Too much in retirement accounts

[Montecfo]

Quote:

Originally Posted by ckelly78z This is exactly what I told my son the other day, and my new SIL last year when they got new jobs. I strongly urged them to get the company match as soon as it is available, then load up whatever you can afford into Roth accounts. That yearly 3% raise can provide you with a nice 2% boost every year to your contributions...Keeping 1% out for your increasing expenses.

So what is the basis for your advice regarding Roths? To me Roth versus tax-deferred is dependent primarily on tax rate expectations. MOST folks can expect to be in lower tax brackets upon retirement as income will be lower for most folks. The "tax torpedo" angst is mainly an issue for folks with generous pensions and prodigious savers (there are a lot of BOTH here, but we are outliers).

In my opinion, you want some tax diversity. I personally invested primarily in 401K/IRA, secondarily in Roth (early in career at lower tax rates) and thirdly in taxable (later in earning career so it is not juicing taxes the whole way).

[CRLLS]

It is not just federal tax brackets to consider but state tax brackets also. I would have to answer the question of, in the next 15 years or beyond, Am I going to be in the same state I am today? For instance, currently in Illinois there is no income tax on SS, pensions IRA, 401K or other retirement disbursements. Not many other states can claim that. The downside is that tax brackets change, both state and federal. Trying to look forward 5 or more years is like trying to hit a moving target.

I have mentioned in other threads, there are other benefits from having everything in a Roth. One being the possibility of freezing one's property tax assessments, and the possibility of a Senior Tax deferral. If one has only a Roth as their retirement savings, then there is no other outside income to be counted as income.

Currently we are retired and collecting some SS, so our plan would be different than yours. Unless we do something, in a few years we will be firmly in the federal 22% bracket (if that is what the brackets will be at that time). We are trying to reduce the tIRAs now, before RMD's, by using the tIRAs for some living expenses and converting well into the 22% bracket avoiding other triggers for the various cliffs. Our plan also helps to mitigate the inevitable surviving spouse's taxes when filing single.

My point is there is more to consider than comparing your anticipated Fed tax brackets now vs later. A lot depends on how detailed you want to plan (guess).

[teetee]

In my mind we should always maxmize the contributions to all the applicable retirement accounts to take advantage of tax related benefits.

I also like ROTH better because there is no RMD with ROTH which is the biggest income tax source during the retirement (assuming that all your income comes from retirement accounts).

So my strategy is convert my 401 k / tIRA to Roth IRA during the low income years before retirement so I can avoid taking the RMD after 72.

[TheWizard]

I was in the 28% marginal Federal tax bracket for the last decade before I retired and I maxed out my tax-deferred 403(b) contributions for at least the last five years before retiring, along with the $5500 or $6000 max to my Roth IRA.

I retired a while back and now with the tax law change, I'm in the 24% marginal Federal tax bracket. But I worked a few years too long and, as a result, both my AGI and the dollar amount of taxes paid to the IRS each year in retirement are higher than they were during working years.

Now some of that AGI is due to Roth conversions I've been doing prior to age 70.5, and now to age 72.
But my projections don't show AGI decreasing after age 72, since I've been Levelizing my AGI for a while now.

I'm ok with this situation, not whining whatsoever...

[ckelly78z]

Quote:

Originally Posted by Montecfo So what is the basis for your advice regarding Roths? To me Roth versus tax-deferred is dependent primarily on tax rate expectations. MOST folks can expect to be in lower tax brackets upon retirement as income will be lower for most folks. The "tax torpedo" angst is mainly an issue for folks with generous pensions and prodigious savers (there are a lot of BOTH here, but we are outliers). In my opinion, you want some tax diversity. I personally invested primarily in 401K/IRA, secondarily in Roth (early in career at lower tax rates) and thirdly in taxable (later in earning career so it is not juicing taxes the whole way).

At this early stage of employment, I stressed maxing out the 401K company match (which will probably yield him 6% + 3% match) in tax deferred accts, and then whatever he can afford (probably another 6% at this young age) in Roth accts. He also has a Charle Schwab brokerage acct for playing around with others. This will give him a balanced investment portfolio for the future.

