Investing Beyond 403bs Options?

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rvfigs
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Investing Beyond 403bs Options?

Post by rvfigs »

Hello everyone,

My wife and I are both school teachers. We have been maxing out our 403b plans for the past 10 years. 100% of our investment contributions are in Vanguard Index Funds.

We would like to continue to invest additional earnings in other investment vehicles.

What are some of the options we should be looking into if we want to invest beyond the 403b option?
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FiveK
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Re: Investing Beyond 403bs Options?

Post by FiveK »

rvfigs, welcome to the forum.

You could stick with what you know and continue to use Vanguard Index Funds .

A few links to information you may find worthwhile:
- Investment Order
- Prioritizing investments
- Tax-efficient fund placement
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CyclingDuo
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Re: Investing Beyond 403bs Options?

Post by CyclingDuo »

rvfigs wrote: Thu Sep 03, 2020 8:02 pm Hello everyone,

My wife and I are both school teachers. We have been maxing out our 403b plans for the past 10 years. 100% of our investment contributions are in Vanguard Index Funds.

We would like to continue to invest additional earnings in other investment vehicles.

What are some of the options we should be looking into if we want to invest beyond the 403b option?
Do you both also have a 457b option available?

Beyond that, with your maxing of the 403b's alone, does your MFJ income qualify you for the Roth IRA? Do you have an HSA option?

And there is always a taxable account to invest in beyond that. At some point you run out of salary to cover all of your household expenses and fill every tax advantaged space you can as a teacher (we're dual income in the teaching field - so can attest to that).

We could fill a 403b, a 401k, a 457b, two Roth IRA's, and put some in taxable accounts if we made more salary in a very good year, but alas - since we are over 50 that's a lot of salary with the catch up contributions these days. So we try to fill at least two of the three 4XX plans, plus two Roth IRA's each year before we move to some taxable account investing as well as empty nesters.

CyclingDuo
Last edited by CyclingDuo on Thu Sep 03, 2020 10:41 pm, edited 2 times in total.
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Katietsu
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Re: Investing Beyond 403bs Options?

Post by Katietsu »

Do you have Roth IRA’s? That is the natural next step. In fact, sometimes a Roth IRA can be a priority over a 403b.

I would not mess with anything besides low cost broad based index funds without a strong interest in the area of interest. Some people have great success with real estate. Heck, I know someone who put his kid’s through college with Star War collectibles. But I would want to really have knowledge and interest to move into any of these areas.
Rainmaker41
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Re: Investing Beyond 403bs Options?

Post by Rainmaker41 »

You could each contribute up to $6,000 to a Roth IRA per year. This gets you extra retirement account space, and some tax diversification to pair with the pre-tax 403(b)s.
terran
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Re: Investing Beyond 403bs Options?

Post by terran »

The investment order post is good for this question. Assuming you're a public school teacher you could look into whether your state/district makes a 457(b) available to you. This could be included with the 403(b) in the investment order.

For the IRA step, there are certain income limits for traditional IRA deductions and for making Roth IRA contributions. If you're above those limits, consider a backdoor Roth IRA contribution.
krow36
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Re: Investing Beyond 403bs Options?

Post by krow36 »

rvfigs wrote: Thu Sep 03, 2020 8:02 pm We would like to continue to invest additional earnings in other investment vehicles.
What are some of the options we should be looking into if we want to invest beyond the 403b option?
The most obvious vehicle would be a low-cost state 457b plan. About half of the states make such a plan available to school district employees. What state are you in? Your district should have a list of 457b vendors that you are allowed to use.

There are advantages to contributing after-tax money to a Roth 403b and/or a Roth 457b, rather than to a taxable brokerage account. Also with 2 pensions and maxing your pretax? 403b accounts, you should probably be contributing to either a Roth 403b or a Roth 457b. This is to keep your income bracket in retirement (after age 72 and the start of RMDs), no higher than it is currently.
Topic Author
rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

Thank you all for taking the time out of your day to help me.

Here is a better picture of my situation:

1. Public school with only a 403b option available. No 457b option is available.
2. No HSA
3. We are married and file single
4. Both combined salaries over 200k

We don't have any IRA's of any type.

After reading your posts carefully, I think I may run into some challenges with the IRA's income requirements and filing status.

We have another 12 years before retirement, so our investment strategy is simple:

1. Max our 403bs
2. Use Flex Spending accounts to reduce taxable income
3. Pretend that a pension doesn't exist (reverse psychology)
4. Search for more opportunities to build retirement wealth


So, would a natural step for us be backdoor IRAs? Would I still run into income requirement and filing status issues?

