Roth 403b or 457 for two teacher family with two pensions

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Topic Author
BashDash
Posts: 680
Joined: Mon Nov 28, 2016 12:31 pm

Roth 403b or 457 for two teacher family with two pensions

Post by BashDash » Sat Feb 09, 2019 8:29 pm

Hi all,
This article got me thinking.

https://403bwise.com/k12/story/432

It doesn't have me thinking to abandon our tax deferred in favor of Roth but maybe mix it up. We currently max out our tax deferred 403b, max half of our 457 and Max our Roth IRAs too. Our pensions are NYSTRS which is considered a well funded one. I have to look into the specifics but once eligible for retirement we will get a percentage of our highest earning years. I am concerned that we will be making more in retirement thus making tax deferred not favorable. Should I mix it up? Half and half with Roth and tax deferred. Our tax deferred space should continue to make us eligible for Roth IRAs as our salaries rise.

Thanks!!!!

General:
Age: upper 30s
Debt: 220k left on mortgage on house 4%. House worth roughly 350k.
Salaries 110k and 105k
403b 137k ( 60/40mix); currently putting in half of the maximum allowable amount
403b 110k (60/40); currently adding 200$ a month
457 40k (60/40) ; currently maxing out
457 25k (60/40); currently maxing out
Roth IRA 22k (100 %stock) ; currently maxing out
Roth IRA 22k (100% stock) currently maxing out
Taxable 137k (100% stock and some individual stocks); reinvesting dividends into VTI ( total stock market index)
Emergency fund 90k in high interest banking
Last edited by BashDash on Tue Apr 02, 2019 12:00 pm, edited 2 times in total.

Grt2bOutdoors
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Location: New York

Re: Roth 403b or 457 for two teacher family with two pensions

Post by Grt2bOutdoors » Sat Feb 09, 2019 8:38 pm

You could either fund ROTH 403b's or continue funding on a tax deferred basis but change the allocation in the 403b to be heavily fixed income (slower growth). Current tax law requires RMD's to increase as you age, a large 403b would increase your expected tax liability. There is no law that requires RMDs from a regular taxable account, you can also use TLH to periodically and opportunistically reduce tax liability and tax harvest losses today.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

02nz
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by 02nz » Sat Feb 09, 2019 8:38 pm

What percentage of your pre-retirement income will your pensions give you? At what age do you plan to retire? Do you pay into Social Security? Do you plan to retire in New York state or somewhere else?

Most people are better off with traditional, but high pension income tends to favor Roth, so perhaps a mix of traditional and Roth is the right answer. We can give better recommendations if you give more details.

I see you have quite a bit in taxable but unclear if you are maxing out tax-advantaged accounts (that's hard to do with both 403b and 457b). What's your reasoning for putting money in taxable, if not maxing tax-advantaged accounts? Generally you should max out that space first before putting money into taxable.
Last edited by 02nz on Sat Feb 09, 2019 11:30 pm, edited 1 time in total.

KlangFool
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by KlangFool » Sat Feb 09, 2019 8:41 pm

BashDash wrote:
Sat Feb 09, 2019 8:29 pm
Hi all,
This article got me thinking. It doesn't have me thinking to abandon our tax deferred in favor of Roth but maybe mix it up. We currently max out our tax deferred 403b, max half of our 457 and Max our Roth IRAs too. Our pensions are NYSTRS which is considered a well funded one. I am concerned that we will be making more in retirement thus making tax deferred not favorable. Should I mix it up? Half and half with Roth and tax deferred. Our tax deferred space should continue to make us eligible for Roth IRAs as our salaries rise.

Thanks!!!!

General:
Age: upper 30s
Salaries 110k and 105k
403b 137k ( 60/40mix)
403b 110k (60/40)
457 40k (60/40)
457 25k (60/40)
Roth IRA 22k (100 %stock)
Roth IRA 22k (100% stock)
Taxable 137k (100% stock and some individual stocks)
Emergency fund 100k
BashDash,

A) Your current income is 215K and you live in NY. One of the highest taxed area of the country.

B) How much are the pensions? Will it be 215K? How long before you are vested.

<<I am concerned that we will be making more in retirement thus making tax deferred not favorable.>>

C) This is not a bad thing. And, as long as you are not in NY, you will not be paying more taxes.

D)With your taxable account, you are paying a lot of taxes that are avoidable.

E) In summary, until your tax-deferred account reached 1 million, you should not look at Roth 403B/Roth 457.

