

    Only risk in the strategy, that I see as a large risk, is the chance the tax code changes. There is a huge national debt. The money has to come from somewhere. Cutting things like the tax loophole you mentioned of 0% on low income dividends, is probably one on the table every time the subject is talked about in Congress.

    What is the plan when they raise the tax on dividends is raised to 20% flat for all dividends, regardless of income level? This could be detrimental to your strategy.

    Investing in a Roth IRA (only 5,500 a year, so less than 2 months of your yearly investment) would ensure these contributions and income are never, ever taxed again. And you can invest them in anything.

    That is my only thought, diversification is important in all aspects of investments, not just the investment. Otherwise I agree…401k funds are certainly not for your strategy.

    Keep on keepin’ on.

    • says

      Anonymous,

      You are right. There is a good chance that the tax code could change in the future to reflect more ambivalent feelings towards investors, instead of the favorable treatment we are given over the working class. This also could have a material impact on my ability to live off dividends while young.

      However, I won’t be alone in this. Also, even if I were to invest in a ROTH I’d still be materially impacted because the ROTH funds (~$50k) would only be about 10% of my overall capital (figuring $500k total). So, even in that situation I’d have favorable taxes towards some of my capital but it wouldn’t be a large enough portion of my wealth to where it would make it real easy to overcome dramatic, unfavorable changes in the tax code.

      I agree with you on tax diversification, which is why I pointed out that tax-advantaged accounts should be pursued by almost everyone else out there. :)

      I hope you keep on truckin’ as well. Hopefully we’ll both be able to achieve all of our goals!

      Take care.

  28. says

    DM,

    I also hold most of my funds in a taxable account like you. I value the flexibility and don’t want to have to go through the pain of a 72t withdrawal to cash out early if I choose. I do my 401k match, because I view it as free money, and not because I’m greatly inspired by the fund choices that I’m offered. I feel like the favorable tax treatment investors are offered is probably underwritten for at least the forseeable future given how fraught the discussions where during the end of 2012 to achieve the agreement. They may eventually get around to changing this again, but I’ll be taking maximum advantage in the meantime. Given the deficit position of the US, there will probably always be calls to broaden the tax base.

    • says

      Integrator,

      I’m glad you value flexibility as well. I certainly might be able to harvest a little more capital by focusing more on tax-advantaged accounts, but what I’m doing isn’t just for show. I’m very serious about accessing my passive income very early in life, and so I need 100% of everything I can get my hands on as early as possible.

      I hear you on tax treatment. It’s obviously tough to predict, but the government had an excellent opportunity to punish investors with this last go-round, and they didn’t. And that was with Obama pushing to hammer investors as much as possible. So, the future looks rather bright for us. Anything is possible with the government, however. In the end, it’s best to have a margin of safety built in and it’s always possible to make side income to make up the shortfall, if there is one.

      Cheers!

  29. says

    Hi DM, I think you are making the right move given your unique individual situation and future plans. Up here in Canada we have Registered Savings Plans (RSPs) and Tax Free Savings Accounts (TFSAs) which are comparable I believe to the US’s 401Ks and Roth IRAs.

    Our TFSAs our fantastic instruments as we invest after tax money into a vehicle where it’s dividends, interest and capital gains are sheltered from taxes, and there is no tax due upon withdrawl. The catch is we are limited to how much each year we can invest, $5,500 per person in 2013.

    Our RSPs work differently, where we can invest up to 18% of our employment income from the previous tax year (to a max of about $23Kish for 2013 I believe) and contributions give us a tax break in the current year. Investments inside the RSP grow tax free, but any withdrawls are taxable.

    On top of those we can always invest whatever we want in non-registered taxable accounts too.

    Thanks for the post,
    MIchael

    • says

      Michael,

      Those sound exactly like our ROTH IRAs and 401(k)s. They work the same almost down to the penny. Good stuff!

      Thanks for the support. I have agreed that I might be giving up a small amount of gains here, but if you’re looking at the big picture it matters very little. In the end, my strategy doesn’t require complications. It just requires discipline and persistence and I aim to showcase that.

      Best regards.

  30. says

    DM, Thank you very much for publishing such an article!

    I have done the same thing along the way, and have kept an open mind to a 401k/IRA rollover contributions pipeline method, but it still hindered the extreme retirement way a bit with everything considered in my personal situation.

    Another thing to consider is after Financial Independence, any extra money you ever make just from doing anything you love and people hand you money; you can easily stock away into your IRA or self directed 401k to keep taxes near 0 until you are 59.5. This will also help keep any additional income taxes near zero after FI from additional income that will come your way even if you say “NO MORE MONEY Please!”

