overfunding retirement accounts

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
stay.the.course
Posts: 13
Joined: Thu Apr 04, 2024 4:29 am

overfunding retirement accounts

Post by stay.the.course »

I need some advice.

51 M. married. two incomes. plan to work til 70. tax bracket: 37%

assets (both my wife's and mine):

Tax-deferred:

403B/457B: $4.5 million
cash balance plan: $1 million
SEP account: $400 k

Taxable:
brocherage account: $1 million

Tax Free accounts:
ROTH IRA: $250 k


I plan on liquidating the cash balance plan and stop contributing to it as I will have an RMD problem at age 75. it looks like i have overfunded the tax deferred bucket at the expense of the other buckets.

The Plan is to build up the taxable account instead.

I have switched our 403 contributions to ROTH last year (not the 457B, our accounts don't allow roth contribution to 457). That means we are contributing $50k to roth 403 b ($30k for me and $23k for my wife). Our employer contribution is around $80k for both of us, tax deferred, not roth option there. we are contributing $46k to tax deferred 457B as well yearly.

Question: do roth conversions (from the SEP IRA and from the liquidated cash balance plan) make sense for someone my age at my tax bracket?
or should i wait til after retirement and before RMD's kick in?

thank you.
HeavyChevy
Posts: 534
Joined: Sun Oct 31, 2021 7:07 am
Location: Below the Mac bridge (Troll)

Re: overfunding retirement accounts

Post by HeavyChevy »

Impossible to know. Starting point is expected tax bracket in retirement vs bracket at time of Roth contribution/conversion.

If you never touch current assets and don't save another dime, they should grow to >$20M by retirement. Your net worth will likely be MUCH higher.
Like many BH, you spend much less than you could. You will have a prosperous retirement and pay a ton of money to uncle Sam regardless (now or later) Not the worst problem to have. I would invest in a solid estate plan as I would guess Roth manipulation will be noise on your current path.
"It's not the best move, but it is a move." - GMHikaru
HomeStretch
Posts: 11774
Joined: Thu Dec 27, 2018 2:06 pm

Re: overfunding retirement accounts

Post by HomeStretch »

Whether or not you should stop contributing to tax deferred space and whether you should do Roth conversions in the highest tax bracket isn’t something that can be definitively answered based on your post.

With a portfolio that is currently “only” $7.2 million, I don’t know if I personally would stop contributing to all available tax deferred space or do Roth conversions now. But given your fact set, I would be contemplating these questions too.

Assuming you have been at 37% for awhile and you have a high annual savings rate (at least $300k/year excluding employer contributions), it’s unexpected to me to see a high-earner portfolio so heavily weighted in tax deferred. Even with both of you fully contributing to 403/457 plans and your employer contributions, I would expect to see tax deferred at 50% or less of your total portfolio rather than the actual 83% it is.

Before you move all your (and possibly employer) contributions to Roth while in the highest tax bracket, consider investing in something like Pralana Gold to model out your complete picture as a couple or surviving spouse.

Some of the questions to contemplate in retirement modeling include:

1. Are you certain (barring health, unemployment, death) that both of you will continue to work, maintain current level of retirement contributions and remain in the highest tax bracket until age 70?

2. Will you have any other retirement income (such as a large pension) in addition to SS benefits, RMDs and investment income?

3. Will you spend your portfolio in retirement? If not, will your significant estate beneficiaries include any qualified charitable organizations? What is the projected tax bracket of your other beneficiaries?

4. Do you have LTC insurance?

5. Your asset allocation and where you place your fixed income.

6. Gifting and donation plans while alive

7. Etc.
Normchad
Posts: 5927
Joined: Thu Mar 03, 2011 6:20 am

Re: overfunding retirement accounts

Post by Normchad »

HeavyChevy wrote: Thu Apr 04, 2024 6:15 am Impossible to know. Starting point is expected tax bracket in retirement vs bracket at time of Roth contribution/conversion.

If you never touch current assets and don't save another dime, they should grow to >$20M by retirement. Your net worth will likely be MUCH higher.
Like many BH, you spend much less than you could. You will have a prosperous retirement and pay a ton of money to uncle Sam regardless (now or later) Not the worst problem to have. I would invest in a solid estate plan as I would guess Roth manipulation will be noise on your current path.
Well said.

