Tax Deferred Investments vs. Taxable??? What is better?

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Topic Author
bg5
Posts: 237
Joined: Mon Jan 15, 2018 11:07 am

Tax Deferred Investments vs. Taxable??? What is better?

Post by bg5 »

Hey Gang,

How do you determine if you are investing to much money in tax deferred accounts?

Retirement accounts today are as follows

Roth IRA - 53K

403B - 147K

Annually we are contributing the following:

19K into 403B

12K into Roth IRA (wife and I)


Another piece of information will be when we retire we both will receive pensions that will be around 100K (50K each) a year with a COLA. Are we currently investing to much in tax deferred ?
boglenomics
Posts: 50
Joined: Fri Jan 18, 2019 5:37 pm

Re: Tax Deferred Investments vs. Taxable??? What is better?

Post by boglenomics »

Depends on what your goals are. If you want to build long term wealth for retirement / estate, tax deferred is almost always the way to go. It's the "cheapest" of all options for that target from a tax perspective.

Taxable can be better if you intend to use the money prior to retirement so you don't get hit with early penalties.

Remember you can withdraw the Roth principal at any point without penalty and there are options available for early 401k withdraw (72t) to an extent.
Topic Author
bg5
Posts: 237
Joined: Mon Jan 15, 2018 11:07 am

Re: Tax Deferred Investments vs. Taxable??? What is better?

Post by bg5 »

boglenomics wrote: Sat Jun 01, 2019 7:13 pm Depends on what your goals are. If you want to build long term wealth for retirement / estate, tax deferred is almost always the way to go. It's the "cheapest" of all options for that target from a tax perspective.

Taxable can be better if you intend to use the money prior to retirement so you don't get hit with early penalties.

Remember you can withdraw the Roth principal at any point without penalty and there are options available for early 401k withdraw (72t) to an extent.
Thank you for a reply.....so there is a good chance that my wife and I will be able to easily live off of our pensions alone as we live well below our means and live in a LCOL area. So if we plan to eventually give this money to our kids when we die you are saying a tax deferred account is best? We wont leave it all but a good majority will probably be left for the kids
MotoTrojan
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Re: Tax Deferred Investments vs. Taxable??? What is better?

Post by MotoTrojan »

Hard to find a scenario where taxable wins. Keep up the great work, that’s an impressive pension.
boglenomics
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Joined: Fri Jan 18, 2019 5:37 pm

Re: Tax Deferred Investments vs. Taxable??? What is better?

Post by boglenomics »

bg5 wrote: Sat Jun 01, 2019 7:16 pm
boglenomics wrote: Sat Jun 01, 2019 7:13 pm Depends on what your goals are. If you want to build long term wealth for retirement / estate, tax deferred is almost always the way to go. It's the "cheapest" of all options for that target from a tax perspective.

Taxable can be better if you intend to use the money prior to retirement so you don't get hit with early penalties.

Remember you can withdraw the Roth principal at any point without penalty and there are options available for early 401k withdraw (72t) to an extent.
Thank you for a reply.....so there is a good chance that my wife and I will be able to easily live off of our pensions alone as we live well below our means and live in a LCOL area. So if we plan to eventually give this money to our kids when we die you are saying a tax deferred account is best? We wont leave it all but a good majority will probably be left for the kids
Yep, if it's a decent amount which it probably is consider some estate planning. I'm not a subject expert but there's probably some good info in the forum search / wiki.

Also +1 on the pension. That's fantastic!
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FiveK
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Re: Tax Deferred Investments vs. Taxable??? What is better?

Post by FiveK »

bg5 wrote: Sat Jun 01, 2019 7:16 pm So if we plan to eventually give this money to our kids when we die you are saying a tax deferred account is best? We wont leave it all but a good majority will probably be left for the kids
Assuming your investments increase in value, Roth is always better than taxable. Do you understand why?

Whether traditional will be better than Roth for your situation depends on the marginal tax rate you would save, vs. the marginal tax rate your heirs will pay when withdrawing.
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ruralavalon
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Re: Tax Deferred Investments vs. Taxable??? What is better?

Post by ruralavalon »

A little additional information is necessary.

What are your ages?

About how long until your expected retirement?

What is your current tax bracket, both federal and state?

How old are your kids?

Will you be eligible for Social Security benefits?

Are there any decent funds offered in your 403b plan? What are the diversified stock and bond funds offered with the lowest expense ratios? Please give fund names, tickers and expense ratios.

You can simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.


bg5 wrote: Sat Jun 01, 2019 7:08 pm Hey Gang,

How do you determine if you are investing to much money in tax deferred accounts?

