Where do we go from here, part II [Minimize taxable income, portfolio help requested]

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Topic Author
cabinover
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Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

After reading the instructions, which I should have done prior to throwing this out the first time (sorry), I'd like to lay this out in a better format.

Emergency funds: 6 months

Debt: No debt

Tax Filing Status: Married filing jointly
Tax Rate: 22% Federal, 6.6% State

State of Residence: VT

Age: Him 56, Her 52

Desired Asset allocation: xx% stocks / xx% bonds
Desired International allocation: xx% of stocks

Please provide an approximate size of your total portfolio: mid six-figures


Current retirement assets


Taxable
10.6% cash (for investing – do not include emergency funds)
xx% fund name (ticker symbol) (expense ratio)
xx% stock company name (ticker symbol)

His SIMPLE IRA
9.2% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%)
3.5% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) (.05%)
Company match? Yes, 3%

His Roth IRA at Vanguard
23% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%)

His Rollover IRA at Vanguard
16.1% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%)

Her 403b
1.9% American Funds 2035 Target Date Retirement Class R6 (RFFTX) (.35%)
6.4% Fidelity 500 Index Fund (FXAIX) (.015%)
Company match? 4% +$4K/yr.

Her Roth IRA at Vanguard
21.9% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%)

Her Traditional IRA at Vanguard
7.4% Vanguard Target Retirement 2030 Investor Class (VTHRX) (.08%)
_______________________________________________________________


Contributions

New annual Contributions
$4500 his SIMPLE Ira (50/50 match with employer)
$9697 her 403b (employer will put in $8310 above)
$7500 his IRA/Roth IRA
$7500 her IRA/Roth IRA
$xx taxable (for retirement, not short term goals)

Available funds

Funds available in his 401(k)
Any Vanguard fund is available for him

Funds available in her 403(b)
American Funds EuroPacific Gr R6 (RERGX) (.47%)
American Funds Growth Fund of Amer R6 (RGAGX) (.30%)
American Funds New Economy R6 (RNGGX) (.41%)
American Funds New Perspective R6 (RNPGX) (.42%)
American Funds SMALLCAP World R6 (RLLGX) (.66%)
DFA US Targeted Value I (DFFVX) (.29%)
Vanguard Explorer Admiral (VEXRX) (.34%)
Vanguard Mid Cap Index Adm (VIMAX) (.05%)
Vanguard Small Cap Index Fund - Admiral (VSMAX) (.05%)
Vanguard Developed Markets Index Admiral (VTMGX) (.07)

American Funds Capital World G/I R6 (RWIGX) (.42%)
Fidelity 500 Index (FXAIX) (.02%)
Vanguard Value Index - Admiral(VVIAX) (.05%)

American Funds American Balanced R6 (RLBGX) (.25%)

American Funds Bond Fund of Amer R6 (RBFGX) (.22%)
American Funds American Hi Inc Tr R6 (RITGX) (.33%)
Dodge & Cox Income Fund - I (DODIX) (.41%)
Vanguard Long-Term Investment Grade Adm (VWESX) (.21%)

American Funds US Govt Money Market R6 (RAFXX) (.31%)


American Funds 2025 Target Date Fund R6 (RFDTX) (.32%)
American Funds 2030 Target Date Fund R6 (RFETX) (.33%)
American Funds 2035 Target Date Fund R6 (RFFTX) (.35%)


Questions:
1. We were hit hard with federal taxes this year. If we both contribute the max allowed into our respective company sponsored retirement accounts, that drops our taxable income for the next year, correct?

2. Not a question but a reason for all of the stock ownership. We didn't get started until our 40s in saving and investing. Trying to make up for that now and a 2% bond fund won't get us there.

Thanks
Last edited by cabinover on Sat Feb 17, 2024 6:40 am, edited 1 time in total.
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arcticpineapplecorp.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by arcticpineapplecorp. »

1. Yes, you will reduce your tax bill, all else being equal, if you contribute more to pretax retirement accounts.

2. You have about 6% bonds (and 10% cash) so maybe 16% fixed income overall it seems to me. So you're 84% in stocks. Based on what you're saying about starting late and needing to "make up" or catch up, you're trying to swing for the fences. The other way is to cut expenses and/or increase savings or work longer. You don't have to take as much risk if you choose any or all of those other options. Just a thought. If you look at the 4% safe withdrawal rate (which the opposite is at retirement you need 25X shortfall of expenses), for every $10,000 you can cut out of your shortfall of expenses in retirement (the amount above SS/pension needed for total spending) you need $250,000 less money at retirement.

Be sure you can handle the volatility of a portfolio that's 84% in stocks:

when stocks fell 50% (you should always be prepared for that) here's how a portfolio between 80%-90% stocks would have fared:

Image

looking at about a 43% loss.

We don't know what your expenses are or your projected expenses and how long you plan to work, so we could run more projections like if you continue to invest at the amounts you wrote over x number of years times y% rate of return how much you might have in z number of years and whether that'd be sufficient or not. So that additional info could be helpful.
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Watty
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by Watty »

cabinover wrote: Sun Feb 11, 2024 3:44 pm 1. We were hit hard with federal taxes this year. If we both contribute the max allowed into our respective company sponsored retirement accounts, that drops our taxable income for the next year, correct?
Contributing to before tax retirement accounts like a 401k or IRA will reduce your total tax bill.

Contributing to post tax retirement accounts like a Roth will not reduce your tax bill.

Keep in mind that the amount of taxes you need to pay, of the refund you will get, when pay your taxes on April 15th is the difference between how much you had withheld from your paycheck and you actually owned.

You can use tax software or web sites to do dummy tax returns to get an idea of what you will be paying in taxes but most of these are for 2023 so it will only be approximately like your 2024 taxes since there will be some minor changes.
Topic Author
cabinover
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

arcticpineapplecorp. wrote: Sun Feb 11, 2024 7:26 pm

We don't know what your expenses are or your projected expenses and how long you plan to work, so we could run more projections like if you continue to invest at the amounts you wrote over x number of years times y% rate of return how much you might have in z number of years and whether that'd be sufficient or not. So that additional info could be helpful.
I will get those numbers to you for expenses ( I honestly do not know) and reply further. Been away for a couple days, hence the slow reply. Thank you.
Topic Author
cabinover
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

Watty wrote: Sun Feb 11, 2024 7:57 pm
cabinover wrote: Sun Feb 11, 2024 3:44 pm You can use tax software or web sites to do dummy tax returns to get an idea of what you will be paying in taxes but most of these are for 2023 so it will only be approximately like your 2024 taxes since there will be some minor changes.
Thank you, hadn't thought of even looking for them honestly.
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mhadden1
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by mhadden1 »

cabinover wrote: Sun Feb 11, 2024 3:44 pm
a 2% bond fund won't get us there.
Not to quibble but you can get up toward 5% right now pretty easily. Anyway, figure out what AA will likely achieve your retirement goals, based on what you can save and what you need to spend. Maybe you can use more fixed-income than you think.
Retired 12/31/2015
Topic Author
cabinover
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

arcticpineapplecorp. wrote: Sun Feb 11, 2024 7:26 pm
We don't know what your expenses are or your projected expenses and how long you plan to work, so we could run more projections like if you continue to invest at the amounts you wrote over x number of years times y% rate of return how much you might have in z number of years and whether that'd be sufficient or not. So that additional info could be helpful.
Sorry I've been slow in responding, it's busy time in VT when you are part of a propane company.