KlangFool

retire2022
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Location: NYC

Re: Roth 403b or 457 for two teacher family with two pensions

Post by retire2022 » Sat Feb 09, 2019 8:59 pm

Kangfool, BashDash lives upstate, Westchester County and NYC has the highest tax rates next to California.

BashDash If I had to do it again, I would had Roth 457b, and Roth IRA from the get go, now with 1.5 million portfolio I will end paying more taxes at retirement and at 70.5 (RMD)

retiredjg
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by retiredjg » Sat Feb 09, 2019 9:01 pm

I have a different opinion. A pension makes a lot of difference in the traditional vs Roth decision. I think at least half of what you are putting into the 403bs and 457s should be Roth.

cdu7
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by cdu7 » Sat Feb 09, 2019 9:12 pm

Your exact expected pension amounts aren’t clear, but a lot of this really depends on whether you intend on staying in NY during your golden years. You can’t really go wrong either way, but hedging your bets by going 1/3 to 1/2 Roth may be the most sensible for now.

fingoals
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Joined: Thu Jan 24, 2019 6:43 pm

Re: Roth 403b or 457 for two teacher family with two pensions

Post by fingoals » Sat Feb 09, 2019 9:40 pm

Thank you for sharing this - it is relevant to my situation as well. I appreciate this community for sharing knowledge and wisdom.

aristotelian
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Joined: Wed Jan 11, 2017 8:05 pm

Re: Roth 403b or 457 for two teacher family with two pensions

Post by aristotelian » Sat Feb 09, 2019 9:54 pm

Generally I would say never to do Roth in a high tax bracket. However, the pension (rare these days!) could change things. You might try putting your numbers in this spreadsheet to make sure. https://docs.google.com/spreadsheets/d/ ... 1374797127

retiredjg
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by retiredjg » Sun Feb 10, 2019 9:36 am

Thanks for adding the article. Have not seen that one before. Here's another.

https://thefinancebuff.com/most-tsp-par ... h-tsp.html

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alpenglow
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by alpenglow » Sun Feb 10, 2019 9:42 am

KlangFool wrote:
Sat Feb 09, 2019 8:41 pm
BashDash wrote:
Sat Feb 09, 2019 8:29 pm
Hi all,
This article got me thinking. It doesn't have me thinking to abandon our tax deferred in favor of Roth but maybe mix it up. We currently max out our tax deferred 403b, max half of our 457 and Max our Roth IRAs too. Our pensions are NYSTRS which is considered a well funded one. I am concerned that we will be making more in retirement thus making tax deferred not favorable. Should I mix it up? Half and half with Roth and tax deferred. Our tax deferred space should continue to make us eligible for Roth IRAs as our salaries rise.

Thanks!!!!

General:
Age: upper 30s
Salaries 110k and 105k
403b 137k ( 60/40mix)
403b 110k (60/40)
457 40k (60/40)
457 25k (60/40)
Roth IRA 22k (100 %stock)
Roth IRA 22k (100% stock)
Taxable 137k (100% stock and some individual stocks)
Emergency fund 100k
BashDash,

A) Your current income is 215K and you live in NY. One of the highest taxed area of the country.

B) How much are the pensions? Will it be 215K? How long before you are vested.

If they work 30 years, their pensions will be 60% of 3 year Final Average Salary (FAS).

<<I am concerned that we will be making more in retirement thus making tax deferred not favorable.>>

C) This is not a bad thing. And, as long as you are not in NY, you will not be paying more taxes.

FYI - if you stay in NY in retirement, NY pensions are state tax free. In addition, $20k each from IRAs/403bs/457s (i.e. $40k for a married couple) is tax free as well.

D)With your taxable account, you are paying a lot of taxes that are avoidable.

E) In summary, until your tax-deferred account reached 1 million, you should not look at Roth 403B/Roth 457.

KlangFool

DA200
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Joined: Fri Feb 06, 2015 3:47 pm

Re: Roth 403b or 457 for two teacher family with two pensions

Post by DA200 » Sun Feb 10, 2019 12:39 pm

How many years do you have in NYSTRS? How many more years do you plan to work in NYSTRS and how old will you be at that time?
If your plan is for both of you to work for a total of 30 years in the NYSTRS system, I would definitely consider the estimations below:

Currently, if you were to max both trad 403bs and both trad 457s, you would be in the following tax bracket:
$215K salary - $7K contribution to pension - $76K (4x$19K) - $24K standard deduction = $108K taxable income (22% marginal bracket)
The top of the $22% bracket is $165K in 2018.
If you were to max both trad 403bs and max both Roth 457s, you would be in the following tax bracket:
$215K salary - $7K contribution to pension - $38K (2x$19K) - $24K standard deduction = $146K taxable income (still staying in 22% bracket)

In retirement after 30 yrs, your combined pensions will probably be around $130K. Since recent tax changes are set to expire in 2025, this income alone in retirement would put you in the 25% bracket.