Thanks for all your help.

P.S. Currently reading "Bogleheads Guide to Investing"...simply amazing.
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rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

FiveK wrote: Thu Sep 03, 2020 10:01 pm rvfigs, welcome to the forum.

You could stick with what you know and continue to use Vanguard Index Funds .

A few links to information you may find worthwhile:
- Investment Order
- Prioritizing investments
- Tax-efficient fund placement
Thank you FiveK for replying and for the links.

I posted more about my situation.
Topic Author
rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

Do you both also have a 457b option available?

Beyond that, with your maxing of the 403b's alone, does your MFJ income qualify you for the Roth IRA? Do you have an HSA option?

CyclingDuo
[/quote]

Thank you Cycling Duo for replying.

Don't have the 457b option or HSA option.

Both my wife and I make over 200k as public school teachers. We are married but file single. We may run into some issues with the IRA income guidelines.
Topic Author
rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

Katietsu wrote: Thu Sep 03, 2020 10:24 pm Do you have Roth IRA’s? That is the natural next step. In fact, sometimes a Roth IRA can be a priority over a 403b.

I would not mess with anything besides low cost broad based index funds without a strong interest in the area of interest. Some people have great success with real estate. Heck, I know someone who put his kid’s through college with Star War collectibles. But I would want to really have knowledge and interest to move into any of these areas.
Thank you for the reply.

I'm looking at Roth IRA's but I may run into some issues with income and filing status requirements.

I'm not sure if a back door ira option would be good?

We could do real estate...Nothing in a house I can't fix.

How would real estate investment be better than market investment? Would real estate returns be better than market returns?
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rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

Rainmaker41 wrote: Thu Sep 03, 2020 10:25 pm You could each contribute up to $6,000 to a Roth IRA per year. This gets you extra retirement account space, and some tax diversification to pair with the pre-tax 403(b)s.
Thank you for the reply.

I'm not sure if our income and filing status allow us to take advantage of Roth IRAs.

I posted some more specifics about our situation.
Topic Author
rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

If you're above those limits, consider a backdoor Roth IRA contribution.
[/quote]

Thank you for the reply.

We don't have a 457b option in our public school.

Would we run into an issues using a back door roth ira contribution..despite our income and filing status?

I posted some more specific about our situation.

Thanks again.
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FiveK
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Re: Investing Beyond 403bs Options?

Post by FiveK »

rvfigs wrote: Fri Sep 04, 2020 9:02 am 3. We are married and file single
Do you file separately, or do you file jointly but withhold at single rates? If you file separately - why?
We don't have any IRA's of any type.
...
So, would a natural step for us be backdoor IRAs? Would I still run into income requirement and filing status issues?
The backdoor IRA process will work for you. Fill a draft version of Form 8606 for each of you now, based on what you expect the numbers to be when you actually file next year, to help make sure you understand it.
3. Pretend that a pension doesn't exist (reverse psychology)
Not a bad idea. One exception: you may want to consider pension income when Estimating your future marginal tax rate when deciding whether to use traditional or Roth 403b contributions. See the rest of that wiki for more on t vs. R.
terran
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Re: Investing Beyond 403bs Options?

Post by terran »

Anyone with earned income of at least the amount contributed can contribute to a traditional IRA, the only restriction for any filing status is whether you deduct the contribution. Once you've contributed to the traditional IRA you can convert that to Roth IRA, which is only taxable to the extent that there are gains in the traditional IRA before you convert or you have previously deducted balances in any traditional IRA in your name (this includes rollover IRAs). It sounds like you don't have any other IRAs, so you're good to go on that. This is the backdoor Roth IRA. See https://www.whitecoatinvestor.com/backd ... -tutorial/ for a good guide on completing the backdoor Roth IRA.

As far as the married filing separately, I assume one of you has student loans for which you're seeking public service forgiveness and you're trying to minimize payments in the meantime or some other such strategy? Usually filing jointly works out better under normal circumstances.
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rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

Hey FiveK,

Our accountant always prepares the returns both ways, joint and file separately. He picks the better outcome - typically its file separately.

I understand the concept of the backdoor IRA. However, I'm nervous about being making a big mistake and getting slammed with double taxation.

Looking at my future marginal tax rate is something I have not done yet. I will definitely need to broaden the scope of my planning.

Thank you for the recommendations. I'm really learning a lot here.
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FiveK
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Re: Investing Beyond 403bs Options?