A quick but pretty accurate expense tally is last years total expenses.
Total expenses last year: $60K
This includes my wife's healthcare costs (with deductible). Mine are taken care of by my company (we pay the deductible).

We just made adjustments to both of our 401K this week. Wife will put away $23K, I will do $19,500 due to SIMPLE IRA max. This is on top of our $7,500/each Roth IRAs.

I originally wanted to not go to work where I currently do at 62 but I'm seeing that this might be too early. So let's plan on 65, that leaves me 9 years.
Wife intends on sticking it out to 65, providing her upper body can do it, so she has 9 years of full $30K contribution, then we'll have to reassess after that. I don't plan on not working, just maybe less money earning work, volunteer, projects, maybe a whole different path than wrenching on people's vehicles.

The above should make a decent addition to our nest egg I'm hoping. Somewhere I read the other day of an 8% return on a 70/30 split. Playing with an investment calculator, I think we could be quite happy with that return. Now how to make that move. Either one of us could change where our money goes, it's what makes the most sense in the end.

Again, thanks for any guidance.
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arcticpineapplecorp.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by arcticpineapplecorp. »

cabinover wrote: Fri Feb 16, 2024 6:01 pm
arcticpineapplecorp. wrote: Sun Feb 11, 2024 7:26 pm
We don't know what your expenses are or your projected expenses and how long you plan to work, so we could run more projections like if you continue to invest at the amounts you wrote over x number of years times y% rate of return how much you might have in z number of years and whether that'd be sufficient or not. So that additional info could be helpful.
Sorry I've been slow in responding, it's busy time in VT when you are part of a propane company.

A quick but pretty accurate expense tally is last years total expenses.
Total expenses last year: $60K
This includes my wife's healthcare costs (with deductible). Mine are taken care of by my company (we pay the deductible).

We just made adjustments to both of our 401K this week. Wife will put away $23K, I will do $19,500 due to SIMPLE IRA max. This is on top of our $7,500/each Roth IRAs.

I originally wanted to not go to work where I currently do at 62 but I'm seeing that this might be too early. So let's plan on 65, that leaves me 9 years.
Wife intends on sticking it out to 65, providing her upper body can do it, so she has 9 years of full $30K contribution, then we'll have to reassess after that. I don't plan on not working, just maybe less money earning work, volunteer, projects, maybe a whole different path than wrenching on people's vehicles.

The above should make a decent addition to our nest egg I'm hoping. Somewhere I read the other day of an 8% return on a 70/30 split. Playing with an investment calculator, I think we could be quite happy with that return. Now how to make that move. Either one of us could change where our money goes, it's what makes the most sense in the end.

Again, thanks for any guidance.
1. if you and your wife are 50 or older you can contribute $8000 to Roths (each) not $7500.
2. With that, looks like $58,500/year for 9 years.
3. you said you currently have mid 5 figures. Does this mean $50,000?
4. If so, looking at 8%/year for the next 9 years would be (in excel):
=FV(.08,9,-58500,-50000)
$830,472.36

Q:
1. What if you don't make 8% for the next 5 years? Long term that might be true (vanguard shows 9% but that's over 100 years: https://investor.vanguard.com/investor- ... allocation) but it's dangerous to think what can happen over the long term WILL happen over the short term (like 9 years). So you could run different assumptions using the numbers above earning less like 7% or 6% and see what you think.

2. Will $830,472 at retirement be enough even if you do earn 8% a year over the next 9 years? Looking at a 4% withdrawal (the first year, then adjusted for inflation) creates $33,218.88 to withdraw from savings the first year (then adjusted for inflation). Will that provide enough additional income? We don't know what your expenses will be in retirement. You said you might work in retirement, so that would help as well.

If your expenses are $60,000 now, can you figure how much they might be in retirement? Then look at how much you'd each get in SS and what the shortfall is. If it's $33,000 or less, you're probably fine. If it's more, you're not.

does that help?
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
Topic Author
cabinover
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

arcticpineapplecorp. wrote: Fri Feb 16, 2024 6:21 pm
1. if you and your wife are 50 or older you can contribute $8000 to Roths (each) not $7500.
2. With that, looks like $58,500/year for 9 years.
3. you said you currently have mid 5 figures. Does this mean $50,000?
4. If so, looking at 8%/year for the next 9 years would be (in excel):
=FV(.08,9,-58500,-50000)
$830,472.36

Q:
1. What if you don't make 8% for the next 5 years? Long term that might be true (vanguard shows 9% but that's over 100 years: https://investor.vanguard.com/investor- ... allocation) but it's dangerous to think what can happen over the long term WILL happen over the short term (like 9 years). So you could run different assumptions using the numbers above earning less like 7% or 6% and see what you think.

2. Will $830,472 at retirement be enough even if you do earn 8% a year over the next 9 years? Looking at a 4% withdrawal (the first year, then adjusted for inflation) creates $33,218.88 to withdraw from savings the first year (then adjusted for inflation). Will that provide enough additional income? We don't know what your expenses will be in retirement. You said you might work in retirement, so that would help as well.

If your expenses are $60,000 now, can you figure how much they might be in retirement? Then look at how much you'd each get in SS and what the shortfall is. If it's $33,000 or less, you're probably fine. If it's more, you're not.

does that help?
1. I don't know how I missed that we can put $8K away this year but you are correct and we will do that extra $1K.
2. Correct
3. That is a mistake, mid 6 figures ($450K) is approx. where we sit currently.

Knowing the difference in #3 changes everything. Thank you for the Excel calculator, great tool.

So according to Excel, if we continue on for the next 9 years as we are, then remove my contribution for the remaining 4 years of my wife's employment, at 6% that should be just south of $2M. Did I miss something?