Since you can contribute to your Roth in the 22% marginal bracket, but will be in the 25% bracket in retirement, I think it makes sense to at least change the 457s or 403bs to Roth versions. You could also consider only contributing to tax deferred accounts enough to drop into the 22% bracket (which would be $215K - $7K - $24K - $165K = $19K total contribution to tax deferred accounts, while staying in 22% bracket

You could also make an arguement to contribute everything to Roth (since you will be in 25% bracket in retirement due to large pensions), which is higher than current 24% marginal bracket with 100% Roth contributions.

I also don't understand why you don't spend down taxable now, to allow you to max out Roth 403bs, Roth IRAs, etc. Then your funds will grow 100% tax free.

Retiring in NY with a NY pension is not bad - zero state tax on pensions!

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Ben Mathew
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by Ben Mathew » Sun Feb 10, 2019 12:50 pm

BashDash wrote:
Sat Feb 09, 2019 8:29 pm
max half of our 457
I don't understand what you mean by "max half the account". Since this is a governmental 457, it's as good as a 403b. If your investment options in this account are good, there is no reason to favor taxable over this. Given that you have a lot in taxable, I would max this out too.

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Ben Mathew
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by Ben Mathew » Sun Feb 10, 2019 12:58 pm

BashDash wrote:
Sat Feb 09, 2019 8:29 pm
Should I mix it up? Half and half with Roth and tax deferred.
One way to think about this is to calculate the RMDs you'll be forced to take out of your traditional accounts. Is this bigger than you otherwise would have taken out for living expenses in the absence of RMD requirements? If so, the Roth gets more attractive. Roth allows you to keep the money in a tax-advantaged account till end of life (and longer, if heirs stretch it out). This is particularly useful if you're not planning to spend down most of your retirement money--i.e. if you plan to maintain a large financial cushion throughout your retirement years or leave a a lot to heirs.

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FiveK
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by FiveK » Sun Feb 10, 2019 1:43 pm

BashDash wrote:
Sat Feb 09, 2019 8:29 pm
Hi all,
This article got me thinking.

https://403bwise.com/k12/story/432

It doesn't have me thinking to abandon our tax deferred in favor of Roth but maybe mix it up.
Some quotes from that article:
Susan just retired at age 70. Her last year’s salary was $90,000. Her taxable City pension is $50,000 and her taxable Social Security annuity is $30,000. She has a taxable balance of $1 million in her 457(b) account.
...
Pre-tax investing is not in the best interests of the long term civil servant.
If you also plan to retire at age 70 with the same (inflation adjusted) incomes and balances, you can probably follow the recommendation it gives.

If your situation will differ, you may wish to follow a different course.

It's probably worth spending a few hours to understand your own situation, as rules of thumb in this area are often based on generic assumptions that don't apply to many individuals.

Topic Author
BashDash
Posts: 680
Joined: Mon Nov 28, 2016 12:31 pm

Re: Roth 403b or 457 for two teacher family with two pensions

Post by BashDash » Sun Feb 10, 2019 7:54 pm

Thank for all the helpful replies! Some more helpful info that was requested.

-in year 18 of working with a hope to retire at 55 although that is not for certain as we like the job and have small children now who may be in college.

-we don't pay into the pension system anymore I believe that ended after 10 or 12 years.

-not sure what state we would like to live in although I like NY and I also like the thought of being near our kids so that would be a question mark.

I am trying to digest all the responses and do more research to educate myself. Right now I don't even have the Roth option but am willing to fight to get it.

Right now of all choices I like the idea of taking the tax deferred savings and tossing it in the Roth IRA. One thing is for sure I am way better off from this site. I was in a high cost 403b and didn't even know what a Roth IRA was just three years ago. That is the reason for the large taxable as someone mentioned. I did buy some stocks during 2008 when stocks were getting pummeled.

retire2022
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Location: NYC

Re: Roth 403b or 457 for two teacher family with two pensions

Post by retire2022 » Sun Feb 10, 2019 9:30 pm

BashDash, you could contribute to 403 and or 457b and transfer it to IRA when you leave, opportunity cost if you dont, both 403 & 457 you can contribute 19Kx2= $38K compared to IRA only 6K.