Post by FiveK »

rvfigs wrote: Fri Sep 04, 2020 9:51 am Our accountant always prepares the returns both ways, joint and file separately. He picks the better outcome - typically its file separately.
That is highly unusual. It would be worth asking "why?" so the two of you understand - and to ensure the accountant hasn't erred (yes, it happens).
I understand the concept of the backdoor IRA. However, I'm nervous about being making a big mistake and getting slammed with double taxation.
Your call. Don't know whether "millions" have done it, but I'd guess at least tens or hundreds of thousands have done so.
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rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

terran wrote: Fri Sep 04, 2020 9:43 am Anyone with earned income of at least the amount contributed can contribute to a traditional IRA, the only restriction for any filing status is whether you deduct the contribution. Once you've contributed to the traditional IRA you can convert that to Roth IRA, which is only taxable to the extent that there are gains in the traditional IRA before you convert or you have previously deducted balances in any traditional IRA in your name (this includes rollover IRAs). It sounds like you don't have any other IRAs, so you're good to go on that. This is the backdoor Roth IRA. See https://www.whitecoatinvestor.com/backd ... -tutorial/ for a good guide on completing the backdoor Roth IRA.

As far as the married filing separately, I assume one of you has student loans for which you're seeking public service forgiveness and you're trying to minimize payments in the meantime or some other such strategy? Usually filing jointly works out better under normal circumstances.
I need to do more homework on the backdoor roth. A bit nervous about making a big mistake.

Our accountant prepares our returns both ways, joint and separately. We always do better filing separately.

Yes, we do have student loans we are still paying. We have been teaching in public education for 20 years. For the past 15 years, we have been denied public service forgiveness.
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ruralavalon
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Re: Investing Beyond 403bs Options?

Post by ruralavalon »

rvfigs wrote: Thu Sep 03, 2020 8:02 pm Hello everyone,

My wife and I are both school teachers. We have been maxing out our 403b plans for the past 10 years. 100% of our investment contributions are in Vanguard Index Funds.

We would like to continue to invest additional earnings in other investment vehicles.

What are some of the options we should be looking into if we want to invest beyond the 403b option?
There are lots of possibilities.

(1) A Roth IRA for each of you,
(2) 457 plans if offered,
(3) a Heath Savings Account (HSA) if a High Deductible Health Plan (HDHP) is offered at work and is suitable for you medical insurance needs, and finally
(4) if all tax-advantaged accounts are maxed then a taxable brokerage account using very tax-efficient stock index funds.

Wiki article, "Prioritizing Investments" .
Last edited by ruralavalon on Fri Sep 04, 2020 10:03 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Topic Author
rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

FiveK wrote: Fri Sep 04, 2020 9:57 am
rvfigs wrote: Fri Sep 04, 2020 9:51 am Our accountant always prepares the returns both ways, joint and file separately. He picks the better outcome - typically its file separately.
That is highly unusual. It would be worth asking "why?" so the two of you understand - and to ensure the accountant hasn't erred (yes, it happens).

Yes, I will be "pressing" harder to get more logic behind his "strategy."
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Harry Livermore
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Re: Investing Beyond 403bs Options?

Post by Harry Livermore »

terran wrote: Fri Sep 04, 2020 9:43 am
Anyone with earned income of at least the amount contributed can contribute to a traditional IRA, the only restriction for any filing status is whether you deduct the contribution.
This is correct and often overlooked or misunderstood. In fact, as a high earner early in my career, prior to the introduction of the Roth, I would contribute to a nondeductible traditional IRA faithfully, though I have not done this in many years. If you are uncomfortable with the process of the backdoor Roth, you could simply leave it as a nondeductible contribution in a traditional IRA. Nothing wrong with that.
I think having some diversity in the tax status of your investments gives you some flexibility in planning, so you may want to contribute to a traditional, and also save some in taxable. The withdrawal of your nondeductible IRA contributions will be tax-free, and the account(s) will still grow tax-deferred. Also, having some investments in taxable accounts can be handy to use at low cap-gains rates between the years where you have earned income and the years where you are using retirement accounts, withdrawing social security, or receiving your pension (if you guys are getting a pension)
Some of this, of course, assumes a certain stasis in tax law, which may or may not turn out to be the case... but we are not supposed to speculate so I'll just leave it there.
Cheers
terran
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Re: Investing Beyond 403bs Options?