If that calculation is correct then we can certainly back away from the cliff to a more conservative allocation than I thought.

I'm sure there will be more medical bills as we age amongst other expenditures, but I'm sure we could live on 4% of $2M, not including the proposed $4,700 from SS if it's still solvent.
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arcticpineapplecorp.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by arcticpineapplecorp. »

cabinover wrote: Sat Feb 17, 2024 7:51 am
arcticpineapplecorp. wrote: Fri Feb 16, 2024 6:21 pm
1. if you and your wife are 50 or older you can contribute $8000 to Roths (each) not $7500.
2. With that, looks like $58,500/year for 9 years.
3. you said you currently have mid 5 figures. Does this mean $50,000?
4. If so, looking at 8%/year for the next 9 years would be (in excel):
=FV(.08,9,-58500,-50000)
$830,472.36

Q:
1. What if you don't make 8% for the next 5 years? Long term that might be true (vanguard shows 9% but that's over 100 years: https://investor.vanguard.com/investor- ... allocation) but it's dangerous to think what can happen over the long term WILL happen over the short term (like 9 years). So you could run different assumptions using the numbers above earning less like 7% or 6% and see what you think.

2. Will $830,472 at retirement be enough even if you do earn 8% a year over the next 9 years? Looking at a 4% withdrawal (the first year, then adjusted for inflation) creates $33,218.88 to withdraw from savings the first year (then adjusted for inflation). Will that provide enough additional income? We don't know what your expenses will be in retirement. You said you might work in retirement, so that would help as well.

If your expenses are $60,000 now, can you figure how much they might be in retirement? Then look at how much you'd each get in SS and what the shortfall is. If it's $33,000 or less, you're probably fine. If it's more, you're not.

does that help?
1. I don't know how I missed that we can put $8K away this year but you are correct and we will do that extra $1K.
2. Correct
3. That is a mistake, mid 6 figures ($450K) is approx. where we sit currently.

Knowing the difference in #3 changes everything. Thank you for the Excel calculator, great tool.

So according to Excel, if we continue on for the next 9 years as we are, then remove my contribution for the remaining 4 years of my wife's employment, at 6% that should be just south of $2M. Did I miss something?

If that calculation is correct then we can certainly back away from the cliff to a more conservative allocation than I thought.

I'm sure there will be more medical bills as we age amongst other expenditures, but I'm sure we could live on 4% of $2M, not including the proposed $4,700 from SS if it's still solvent.
yes, i agree with your numbers.

glad to help. keep socking away money and let the compounding continue uninterupted (in other words, don't panic sell when the market craps out, which it inevitably will from time to time).
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
bonesly
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by bonesly »

cabinover wrote: Sat Feb 17, 2024 7:51 am So according to Excel, if we continue on for the next 9 years as we are, then remove my contribution for the remaining 4 years of my wife's employment, at 6% that should be just south of $2M. Did I miss something?
Using a constant compound earnings rate is good for a ball-park estimate, but when stocks and/or bond funds are involved there is volatility resulting in sequence-of-return risk. That's better characterized by a Monte Carlo simulation over many trials to identify a range of possible outcomes, rather than a single number for planning (e.g., $2M). When I ran a simple Monte Carlo, I see this range of outcomes for your balance at age 65 (9 years out), assuming you increase your contributions by +3%/yr due to wage increases/inflation, and that your average expense ratio is 0.10%:

End-Bal Percentile
$1,140.0K 5th
$1,516.4K 25th
$1,894.4K 50th
$2,418.4K 75th
$3,313.5K 95th

$2M is between the 50th and 75th percentile, so that's a pretty optimistic projection. There's a 95% chanced that if you use $1.1M, you'll actually end up with more than what you planned for. There's a 75% chance of more if you plan for $1.5M. Planning on $1.9M is a coin-toss as there's a 50% chance of more, but a 50% chance of less.

Image

I missed the details for "remove my contribution for the remaining 4 years of my wife's employment", so that could change the range of outcomes. I'd also expect that the two target date funds will reduce your stock % over time (I modeled a constant 84/16 AA the whole 9 years), but you might want to explicitly include bonds to steepen that glide path to -1%/yr in stocks for the total portfolio, reduce volatility, and compress the range out of outcomes (higher 5th percentile, lower 95th percentile).

I think this is another 4 years, beyond the 9 I modeled, but with a reduction of $4.5K/yr for the SIMPLE... the 403B and both Roth IRAs would still be fully funded? Do you expect +3%/yr increases to contributions or would it be a lesser increase (or none at all)?
Topic Author
cabinover
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

arcticpineapplecorp. wrote: Sat Feb 17, 2024 2:16 pm
glad to help. keep socking away money and let the compounding continue uninterupted (in other words, don't panic sell when the market craps out, which it inevitably will from time to time).
Thanks for your assistance. The market falling doesn't scare me as much as my local and federal government do.
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cabinover
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

bonesly wrote: Sat Feb 17, 2024 2:53 pm
Using a constant compound earnings rate is good for a ball-park estimate, but when stocks and/or bond funds are involved there is volatility resulting in sequence-of-return risk. That's better characterized by a Monte Carlo simulation over many trials to identify a range of possible outcomes, rather than a single number for planning (e.g., $2M). When I ran a simple Monte Carlo, I see this range of outcomes for your balance at age 65 (9 years out), assuming you increase your contributions by +3%/yr due to wage increases/inflation, and that your average expense ratio is 0.10%:

End-Bal Percentile
$1,140.0K 5th
$1,516.4K 25th
$1,894.4K 50th
$2,418.4K 75th
$3,313.5K 95th

$2M is between the 50th and 75th percentile, so that's a pretty optimistic projection. There's a 95% chanced that if you use $1.1M, you'll actually end up with more than what you planned for. There's a 75% chance of more if you plan for $1.5M. Planning on $1.9M is a coin-toss as there's a 50% chance of more, but a 50% chance of less.

Image

I missed the details for "remove my contribution for the remaining 4 years of my wife's employment", so that could change the range of outcomes. I'd also expect that the two target date funds will reduce your stock % over time (I modeled a constant 84/16 AA the whole 9 years), but you might want to explicitly include bonds to steepen that glide path to -1%/yr in stocks for the total portfolio, reduce volatility, and compress the range out of outcomes (higher 5th percentile, lower 95th percentile).