Personally, I won’t be doing any ROTH conversions. Good chance I’ll be dead by 75. And if I’m not, I’ll just take them and pay the taxes. I just don’t see it as a big problem. If it happens, it’s rich guy problem.
KlangFool
Posts: 32103
Joined: Sat Oct 11, 2008 12:35 pm

Re: overfunding retirement accounts

Post by KlangFool »

OP,

1) What is your current marginal tax rate?

2) Do you pay state income tax?

3) Do you plan to retire in a state with no state income tax?

4) Will you have pension? How much is that?

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
James.534
Posts: 312
Joined: Thu Feb 04, 2021 1:34 pm

Re: overfunding retirement accounts

Post by James.534 »

What is the end game?

If you are planning to work until 70, continue making a presumed good living to be able to afford daily needs and wants and not planning a long expensive retirement, why continue to increase the bucket size with more retirement savings?
smitcat
Posts: 13439
Joined: Mon Nov 07, 2016 9:51 am

Re: overfunding retirement accounts

Post by smitcat »

James.534 wrote: Thu Apr 04, 2024 9:02 am What is the end game?

If you are planning to work until 70, continue making a presumed good living to be able to afford daily needs and wants and not planning a long expensive retirement, why continue to increase the bucket size with more retirement savings?
This is the key question.
What will the purpose for the funds be? There may be methods/choices to optimize but it really depends on what the funds will be used for - spending, charity heirs, etc.
bloom2708
Posts: 9899
Joined: Wed Apr 02, 2014 2:08 pm

Re: overfunding retirement accounts

Post by bloom2708 »

Working to 70 in the OPs scenario is, well, dumb. :D

But people do dumb stuff all the time. Just look around.

The OP will have more than enough and so paying tax is just part of the deal. Tax was deferred on that $4.8. Deferred means later.

Working to 70 also makes Roth conversions less impactful. 32% now or later is 32%.
User avatar
RickBoglehead
Posts: 8017
Joined: Wed Feb 14, 2018 8:10 am
Location: In a house

Re: overfunding retirement accounts

Post by RickBoglehead »

bloom2708 wrote: Thu Apr 04, 2024 9:18 am Working to 70 in the OPs scenario is, well, dumb. :D

But people do dumb stuff all the time. Just look around.

The OP will have more than enough and so paying tax is just part of the deal. Tax was deferred on that $4.8. Deferred means later.

Working to 70 also makes Roth conversions less impactful. 32% now or later is 32%.
32% of today is a lot less than 32% of the future amount...
Avid user of forums on variety of interests-financial, home brewing, EVs (1005 EV), etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
avalpert1
Posts: 569
Joined: Sat Mar 02, 2024 6:15 pm

Re: overfunding retirement accounts

Post by avalpert1 »

If you aren't restraining your current spending there is no such thing as 'overfunding' retirement accounts... Since you are in the highest marginal bracket today it makes zero sense to forgo any pre-tax contributions or choose roth contributions instead and even less sense to do roth conversions. Worst case, you do them at the same cost later - bets case you have years of lower income in early retirement to do them at a lower rate.
avalpert1
Posts: 569
Joined: Sat Mar 02, 2024 6:15 pm

Re: overfunding retirement accounts

Post by avalpert1 »

RickBoglehead wrote: Thu Apr 04, 2024 9:21 am
bloom2708 wrote: Thu Apr 04, 2024 9:18 am Working to 70 in the OPs scenario is, well, dumb. :D

But people do dumb stuff all the time. Just look around.

The OP will have more than enough and so paying tax is just part of the deal. Tax was deferred on that $4.8. Deferred means later.

Working to 70 also makes Roth conversions less impactful. 32% now or later is 32%.
32% of today is a lot less than 32% of the future amount...
And yet results in the exact same amount left over... the goal isn't to pay the least in taxes, it is to maximize after-tax assets and thus if the tax rate is the same today or tomorrow the outcome you care about is the same.
James.534
Posts: 312
Joined: Thu Feb 04, 2021 1:34 pm

Re: overfunding retirement accounts

Post by James.534 »

Is there a certain amount of assets in a 401k, that it may tax inefficient to to a Roth conversion prior to retirement?
Topic Author
stay.the.course
Posts: 13
Joined: Thu Apr 04, 2024 4:29 am

Re: overfunding retirement accounts

Post by stay.the.course »

HeavyChevy wrote: Thu Apr 04, 2024 6:15 am Impossible to know. Starting point is expected tax bracket in retirement vs bracket at time of Roth contribution/conversion.