Post by terran »

rvfigs wrote: Fri Sep 04, 2020 9:59 am
terran wrote: Fri Sep 04, 2020 9:43 am Anyone with earned income of at least the amount contributed can contribute to a traditional IRA, the only restriction for any filing status is whether you deduct the contribution. Once you've contributed to the traditional IRA you can convert that to Roth IRA, which is only taxable to the extent that there are gains in the traditional IRA before you convert or you have previously deducted balances in any traditional IRA in your name (this includes rollover IRAs). It sounds like you don't have any other IRAs, so you're good to go on that. This is the backdoor Roth IRA. See https://www.whitecoatinvestor.com/backd ... -tutorial/ for a good guide on completing the backdoor Roth IRA.

As far as the married filing separately, I assume one of you has student loans for which you're seeking public service forgiveness and you're trying to minimize payments in the meantime or some other such strategy? Usually filing jointly works out better under normal circumstances.
I need to do more homework on the backdoor roth. A bit nervous about making a big mistake.

Our accountant prepares our returns both ways, joint and separately. We always do better filing separately.

Yes, we do have student loans we are still paying. We have been teaching in public education for 20 years. For the past 15 years, we have been denied public service forgiveness.
Take a look through the White coat investor link, and share it with your accountant if he/she isn't already familiar. It's definitely one of the more confusing aspects of personal finance and taxation (which makes sense since it's basically a loophole/workaround), but not too bad once you understand it.
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rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

Harry Livermore wrote: Fri Sep 04, 2020 10:07 am
terran wrote: Fri Sep 04, 2020 9:43 am
Anyone with earned income of at least the amount contributed can contribute to a traditional IRA, the only restriction for any filing status is whether you deduct the contribution.
This is correct and often overlooked or misunderstood. In fact, as a high earner early in my career, prior to the introduction of the Roth, I would contribute to a nondeductible traditional IRA faithfully, though I have not done this in many years. If you are uncomfortable with the process of the backdoor Roth, you could simply leave it as a nondeductible contribution in a traditional IRA. Nothing wrong with that.
I think having some diversity in the tax status of your investments gives you some flexibility in planning, so you may want to contribute to a traditional, and also save some in taxable. The withdrawal of your nondeductible IRA contributions will be tax-free, and the account(s) will still grow tax-deferred. Also, having some investments in taxable accounts can be handy to use at low cap-gains rates between the years where you have earned income and the years where you are using retirement accounts, withdrawing social security, or receiving your pension (if you guys are getting a pension)
Some of this, of course, assumes a certain stasis in tax law, which may or may not turn out to be the case... but we are not supposed to speculate so I'll just leave it there.
Cheers
Thanks Harry this perspective.

I hope I understand this correctly. So, I can contribute to a traditional IRA without concern for income or filing status? Income and filing status only becomes a issue if I want to make deductible IRA contributions?

I'm trying to understand what advantage I would gain with a backdoor IRA.

Maybe I'm mixing things up...I'm sorry. I'm trying to focus on the moving part :happy
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rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

Take a look through the White coat investor link, and share it with your accountant if he/she isn't already familiar. It's definitely one of the more confusing aspects of personal finance and taxation (which makes sense since it's basically a loophole/workaround), but not too bad once you understand it.
[/quote]

Thank you. I have a lot of reading to do :D
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FiveK
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Re: Investing Beyond 403bs Options?

Post by FiveK »

rvfigs wrote: Fri Sep 04, 2020 10:19 amI hope I understand this correctly. So, I can contribute to a traditional IRA without concern for income or filing status? Income and filing status only becomes a issue if I want to make deductible IRA contributions?
Yes. See Retirement Topics - IRA Contribution Limits | Internal Revenue Service.
I'm trying to understand what advantage I would gain with a backdoor IRA.
Might not be any advantage if stopping with the Non-deductible traditional IRA. Taking the extra step of converting to Roth, however, means you can then avoid taxes on all your gains in that account.
terran
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Re: Investing Beyond 403bs Options?

Post by terran »

rvfigs wrote: Fri Sep 04, 2020 10:19 am I hope I understand this correctly. So, I can contribute to a traditional IRA without concern for income or filing status? Income and filing status only becomes a issue if I want to make deductible IRA contributions?
Mostly. You each need to have at least as much earned income as you contribute to your IRA. A spouse can also make contributions based on their spouse's income, but I'm not sure this applies to MFS filers.
rvfigs wrote: Fri Sep 04, 2020 10:19 am I'm trying to understand what advantage I would gain with a backdoor IRA.