I think this is another 4 years, beyond the 9 I modeled, but with a reduction of $4.5K/yr for the SIMPLE... the 403B and both Roth IRAs would still be fully funded? Do you expect +3%/yr increases to contributions or would it be a lesser increase (or none at all)?
Let me digest and learn a few things about what a Monte Carlo is (besides the '73 my dad once had). You caught me completely off guard with this info. I'll be back...
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arcticpineapplecorp.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by arcticpineapplecorp. »

cabinover wrote: Sat Feb 17, 2024 6:01 pm
bonesly wrote: Sat Feb 17, 2024 2:53 pm
Using a constant compound earnings rate is good for a ball-park estimate, but when stocks and/or bond funds are involved there is volatility resulting in sequence-of-return risk. That's better characterized by a Monte Carlo simulation over many trials to identify a range of possible outcomes, rather than a single number for planning (e.g., $2M). When I ran a simple Monte Carlo, I see this range of outcomes for your balance at age 65 (9 years out), assuming you increase your contributions by +3%/yr due to wage increases/inflation, and that your average expense ratio is 0.10%:

End-Bal Percentile
$1,140.0K 5th
$1,516.4K 25th
$1,894.4K 50th
$2,418.4K 75th
$3,313.5K 95th

$2M is between the 50th and 75th percentile, so that's a pretty optimistic projection. There's a 95% chanced that if you use $1.1M, you'll actually end up with more than what you planned for. There's a 75% chance of more if you plan for $1.5M. Planning on $1.9M is a coin-toss as there's a 50% chance of more, but a 50% chance of less.

Image

I missed the details for "remove my contribution for the remaining 4 years of my wife's employment", so that could change the range of outcomes. I'd also expect that the two target date funds will reduce your stock % over time (I modeled a constant 84/16 AA the whole 9 years), but you might want to explicitly include bonds to steepen that glide path to -1%/yr in stocks for the total portfolio, reduce volatility, and compress the range out of outcomes (higher 5th percentile, lower 95th percentile).

I think this is another 4 years, beyond the 9 I modeled, but with a reduction of $4.5K/yr for the SIMPLE... the 403B and both Roth IRAs would still be fully funded? Do you expect +3%/yr increases to contributions or would it be a lesser increase (or none at all)?
Let me digest and learn a few things about what a Monte Carlo is (besides the '73 my dad once had). You caught me completely off guard with this info. I'll be back...
the monte carlo is a simulation looking back usually at returns over many decades. Because any time period you look at (like 14 years) doesn't always perform the same, it's not easy or wise to say "I'll earn 6% over the next 14 years" because you don't know. Some 14 year periods you might have 6% CAGR (with a 70/30 portfolio), some 14 year periods you may have earned more and other 14 year periods you may have earned less. So it's looking at the averages and also the best and worst outcomes so you can prepare for a range of outcomes. Doing that you can say, well what if the historical worst returns come to pass for the next 14 years? Will I still be ok? If you plan based on conservative estimates, and that worst comes to pass, you're fine. But if you plan on optimistic assumptions and that doesn't happen, you're toast.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
Topic Author
cabinover
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

Thanks for the education. It makes more sense to use this than just saying 7.5% or the like.

So let's say we back off to a 70/30 allocation:
Do you guys see any funds listed for my wife's 401K that you like?
Any thoughts on where I should go within Vanguard?

As for cash laying around we can drop $60K somewhere and still be fine. This amount includes our emergency fund but still leaves a smaller cash supply for what comes along.
Would you guys say a 5% APY savings account like Wealthfront is a good place to put this? It would still be fairly liquid within a few days, correct?
Other recommendations are fine as well.
spacemanspif
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by spacemanspif »

Do you guys see any funds listed for my wife's 401K that you like?
If it were me, I would switch out of the American fund and into the Fidelity 500 Index (FXAIX) as it is much less expensive. Then in one of your traditional IRA's make up for the bond portion and international that you had in the American target date fund plus any additional bond allocation you are pondering.
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cabinover
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

Thanks spaceman, that makes sense. If I do that then I need about 16% into a bond fund to get about 70/30. I can use my rollover account with 16% in it and then we'd be pretty well set, correct?

From there it's just a constant maintenance to maintain that allocation unless I change my payroll deduction to fix that.

And here I thought I had even half a handle on this whole investing deal, nowhere close in reality. Thanks to all of you I'm learning just how foolish a notion that was. I know vehicles and a few other things, can't have it all.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by HomeStretch »

The goal is to maximize after-tax income rather than minimize taxes. It’s a multi-year approach. For example, one may do Roth conversions this year (raising taxable income) in order to reduce taxable income and taxes/IRMAA etc. in future years.

Consider investing the Taxable account’s 11% cash in a S&P 500 fund which will generate qualified lower taxable dividends than the ordinary dividends from a higher-yielding money market fund. Offset this by exchanging equity for fixed income in a tax deferred account.

Longer term consider moving as much of your additional savings/holdings from Taxable to Roth. Roth accounts grow tax free. Not having a high amount of taxable income from Taxable dividends/interest in retirement will help reduce taxes, increase ACA subsidies in early retirement, reduce IRMAA MAGI, etc.

Does Her 403b allow mega backdoor Roth?

Your MFJ MAGI may be getting close to the cutoff for direct Roth contributions. She can do a future backdoor Roth if she rolls over Her Traditional IRA into her 403b, if it accepts rollovers in. The slightly higher ER for FXAIX in the 403b is not an issue. His SIMPLE IRA makes him not a good candidate for a backdoor Roth due to pro-rated taxes.
Navillus1968
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by Navillus1968 »

cabinover wrote: Fri Feb 16, 2024 6:01 pm
arcticpineapplecorp. wrote: Sun Feb 11, 2024 7:26 pm
We don't know what your expenses are or your projected expenses and how long you plan to work, so we could run more projections like if you continue to invest at the amounts you wrote over x number of years times y% rate of return how much you might have in z number of years and whether that'd be sufficient or not. So that additional info could be helpful.
Sorry I've been slow in responding, it's busy time in VT when you are part of a propane company.

A quick but pretty accurate expense tally is last years total expenses.
Total expenses last year: $60K
This includes my wife's healthcare costs (with deductible). Mine are taken care of by my company (we pay the deductible).

We just made adjustments to both of our 401K this week. Wife will put away $23K, I will do $19,500 due to SIMPLE IRA max. This is on top of our $7,500/each Roth IRAs.

I originally wanted to not go to work where I currently do at 62 but I'm seeing that this might be too early. So let's plan on 65, that leaves me 9 years.
Wife intends on sticking it out to 65, providing her upper body can do it, so she has 9 years of full $30K contribution, then we'll have to reassess after that. I don't plan on not working, just maybe less money earning work, volunteer, projects, maybe a whole different path than wrenching on people's vehicles.

