Which Retirement Accounts to Use and How Much to Contribute to Them?

[Ron Ronnerson]

I could use help deciding which retirement accounts to utilize next year and how much to put into each of them. Our gross income should be around $150k. My wife and I both turn 50 in 2024 so catch-up contributions become available also. I’m a teacher and my spouse is a stay-at-home parent.

The Parameters:
-I need to keep modified adjusted gross income (MAGI) below $109k. This would enable us to qualify for the premium tax credit for health insurance. My share of the least expensive insurance offered by my employer can’t exceed 8.39% of MAGI in 2024 or the insurance is considered unaffordable per the ACA. If I get MAGI below $109k, my employer’s insurance is considered too expensive and my family can get tax credits toward insurance purchased on the exchange. These credits are typically worth $15k-$20k per year for us. For this reason, I only wish to use tax-deferred accounts and no Roth accounts.

-I would like to keep my total income as shown on my federal tax return below $99,400 so that I am below 400% of the federal poverty level. This is not for health insurance purposes but to potentially qualify for California rebates on an electric vehicle that I may purchase at some point in the future. Money put into an HSA or traditional IRA accounts would show up on the tax return but contributions to workplace retirement accounts and pension contributions would not. - UPDATE - I've removed this as it's a low priority and working against more important goals

-I’d like to save as little as possible but still meet the above requirements and would also like to fully contribute to an HSA due to all the various tax benefits of that account.

-I typically like to put traditional IRAs at the bottom of the list since contributions can be made until April of the following year. If income ends up higher than expected, I like having the traditional IRA as a safety net to reduce MAGI as needed.

-Our retirement expenses should be fully covered by a pension ($110k/year with cost-of-living adjustments) plus social security ($30k/year). Our total net worth is around $1.77m ($578k in traditional retirement accounts, $345k in Roth, $112k in taxable, $735k in home equity).

-I plan to go to part-time work at age 55 and fully retire at 61. Being able to access the money in our retirement accounts prior to fully retiring would be useful. The plan is to stop saving at age 55 and perhaps even deficit spend during our late 50s. We can pay off the debt in our 60s when our income should increase due to the pension.

Retirement Accounts Available in 2024:
Mandatory Pension Contributions: $14.2k (this is tax-deferred and automatically taken from my gross income)
Dental Insurance Premiums (Deducted from Check): $1k
HSA: $8.3k
457b: $23k; catch-up: $7.5k
403b: $23k; catch-up: $7.5k
Traditional IRA: $7k; catch-up: $1k
Spouse Traditional IRA: $7k; catch-up: $1k
Total Available Tax-Deferred Space: $100,500

Question:
Which accounts should I use, in what order, and how much should I put into each of them? Thanks for the guidance!

[mamster]

My wife is also a public employee.

I think your analysis is spot-on. Max out the HSA, then the 457(b). A government 457(b) is an amazing tool—use it! Then the 403(b). Make sure you're using the lowest-cost options in all of these accounts, but especially the 403(b), because that's where you run into an annuity swamp. By the way, the max non-catchup contribution for both 457(b) and 403(b) is currently $22.5K, not $23K.

You wrote:

The plan is to stop saving at age 55 and perhaps even deficit spend during our late 50s.

Do you mean literally rack up debt? Or just spend down some of your portfolio while still working? The latter will probably pencil out fine. The former doesn't make any sense to me, because it implies that you will exhaust your entire portfolio and then some before your pension and social security income streams come online. That seems absurdly risky and unnecessary.

[Ron Ronnerson]

My wife is also a public employee.

I think your analysis is spot-on. Max out the HSA, then the 457(b). A government 457(b) is an amazing tool—use it! Then the 403(b). Make sure you're using the lowest-cost options in all of these accounts, but especially the 403(b), because that's where you run into an annuity swamp. By the way, the max non-catchup contribution for both 457(b) and 403(b) is currently $22.5K, not $23K.

You wrote:

The plan is to stop saving at age 55 and perhaps even deficit spend during our late 50s.

Do you mean literally rack up debt? Or just spend down some of your portfolio while still working? The latter will probably pencil out fine. The former doesn't make any sense to me, because it implies that you will exhaust your entire portfolio and then some before your pension and social security income streams come online. That seems absurdly risky and unnecessary.