Maybe I'm mixing things up...I'm sorry. I'm trying to focus on the moving part :happy
If you leave the money in a traditional IRA then you'll pay tax on the gains at your ordinary tax rate when you withdraw. This isn't terrible, but it's generally worse than just investing in a taxable account (since long term capital gain and qualified dividend tax rates are always lower than ordinary income tax rates). If you convert to Roth it becomes basically like a normal Roth contribution, so the gains won't be taxed when you withdraw. It's definitely better to convert a non-deductible traditional IRA to Roth than to leave it if you can.
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rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

Mostly. You each need to have at least as much earned income as you contribute to your IRA. A spouse can also make contributions based on their spouse's income, but I'm not sure this applies to MFS filers.

If you leave the money in a traditional IRA then you'll pay tax on the gains at your ordinary tax rate when you withdraw. This isn't terrible, but it's generally worse than just investing in a taxable account (since long term capital gain and qualified dividend tax rates are always lower than ordinary income tax rates). If you convert to Roth it becomes basically like a normal Roth contribution, so the gains won't be taxed when you withdraw. It's definitely better to convert a non-deductible traditional IRA to Roth than to leave it if you can.
[/quote]

Ahh. Now I'm getting some clarity.

You said, "You each need to have at least as much earned income as you contribute to your IRA."

What does this mean exactly?

Sorry, for the dumb question.
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Harry Livermore
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Re: Investing Beyond 403bs Options?

Post by Harry Livermore »

rvfigs wrote: Fri Sep 04, 2020 10:54 am
You said, "You each need to have at least as much earned income as you contribute to your IRA."

What does this mean exactly?
Other posters have already clarified your earlier question (yes, everyone with earned income is eligible to contribute to an IRA, regardless of income level or filing status)
To answer the above, if you wanted to contribute $5K to an IRA, you would need to have earned at least $5K in the contributory tax year.
Cheers
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FiveK
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Re: Investing Beyond 403bs Options?

Post by FiveK »

rvfigs wrote: Fri Sep 04, 2020 10:54 am You said, "You each need to have at least as much earned income as you contribute to your IRA."

What does this mean exactly?
See What Is Compensation?.
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rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

Other posters have already clarified your earlier question (yes, everyone with earned income is eligible to contribute to an IRA, regardless of income level or filing status)
To answer the above, if you wanted to contribute $5K to an IRA, you would need to have earned at least $5K in the contributory tax year.
Cheers
[/quote]

Thank you.
carmonkie
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Re: Investing Beyond 403bs Options?

Post by carmonkie »

I am surprised no one picked up on the student loans statement.

Just curious what is your plan for the student loans? Are you hoping for forgiveness or how come you are not prioritizing paying those off?
What is the balance and interest rate of those loans? Have you been paying just the minimum these past 20 years?

I would attempt to pay the school loans ahead of any other investment. there is no better feeling of being debt free. Your student loans are debt no matter how you slice them and dice them and at some point you need to face reality and decide what you want to do. Looks to me you are hoping for forgiveness. With your combined income of 200K, you should be able to start taking big chunks off the balance.
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rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

carmonkie wrote: Fri Sep 04, 2020 11:42 am I am surprised no one picked up on the student loans statement.

Just curious what is your plan for the student loans? Are you hoping for forgiveness or how come you are not prioritizing paying those off?
What is the balance and interest rate of those loans? Have you been paying just the minimum these past 20 years?

I would attempt to pay the school loans ahead of any other investment. there is no better feeling of being debt free. Your student loans are debt no matter how you slice them and dice them and at some point you need to face reality and decide what you want to do. Looks to me you are hoping for forgiveness. With your combined income of 200K, you should be able to start taking big chunks off the balance.
Good catch :happy

Honestly, we have come to the conclusion that we are solely responsible for our student loan debt. We don't expect the government to bail us out.

We have been paying our student loans...always paying more than the minimum.

Many years ago we decided to max our 403b plans before paying off our student loans. We wanted to reduce our taxable income while increasing our retirement nest egg. To date, our Vanguard 403bs are doing quite well. I'm not sure if this would be the case had I waited to pay off all student loan debt first.

Our thinking was simple: Pay off as much debt as you can and invest as much as you can. We just didn't want to miss any opportunities to invest early because we were too focused on debt reduction.

Having said all this, we are still learning to look at our financial situation with a different lens. It's really challenging coming up with the best strategy.

