Optimal Maximum Retirement Account Balance? FIRE Considerations? Avoiding Taxes

I’ve long thought the optimal level of the pre-tax retirement account was about $250k for purposes of FIRE. This would mean that if the account generated at least a 5% nominal return each year, you would be able to do a Roth IRA conversion of the $10k annual standard deduction/personal exemption. This would be done in any year when you are not working, such as FIRE, and would otherwise forgo the non-refundable tax break.

If you FIRE in your 30s or 40s, then you’ll be able to convert a ton of money, tax-free into a Roth IRA. Where you never paid taxes on the money initially, since it was placed in a tax-deferred retirement account. And you never paid taxes on the conversion since you only did so up to the standard deduction. And you never pay taxes coming out, since it’s a Roth IRA.

That was the idea at least, before Orangeman. Orangeman scrapped the personal exemption for a larger standard deduction. However, it was my understanding the larger standard deduction was only going to last a few years, and then revert back to the original $6k or so, but the personal exemption was gone forever. Unless we re-elected Orangeman and he would extend the larger standard deduction. So it’s certainly possible the $10k of free conversions each year will drop. Although who knows.

On to my concern if the pre-tax retirement account value is too high. More money is generally better than less money, except when the government is involved. If you made over $75k last year, like me, then you got no $1200 stimulus check. However, Orangeman will let us take the $1200 as a refundable tax credit as long as you make no more than $75k in 2020. So if you make $75,001, then you get nothing. Thus, the extra $1 you earned cost you $1119. And we are likely to get a second $1200 stimulus check with the same criteria so if you’re at $77k AGI, it might be worthwhile to take unpaid leave from work for a week or so in December, to get a $2400 tax credit.

The problem with having too much money tends to be on the margins of government programs. I’d rather have $10M in my pre-tax retirement account than $250k, but I might actually be better off with $250k than $300k.

If the pre-tax retirement account value is too high, then RMDs will kill you in your 70s, if eating fast food hasn’t already. And Social Security starts getting taxed if you make more than $X per year, so you want to keep total income down.

The government has also made it clear that they want to do means testing for handouts, like the ACA subsidy. If your 401k is a few thousand dollars above an optimal level, then your RMDs may cause you to be a few dollars above the marginal threshold for various government cheese programs.

As a last ditch resort, you could put some portion of your 401k money into a triple inverse ETF that’s guaranteed to lose money over the long-term based on operating structure. But, rather than try to burn money from the account in my 70s, I want to avoid putting too much in there to begin with.

Thus, I’m considering the optimal account balance leading up to retirement. The $250k figure was something I thought about when I was in my late 20s. Now in my 30s, I wound up with $500k in there and I’m still not FIRE. Ooooops.

So now, I’m considering two strategies.

One, is I do Roth IRA conversions even past the “free” point, maybe into the first tax bracket marginal point. This sucks a bit, since it means I will have paid some tax on this money, which the original strategy was meant to get it out tax-free.

Two, is I take a 401k loan before the RMD point kicks in during my 70s, so that the total balance is lower and the RMD amount is lower. If you are self-employed, or have a pulse and a SSN and can apply for an EIN on the IRS website, you can qualify for a Solo 401k at a brokerage that allows loans. Even if you worked as a W2 employee your whole career, you can roll it over into a Solo 401k and take a loan from that. Bingo, bango, lower balance and less RMDs.

The problem is you can only do a loan of $50k so it doesn’t help much, but it’s something.

I post this to get some kicking at the tires. Am I crazy for thinking it’s a bad idea to have “too much” in a pre-tax retirement account? Any strategies I missed to strip money out?

All of this assumes the laws stay the same for the next 30 years but we can assume the future laws will be some kind of amalgam of current laws, meaning some form of RMD will exist. The age may get pushed later to a higher age. There also may be some kind of VAT to pay for universal healthcare which will reduce the value of Roths. It’s possible the VAT takes the place of some federal income tax, meaning tax rates go down, in exchange for this VAT, but that seems unlikely since it would be regressive in nature, and government tends to only increase tax, not trade a new tax for less of an existing tax.

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Not exactly. It phases out. It works like an extra 5% tax until you get to 99k (where the credit is $0).