    You’ll probably find hundreds of ways to make money just by doing the things you love even though you will be FI.

    • says

      FYC,

      Glad you enjoyed the article. And thanks for mentioning me over at the MMM forums. I noticed some traffic my way today from that. :)

      You have a great point there. Any extra money that I may end up earning once financially independent can certainly be invested in tax-advantaged accounts, especially if this money is above and beyond what I need.

      I hope you’re right about being able to make money doing the things I love. That’s really a dream of mine!

      Thanks for all the support.

      Cheers!

  31. Anonymous says

    The one reason why you might want to consider a Roth IRA is the flexibility that you can remove your contributions at any age (e.g., 40), and then still let the remaining gains and earnings continue to grow tax-free until you need them at age 59 1/2.

    • says

      Anonymous,

      Thanks for stopping by!

      I discussed the fact that contributions can be withdrawn early without penalty from a Roth, but I also went over why I continue to invest solely in taxable accounts ad nauseam.

      However, I still recommend tax-advantaged accounts to anyone who has access to them. Most people are not looking to have access to 100% of their available funds so early in life.

      Best regards.

  32. Anonymous says

    My two inflation-adjusted 2c: the biggest threat to your plan is inflation.
    Stocks don’t well during periods of high inflation. Income oriented equities(reits, mlps) do worse still. In such an environment dividend increases aren’t likely to outpace inflation. Inflation also tends to push you into a higher taxation bracket even as higher nominal dividends provide no inflation-adjusted extra benefit to you.
    Your holy-grail $1500/month dividend stream isn’t going to be buying much in a decade.

    Read Buffet on inflation for a full analysis: http://features.blogs.fortune.cnn.com/2011/06/12/warren-buffett-how-inflation-swindles-the-equity-investor-fortune-1977/

    • says

      Anonymous,

      Inflation is a tough bug, no doubt about it. But dividend growth investing is an even tougher boot.

      I haven’t written my own post on this yet, but David Van Knapp has already put together a pretty epic piece on this to quell your inflation fears:

      http://seekingalpha.com/article/439171-has-dividend-growth-kept-up-with-inflation

      “Your holy-grail $1500/month dividend stream isn’t going to be buying much in a decade.”

      My $1,500 dividend stream will increase at a rate that in all likelihood will outpace the rise in my expenses. That’s the whole reason I’m investing in high quality equities right now, rather than bond income that will stagnate and reduce my purchasing power. The above article references 61 years of data, so I’m fairly confident that is a reasonable conclusion.

      Best wishes!

  33. Anonymous says

    DM,
    First, thanks so much for your wonderful & inspiring blog which I came across a few days ago. I have learnt so much from reading your posts. But I have to say that I think you are making a serious miscalculation with respect to your income after your official retirement when you turn 40. With all the following you have on your blog, I’m willing to bet that you will be making a LOT more money from writing, blogging and inspiring people about financial freedom. In fact, I wish to encourage you to monetize all the work that you are putting into this blog right now doing e-books, affiliate marketing etc. You could substantially increase your income way before you retire. Please don’t limit yourself and your earning potential before or after retirement!

    Thanks again! I wish you the best!

    Emma

    • says

      Emma,

      Thanks for the kind words. I’m glad you enjoy the blog so far. I’m here to inspire!

      I totally hear what you’re saying. I haven’t taken a very active approach as far as trying to monetize my writing efforts, however I can see how this could potentially help my journey. I have some passive ads up and that does provide some additional income, which is wonderful. At some point I’m going to really look into increasing the income from this blog and other writing efforts to make the transition not only easier, but perhaps earlier. I’m hopeful!

      Thanks for your very encouraging words.

      Best wishes.

  34. says

    Jason – I’m glad that you have thought about increasing your income from this blog. I just embarked on a journey to learn how to make money online & would be happy to recommend some free resources. Drop me a note at emma2013@outlook.com if you are interested. Make it a goal to increase your earnings which will allow you to increase your savings even more.

    Take care!

    Emma

  35. Anonymous says

    Hi Dividend Mantra,

    I know this is an “older” thread, but I wanted to share some GOOD NEWS with you.

    I didn’t read all of the comments so, I’m not sure if this has already been addressed … Here goes -

    In your post, you mention: “That means as long as I earn under $36,251 per year in qualified dividend income I’ll pay 0%.”