I'm really happy I found this forum. You guys are making me think hard :D
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FiveK
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Re: Investing Beyond 403bs Options?

Post by FiveK »

The psychological effect of paying down debt and being debt free is significant for some, and negligible for others.

Many in each group can't understand how the other group could think that way. ;)
terran
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Re: Investing Beyond 403bs Options?

Post by terran »

The investment order link in FiveK's first post upthread offers some good guidance on when to contribute to various accounts and when to pay off debt based on the interest rate.
Sahara
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Re: Investing Beyond 403bs Options?

Post by Sahara »

It does sound like money above 19,500 per person could be invested in a tax advantaged account using the backdoor Roth, and then a taxable account.

Do you have a Roth option in the 403b? If so, you might want to do a comparison of your current vs retirement tax rate and evaluate whether Traditional or Roth contributions are most advantageous - at this point or as you get closer to retirement.
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rvfigs
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[403b contribution questions]

Post by rvfigs »

No, not that Chapter 11 advice...chapter 11 in "Bogleheads Guide to Investing" - Fund Placement :D

At the moment, my wife and I contribute $19,500 to our 403b plans. Once we turn 50, then we can increase our contributions to $26,000.

Option 1: Increase our 403b after age 50 to $26,000

Option 2: Continue to contribute $19,500 to our 403b plans. The additional funds we had planned to use for the 403b would go into a backdoor roth ira.

We are trying to think about the tax impact during retirement. Sheltering a lot of money into a 403b plan is great for tax saving, but at some point we will pay taxes on the 403b distributions.

Any insight we can get on this scenario would be terrific.

Stay safe and healthy.
Last edited by Flyer24 on Mon Sep 07, 2020 11:21 am, edited 1 time in total.
Reason: title clarity
Flyer24
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Re: [403b contribution questions]

Post by Flyer24 »

I edited the title for subject clarity.
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rvfigs
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

Sahara wrote: Sat Sep 05, 2020 10:21 am It does sound like money above 19,500 per person could be invested in a tax advantaged account using the backdoor Roth, and then a taxable account.

Do you have a Roth option in the 403b? If so, you might want to do a comparison of your current vs retirement tax rate and evaluate whether Traditional or Roth contributions are most advantageous - at this point or as you get closer to retirement.
Thank you for the reply.

Unfortunately, we don't have a Roth option in our 403b.

During retirement, I think our tax rate will be high :(
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rvfigs
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Re: [403b contribution questions]

Post by rvfigs »

Flyer24 wrote: Mon Sep 07, 2020 11:22 am I edited the title for subject clarity.
Sorry about that :(
terran
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Re: [403b contribution questions]

Post by terran »

If you're above the limit to make regular Roth contributions such that you have to make backdoor contributions then you're in a pretty high tax bracket. What do you expect your tax bracket to be in retirement? Things that will play into that are: when do you plan to retire, do you have a pension, how much social security do you expect, how much do you already have in your 403(b), do you plan to move to a higher/lower tax state in retirement, etc?
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ruralavalon
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Re: Investing Beyond 403bs Options?

Post by ruralavalon »

rvfigs wrote: Mon Sep 07, 2020 11:39 am
Sahara wrote: Sat Sep 05, 2020 10:21 am It does sound like money above 19,500 per person could be invested in a tax advantaged account using the backdoor Roth, and then a taxable account.

Do you have a Roth option in the 403b? If so, you might want to do a comparison of your current vs retirement tax rate and evaluate whether Traditional or Roth contributions are most advantageous - at this point or as you get closer to retirement.
Thank you for the reply.

Unfortunately, we don't have a Roth option in our 403b.

During retirement, I think our tax rate will be high :(
What is your current tax bracket, both federal and state?

Why do you feel that you will be in a higher tax bracket in retirement? Retirement usually means the end of paid employment, and most people will likely be in a lower tax bracket in retirement.

Will you be eligible for a significant pension in addition to Social Security? Do you plan significant paid work after retiring? What is your profession or occupation? About how much do you currently have in traditional tax-deferred accounts?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Flyer24
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Re: Investing Beyond 403bs Options?

Post by Flyer24 »

Topics have been merged.
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FiveK
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Re: [403b contribution questions]

Post by FiveK »

rvfigs wrote: Mon Sep 07, 2020 11:03 am Any insight we can get on this scenario would be terrific.
What are your thoughts on the suggestions in links already provided?
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rvfigs
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Re: [403b contribution questions]

Post by rvfigs »

FiveK wrote: Mon Sep 07, 2020 12:39 pm
rvfigs wrote: Mon Sep 07, 2020 11:03 am Any insight we can get on this scenario would be terrific.
What are your thoughts on the suggestions in links already provided?
The links you provided were excellent. These links combined with the book "The Boglehead Guide to Investing" are leading me to more questions and much more clarity.