Thanks for the feedback! My question is for 2024 and I believe the contribution limits are projected to go up slightly for certain accounts.

I want to make sure I correctly understand the rules for withdrawing from a 403b and 457b while I’m still employed but over age 59.5. That may help me decide which of these two accounts to prioritize over the other. I have the exact same investment options available in both the 457b and 403b and they are fairly good. I pay an administrative fee of 0.25% along with a 0.02% expense ratio for total expenses of 0.27% for Vanguard funds.

Currently, I’m maxing out an HSA and 457b on top of the mandatory pension contributions but am only partially funding my 403b. Once catch-up contributions become available next year, I could possibly contribute even more toward the 457b and reduce the contributions to the 403b. However, I’m not sure if it would be better to just skip the catch-up contributions all together to avoid possible complications like my employer thinking I’m contributing too much even though I’m eligible or due to changes from the Secure Act 2.0 that have increased the complexity pertaining to catch-up contributions.

I'm thinking that for the last few years of my career, my expenses may be greater than the income coming in as I reduce my hours. I’m okay with that as my income will get a significant boost during retirement. So I can make up the shortfall between income and expenses during the last part of my career by either withdrawing from retirement accounts or by getting a loan such as a HELOC or using credit cards with promo rates for a short while. We do have over $100k in Roth IRA contributions that we could withdraw at any time without tax or penalty as well.

[mamster]

Thanks for the feedback! My question is for 2024 and I believe the contribution limits are projected to go up slightly for certain accounts.

Fair!

I want to make sure I correctly understand the rules for withdrawing from a 403b and 457b while I’m still employed but over age 59.5. That may help me decide which of these two accounts to prioritize over the other. I have the exact same investment options available in both the 457b and 403b and they are fairly good. I pay an administrative fee of 0.25% along with a 0.02% expense ratio for total expenses of 0.27% for Vanguard funds.

Yes, that administrative fee could be a lot worse.

You should prioritize the 457(b), but it probably won't matter. You can't withdraw from either the 457(b) or the 403(b) while still employed. You have to be separated from service before you can make withdrawals without penalty. If you're over 55 during the year you retire, the 457(b) and 403(b) are equivalent. (The rule of 55 applies to the 403(b).) Once you're both 59.5 and separated from service, you'll want to roll both accounts over to an IRA to simplify and save on the administrative fee.

The reason to prioritize the 457(b) is just in case you take early retirement or are laid off. I agree that it may not be worth figuring out the catch-up contributions, because your plan doesn't seem to rely on early withdrawals from the 457(b) at all, and having a little extra money in there instead of the 403(b) is really unlikely to make any difference.

You mentioned in your original post that you were thinking of going part-time at 55. If you're still with the same employer, you will not be able to draw on any of the accounts you've mentioned except for the HSA without penalty. So yes, you would need to make use of other income sources. I would be very careful about using debt funding for this.

It sounds like your question comes down to this:

I want to reduce my MAGI now so I qualify for an ACA plan and an EV credit. But I also want to go part-time at 55 and be able to fund the income shortfall between age 55 and retirement from my savings, without paying penalties. How do I do that?

Well, the 403(b) and 457 are off the table for funding that shortfall unless you change employers. You could do a 72(t) election from a traditional IRA, but it sounds like you don't have that much money in tIRA.

This is a hard problem with a lot of moving parts. Yes, a HELOC could make sense. Prioritizing the tIRA could make sense. Forgetting about the EV credit and putting that $10K/year into a taxable account could make sense. I don't see any easy answers here, but I'm curious what other people thing and whether I summarized your question correctly.

[Ron Ronnerson]

Thanks for the feedback! My question is for 2024 and I believe the contribution limits are projected to go up slightly for certain accounts.

Fair!

I want to make sure I correctly understand the rules for withdrawing from a 403b and 457b while I’m still employed but over age 59.5. That may help me decide which of these two accounts to prioritize over the other. I have the exact same investment options available in both the 457b and 403b and they are fairly good. I pay an administrative fee of 0.25% along with a 0.02% expense ratio for total expenses of 0.27% for Vanguard funds.