The above should make a decent addition to our nest egg I'm hoping. Somewhere I read the other day of an 8% return on a 70/30 split. Playing with an investment calculator, I think we could be quite happy with that return. Now how to make that move. Either one of us could change where our money goes, it's what makes the most sense in the end.

Again, thanks for any guidance.
Can you confirm that your MAGI is too high to make deductible IRA contributions? For 2024, if your MAGI is less than $123k MFJ, you can make a fully deductible IRA contribution if you are each covered by a employer plan, which I believe you are.
https://www.fidelity.com/learning-cente ... ion-limits

Note that making Trad. SIMPLE IRA & 403b contributions reduces your MAGI, dollar for dollar. So, if your wife makes a maximum $30.5k contribution to her 403b & you max out your SIMPLE IRA at $19.5k, that reduces your MAGI by $50k.

Would that be enough to bring your MAGI below $123k for 2024? At your combined tax rate of 28.6%, you would save about $4,500 in taxes by making 2x $8k deductible IRA contributions instead of using the Roth IRA.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by Watty »

cabinover wrote: Fri Feb 16, 2024 6:01 pm
A quick but pretty accurate expense tally is last years total expenses.
Total expenses last year: $60K
This includes my wife's healthcare costs (with deductible). Mine are taken care of by my company (we pay the deductible).

We just made adjustments to both of our 401K this week. Wife will put away $23K, I will do $19,500 due to SIMPLE IRA max. This is on top of our $7,500/each Roth IRAs.
We are retired and on Medicare and getting Social Security and $60K a year is about or core retirement expenses too but we have a paid off house which helps a lot. That does not include large lumpy expenses like when we need a replacement car.

What is your housing situation? (renting, mortgage, or paid off) and the details of your home equity and any mortgage?

I might have missed it but also I did not see how much Social Security you expect to get. See this web site to see when it says that you should start Social Security. Be sure that your Social Security estimate is based on when you expect to stop working.

https://opensocialsecurity.com/

The reason that I am asking this is that the way Social Security is taxed is complex and that can result in you being in a different retirement tax bracket than you might be expecting. There is a wiki on how it is taxed. The details are convoluted but towards the bottom of the wiki there are two multi-color charts which have the calculated marginal tax brackets for different levels of taxable income and social security. For example a couple with $40K in Social Security and $24K in taxable income would still be in the 0% federal tax bracket. That is roughly my situation so I expect to be in a very low or zero federal tax bracket most years.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

You would also need to look at your numbers as if one of your survived the other.

The reason that I am pointing this out is that for money that is needed after you are both getting Social Security checks any IRA withdrawals will likely be taxed at a very low rate which would make a traditional IRA or 401k preferable to using a Roth. You may want to reconsider and contribute as much as you can to your traditional deductible retirement accounts before contributing more to a Roth.

Even before you are getting Social Security if you withdraw $60K from an IRA you will have a standard deduction of about $30K so only around half of it would be taxed.
cabinover wrote: Sat Feb 17, 2024 7:51 am mid 6 figures ($450K) is approx. where we sit currently.
cabinover wrote: Fri Feb 16, 2024 6:01 pm I originally wanted to not go to work where I currently do at 62 but I'm seeing that this might be too early. So let's plan on 65, that leaves me 9 years.
Wife intends on sticking it out to 65, providing her upper body can do it, so she has 9 years of full $30K contribution, then we'll have to reassess after that.
I did not follow all the numbers in this thread but I would suspect that when you factor in Social Security that you are doing a lot better than you realize.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

Navillus1968 wrote: Sun Feb 18, 2024 10:14 am
Can you confirm that your MAGI is too high to make deductible IRA contributions? For 2024, if your MAGI is less than $123k MFJ, you can make a fully deductible IRA contribution if you are each covered by a employer plan, which I believe you are.
https://www.fidelity.com/learning-cente ... ion-limits

Note that making Trad. SIMPLE IRA & 403b contributions reduces your MAGI, dollar for dollar. So, if your wife makes a maximum $30.5k contribution to her 403b & you max out your SIMPLE IRA at $19.5k, that reduces your MAGI by $50k.

Would that be enough to bring your MAGI below $123k for 2024? At your combined tax rate of 28.6%, you would save about $4,500 in taxes by making 2x $8k deductible IRA contributions instead of using the Roth IRA.
Our MAGI for 2023 was $137K. I don't expect it to go down this year but further upwards. We are both covered by employer plans.

One question, if I may...suppose this deduction would put us under the limit and we could take advantage of the tax savings, while reading the post above you by HomeStretch, tax-wise we would do well to do some Roth conversions. Wouldn't I then also need to convert this $16K over to Roth eventually and pay the taxes on that money?

I really appreciate your thoughts, as well as everyone that has spoken up here, I'm being directed to so many different information that I had no idea about.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by Navillus1968 »

cabinover wrote: Sun Feb 18, 2024 10:56 am
Navillus1968 wrote: Sun Feb 18, 2024 10:14 am
Can you confirm that your MAGI is too high to make deductible IRA contributions? For 2024, if your MAGI is less than $123k MFJ, you can make a fully deductible IRA contribution if you are each covered by a employer plan, which I believe you are.
https://www.fidelity.com/learning-cente ... ion-limits

Note that making Trad. SIMPLE IRA & 403b contributions reduces your MAGI, dollar for dollar. So, if your wife makes a maximum $30.5k contribution to her 403b & you max out your SIMPLE IRA at $19.5k, that reduces your MAGI by $50k.

Would that be enough to bring your MAGI below $123k for 2024? At your combined tax rate of 28.6%, you would save about $4,500 in taxes by making 2x $8k deductible IRA contributions instead of using the Roth IRA.
Our MAGI for 2023 was $137K. I don't expect it to go down this year but further upwards. We are both covered by employer plans.

One question, if I may...suppose this deduction would put us under the limit and we could take advantage of the tax savings, while reading the post above you by HomeStretch, tax-wise we would do well to do some Roth conversions. Wouldn't I then also need to convert this $16K over to Roth eventually and pay the taxes on that money?

I really appreciate your thoughts, as well as everyone that has spoken up here, I'm being directed to so many different information that I had no idea about.
Yes, but doing Roth conversions in early retirement might mean you would be in the future 15% Fed bracket vice 22% today & possibly drop into the VT 3.35% bracket (had to look that one up!) vice 6.6% today.
So, instead of being taxed today at 28.6% on a Roth contribution, you could Roth convert at a combined rate of 15+3.35= 18.35%, not a bad savings.