If you never touch current assets and don't save another dime, they should grow to >$20M by retirement. Your net worth will likely be MUCH higher.
Like many BH, you spend much less than you could. You will have a prosperous retirement and pay a ton of money to uncle Sam regardless (now or later) Not the worst problem to have. I would invest in a solid estate plan as I would guess Roth manipulation will be noise on your current path.
thank you
Topic Author
stay.the.course
Posts: 13
Joined: Thu Apr 04, 2024 4:29 am

Re: overfunding retirement accounts

Post by stay.the.course »

KlangFool wrote: Thu Apr 04, 2024 7:44 am OP,

1) What is your current marginal tax rate?

37% (effective tax rate 35%)


2) Do you pay state income tax?

yes. 5.75%

3) Do you plan to retire in a state with no state income tax?

very likely. Florida.

4) Will you have pension? How much is that?

no pension (except the cash balance plan that I funded myself).

KlangFool
GT99
Posts: 772
Joined: Wed Jun 20, 2018 5:26 pm

Re: overfunding retirement accounts

Post by GT99 »

bloom2708 wrote: Thu Apr 04, 2024 9:18 am Working to 70 in the OPs scenario is, well, dumb. :D

But people do dumb stuff all the time. Just look around.

The OP will have more than enough and so paying tax is just part of the deal. Tax was deferred on that $4.8. Deferred means later.

Working to 70 also makes Roth conversions less impactful. 32% now or later is 32%.
It's only dumb if they don't truly derive pleasure from their jobs. If it were me, I would have started loading up taxable a couple years ago and would already be retired. :D
Topic Author
stay.the.course
Posts: 13
Joined: Thu Apr 04, 2024 4:29 am

Re: overfunding retirement accounts

Post by stay.the.course »

avalpert1 wrote: Thu Apr 04, 2024 9:25 am If you aren't restraining your current spending there is no such thing as 'overfunding' retirement accounts... Since you are in the highest marginal bracket today it makes zero sense to forgo any pre-tax contributions or choose roth contributions instead and even less sense to do roth conversions. Worst case, you do them at the same cost later - bets case you have years of lower income in early retirement to do them at a lower rate.
Dear Avalpert:

I am definitely not restraining my current spending.

so would you say it's best to maximize tax-deferral, meaning switch the 403 B back to tax deferral?
doesn't that go against the three bucket theory of diversification in retirement?

i agree with you that roth conversions probably don't make sense now. life is never a straight line and if i have unforeseen changes in job/earnings, then roth conversions would make sense. But not now.

would you start super funding the taxable account now that I will no longer be funding the cash balance plan account?
Last edited by stay.the.course on Thu Apr 04, 2024 12:00 pm, edited 2 times in total.
Topic Author
stay.the.course
Posts: 13
Joined: Thu Apr 04, 2024 4:29 am

Re: overfunding retirement accounts

Post by stay.the.course »

GT99 wrote: Thu Apr 04, 2024 11:46 am
bloom2708 wrote: Thu Apr 04, 2024 9:18 am Working to 70 in the OPs scenario is, well, dumb. :D

But people do dumb stuff all the time. Just look around.

The OP will have more than enough and so paying tax is just part of the deal. Tax was deferred on that $4.8. Deferred means later.

Working to 70 also makes Roth conversions less impactful. 32% now or later is 32%.
It's only dumb if they don't truly derive pleasure from their jobs. If it were me, I would have started loading up taxable a couple years ago and would already be retired. :D
thank you GT99.
i love my job. it's part of my identity. i derive tremendous pleasure from it. i love what I do.
thank you.
GT99
Posts: 772
Joined: Wed Jun 20, 2018 5:26 pm

Re: overfunding retirement accounts

Post by GT99 »

HomeStretch wrote: Thu Apr 04, 2024 7:30 am
4. Do you have LTC insurance?

Why would they need LTC insurance? Insurance is for things that you can't afford to happen. If this couple truly intends to work until they're 70 and keeps saving, they'll be able to afford the most lavish long term care out there for 20 years...for both of them.
GT99
Posts: 772
Joined: Wed Jun 20, 2018 5:26 pm

Re: overfunding retirement accounts

Post by GT99 »

stay.the.course wrote: Thu Apr 04, 2024 11:51 am
GT99 wrote: Thu Apr 04, 2024 11:46 am
bloom2708 wrote: Thu Apr 04, 2024 9:18 am Working to 70 in the OPs scenario is, well, dumb. :D

But people do dumb stuff all the time. Just look around.