    The actual amount (for 2013) is $46,250 for singles. You get the benefit of the personal exemption ($3,900) and standard deduction ($6,100), which bumps up that number by $10,000. For 2014, the number is: $36,900 (top edge of 15% bracket) plus $6,200 (standard deduction) plus $3,950 (personal exemption) = $47,050.

    You can put the 2013 numbers into the following website: www. hrblock.com/free-tax-tips-calculators/tax-estimator .html If you open “Enter income other than wages …:, then open “Dividend income”, and put $46,500 ($250 higher than the 0% rates), in both parts of the dividend box, the Federal income tax shows as $37. The calculation (for 2013) is: $46,500 minus $3,900 minus $6,100 = $36,500.

    $36,250 is taxed at 0%, and the remaining $250 is taxed at 15%: $250 times 15% = $37.

    Be well!

    • says

      Anonymous,

      Excellent points there. I didn’t even think about the exemption and deduction until well after this post was written and published. I was going to go back and edit it, but the main message is still valid and it gives me a good reason to revisit this concept at a later date.

      Thanks for sharing that news. That actually allows an even bigger cushion for tax-free income, and further validates my strategy.

      I appreciate the comment. Stay in touch!

      Best regards.

  36. Anonymous says

    One thing to add in favor of 401ks…they are protected from court actions much more so than almost any other investment vehicle, including IRA’s, but especially taxable accounts…also you can borrow money, this is one way to ‘convert’ your 401k money into IRA money…take a loan from your 401k, stash the money in your IRA, earn the tax credit by doing so, use the (hopefully 5k) you borrowed to buy some quality dividend stocks, use your working income to pay back the ‘loan’ over the course of the next year, and do it all over again the following year…you get the tax credit for the 401k deduction, plus the tax credit for the IRA contribution, and your money winds up where you want it, in an IRA you control, earning dividends…I know you don’t utilize a 401k for understandable reasons, but the 401k has some advantages lots of people don’t realize

    • says

      Anonymous,

      Good points there. I hope never to be in the position where someone is suing me for my assets, but you make a great point there in the additional protection that some accounts can provide against such unsavory propositions.

      Although, the game you’re talking about regarding transfers is exactly what I’m trying to avoid. If I needed to do that to reach financial independence I would, but luckily my plan doesn’t require me to do so. I guess I just like to keep my life simple. :)

      Have a great 2014!

      Best wishes.

    • Anonymous says

      Taking a loan against your 401k is always a losing proposition. You are paying the equivalent of your effective tax rate in interest. Even for a person making under $40k/yr, the effective rate will be north of 15% fed/state/SS.

      Think about it as you contributed $10k pretax, and now you’re paying $10k POST-tax to bring yourself back to an even balance in the account. Essentially you’re paying at least 15% (or whatever your effective tax rate is) as an interest rate. You would be better off borrowing from almost anything but a credit card and it would be better than borrowing from a 401k or IRA.

  37. Anonymous says

    First, great blog and thanks for sharing your insight with us. I have really enjoyed your articles over the past year or so.

    Not to beat a dead horse (well maybe) but I think you should consider a Roth. In my opinion the most important reason is asset protection. Anyone can be hit with a medical catastrophe (I see this every day as I work in the medical field) or other life altering event (lawsuit, etc) that can be financially devastating. These are low probability events but they happen. No one ever thinks something like this will happen to they, yet I see it every day. It’s not just rich people being sued by the way, common misconception that you need millions in assets to be targeted.

    Typically we try and insure against losses we can’t absorb and self insure for the small stuff. Think of a Roth (or even better a 401k, although with no match and high fees I would take my chances in a non-qualified account) as insurance. You are insuring 10% of your money (or whatever) against a possible massive judgement or bankruptcy. You are diversifying risk, and for something that costs so little money or time I can’t see a downside. As previous comments have stated, there are other smaller benefits for you like tax diversification, etc. If you really need the money in an emergency you can always take it out of the Roth, but like you said your plan is to live off the dividends so it is likely taking “dividend income” out of the Roth investments over the years in retirement are unlikely to exceed the principal you contributed (and thus be tax and penalty free after 5 yrs).

    I don’t know, just my 2c. I usually don’t comment on blogs but I thought this point was an important one that some of your readers may benefit from. Keep writing the good stuff!

    • says

      Anonymous,

      Glad you’ve enjoyed the blog over the last year. I’m here to inspire, and hopefully people find value in what I write.