[armor99]

Quote:

Originally Posted by Gumby If it is a government 457, it is quite unlikely that there is an employer match, so I wouldn't bother at the very low tax brackets I posited. I would just max the Roth and save the rest after tax. However, if our hypothetical young person is successful, they will soon move up to the 24% bracket. At that point I would contribute to the 457 as necessary to stay in the 22% bracket, but not more. I also don't believe there is any difference between the 457 and the 401k categorically that would preclude the Rule of 55 withdrawal. It is up to the individual plan. Actually, I think early retirement is best served by having a wad of after tax money on hand when you retire.

There is one wrinkle.... the rule of 55 applies to Roth 401k as well, but you will pay a prorated amount of tax on the growth, but no penalties... However, if at 55 you move it into a Roth IRA, and that ROTH IRA has existed for 5 years, then you CAN take out all of your personal contributions with no taxes, or penalties. I plan on doing this....

[Montecfo]

Quote:

Originally Posted by ckelly78z At this early stage of employment, I stressed maxing out the 401K company match (which will probably yield him 6% + 3% match) in tax deferred accts, and then whatever he can afford (probably another 6% at this young age) in Roth accts. He also has a Charle Schwab brokerage acct for playing around with others. This will give him a balanced investment portfolio for the future.

To me that strategy would vary depending on tax brackets. If he is in the 12 percent bracket then sure go Roth after picking up match. 22 or 24 percent, then it is less clear. I would probably tilt back toward tax deferred at those rates, or possibly split between deferred and Roth

These singles hit those higher rates so quickly.

[pb4uski]

Quote:

Originally Posted by TheWizard I was in the 28% marginal Federal tax bracket for the last decade before I retired and I maxed out my tax-deferred 403(b) contributions for at least the last five years before retiring, along with the $5500 or $6000 max to my Roth IRA. I retired a while back and now with the tax law change, I'm in the 24% marginal Federal tax bracket. But I worked a few years too long and, as a result, both my AGI and the dollar amount of taxes paid to the IRS each year in retirement are higher than they were during working years. Now some of that AGI is due to Roth conversions I've been doing prior to age 70.5, and now to age 72. But my projections don't show AGI decreasing after age 72, since I've been Levelizing my AGI for a while now. I'm ok with this situation, not whining whatsoever...

So at the end of the day if you deferred at 28% and withdrew at 24% the you saved at least 4%.... right? Perhaps not the extent of savings that you expected when you deferred the income, but nonetheless still a savings.

[pb4uski]

Quote:

Originally Posted by Montecfo To me that strategy would vary depending on tax brackets. If he is in the 12 percent bracket then sure go Roth after picking up match. 22 or 24 percent, then it is less clear. I would probably tilt back toward tax deferred at those rates, or possibly split between deferred and Roth These singles hit those higher rates so quickly.

+1 12% is a pretty low bar... if one is currently in the 12% tax bracket then Roth is the way to go as it is unlikely that one will be in a lower tax bracket when withdrawing.... 22 or 24% then income deferral migh be perferable but you need to pick up a pencil and do some ciphering.

[fosterscik]

I think it's worth mentioning that when I put money into a traditional IRA it saved money at my marginal tax rate (both Federal & State). Now that I'm withdrawing I get the additional benefit that some of those draws are covered by standard deductions and lower brackets and it's my effective tax rate that counts. Every little bit counts!

[pb4uski]

Yes... I calculate an effective rate on my withdrawal by taking the difference in the tax after and before the tIRA withdrawal/Roth conversion divided by the amount withdrawn/converted. Over the last 7 years my effective rate has averaged 8.5%... an average of 0% (covered by deductions and exemptions when we had those), 10% and 12% (formerly 15%).

A big savings from the 28% or so that I avoided when I deferred that income.

[Winemaker]

I maxed out thrift plan/401k and tIRA/Roth from 1981 to 2014, DW maxed tIRA/Roth from 1983 to 2015. She only put in 10% into 403b, and we never went without. Kids went to private colleges; graduated debt free. People can and do contribute to both. While we are members of the 401k/403b/tIRA 7 figure club, we will also be in the high tax club, too. Nice problem to have.

[TheWizard]

Quote:

Originally Posted by pb4uski So at the end of the day if you deferred at 28% and withdrew at 24% the you saved at least 4%.... right? Perhaps not the extent of savings that you expected when you deferred the income, but nonetheless still a savings.