However, in order to get better advice I need to provide readers with more clarity. So, here goes:

Current tax rate: 24%
Current 403b combined fund (Vanguard Index): $360,000
Retirement Date: 2031 or 2032
Pensions combined: 175k
Social Security Combined: 50k at 62

So, now I'm thinking more as a result of all the reading and feedback.

At the moment, my wife and I contribute $19,500 to our 403b plans. Once we turn 50, then we can increase our contributions to $26,000.

Option 1: Increase our 403b after age 50 to $26,000

Option 2: Continue to contribute $19,500 to our 403b plans. The additional funds we had planned to use for the 403b would go into a backdoor roth ira.

If I choose option 2, then I need to think about the type of funds in my roth IRA. After reading your third link (tax efficient fund placement), I think I should consider choosing a roth ira fund with tax efficiency. This is my gut feeling...but I learned, while reading the Boglehead Guide, that gut feelings should be avoided in financial planning.

As always, I appreciate the time you take out of schedule to give me food for thought :D
Xtrasystolic
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Re: Investing Beyond 403bs Options?

Post by Xtrasystolic »

rvfigs wrote: Fri Sep 04, 2020 9:51 am ...Snipped
I understand the concept of the backdoor IRA. However, I'm nervous about being making a big mistake and getting slammed with double taxation....
Hi rvfigs
I’ve only recently started absorbing the wealth of information on these boards. I did start the backdoor Roth process for both my spouse and I this year since there is no question about it being the next best way to invest after maximizing employer sponsored plans.

I too was hesitant about getting in ‘trouble’ if I made any errors with the required Form 8606. Make sure you watch white coat investor’s video tutorial on this form. Keep it very simple, transfer $6000 as a non-deductible tIRA contribution. As soon as (24-48 hours with Schwab, a day longer with Vanguard) the funds are available to invest, do the ‘convert to Roth’ step and then buy funds. As long as you do the second step ASAP, any possible growth (while funds are in tIRA) should be pennies which don’t need to get reported and hence the form 8606 should be neat and simple.

I also read some concerns about the step transaction doctrine and various people deciding to wait several weeks/months complicating the math. However, as WCI has pointed out, Congress has no issues with people using this process and there really is no reason to wait before the conversion ( https://www.forbes.com/sites/ashleaebe ... fe42667471)
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ruralavalon
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Re: [403b contribution questions]

Post by ruralavalon »

rvfigs wrote: Mon Sep 07, 2020 1:07 pm
FiveK wrote: Mon Sep 07, 2020 12:39 pm
rvfigs wrote: Mon Sep 07, 2020 11:03 am Any insight we can get on this scenario would be terrific.
What are your thoughts on the suggestions in links already provided?
The links you provided were excellent. These links combined with the book "The Boglehead Guide to Investing" are leading me to more questions and much more clarity.

However, in order to get better advice I need to provide readers with more clarity. So, here goes:

Current tax rate: 24%
Current 403b combined fund (Vanguard Index): $360,000
Retirement Date: 2031 or 2032
Pensions combined: 175k
Social Security Combined: 50k at 62

So, now I'm thinking more as a result of all the reading and feedback.

At the moment, my wife and I contribute $19,500 to our 403b plans. Once we turn 50, then we can increase our contributions to $26,000.

Option 1: Increase our 403b after age 50 to $26,000

Option 2: Continue to contribute $19,500 to our 403b plans. The additional funds we had planned to use for the 403b would go into a backdoor roth ira.

If I choose option 2, then I need to think about the type of funds in my roth IRA. After reading your third link (tax efficient fund placement), I think I should consider choosing a roth ira fund with tax efficiency. This is my gut feeling...but I learned, while reading the Boglehead Guide, that gut feelings should be avoided in financial planning.

As always, I appreciate the time you take out of schedule to give me food for thought :D
With $175k annually in pensions, $50k annually in Social Security, and $360k currently in traditional tax-deferred accounts and more to come for 12 years, I believe that backdoor Roth IRA contributions will likely be a good idea.