Obviously, if you make large Roth conversions, you would push yourself into higher tax rates, but you probably won't need to do those types of Roth conversions if your pre-tax accounts are not so large as to result in substantial RMDs later on.

ETA- To facilitate Roth conversions, at least one of you should delay claiming SS until 70. This opens up lower tax brackets to be filled with Roth conversions. Go to the Open SS site that Watty linked above & plug in your 2 PIA numbers for a claiming strategy recommendation.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

Watty wrote: Sun Feb 18, 2024 10:47 am
We are retired and on Medicare and getting Social Security and $60K a year is about or core retirement expenses too but we have a paid off house which helps a lot. That does not include large lumpy expenses like when we need a replacement car.

What is your housing situation? (renting, mortgage, or paid off) and the details of your home equity and any mortgage?

I might have missed it but also I did not see how much Social Security you expect to get. See this web site to see when it says that you should start Social Security. Be sure that your Social Security estimate is based on when you expect to stop working.

https://opensocialsecurity.com/

The reason that I am asking this is that the way Social Security is taxed is complex and that can result in you being in a different retirement tax bracket than you might be expecting. There is a wiki on how it is taxed. The details are convoluted but towards the bottom of the wiki there are two multi-color charts which have the calculated marginal tax brackets for different levels of taxable income and social security. For example a couple with $40K in Social Security and $24K in taxable income would still be in the 0% federal tax bracket. That is roughly my situation so I expect to be in a very low or zero federal tax bracket most years.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

You would also need to look at your numbers as if one of your survived the other.

The reason that I am pointing this out is that for money that is needed after you are both getting Social Security checks any IRA withdrawals will likely be taxed at a very low rate which would make a traditional IRA or 401k preferable to using a Roth. You may want to reconsider and contribute as much as you can to your traditional deductible retirement accounts before contributing more to a Roth.

Even before you are getting Social Security if you withdraw $60K from an IRA you will have a standard deduction of about $30K so only around half of it would be taxed.
cabinover wrote: Sat Feb 17, 2024 7:51 am mid 6 figures ($450K) is approx. where we sit currently.
cabinover wrote: Fri Feb 16, 2024 6:01 pm I originally wanted to not go to work where I currently do at 62 but I'm seeing that this might be too early. So let's plan on 65, that leaves me 9 years.
Wife intends on sticking it out to 65, providing her upper body can do it, so she has 9 years of full $30K contribution, then we'll have to reassess after that.
I did not follow all the numbers in this thread but I would suspect that when you factor in Social Security that you are doing a lot better than you realize.
Hi Watty, allow me to answer some of your questions...and you are correct about not having figured SS into the fray (another thing I hadn't thought of in regards to taxes).
Our home is owned free and clear, no debt other than the day to day debt. SS, from their calculator, should put us around $24K/yr combined.
We are now contributing the max amount to both our Roths and our companies 401Ks, total of $58,500. $42,500 of this is taxable.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

Navillus1968 wrote: Sun Feb 18, 2024 11:19 am

Yes, but doing Roth conversions in early retirement might mean you would be in the future 15% Fed bracket vice 22% today & possibly drop into the VT 3.35% bracket (had to look that one up!) vice 6.6% today.
So, instead of being taxed today at 28.6% on a Roth contribution, you could Roth convert at a combined rate of 15+3.35= 18.35%, not a bad savings.

Obviously, if you make large Roth conversions, you would push yourself into higher tax rates, but you probably won't need to do those types of Roth conversions if your pre-tax accounts are not so large as to result in substantial RMDs later on.

ETA- To facilitate Roth conversions, at least one of you should delay claiming SS until 70. This opens up lower tax brackets to be filled with Roth conversions. Go to the Open SS site that Watty linked above & plug in your 2 PIA numbers for a claiming strategy recommendation.
Makes perfect sense. I've played with the OpenSS site, and yes, they recommend that I don't claim until 70. I did not know why other than a larger check I guess. Your reply helps in why I would wait.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by sergeant »

What exactly does "hit hard" mean? Most here pay federal taxes. There are ways to lessen the amount but I'm not sure why you are frightened by the federal and local government. A bit of hyperbole?
For the ashes of his fathers, And the temples of his gods. | Pensions= 2X yearly expenses. Portfolio= 40X yearly expenses.
Navillus1968
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by Navillus1968 »

cabinover wrote: Sun Feb 18, 2024 11:32 am
Navillus1968 wrote: Sun Feb 18, 2024 11:19 am

Yes, but doing Roth conversions in early retirement might mean you would be in the future 15% Fed bracket vice 22% today & possibly drop into the VT 3.35% bracket (had to look that one up!) vice 6.6% today.
So, instead of being taxed today at 28.6% on a Roth contribution, you could Roth convert at a combined rate of 15+3.35= 18.35%, not a bad savings.

Obviously, if you make large Roth conversions, you would push yourself into higher tax rates, but you probably won't need to do those types of Roth conversions if your pre-tax accounts are not so large as to result in substantial RMDs later on.

ETA- To facilitate Roth conversions, at least one of you should delay claiming SS until 70. This opens up lower tax brackets to be filled with Roth conversions. Go to the Open SS site that Watty linked above & plug in your 2 PIA numbers for a claiming strategy recommendation.
Makes perfect sense. I've played with the OpenSS site, and yes, they recommend that I don't claim until 70. I did not know why other than a larger check I guess. Your reply helps in why I would wait.
When the higher earner delays SS until 70, it's a two-fold gain- you maximize your worker's benefit by 24% compared to age 67, but that larger age 70 benefit also becomes the SS survivor benefit for the widow in the couple when one of you passes. The lower benefit goes away.
In a married couple, the probability of one of you surviving until age 90 or beyond is pretty high, about 50%. Maximizing the SS survivor benefit is smart in light of these odds. It's cheap insurance against the possibility of a very long life.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

sergeant wrote: Sun Feb 18, 2024 11:36 am What exactly does "hit hard" mean? Most here pay federal taxes. There are ways to lessen the amount but I'm not sure why you are frightened by the federal and local government. A bit of hyperbole?
Maybe a little but this is VT, land of let's catch up with anything California does, and then do more. Green, taxes, etc. :wink:
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by TOM1964 »

I’m in VT too.

It’s a shame forum policies prevent us from discussing pending legislation. This is shaping up to be an “interesting” year in our little state.