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I have been rolling the maximum tax free from my IRA to my Roth for the last 9 years. Even before I was 59.5 years old and could withdraw from my IRA penalty free. I rolled over the maximum I could tax free and took the 10% penalty just to get my IRA amount lower. I have been looking ahead to the future when the RMD will effect my ability to have some control of what will be taxed at higher levels. When I retired at 49 a large amount was put into my 401k and I have been actively trying to manage it since. One of the first things I did was move the 401k into a IRA to eliminate the fees my 401k was charging. To let your IRA or 401K sit and grow without considering the future RMD is foolish.

I used to buy a tax program or two in November and pre calculate my taxes to determine the most efficient amount to roll into a Roth each year. A few years ago all the tax programs I could find would not be very good at calculating until late December or even January. That is when I found a spreadsheet that was better suited to determine what was the rollover amount for that year even earlier than November.


This helps me plan some of my financial decisions earlier and give me more flexibility planning things like stock selling and CD amounts. Now that the RMD is drawing near and I will begin collecting Social Security when I reach 70. I still have not lowered the amount in my IRA’s to give me the flexibility I want. I wish I had started rolling over earlier and more. Paying that early 10% IRA penalty was a hard step to take and my hesitation may cost me 12% or more unless future tax rulings change.
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My problem with this is the size of our future traditional IRA accounts (rolled from 403b + 401a). After moving money from 403b, I don’t know how to chip at 7 figure amounts in a meaningful way by just using annual free conversion to Roth IRAs. I’d be fine probably with extending to the first marginal limit and pay 10% taxes which would certainly be lower than eventual taxes after age 72.

Honestly, I’d consider tolerating even higher brackets than 10%, unless you thought you were going to draw it all down in your lifetime.

Leaving any Traditional IRA money to heirs has become distinctly worse with the elimination of “stretch” IRA provisions. Any inherited money has a high probability of hitting heirs during their highest tax years, and their need to draw it all down within 10 years can cause some real headaches.

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Agreed 12% bracket would be acceptable and extend considerably the amount you can convert annually. That goes until $80k (filling jointly) which is a start but afterwards, you’re in the 22+% bracket so you’re not saving much compared to what RMD tax rate will be (unless they increase a lot in the future).

Otherwise, we’ll probably try to live off the traditional IRA money as much as possible before age 72 to reduce balances while delaying taking social security and our company pension to increase annual pay outs afterwards. But all these only go so far unfortunately.

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I’d like to have your 7 figure problem.

Yes it’s not an unmanageable problem to have but it’s the only way we had to FIRE as soon as the kids were all out of the house. We switched to maxing out Roth 403b contributions now (along with Roth IRA contributions) but that’ll not help much with accumulated balances in pre-tax accounts, at least until we stop working in 5 years or so (should be 52 by then) when we should be able to start doing Roth conversions.

Even at 22% I’d give it serious consideration, since i think it is unlikely that my heirs would have a marginal rate lower than that.

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It depends on what the rest of your assets look like and how you plan to take the money out for FIRE.

I would assume you’ll do a mix of Roth IRA conversion laddering and 72T SEPP.

If I had $1M+ in a 401k, I’d strongly consider real estate holdings in a self directed account.

Really it depends on how much you need per year to live on.

I was thinking the same thing, but then I thought if an account requires RMD, would you have to liquidate the real estate at some point? And is the value of real estate based on current market or on purchase price? Cause I suppose if you buy it long enough in advance, you could take RMDs out of other accounts for a while or something…

I’m not sure. I would think depending on the RMD amount, you might be able to take the cash flow from renting out the property and use that as the RMD. Since you are supposed to have any rent payments feed back into the 401k into the cash account.

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One thing I am considering is buying a RAV4 Prime. I need a new vehicle and right now it comes with a $7,500 federal tax credit. The tax credit will help.

That’s how you know they are the highest quality vehicle. When the government has to subsidize a large chunk of the purchase price.

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If that were the case, why didn’t they design the legislation to be based on assets in addition to income?

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I also have a substantial gain in MCD (McDonald) stock that I need to cash in and pay the taxes on, maybe in 2021. I need to put that cash in a non dividend stock to give me more room to roll more IRA funds into my Roth.

The government is giving out incentives to get electric vehicles. I might as well take advantage of it with on of the better quality electrics out there. I can’t bring myself to take a risk on a Tesla. Which from what I read has substantial quality issues.

I am unaware of any asset testing for ACA subsidies.

That’s because there isn’t any.