Yes, that administrative fee could be a lot worse.

You should prioritize the 457(b), but it probably won't matter. You can't withdraw from either the 457(b) or the 403(b) while still employed. You have to be separated from service before you can make withdrawals without penalty. If you're over 55 during the year you retire, the 457(b) and 403(b) are equivalent. (The rule of 55 applies to the 403(b).) Once you're both 59.5 and separated from service, you'll want to roll both accounts over to an IRA to simplify and save on the administrative fee.

The reason to prioritize the 457(b) is just in case you take early retirement or are laid off. I agree that it may not be worth figuring out the catch-up contributions, because your plan doesn't seem to rely on early withdrawals from the 457(b) at all, and having a little extra money in there instead of the 403(b) is really unlikely to make any difference.

You mentioned in your original post that you were thinking of going part-time at 55. If you're still with the same employer, you will not be able to draw on any of the accounts you've mentioned except for the HSA without penalty. So yes, you would need to make use of other income sources. I would be very careful about using debt funding for this.

It sounds like your question comes down to this:

I want to reduce my MAGI now so I qualify for an ACA plan and an EV credit. But I also want to go part-time at 55 and be able to fund the income shortfall between age 55 and retirement from my savings, without paying penalties. How do I do that?

Well, the 403(b) and 457 are off the table for funding that shortfall unless you change employers. You could do a 72(t) election from a traditional IRA, but it sounds like you don't have that much money in tIRA.

This is a hard problem with a lot of moving parts. Yes, a HELOC could make sense. Prioritizing the tIRA could make sense. Forgetting about the EV credit and putting that $10K/year into a taxable account could make sense. I don't see any easy answers here, but I'm curious what other people thing and whether I summarized your question correctly.

Thanks for breaking it down like this. Your explanation is very helpful and makes sense. I was not sure about the rules pertaining to withdrawing from the 457b and 403b once I’m over 59.5 but prior to retiring so thanks for the clarification on that.

I’ll try to explain further. The ACA credit is significant and thus important for my family. My employer offers health insurance but the employee must pay for the entire cost. For our family of 3, the cost to purchase from my employer would be $30k/year. By controlling our MAGI, we qualify for subsidies on insurance purchased through the exchange each year.

The EV rebate (I’m speaking of a California program, not the federal EV credit) is a lot less important and may not even materialize. Currently, people whose income is under 400% of the federal poverty level qualify for a California rebate on EVs. However, California rebate programs come and go. If I can grab a nice rebate, it would be great but it’s not a huge deal in the grand scheme.

Moving onto the topic of part time work. I basically have golden handcuffs until I’m age 61. At age 58, my pension would be $6k/month. At 59, it’s $7k/month. At 60, it’s $8k/month. At 61, it becomes $9k/month (amounts are approximate and in current dollars). After 61, the pension hardly increases for additional years worked.

Once I am age 55, I am eligible for a workload reduction program through my employer. Basically, so long as I work at least 50% as much as a full-time employee, my pension won’t be adversely impacted by reducing my hours.

Due to trying to get the ACA credits in recent years, I’ve had to save more for the future than I actually need since retirement should be pretty much covered by my pension and wife’s social security. We could also sell our home in California during retirement and move to a lower cost-of-living area.

So our retirement years appear to be in good shape. To smooth out consumption over time, I’d like to pull some of the money from my retirement years into the decade where I’ll be in my 50s.

It looks like our IRAs (current balance is around $400k, mostly in Roth) will become available for the last couple of years that I’m working but I need to cover ages 55-59. Options include getting a HELOC or some other loan, taking out Roth contributions but not the growth (we’ve made $131k in contributions over the years that we could access), or not reducing my hours quite so much during those years (I could go down to working 4 days per week instead of 3 days, for instance).

In short, yes, it’s a bit of a puzzle but I believe it’s solvable.

[Rob Relyea]

Recommend digging into bogleheads.org/wiki/Prioritizing_investments

And the external links section on that page includes a link to bogle.tools savings-planner which is a tool to help you calculate what to save where, based on your situation.