In general in a Roth IRA use stock funds with their higher expected growth, rather than bond funds. This depends on what funds are offered in your employer's 403b plan.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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FiveK
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Re: [403b contribution questions]

Post by FiveK »

rvfigs wrote: Mon Sep 07, 2020 1:07 pm The links you provided were excellent. These links combined with the book "The Boglehead Guide to Investing" are leading me to more questions and much more clarity.
Yes, learning more often spawns new questions. :)
However, in order to get better advice I need to provide readers with more clarity. So, here goes:

Current tax rate: 24%
Current 403b combined fund (Vanguard Index): $360,000
Retirement Date: 2031 or 2032
Pensions combined: 175k
Social Security Combined: 50k at 62

So, now I'm thinking more as a result of all the reading and feedback.

At the moment, my wife and I contribute $19,500 to our 403b plans. Once we turn 50, then we can increase our contributions to $26,000.

Option 1: Increase our 403b after age 50 to $26,000

Option 2: Continue to contribute $19,500 to our 403b plans. The additional funds we had planned to use for the 403b would go into a backdoor roth ira.
If the $175K is in today's dollars, it's likely you will face at least a 24% marginal rate in retirement. Some things to consider:
- lobbying for a Roth option in the 403b
- traditional 403b is still likely better than taxable
- deferring SS benefits for at least one of you to age 70 might reduce the tax bite on Roth (Open Social Security: Free, Open-Source Social Security Calculator might be useful).
If I choose option 2, then I need to think about the type of funds in my roth IRA. After reading your third link (tax efficient fund placement), I think I should consider choosing a roth ira fund with tax efficiency. This is my gut feeling...but I learned, while reading the Boglehead Guide, that gut feelings should be avoided in financial planning.
No need to worry about tax efficiency within the Roth account, but see ruralavalon's comment on what funds might be appropriate.
Topic Author
rvfigs
Posts: 62
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Re: [403b contribution questions]

Post by rvfigs »

In general in a Roth IRA use stock funds with their higher expected growth, rather than bond funds. This depends on what funds are offered in your employer's 403b plan.
[/quote]

If we do start a backdoor Roth, what specific criteria should we look for in a fund? Are there some funds to consider in the Vanguard lineup?

Currently, here is my 403b fund profile:

Vanguard Total Stock Market Index Fund Investor Shares 40.90%
Vanguard Total International Stock Index Fund Investor Shares 26.80%
Vanguard Total Bond Market II Index Fund Investor Shares 22.50%
Vanguard Total International Bond Index Fund Investor Shares 9.80%
Topic Author
rvfigs
Posts: 62
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Re: Investing Beyond 403bs Options?

Post by rvfigs »

Xtrasystolic wrote: Mon Sep 07, 2020 1:31 pm
rvfigs wrote: Fri Sep 04, 2020 9:51 am ...Snipped
I understand the concept of the backdoor IRA. However, I'm nervous about being making a big mistake and getting slammed with double taxation....
Hi rvfigs
I’ve only recently started absorbing the wealth of information on these boards. I did start the backdoor Roth process for both my spouse and I this year since there is no question about it being the next best way to invest after maximizing employer sponsored plans.

I too was hesitant about getting in ‘trouble’ if I made any errors with the required Form 8606. Make sure you watch white coat investor’s video tutorial on this form. Keep it very simple, transfer $6000 as a non-deductible tIRA contribution. As soon as (24-48 hours with Schwab, a day longer with Vanguard) the funds are available to invest, do the ‘convert to Roth’ step and then buy funds. As long as you do the second step ASAP, any possible growth (while funds are in tIRA) should be pennies which don’t need to get reported and hence the form 8606 should be neat and simple.

I also read some concerns about the step transaction doctrine and various people deciding to wait several weeks/months complicating the math. However, as WCI has pointed out, Congress has no issues with people using this process and there really is no reason to wait before the conversion ( https://www.forbes.com/sites/ashleaebe ... fe42667471)

It's certainly amazing how much you can learn from the folks in this community.

The questions from members have forced me to "flush out" my financial situation in a very concrete way.

As you mention, the key to the backdoor roth is to immediately to take of the transfer. I reached out to my accountant to make sure he was familiar with the backdoor roth. He too stressed timing is key.

Now I just to figure out which roth ira fund to select :-(

Thanks again for the reply.
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FiveK
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Re: [403b contribution questions]

Post by FiveK »

rvfigs wrote: Mon Sep 07, 2020 3:18 pmAre there some funds to consider in the Vanguard lineup?

Vanguard Total Stock Market Index Fund
Vanguard Total International Stock Index Fund
Those two are worth considering.
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