IRS publication 590A page 22:

https://www.irs.gov/pub/irs-pdf/p590a.pdf

Cumulative addition in 403/457 in next 37 years will be $1,406,000 without compound interest (age 30-67=37 years of investing) compare to 6000x37years=$222,000

if you have $38,000x37years with projected hypothetical compound interest of 3%, plus principal of $137,000 (403b) + $40,000 (457b)+ (Roth IRA) 22,000= $199,000

You will have end of 37+2019 in year 2056 $3,184,119.18

http://www.moneychimp.com/calculator/co ... ulator.htm

spouse

$110,000 (403b)+$25,000 (457b)+$22,000 (RothIRA)= $157,000+ $38,000x37 @3% compound interest years=$3,058,739.66

http://www.moneychimp.com/calculator/co ... ulator.htm

retiredjg
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by retiredjg » Mon Feb 11, 2019 9:33 am

BashDash wrote:
Sun Feb 10, 2019 7:54 pm
Right now I don't even have the Roth option but am willing to fight to get it.
If neither the two 403bs nor the two 457bs have a Roth option, you should use a taxable account for some of the money that is currently going into a tax deferred account.

There is such a thing as having too much in tax deferral and it appears to me you are headed there.

You currently have 4 containers that can receive $19k per year. With two pensions, I believe it would be a mistake to fill all 4 of them or even as much as you are doing now. I'd fill two of them and put the rest in a taxable account. Since early retirement is a possibility, I'd probably use the 457s if the options in the 457s are as good as the options in the 403b.
Right now of all choices I like the idea of taking the tax deferred savings and tossing it in the Roth IRA.
That's a big step. You would be converting at 24% which might not be outrageous for your situation. But before doing that, be sure you will not be in a lower tax bracket in retirement (which would be common).

You said you are concerned you will be making more in retirement than now. Just what do you expect your retirement income to be?

Topic Author
BashDash
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by BashDash » Mon Feb 11, 2019 12:45 pm

Retiredjg,
Thanks for the reply!

"Right now of all choices I like the idea of taking the tax deferred savings and tossing it in the Roth IRA."

I am probably explaining myself incorrectly. I meant that when I save money now by using the tax deferred that I will take that present tax savings and fill up the Roth IRA bucket. I didn't mean I was converting anything. I 'm actually not even sure how to do that. I'm not exactly sure what my retirement income would be but I get the feeling it would be high with a husband/wife teacher pension where each has put in 30+ years..

retiredjg
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by retiredjg » Mon Feb 11, 2019 2:15 pm

Well, maybe I'm confused. I understood you are already filling the two Roth IRAs and I thought you said you did not have any Roth options in the 403bs or 457bs.

And I'd like to correct what I said earlier about filling two of the tax-deferred containers. That may actually be more than I meant. It sort of depends on how much you can save each year. I'd make sure that at least half (maybe more) of what you save for retirement is in Roth (or taxable if Roth is not available).

You definitely want to arrive at retirement with some tax deferred money. But you don't want so much that it will push you into a higher tax bracket than necessary when RMDs start.

Topic Author
BashDash
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Joined: Mon Nov 28, 2016 12:31 pm

Re: Roth 403b or 457 for two teacher family with two pensions

Post by BashDash » Mon Feb 11, 2019 2:24 pm

I probably was unclear. Currently, my job does not have the roth 403/457 options but I am exploring whether it is worth pursuing getting those options added. It certainly sounds like it is worth it!

I am 60/40 bonds so maybe I should stay with theme of trying to be 60 tax deferred/ 40 Roth. I don't think that would necessarily be a bad thing?

ExitStageLeft
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by ExitStageLeft » Mon Feb 11, 2019 5:19 pm

BashDash wrote:
Mon Feb 11, 2019 2:24 pm
I probably was unclear. Currently, my job does not have the roth 403/457 options but I am exploring whether it is worth pursuing getting those options added. It certainly sounds like it is worth it!

I am 60/40 bonds so maybe I should stay with theme of trying to be 60 tax deferred/ 40 Roth. I don't think that would necessarily be a bad thing?
That sounds like a pretty good target. DW and I are shoooting for 75/25 but we're a little lighter on the pension in our case.

retire2022
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Re: Roth 403b or 457 for two teacher family with two pensions

Post by retire2022 » Fri Feb 15, 2019 6:39 pm

BashDash

In hindsight we should have sold off some assets Dec 17, 2018 at a lost to convert a portion of traditional 457 portfolio to Roth 457.

This is sort of harvesting losses to convert portfolio, in my case my $1,060,000 is expected in 11 years @4% to be worth $1,631,821.30

you can check my calculations

http://www.moneychimp.com/calculator/co ... ulator.htm

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