      I agree with you in regards to the hidden value in a Roth as far as protecting assets, however I still come back to the point that if I were really in such a dire situation that someone was suing me for all of my worldly wealth I’m probably in the type of trouble that having, say, $40k or so in a Roth won’t really help. I could be wrong, of course, but I hope to limit a low-risk scenario like that and stay off any litigious radar. We’ll see how I do. :)

      Thanks for stopping by. I really appreciate your perspective, and I agree with what you’re saying. I think the Roth is the best way to go if you don’t have a match for the 401(k).

      Best regards.

  38. Anonymous says

    Great piece. A very sound and methodical plan that should fit your goals well. I have similar goals; I would like to retire in my 40′s and live off my pension and investment income.

    Personally my situation is a little different. I am 29 and will be eligible to retire at 41 years old at half salary which will be north of 65k/yr (today’s dollars). I have a 401k and 457 available to me in which I currently contribute the max to ($17,500 in each – $35,000 total pretax). Combined, these two accounts have an approximate value of $190k. My taxable account value is north of a ¼ MM, and pays out roughly $5800 in dividend income. I’m in the 28% tax bracket (single filer).

    Understanding that we all have different circumstances which contribute to the way we save and invest, I’ve been debating if I should continue to defer money or pay the tax on it and invest it through my brokerage account. I know both options have many advantages/disadvantages but would like some opinions. The 457 account I can withdraw from when I separate from my job penalty free (anytime after age 41), the 401k I obviously would have to wait until the age requirement of 59 ½. So in closing, should I continue to contribute to to both pre-tax accounts or shift some money into my taxable to invest in dividend paying companies?

    I thank you for letting us follow your journey and giving sound investment advice.

    • says

      Anonymous,

      Wow. Congrats to you. You’re in a phenomenal position for your age!

      I can only wish I was doing as well as you. :)

      I don’t think you really need any of my advice, but with your situation I would defer taxes as much as possible. I don’t know how much you spend, but $65k/year at 41 is pretty strong. You already have a substantial portion of assets in your taxable account and that will likely grow to significant portions by the time you’re 41 even without large additions. Even if you contribute $0 to your taxable account from here on out, it’ll be ~$650k at 41 assuming an 8% return (factoring out taxes). I think you’ll be fine no matter what you do, as you don’t have to walk the tightrope I do. However, I would probably max out my tax-advantaged accounts if I were you.

      Best of luck to you!

      Cheers.

    • Anonymous says

      Thanks Jason. Although I never inherited money or anything, It was a bunch of luck, lots of hard work, and most importantly living well beneath my means which got me where I am. I did many things in my life that were different from the majority, and was never one to follow the ‘sheep’.

      I really appreciate you taking the time to run those numbers, something I never did lol. You make a lot of sense in things. Keep up the great work.

      Chad

  39. Kyle says

    DM,

    Love the blog and the dialogue.

    Maybe I missed this point earlier, but what are your plans regarding health insurance when you ER?

    • says

      davidmichael3639,

      I’m still investigating this.

      If I had to guess as to whether a basket of high quality companies or a basket of high-interest loans would prove to be a better investment class over time I’d pick the former over the latter ten times out of ten.

      That being said, I’m a fan of diversifying income when and where possible, as it makes sense. However, the more I look into this the more I read that institutional investors suck up a good portion of the solid loan opportunities before us little guys ever get a shot.

      We’ll see. Stay tuned! :)

      Cheers.

  40. JG says

    Hello,

    Great blog and info. Let’s say you worked for a company that offers a generous 401k plan that matched 100% up to the max contribution 17,500 +17500 = 35,000 would be possible each year. Would you take advantage of that?

    • says

      JG,

      Thanks! Glad you enjoy the blog. :)

      To answer your question: unequivocally yes. I would never pass up that kind of money.

      Unfortunately, I’m not in that position. If you know of a place that’s hiring that offers such a benefit let me know! :)

      Best wishes.

      • JG says

        My company offered this plan, but recently changed the match to 50% of the max contribution last year. Fortunately for me I’m grandfathered in at the 100% that I take advantage of. The issue for me is that would like to reach FI sooner then 59 1/2, but the majority of my savings is tied up in tax advantaged accounts. I call this 401k poor. After reading your blog I think it does make sense to diversify with a taxable account to build more liquid cash nest using a dividend investing strategy. I’m still in my 30′s so I do have some time left to let my money work for me to get the desirable compounding benefits.

        I look forward to following your journey.

    • Ravi says

      You should always contribute enough to get the match in a 402k. It’s a guaranteed 100% return. As long as your investment options somewhat track the market, you’ll come out way ahead. Hopefully your plan doesn’t just let you invest in dog poop futures.

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