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Message
re: Early IRA Withdrawal
Posted on 12/15/22 at 10:45 am to Negatiger1986
Posted on 12/15/22 at 10:45 am to Negatiger1986
I have not read the full thread in detail, but I think people always underestimate the power of compounding. ESPECIALLY in the later years.
You say 24 years… if you use the rule of 72/ rate of return for the amount of time for your money to double. That money, which you plan to withdrawal, would likely double somewhere between 2-3 times over the next 24 years, using a return rate of of 6-9%.
So withdrawing $50K now means losing anywhere between $100K (double twice) to $200K (double 3X)
Are you saving that much on interest?
It’s that last “double” which people always seem to forget when talking about saving early. It’s why you always see the random example of the person who begins saving $XX from 18YO only through 30YO vs the person who begins saving at 30YO, and not able to catch up to the 18YO who stopped investing at 30YO.
The continuous doubling of your balance at age 50, then, 58, then 66, etc etc… is lost on a lot of people.
You say 24 years… if you use the rule of 72/ rate of return for the amount of time for your money to double. That money, which you plan to withdrawal, would likely double somewhere between 2-3 times over the next 24 years, using a return rate of of 6-9%.
So withdrawing $50K now means losing anywhere between $100K (double twice) to $200K (double 3X)
Are you saving that much on interest?
It’s that last “double” which people always seem to forget when talking about saving early. It’s why you always see the random example of the person who begins saving $XX from 18YO only through 30YO vs the person who begins saving at 30YO, and not able to catch up to the 18YO who stopped investing at 30YO.
The continuous doubling of your balance at age 50, then, 58, then 66, etc etc… is lost on a lot of people.
2
Posted on 12/15/22 at 11:46 am to Fbohn1
quote:
So withdrawing $50K now means losing anywhere between $100K (double twice) to $200K (double 3X)
This!
The ^n in (1+k)^n very expensively escapes too many people
Posted on 12/15/22 at 11:56 am to Negatiger1986
quote:
Scenario 1:
100k is taxed at 25% and put into a taxable savings account. It earns 10% for 5 years. The value is (100*.75)*(1.1^5).
Scenario 2:
100k is put in a tax deferred account. It earns 10% for 5 years. It is then withdrawn and taxed at 25%. The value is 100*(1.1^5)*.75. Its the same equation, just written in a different order. The money is worth ~121k on a post-income tax basis either way.
Now, apply your real life...
n = 25 to 30 years
Tax rate 1 = 25%
Tax rate 2 (retirement) = <25%
All things equal, IMO, Roth is better way to go, not least of which is no RMDs. Your Tax arbitrage frame has a blind spot...
My general rule, the tax calculation should not be the primary driver of a financial decision such as this. It is important but it is not primary.
Primary here - value destruction in:
10% penalty > debt interest rate
Forfeiting 25-30 yrs of compounding for home remodel
Posted on 12/15/22 at 7:42 pm to Fbohn1
First of all - I now agree that the ROTH conversion is the much better option for the scenario I've described rather than trying to siphon project funds off the IRA. I will explore financing options including an SBLOC. I appreciate the comments and conversation.
In response to your post specifically, I agree with what you're saying and the power of compounding is certainly not lost on me. But you are foregoing compounding interest every time you spend a dollar. You can't let that control every decision. At some point it's OK to start spending some money on "nice things" if you are on track to meet your financial goals. (Most people spend money on nice things even when they're not on track to meet their financial goals). What is the point of having money otherwise? Also, “spend” isn’t exactly the right word in this context – I’m not YOLO’ing it on a trip or vehicle. While the property won't outperform the S&P, it’s an asset that can be expected to appreciate over time and the value will increase as a result of the remodel.
In response to your post specifically, I agree with what you're saying and the power of compounding is certainly not lost on me. But you are foregoing compounding interest every time you spend a dollar. You can't let that control every decision. At some point it's OK to start spending some money on "nice things" if you are on track to meet your financial goals. (Most people spend money on nice things even when they're not on track to meet their financial goals). What is the point of having money otherwise? Also, “spend” isn’t exactly the right word in this context – I’m not YOLO’ing it on a trip or vehicle. While the property won't outperform the S&P, it’s an asset that can be expected to appreciate over time and the value will increase as a result of the remodel.
Posted on 12/15/22 at 7:46 pm to Turf Taint
quote:
Now, apply your real life...
I agree with all this - I was just illustrating that the benefit of a 401k/IRA is in fact not the compounding interest but the tax implications - as you've laid out. But that's not what the other poster said. Also I'm not too optimistic about that retirement tax rate but that's a conversation for the Poli Board.
As stated above agree with the Roth advice as well - thanks for the input.
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