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Non-Taxable vs Taxable Investments?
Old 08-19-2014, 10:27 PM   #1
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Non-Taxable vs Taxable Investments?

Hi Gang,

I am 50 and have targeted retirement at 60. I have no debt and have a net worth around $750k. Current annual expenses are around $50k, and expected expenses in retirement are $40k.

I currently have $250K in 401k and 403b accounts - about $125k in each. The 401k is from a previous job, and I'm actively contributing to the 403b. There is $25k in an emergency fund and the kids' college accounts are complete. House is paid off and no other debt.

The wrinkle: As an ordained minister, the funds in the 403b can be disbursed as a minister's housing allowance, up to the actual costs of housing (clearly defined in the IRS tax code, so I won't bore you w/ the details). This is a TAX-FREE disbursement. So if my housing costs are $20k per year, I can withdraw this amount tax-free. Right now I am directing all of my retirement savings to the 403b - currently at $15k/yr and hope to be at the max in the next year or so. If I have $500k in the 403b when I retire, I can pull $20k/yr using the 4% WR.

However, I am also wondering if I should have some taxable investments. If for some reason I want/need to retire at 55, I don't have a "bridge" until I can access the 403b at 59-1/2. I am familiar with diversification of investments across asset classes, but should I also have "diversification" between taxable and non-taxable? I don't expect to be in a high tax bracket in retirement, even when SS kicks in, and the housing allowance distribution is non-taxable anyway. So my main question is about having "buckets" based on my age in case I choose to retire earlier than expected. Or do I initiate Roth IRAs once I max out the 403b?

Sorry this is so wordy, but I wanted everyone to have enough info to make constructive comments.
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Old 08-20-2014, 07:16 AM   #2
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I agree with hedging your bets and having both taxable and nontaxable accounts. I retired at 61 and don't plan to file for SS till I'm 70. (DH is 76 so we're getting some SS Income already.) I haven't touched the IRAs yet. Some of the reasons I like after-tax savings:

1. You get the favorable rates on long-term gains and dividends. If they come out of an IRA or 401(k) they're all taxed as ordinary income.

2. You're likely to have lower tax rates in retirement.

3. You can let the $$ in the after-tax accounts accumulate without being gouged by taxes during your working years. Some of the good years in the market have been marred by some really painful checks I had to write to the IRS!

Roth may be the best of both worlds; my employers offered them too late in the game for me to get much of my savings into them. I'll leave comments on that to the Roth experts. Just remember that the one big crapshoot is that tax laws can change at any time- another reason to have multiple types of retirement accounts.
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Old 08-20-2014, 07:51 AM   #3
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If you are considering taxable investments from your income (instead of
contributing to the 403B), wouldn't you be better off in a Roth? In both cases, you would be paying tax on that income, but in the case of the Roth, there would be no taxes on withdrawals.....subject, of course to the rules on aging....both you and the account.......although contributions could be withdrawn at any time w/o tax or penalty.

re: Roth vs 403B......you'd have to consider the usual question of what is your marginal tax rate at which you are saving on the 403B contribution vs what your tax rate would be if you had to withdraw early.
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Old 08-20-2014, 10:07 AM   #4
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If your taxable would be invested in equities that are 0% tax if you are in the 15% tax bracket or lower then I would lean to taxable instead of Roth since both are tax free but taxable gives you less restrictions. However, if your taxable investments would generate income that would be subject to taxes then the Roth may be preferable.

I have all three - taxable, tax-deferred and tax-free. We are ERd and currently living on taxable funds and absent Roth conversions would pay zero tax because we are in the 15% tax bracket so most of the income from our taxable account is tax-free and what little taxable income we have would be covered by the standard deduction and personal exemptions.
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Old 08-20-2014, 05:07 PM   #5
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I just wanted to note that $20K in housing costs seems rather high. Many retirees are living in paid-for homes, so housing costs might only be property taxes and a little bit of upkeep. I know that is the case for me.

In your situation, I see no need to contribute to a taxable account until you contribute the $23,000 max to your 403(b) and another $6500 max to your Roth IRA each year. It seems like you have a ways to go. Don't forget that you can withdraw Roth IRA contributions without penalty any time you wish.
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Old 08-20-2014, 06:25 PM   #6
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Thanks for the input so far.

Our house is paid for, so no mortgage is involved. The IRS housing allowance can include several items other than mortgage or rent. You can include all utilities, repairs, upgrades, remodeling, landscaping, property taxes. It's not difficult to get to $20K, but you are correct - it's not difficult to keep expenses a lot lower too.

The Roth option sounds good. If I am reading correctly, it would be possible to start using these funds at, say, age 55 if I meet certain conditions. That would be a good way to hedge my bets. Any other ideas?
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Old 08-20-2014, 06:35 PM   #7
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One can starting using Roth contributions about 1 second after they are contributed, so that could be age 20, age 30, age whatever. One does not have to wait until age 55.

Note that contributions are not gains.

Also, did you catch that as an oldster your 403(b) and Roth contribution limits are higher than when you were younger?
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Old 08-20-2014, 08:53 PM   #8
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Yes, I am aware of the higher limits for us old fogeys. Thanks for the reminder!
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