[Mike Scott]

The accounts in the order you listed is OK. Contribute enough to get your taxable income number down to where you need it. You probably do not need the "catch up space". I would do enough pretax so you can max the Roth IRAs and then add any extra to taxable accounts. You can use HSA reimbursements, Roth contributions and any taxable funds while you are still working. Having flexible work hours could let you adjust for income along the way. Is there a 457/403 loan option that might help if you run out of other options? HELOC rates may be better if/when you get to that point. Paying taxes and penalties for early IRA withdrawals may even work out depending on all the other numbers. It sounds like you have enough flexibility to make it work with plenty of backstop if you come up short somewhere.

You seem to be aware that minimizing income now is building your pretax retirement accounts to a larger value than actually needed so you may want to add managing that to your longer term plans if you have not already.

[Carl53]

Seems that you have a good handle on your situation. You made a couple of statements that I fail to follow. You note that your employer health insurance costs $30k but getting your MAGI below $109k will cause your employer health insurance to be deemed too expensive since it will exceed 8.39%, or about $9k. Is that because you are now below 400% of FPL at 109k?

[Ron Ronnerson]

Recommend digging into bogleheads.org/wiki/Prioritizing_investments

And the external links section on that page includes a link to bogle.tools savings-planner which is a tool to help you calculate what to save where, based on your situation.

Thanks, I'll check out the links.

[Ron Ronnerson]

Seems that you have a good handle on your situation. You made a couple of statements that I fail to follow. You note that your employer health insurance costs $30k but getting your MAGI below $109k will cause your employer health insurance to be deemed too expensive since it will exceed 8.39%, or about $9k. Is that because you are now below 400% of FPL at 109k?

We have insurance through Kaiser currently and would want to keep it that way as we're happy with them. Kaiser insurance costs $30k/year for a family of 3 or more through my employer, with the employee paying that whole amount.

The way the rule for qualifying for the subsidy through the ACA works when your employer offers insurance is this: the employee’s share of the least expensive insurance offered to cover just the employee (not any dependents) can’t exceed a certain percentage of the employee’s income. Income is defined as MAGI and the percentage changes from year to year. In 2024, it is set at 8.39%. If the employee’s share of the cost does exceed that amount, the entire family becomes eligible for the subsidy.

In 2024, I would need to pay roughly $9100 for the least expensive insurance option offered by my employer for employee-only coverage. 8.39% of $108.5k is around $9100. If I get MAGI below $108.5k, I can qualify for the subsidy in 2024 for my entire family.

This year, I have to keep MAGI below $89k to qualify for the subsidy. The cut-off for MAGI was at $69k last year. So the numbers can jump around quite a bit based on what the employer affordability percentage is set at (it’s 9.12% this year but decreasing to 8.39% next year) and what the least expensive insurance offered by my employer costs. It sounds a little funny but the more expensive the insurance is through my employer, the better it is for me as it gives me more breathing room (meaning I can keep income at a higher level and still qualify for a subsidy).

Next year will be our 6th year getting subsidized insurance through the ACA. Prior to that, we got insurance through my wife’s employer but she stopped working in 2018 to be a stay-at-home parent and is likely already retired as of age 43. I’d like to spend more time with her so am looking at going part time when I turn 55. That will mean decreased income but, due to saving more money than we will need during our retirement years, if we can figure out a way to pull some of that money from the future toward the present, we can make things work nicely.

[Ron Ronnerson]

The accounts in the order you listed is OK. Contribute enough to get your taxable income number down to where you need it. You probably do not need the "catch up space". I would do enough pretax so you can max the Roth IRAs and then add any extra to taxable accounts. You can use HSA reimbursements, Roth contributions and any taxable funds while you are still working. Having flexible work hours could let you adjust for income along the way. Is there a 457/403 loan option that might help if you run out of other options? HELOC rates may be better if/when you get to that point. Paying taxes and penalties for early IRA withdrawals may even work out depending on all the other numbers. It sounds like you have enough flexibility to make it work with plenty of backstop if you come up short somewhere.

You seem to be aware that minimizing income now is building your pretax retirement accounts to a larger value than actually needed so you may want to add managing that to your longer term plans if you have not already.

