Investment Account Priority Order

[vtjon]

My spouse (44yo) and I (43yo) have access to a lot of tax-deferred space. Since we have more savings to contribute, I want to make sure we are using it in an optimal way that is is both tax efficient and preserves future options. I am not sure of a retirement age. I have often said I wanted to retire when I am 52-55 but that is seems unlikely at this point (by choice though I prefer to have an option). I can see my spouse working well into her late 60s. We will have college expenses for two kids starting in 6 years and 9 years but have a small 529 and plan to cash flow. Probably not necessary to optimize financial aid due to our situation.

- Spouse eligible for full state COLA pension (~50% of salary) at age 56
- Full SS retirement age is 67
- Have small inherited IRA with about $120K (RMD currently required)
- Current federal marginal tax rate teetering between 22% and 24% and state tax is 5.75%

Current Accounts
- 403b (maxed)
- Solo 401K (maxed + profit sharing)
- Backdoor Roth (x2 - will do in 2023 when I cleaned a trad. ira)

Other options
- Spouse Governmental 457 (w/ Roth option; does not support in-service withdrawal/rollovers best I can tell)
- Considering setting up a Mega backdoor roth option with my solo 401k
- Taxable (have a low six figures [$100K-$200K] balance)

I am aware of the section 415 limits. We do not have enough budget room to max a 457+mega backdoor roth but could likely hit the $66K cap for one of us. We do not have any specific spending plans but do not know what our 50s bring. I could see a situation where we want to help our kids pay for large life expenses (house, wedding, med school, law school, etc) or make other investments (rental property, business, etc). The 457 account seems overly restrictive due to the separation of service. The fund choices in the 457 seem fine and not overly expensive.

It seems building up roth space (instead of taxable) is best at this point and the mega backdoor roth appears the most flexible. It has a little bit of friction on setup due to having to move my solo 401k from Fidelity to a different company/plan document.

Any thoughts overall on this? I know we'll be okay whatever path I go but trying to optimize.

[vtjon]

post bump

[FiveK]

What do you think of the suggestions in Prioritizing investments and/or Investment Order?

[vtjon]

What do you think of the suggestions in Prioritizing investments and/or Investment Order?

I have generally followed this though I'm generally stuck at step 5/6/7. The orders assume you will actually "retire" and then have access to the 457 money. If that was clearer, then the 457 would be the correct path. OTOH, if you don't know when you might retire, it seems locking it up in a 457 is maybe not the best path. One could make the case if you're still working, you will have income and not need the $$ in the 457. I am likely splitting hairs at this point.

[retired@50]

... I know we'll be okay whatever path I go but trying to optimize.

... I am likely splitting hairs at this point.

I agree. You'll be okay whatever path you choose. Trying to optimize usually involves some false precision, so I'd quit worrying.

Regards,

[Navillus1968]

If you contribute to Roth now, you are locking in a combined tax rate of either 27.75% (22+5.75) or 29.75% (24+5.75). If you make tax-deferred contributions, you always can convert to Roth in early retirement prior to claiming SS, your Fed marginal tax rate could be 15%. Another possibility is moving to a state with zero income tax & making larger Roth conversions filling up the 25% marginal rate. Either option saves you money compared to doing Roth today.
Predicting future tax rates 15 years from now is impossible, but you have to make your best guess.

Note- Doing Roth conversions in early retirement is more efficient if both of you are retired! If DW intends to work full-time into her late 60s, that's not ideal for Roth conversions, since her salary will fill Roth conversion space in the lower brackets. Can you convince her to retire in her early 60s (or late 50s)?
If she really wants to work another 20-plus years, that's probably a reason to contribute to Roth today, depending on the size of her future W-2 income. The 15% bracket could be mostly filled by her salary & moving to FL (or another zero tax state) would also be off the table, so a double whammy against future Roth conversions.

Converting to Roth at future 25% Fed rates, plus 5.75% VA (MD?) state rates is worse than doing Roth today.

[vtjon]

I've basically convinced myself of the mega backdoor roth for at least the next two tax years. Since I have an s-corp, I get the QBI deduction so my effective tax rate is lower (and keeps me in the 22% marginal most of the time). I can't ever imagine us being in the 12% bracket and certainly not if my wife is still working. Her W2 income consumes nearly all of the 12% bracket. The chances of us moving to a no-tax state is unlikely.

The 457 just seems to unncessarily restrict our options for what might be a breakeven caclulation (22%-qbi marginal rate now vs 22% + in retirement). As incomes continue to grow, maybe there will be a chance to do both!

[tonyclifton]

457 likely allows penalty free withdrawals at any age upon retirement. This is a powerful tool if there is any desire to retire before “normal” retirement age which is the age when withdrawals incur penalties from 401k, ROTH, and traditional IRA.

[suemarkp]

Taxable isnt a bad place if you invest the money in equities and avoid high dividend paying holdings. All your other accounts are going to be taxed at ordinary rates (except the Roth ones) but taxable would have more favorable LTCG rates for gains and dividends. If you are maxing tax deferred accounts, it sounds like those will end up large and it may be difficult to convert much to Roth with low tax. Taxable can be withdrawn whenever you want without penalty.

Certainly, after tax contributions that allow mega back door roth are better if you can make it work.