[Karlie]

Wondering if someone can guide me? Most retirement accounts like Roth IRA, 401k etc have costs if you get your money earlier than 65…

what type of accounts do you use for FIRE? Are these only brokerage accounts?

Are you paying double taxes? Is the goal investing in target date index funds but for when you are 45 va 65?

Thanks

[Frank]

Here, have a recent podcast.
Do not use target date funds at all. They are especially bad in early retirement scenarios.

[Bill]

Sounds like you might be on the early side of your path? Just try getting to the point where you can max these retirement accounts out.

That’s the most important part. There are lots of tips and tricks to get the money out.

For actual funds, a total stock market fund would be ideal.

You don’t need anyone building a “target” fund for you.

Pure index funds will be perfect for 100% of your investments until you get close to retirement

[Joel]

You are mistaken. Most impose a 10% early withdrawal penalty if you withdrawal penalty if you take a distribution before age 59 1/2, assuming one of several exemptions do not apply.

Only an HSA requires you to be 65 or older to waive its early withdrawal penalty.

What’s more, retirement from a job in the year you turn 55 or later is one of those exemptions for employer sponsored plans.

Also 457(b) plans have no early withdrawal penalties at all and neither do individual taxable brokerage accounts.

Also you can withdraw any contributions to a Roth IRA immediately without taxes or penalties.

The same is true of any non-taxable Roth IRA conversion dollars.

Taxable Roth IRA conversions must be held in a Roth account at least 5 years, but after that the conversion may be distributed tax and penalty free.

Only Roth earnings need to remain in the account until after you turn 59 1/2 to avoid taxes and penalties. And since you don’t stop needing financial resources after you turn 59 1/2, this should not be a huge problem.

These rules are the basis of the so-called Roth IRA conversion ladder.

Finally, there are Section 72(t) [aka SEPP – Substantially Equal Periodic Payments] distributions. Those can be taken from any retirement account.

If you follow the rules, no penalties are due. Obviously you will owe taxes if you use SEPP distributions on a pre-tax account.

Also once started, you will need to continue taking SEPP distributions until you are 59 1/2 or 5 years have elapsed, whichever is longer.

With a little preparation, anyone can utilize retirement accounts as part of their retirement plan before they reach the usual withdrawal age of 59 1/2. It takes planning, but it’s hardly rocket science.

As for using taxable brokerage accounts to bridge the gap – the most you might need is 5 years of expenses.

That’s because you can always fall back on a Roth IRA conversion ladder if you had been doing Roth conversions during those first 5 years.

If that isn’t going to work, it’s probably because you haven’t saved enough…

I used what I had access to. I contributed to Pre-tax, After-tax and Roth 401(k) as well as making Roth IRA and backdoor Roth IRA contributions. I also saved money in a taxable brokerage account.

By the time I had access to Mega backdoor Roth 401(k) contributions, I already had a substantial amount in a taxable account so I made the most of that and front-loaded my contributions in an effort to shelter as much of that money from taxes as possible.

Unfortunately that was during the longest bull market in history and the market made it impossible for me to put much more into the 401(k) plan than I made in my taxable accounts.

Why would you think that’s even a thing? There may be more, but there is only one situation I’m even aware of where you would be double-taxed…

Investing in index based target date funds is not in itself a goal. It is a potentially easy, good enough solution to accomplish the goal of financial independence.

Target date funds are designed to adjust their asset allocations to fit an idealized glidepath, being more aggressive in the earlier years and (much) less aggressive in later years.

I don’t like these funds because they tend to be too conservative too soon. In fact they become excessively conservative once you reach the target date.

You can go that path if you want, but I prefer to recommend investing in a broad market equity index fund like an S&P 500 or total US stock market index fund until you are within about 5 to 10 years from retiring.

Once you are close to your FIRE number, loading up on bonds and other diversifying assets makes sense because it can reduce the volatility of your portfolio, which can help reduce your sequence of returns risk in retirement.

Besides, separately investing in different asset classes in different types of accounts can improve tax efficiency over target date funds.

[Michael]

Regular taxable brokerage account. That way, you can do ROTH conversion for years when you retire early and save thousands on tax!

[Author]

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