Cheers, Tom
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

Yes it is.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

Navillus1968 wrote: Sun Feb 18, 2024 11:41 am
When the higher earner delays SS until 70, it's a two-fold gain- you maximize your worker's benefit by 24% compared to age 67, but that larger age 70 benefit also becomes the SS survivor benefit for the widow in the couple when one of you passes. The lower benefit goes away.
In a married couple, the probability of one of you surviving until age 90 or beyond is pretty high, about 50%. Maximizing the SS survivor benefit is smart in light of these odds. It's cheap insurance against the possibility of a very long life.
Pretty sure that will be my wife, she has longevity in her family. I've already done 6 stints and 2 heart attacks. I'd at least like to have 5 or 10 good years before checking out but we just never know.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by Navillus1968 »

cabinover wrote: Sun Feb 18, 2024 2:01 pm
Navillus1968 wrote: Sun Feb 18, 2024 11:41 am
When the higher earner delays SS until 70, it's a two-fold gain- you maximize your worker's benefit by 24% compared to age 67, but that larger age 70 benefit also becomes the SS survivor benefit for the widow in the couple when one of you passes. The lower benefit goes away.
In a married couple, the probability of one of you surviving until age 90 or beyond is pretty high, about 50%. Maximizing the SS survivor benefit is smart in light of these odds. It's cheap insurance against the possibility of a very long life.
Pretty sure that will be my wife, she has longevity in her family. I've already done 6 stints and 2 heart attacks. I'd at least like to have 5 or 10 good years before checking out but we just never know.
If you pass prior to 67, your full retirement age, your wife will get a survivor benefit calculated on what your SS benefit would have been at your FRA, so that's another reason to not claim early when married.
If you pass between 67 & 70, SS will calculate the survivor benefit by applying the yearly 8% delayed retirement credit to each month you were alive past 67, basically a 0.667% raise per month.
https://www.aarp.org/retirement/social- ... cting.html

Your local SS office can explain the various claiming strategies between your wife's worker's benefit & her survivor benefit, should it come to that.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

HomeStretch wrote: Sun Feb 18, 2024 10:01 am The goal is to maximize after-tax income rather than minimize taxes. It’s a multi-year approach. For example, one may do Roth conversions this year (raising taxable income) in order to reduce taxable income and taxes/IRMAA etc. in future years.

Consider investing the Taxable account’s 11% cash in a S&P 500 fund which will generate qualified lower taxable dividends than the ordinary dividends from a higher-yielding money market fund. Offset this by exchanging equity for fixed income in a tax deferred account.

Longer term consider moving as much of your additional savings/holdings from Taxable to Roth. Roth accounts grow tax free. Not having a high amount of taxable income from Taxable dividends/interest in retirement will help reduce taxes, increase ACA subsidies in early retirement, reduce IRMAA MAGI, etc.

Does Her 403b allow mega backdoor Roth?

Your MFJ MAGI may be getting close to the cutoff for direct Roth contributions. She can do a future backdoor Roth if she rolls over Her Traditional IRA into her 403b, if it accepts rollovers in. The slightly higher ER for FXAIX in the 403b is not an issue. His SIMPLE IRA makes him not a good candidate for a backdoor Roth due to pro-rated taxes.
I will look into what you've given for information. I read the first sentence and mulled it over a lot. To me it says a Roth trumps saving income taxes now. Am I reading it correctly?

As for the 11% cash into an S&P 500, doesn't that take it out of liquidity? Or is it that we'd have to pay taxes on any gains but it's still liquid, as in a brokerage account? I guess I don't quite understand qualified lower taxable dividends vs ordinary dividends from an HYSA/HYMM?

The following part (Offset this by exchanging equity for fixed income in a tax deferred account.) has me also stumped. Thank you for any insight for a novice like myself.

The rest of your reply makes sense, such as the ACA and IRMAA. I've never heard of them but now that you pointed it out, I looked them up and learned why you said it. Thanks.

I don't know about a mega backdoor Roth but I will find out.

As for the MJF MAGI, I'm guessing you are asking about what was addressed in the reply after you, what our MAGI was in 2023. It was $137K. Will be higher in 2024, probably around $10K +/-.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by Navillus1968 »

cabinover wrote: Sun Feb 18, 2024 4:58 pm
HomeStretch wrote: Sun Feb 18, 2024 10:01 am The goal is to maximize after-tax income rather than minimize taxes. It’s a multi-year approach. For example, one may do Roth conversions this year (raising taxable income) in order to reduce taxable income and taxes/IRMAA etc. in future years.

Consider investing the Taxable account’s 11% cash in a S&P 500 fund which will generate qualified lower taxable dividends than the ordinary dividends from a higher-yielding money market fund. Offset this by exchanging equity for fixed income in a tax deferred account.

Longer term consider moving as much of your additional savings/holdings from Taxable to Roth. Roth accounts grow tax free. Not having a high amount of taxable income from Taxable dividends/interest in retirement will help reduce taxes, increase ACA subsidies in early retirement, reduce IRMAA MAGI, etc.

Does Her 403b allow mega backdoor Roth?

Your MFJ MAGI may be getting close to the cutoff for direct Roth contributions. She can do a future backdoor Roth if she rolls over Her Traditional IRA into her 403b, if it accepts rollovers in. The slightly higher ER for FXAIX in the 403b is not an issue. His SIMPLE IRA makes him not a good candidate for a backdoor Roth due to pro-rated taxes.
I will look into what you've given for information. I read the first sentence and mulled it over a lot. To me it says a Roth trumps saving income taxes now. Am I reading it correctly?

As for the 11% cash into an S&P 500, doesn't that take it out of liquidity? Or is it that we'd have to pay taxes on any gains but it's still liquid, as in a brokerage account? I guess I don't quite understand qualified lower taxable dividends vs ordinary dividends from an HYSA/HYMM?

The following part (Offset this by exchanging equity for fixed income in a tax deferred account.) has me also stumped. Thank you for any insight for a novice like myself.

The rest of your reply makes sense, such as the ACA and IRMAA. I've never heard of them but now that you pointed it out, I looked them up and learned why you said it. Thanks.

I don't know about a mega backdoor Roth but I will find out.

As for the MJF MAGI, I'm guessing you are asking about what was addressed in the reply after you, what our MAGI was in 2023. It was $137K. Will be higher in 2024, probably around $10K +/-.
Read the BH wiki on "Cash in a tax-advantaged account," it has details on what HomeStretch was referring to- https://www.bogleheads.org/wiki/Placing ... ed_account
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

Navillus1968 wrote: Sun Feb 18, 2024 7:01 pm
Read the BH wiki on "Cash in a tax-advantaged account," it has details on what HomeStretch was referring to- https://www.bogleheads.org/wiki/Placing ... ed_account
I have not forgotten the help here, I've been slowly trying to digest the above. Thanks for everything and I'll be back shortly.
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Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by HomeStretch »

See my comments in blue font, below.
cabinover wrote: Sun Feb 18, 2024 4:58 pm
HomeStretch wrote: Sun Feb 18, 2024 10:01 am The goal is to maximize after-tax income rather than minimize taxes. It’s a multi-year approach. For example, one may do Roth conversions this year (raising taxable income) in order to reduce taxable income and taxes/IRMAA etc. in future years.

