Too much in retirement accounts

[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by taking the difference in the tax after and before the tIRA withdrawal/Roth conversion divided by the amount withdrawn/converted.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]

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]

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]

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]

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

 

[pb4uski]

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.

This is what we are doing and I've written about it often. What happened was that we were living off of taxable and doing Roth conversions but the taxable equities were 200% of cost so the gains from selling taxable equities to raise cash for spending was getting in the way of Roth conversions. So we changed tacks and are leaving taxable alone to get a stepped up basis and gains become totally tax free and that leaves more room for Roth conversions. We have enough in Roths that are past the 5 years to use a portion of those for spending... so we have Roth conversions going in the back end of the toothpaste tube and Roth withdrawals for spending coming out the front end of the toothpaste tube.

We may also use some of those highly appreciated equities in the taxable account for charitable contributions.

 

[samcat]

I scanned the posts and don't think this was mentioned but there is such a thing as having too much in pre-tax retirement accounts. Once RMDs hit at 72, you don't want to have to take so much that it puts you in a much higher tax bracket.

We have a four pronged approach.

401k
Roth
After tax savings
social security

We put an amount into our 401ks that we are comfortable with (we have our own S Corp so determine our own match) and then put the rest into a Roth or after tax savings. We are probably averaging $20k total between the two of us into our 401ks.

We are not retired yet but feel that the more we put into after tax savings, the more flexibility we have with life. And a lot of our after tax savings is in cash which I'm sure I'll get nailed for but we like cash!