Thanks for the feedback! I really want to avoid paying penalties on IRA withdrawals but the rest sounds good to me. I have not considered a 457b or 403b loan. Thanks for mentioning that option and I will look more into the rules for that. It might be another way to get access to a bit of money during the years that I could use it.

[phoroner]

I would suggest using the IRA to the limit each year, whether Traditional or Roth. That way you can make withdrawals from your Roth IRA, potentially including a ladder of Traditional-to-Roth IRA conversions, during your lower income years in your late 50s. Of course you will still need to use your HSA and workplace retirement accounts (457 > 403) for the bulk of your tax deferred accounts. But to the extent you can estimate how much tax deferral you need each year and ensure you maximize use of IRAs, I think it will offer maximum flexibility to you while still allowing you to capture valuable subsidies now.

You also might want to check if your 403 or 457 allow in plan / in service Roth conversions. In your low income years later on, you may want to convert up to the ACA subsidy threshold. Your Traditional IRA balance is likely high enough that this isn’t a big deal for you.

I think you indicated both you and your spouse have opened Roth IRAs already. If not, you should ASAP to start the five-year clock for account opening.

Does this seem right to you? Post back with questions/comments.

[Ron Ronnerson]

I would suggest using the IRA to the limit each year, whether Traditional or Roth. That way you can make withdrawals from your Roth IRA, potentially including a ladder of Traditional-to-Roth IRA conversions, during your lower income years in your late 50s. Of course you will still need to use your HSA and workplace retirement accounts (457 > 403) for the bulk of your tax deferred accounts. But to the extent you can estimate how much tax deferral you need each year and ensure you maximize use of IRAs, I think it will offer maximum flexibility to you while still allowing you to capture valuable subsidies now.

You also might want to check if your 403 or 457 allow in plan / in service Roth conversions. In your low income years later on, you may want to convert up to the ACA subsidy threshold. Your Traditional IRA balance is likely high enough that this isn’t a big deal for you.

I think you indicated both you and your spouse have opened Roth IRAs already. If not, you should ASAP to start the five-year clock for account opening.

Does this seem right to you? Post back with questions/comments.

That makes sense about using the IRA accounts. I'll post an update in a few minutes about the plan I have in mind but will first address some of the points your raised.

I'll have to see if the 403b and 457b allow for in-service Roth conversions. Thanks for this suggestion.

We opened our Roth IRA accounts almost 20 years ago and currently have about $335k in them. Another $10k is in an HSA (account was opened just last year). Traditional IRA balances are only $33k.

[Ron Ronnerson]

Thanks for the feedback, everyone. The discussion here has been very helpful to me in prioritizing my goals. At the top of the list is to continue to get the ACA subsidy. Next is having sources of money I can access prior to fully retiring at 61. A potential one-time EV rebate is unnecessarily complicating things so I’m going to just forget about that.

So here is the plan for 2024:
1) Make the mandatory contributions of $14.2k toward the pension
2) Deduct $1.2k for dental premiums taken from my check and $300 for educator expenses
3) Max out the the HSA at $8.3k
4) Max out the 457b at $23k but don’t use catch-up contributions
5) Contribute $2k to the 403b just to keep this account active
6) IRA Contributions (traditional or Roth) for 2024 made in early 2025

#1-5 above total around $49k. This would bring down MAGI to around $101k. I’d qualify for the ACA subsidy as I have to keep income below $108.5k for that.

To be on the safe side, I’ll wait to make IRA contributions for 2024 until early 2025. If I need to bring down MAGI further for some reason (such as due to getting a raise or earning more interest than expected), I will have an additional $16k in space available for contributions to our two traditional IRAs. In all likelihood, I won’t need to contribute to the traditional IRAs and will instead put money into our Roth IRAs instead. The investments purchased there will hopefully grow over time and we can take out the Roth IRA contributions at any time without tax or penalty.

Thanks again and if there is anything else I should consider, I'd welcome the input.

[phoroner]

Sounds like a good plan.

And that you have enough Roth IRA contributions to make non-qualified withdrawals of contributions (tax free) if you need to from age 55-60.

[Ron Ronnerson]

Sounds like a good plan.

And that you have enough Roth IRA contributions to make non-qualified withdrawals of contributions (tax free) if you need to from age 55-60.

Thank you. I’ll proceed with it then.