Retirement accounts today are as follows[/u]

Roth IRA - 53K

403B - 147K

Annually we are contributing the following:

19K into 403B

12K into Roth IRA (wife and I)


Another piece of information will be when we retire we both will receive pensions that will be around 100K (50K each) a year with a COLA. Are we currently investing to much in tax deferred ?
bg5 wrote: Sat Jun 01, 2019 7:16 pm
boglenomics wrote: Sat Jun 01, 2019 7:13 pm Depends on what your goals are. If you want to build long term wealth for retirement / estate, tax deferred is almost always the way to go. It's the "cheapest" of all options for that target from a tax perspective.

Taxable can be better if you intend to use the money prior to retirement so you don't get hit with early penalties.

Remember you can withdraw the Roth principal at any point without penalty and there are options available for early 401k withdraw (72t) to an extent.
Thank you for a reply.....so there is a good chance that my wife and I will be able to easily live off of our pensions alone as we live well below our means and live in a LCOL area. So if we plan to eventually give this money to our kids when we die you are saying a tax deferred account is best? We wont leave it all but a good majority will probably be left for the kids
It doesn't look like you are investing too much in tax-deferred, on the information provided so far. My first guess is that traditional contributions to your 403b plan will likely be better than contributions to a taxable account, as long as any decent funds are offered in the 403b plan.

Here is a general account funding priority that usually works well for many people (when there is no high interest debt or HSA use):
1) Contribute to the work-based plans (401k, 403b, 457, SIMPLE IRA, TSP, etc.) enough to get the full employer match (the match is like free money, your best possible investment);
2) Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique), depending on eligibility and personal circumstances;
3) Contribute the remainder of the maximum employee contribution to the work-based accounts; and
4) Contribute to a taxable investing account.

"If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA." Please see the wiki article "Prioritizing investments".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
cherijoh
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Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Tax Deferred Investments vs. Taxable??? What is better?

Post by cherijoh »

bg5 wrote: Sat Jun 01, 2019 7:08 pm Hey Gang,

How do you determine if you are investing to much money in tax deferred accounts?

Retirement accounts today are as follows

Roth IRA - 53K

403B - 147K

Annually we are contributing the following:

19K into 403B

12K into Roth IRA (wife and I)


Another piece of information will be when we retire we both will receive pensions that will be around 100K (50K each) a year with a COLA. Are we currently investing to much in tax deferred ?

Without knowing your ages and anticipated retirement dates I can't tell if you are far behind or well ahead of the game.

Also never count on a pension or the amount of the pension until you are ready to draw it or possibly not even then. ERISA regulations only require that you get the vested amount of the pension you have accrued to date. If you have a traditional DB pension (X% times years of service times salary amount) the pension can be frozen so that its nominal value is frozen (its value in real dollars will decline). Most of the growth in a DB pension comes in the final few years, so a frozen pension may provide a fraction of what you anticipated at retirement. Even if the pension isn't frozen, the terms of the pension can be modified - including cancelling any future COLAs.

A cash balance pension is made up of two components - salary credits (usually set at a specified % of your current salary) and interest credits (usually tied to the interest rate of some financial instrument (e.g., 10-year treasuries). This pension can also be frozen by cutting out the salary credits. A frozen cash balance pension will still grow in nominal terms but most of the increase will be eaten up by inflation
Lee_WSP
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Location: Arizona

Re: Tax Deferred Investments vs. Taxable??? What is better?

Post by Lee_WSP »

MotoTrojan wrote: Sat Jun 01, 2019 7:16 pm Hard to find a scenario where taxable wins. Keep up the great work, that’s an impressive pension.
Only scenarios involve avoiding the early withdrawal penalties.
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Wiggums
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Re: Tax Deferred Investments vs. Taxable??? What is better?

Post by Wiggums »

If you use this template, it will help us to provide you with a better answer...

Asking portfolio questions
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Dandy
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Re: Tax Deferred Investments vs. Taxable??? What is better?

Post by Dandy »

The contributions to the 403b gives you some current tax advantage. Depending on your tax bracket in retirement it might make RMDs put you in a higher retirement tax bracket. Oh the curse of too much money. :D You should look at how you might use the "excess" income (now or in retirement) to make life better for you, your children and others. Sometimes we get too used to living below our means and pass up opportunities to enjoy life a bit more.

We are retired and our pension/SS income almost meets our current lifestyle. My RMD is mostly excess. We decided to gift some of our RMD as "early inheritance" to our children. It helps them and our grandchildren enjoy life a bit more -- and that makes us happy. We also increased our charity contributions. But the RMDs, pension and SS (collected at age 70) put us in a high tax bracket -- probably from now on.
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