It might look that way, but I planned for roughly the same net income in retirement as when employed, irrespective of taxes.
And the tax cut from 28% marginal to 24% last year was accompanied by removal of personal exemptions and a $10,000 limit on deductable State And Local Taxes.
Bottom line for me: I'm paying a bit more to the IRS than previously.

You can do a certain amount of planning but then you just roll with the punches...

[Markola]

Quote:

Originally Posted by rollergrrl Is the 401k millionaire goal the best route for young investors?

I think it is, for another reason besides tax math: It’s slightly harder to get one’s paws on it for an emergency sports car, international vacation or to pay off credit cards and student loans. If the particular kid is the rare type who can leave the marshmallow alone and just look at it sit on the table, then tax deferred accounts with their 10% penalties offer a bit more disincentive to crack the glass and pull the lever when the first foul or tempting breeze in adulthood blows. If the kid is among the majority that eats the marshmallows, their elders are wasting their time worrying about them learning to save and invest. I think most kids can be identified as one or the other through their consumption patterns and whether they are capable of deferred gratification by their early twenties.

[tflannery]

never realy see people factor in state taxes. i live in IL, i believe i do not pay state taxes when i contribute to 401k, nor do I pay state taxes when i withdraw from my 401k.

[imnontrad]

The answer is - it depends.
If in Roth - FANTASTIC!
If in a traditional 401K and they plan to retire early enough to convert a big chunk to Roth - Good
If in a traditional 401K and they have 5 or more years until they retire at 63 - be prepared for an eventual income tax hit AND higher Medicare premiums - especially if one spouse dies before the account is drained.

[rvindave]

Something I don't see mentioned in discussions about 401k's is the fact that both your contributions and earnings (returns) are taxed upon withdraw, both taxed as regular income. In non tax deferred accounts, your earnings are taxed at the Capital Gains rate, or the applicable dividend tax rate. If you keep your income lower than $40k, your Cap Gains tax rate is 0%. I retired early (at 52), and am living on my non tax deferred accounts. I work to keep my income low, both for the Cap Gains rate & the ACA qualification for subsidies. Just something to consider.

[eroscott]

Quote:

Originally Posted by rollergrrl By having my Spouse and I max out tax Deferred accounts we can lower are taxes from 22% to 12%. Is that worth putting that much in a tax deferred account special with not having a match? Is lowering to 12% bracket worth it? The fees in the accounts are not that bad.

Does one of your tax deferred accounts (401K) allow you to put in both before and after tax money? This is a sweet way to get money into ROTH accounts.

i.e. I did this at my job which allowed $19K in before tax and then up to 20% into the 401K with after tax money. Every year I could call up Fidelity and transfer out the 401K after tax money to the Fidelity ROTH IRA. So this was on top of us maxing out each of our other Vanguard ROTH IRAs.

Title: Guidance on Allocation of After-Tax Amounts to Rollovers
IRS Tax Notice 2014-54
https://www.irs.gov/pub/irs-drop/n-14-54.pdf

[Scratchy]

My apologies if the point I raise below has already been mentioned in this thread, I did not see it at a quick glance.

For non tax-advantaged accounts, the cost basis gets reset at the time of death of the owner. In a community property state, it gets reset upon the death of either spouse, leaving the surviving spouse with a new cost basis for all community property holdings.

So, for those who can foresee that much of their non tax-advantaged holdings would not be spent before they were passed on to their heirs, or surviving spouse, capital gains tax would be largely avoided.

There is no corresponding advantage for non Roth retirement accounts. Tax will be paid on those funds, including principal and gains, when they are withdrawn, whether by the original owner or the heirs.

The point being, the gains in non tax-advantaged accounts may actually never be taxed, in some cases. I anticipate largely spending money from my retirement accounts, and avoiding selling positions which have significant gains in my non-tax advantaged accounts, as this will be beneficial to my heirs.

[ozpowell]

Quote:

Originally Posted by Souschef I am sorry,but i disagree. When your savings grow tax deferred, there is the power of compounding, as you do not pay tax every year. That can be proved mathematically.

+1 compounded