Consider investing the Taxable account’s 11% cash in a S&P 500 fund which will generate qualified lower taxable dividends than the ordinary dividends from a higher-yielding money market fund. Offset this by exchanging equity for fixed income in a tax deferred account.

Longer term consider moving as much of your additional savings/holdings from Taxable to Roth. Roth accounts grow tax free. Not having a high amount of taxable income from Taxable dividends/interest in retirement will help reduce taxes, increase ACA subsidies in early retirement, reduce IRMAA MAGI, etc.

Does Her 403b allow mega backdoor Roth?

Your MFJ MAGI may be getting close to the cutoff for direct Roth contributions. She can do a future backdoor Roth if she rolls over Her Traditional IRA into her 403b, if it accepts rollovers in. The slightly higher ER for FXAIX in the 403b is not an issue. His SIMPLE IRA makes him not a good candidate for a backdoor Roth due to pro-rated taxes.
I will look into what you've given for information. I read the first sentence and mulled it over a lot. To me it says a Roth trumps saving income taxes now. Am I reading it correctly?

Not always, but it may. It’s a multi-year analysis based on assumptions. There may be years where you choose to increase taxable income/tax liability (for example, by doing a Roth conversion) in order to save on taxes/IRMAA, etc. in the future. You would do this if cumulatively it resulted in higher after-tax spend during your lifetime.

A Roth conversion is one example of a tool that can be used to increase lifetime after-tax spend for a couple/surviving spouse. It’s a tool that may be used in a low income year such as early retirement or job loss. This BH wiki page about Roth conversions may be helpful:
https://www.bogleheads.org/wiki/Roth_conversion

Other tools to increase after-tax spend include tax-efficient fund placement and prioritizing Roth over Taxable for retirement savings. That is why I made some of the suggestions, below.


As for the 11% cash into an S&P 500, doesn't that take it out of liquidity? Or is it that we'd have to pay taxes on any gains but it's still liquid, as in a brokerage account? I guess I don't quite understand qualified lower taxable dividends vs ordinary dividends from an HYSA/HYMM?

The following part (Offset this by exchanging equity for fixed income in a tax deferred account.) has me also stumped. Thank you for any insight for a novice like myself.

Is the 11% cash in your Taxable account for retirement or a non-retirement goal?

A Taxable account is liquid whether holdings are a money market fund or an equity fund which can be sold and settle in T+2. If the account is for retirement, there should not be a need to take distributions until retirement.

It is often more tax efficient to hold equities (paying an annual dividend of 2% taxed at lower capital gain rates) than cash in a MMF yielding 5% taxed at higher ordinary income rates.

If you buy equities with the 11% MMF (fixed income) in Taxable, if you want to maintain your overall portfolio asset allocation you will need to exchange a corresponding amount of equity for fixed income preferably in a tax deferred account. All distributions from a tax deferred account are taxed at ordinary income rates whether the income is from equities or fixed income.

This BH wiki page about tax-efficient fund placement may be helpful:
https://www.bogleheads.org/wiki/Tax-eff ... _placement


The rest of your reply makes sense, such as the ACA and IRMAA. I've never heard of them but now that you pointed it out, I looked them up and learned why you said it. Thanks.

I don't know about a mega backdoor Roth but I will find out.
Roth accounts grow tax free whereas a Taxable account’s income/gains are subject to tax. For retirement savings, prioritize Roth over Taxable contributions. This means filling available Roth space before contributing to a Taxable account or holding funds in a Taxable account. You/spouse are already making the maximum Roth IRA contributions. If your spouse’s 403b plan allows after-tax employee contributions that can be converted to Roth 401k/Roth IRA (aka “Mega backdoor Roth” (MBDR)), then consider filling/maximizing this Roth space in lieu of your planned Taxable contributions. If maximizing the MBDR space results in your spouse’s net pay being too low to cover living expenses, use a portion of the Taxable account’s 11% cash for living expenses. In this manner, you shift your retirement savings from Taxable to Roth. This BH wiki page regarding MBDR may be helpful:
https://www.bogleheads.org/wiki/Mega-backdoor_Roth

The more retirement savings you can tax-effectively shift to Roth from Taxable, the better imo. This will lower income subject to taxes over your lifetime. Lower taxable income in retirement is desirable as it may also mean you qualify for more subsidies if you use ACA healthcare coverage in early retirement, you won’t pay higher Medicare premiums (IRMAA), you may avoid NIIT, you might qualify for reduced property taxes if your town offers such based on age/income, etc.


As for the MJF MAGI, I'm guessing you are asking about what was addressed in the reply after you, what our MAGI was in 2023. It was $137K. Will be higher in 2024, probably around $10K +/-.
If your MAGI is over the phase-out for direct Roth IRA contributions (MAGI between $146k - $161k for 2024), that’s when a backdoor Roth becomes a vehicle for making Roth IRA contributions in a two-step process described in this BH wiki page linked below. Pay close attention to the section about why a backdoor Roth is less desirable if you have to pay pro-rated taxes on the conversion (step 2) due to having a 12/31 balance in a pretax IRA account such as a Rollover IRA (spouse) or a SIMPLE IRA (you).
https://www.bogleheads.org/wiki/Backdoor_Roth
Topic Author
cabinover
Posts: 43
Joined: Mon Mar 07, 2016 8:07 pm
Location: VT

Re: Where do we go from here, part II [Minimize taxable income, portfolio help requested]

Post by cabinover »

I apologize for the late reply folks. I guess I'm just rather simple when it comes to putting things in my head. :oops: I'm probably trying to hard to get it into my skull but darn if it doesn't slip right back out.

For the time being (while I keep reading and learning) I'm not going to do anything, lest it be a move in a bad direction.

We will continue as we have been, funding fully our Roth IRAs, maxing out our company plans, and see how our bank account stays. If it goes down then we've over budgeted. If it doesn't, and stays pretty static, we're good. If it rises then that will be a problem we can deal with.

I will continue to learn about tax strategies and have some questions about Mega Roth conversions for my wife's company.

Thank you for all of your help, you are all fantastic!

When the time comes that I understand a little more, I'll be back on this thread to continue.

Bob
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