The OP will have more than enough and so paying tax is just part of the deal. Tax was deferred on that $4.8. Deferred means later.

Working to 70 also makes Roth conversions less impactful. 32% now or later is 32%.
It's only dumb if they don't truly derive pleasure from their jobs. If it were me, I would have started loading up taxable a couple years ago and would already be retired. :D
thank you GT99.
i love my job. it's part of my identity. i derive tremendous pleasure from it. i love what I do.
thank you.
Cheers to you - I admire that!
Topic Author
stay.the.course
Posts: 13
Joined: Thu Apr 04, 2024 4:29 am

Re: overfunding retirement accounts

Post by stay.the.course »

Normchad wrote: Thu Apr 04, 2024 7:37 am
HeavyChevy wrote: Thu Apr 04, 2024 6:15 am Impossible to know. Starting point is expected tax bracket in retirement vs bracket at time of Roth contribution/conversion.

If you never touch current assets and don't save another dime, they should grow to >$20M by retirement. Your net worth will likely be MUCH higher.
Like many BH, you spend much less than you could. You will have a prosperous retirement and pay a ton of money to uncle Sam regardless (now or later) Not the worst problem to have. I would invest in a solid estate plan as I would guess Roth manipulation will be noise on your current path.
Well said.

Personally, I won’t be doing any ROTH conversions. Good chance I’ll be dead by 75. And if I’m not, I’ll just take them and pay the taxes. I just don’t see it as a big problem. If it happens, it’s rich guy problem.
I am starting to think this way too.
I am heavily leaning towards not doing any more conversions (unless my income/earnings/jobs change in the future for the worst, God Forbid).
Plus, my three boys may be in a lower tax bracket.
avalpert1
Posts: 569
Joined: Sat Mar 02, 2024 6:15 pm

Re: overfunding retirement accounts

Post by avalpert1 »

stay.the.course wrote: Thu Apr 04, 2024 11:49 am
avalpert1 wrote: Thu Apr 04, 2024 9:25 am If you aren't restraining your current spending there is no such thing as 'overfunding' retirement accounts... Since you are in the highest marginal bracket today it makes zero sense to forgo any pre-tax contributions or choose roth contributions instead and even less sense to do roth conversions. Worst case, you do them at the same cost later - bets case you have years of lower income in early retirement to do them at a lower rate.
Dear Avalpert:

I am definitely not restraining my current spending.

so would you say it's best to maximize tax-deferral, meaning switch the 403 B back to tax deferral?
Yes, I would.
doesn't that go against the three bucket theory of diversification in retirement?
I guess that depends on how said theory is stated, but in any case I know of no theory of diversification that insists on diversification for diversifications sake. Sure, its great to have options to choose the best income source based on tax consideration in retirement, but not at the expense of paying higher tax rates before retirement.
would you start super funding the taxable account now that I will no longer be funding the cash balance plan account?
Not sure what you mean by 'super funding', I would still use all tax-advantaged space available before a taxable account but once you have done that then sure put the rest into a taxable account.
nchunter
Posts: 74
Joined: Fri Sep 06, 2013 1:58 pm

Re: overfunding retirement accounts

Post by nchunter »

You have an estate planning problem not a tax deferral problem. At your current trajectory and the rolling back of estate tax to around 7M give or take. I would also be funding my taxable brokerage and contributing to the bare minimum meaning just max out the 401k, HSA etc. Then load up the taxable. People get all bent out of shape over the relatively paltry amount of Roth savings you can generate. But at 51 you don't have and won't have too many turns at the doubling apple to even matter. Money in taxable is not subject to RMD's, you can donate appreciated shares and your heir will get the step up basis.

I have Roth's for my kids which can be substantial growing from teens to 60's and not having to pay taxes, but as I get older, I am not really saving that much relative to my overall net worth
robphoto
Posts: 601
Joined: Tue Sep 25, 2018 12:42 pm

Re: overfunding retirement accounts

Post by robphoto »

Moving to Florida when retired can really tip the balance towards not converting to Roth now.

Now your taxes on the conversion would be 37% + 5.75%

If you spend the money or convert it when you live in Florida, even if you're in the same bracket, it would be just the 37% (or whatever Federal tax is at the time)
Topic Author
stay.the.course
Posts: 13
Joined: Thu Apr 04, 2024 4:29 am

Re: overfunding retirement accounts

Post by stay.the.course »

nchunter wrote: Thu Apr 04, 2024 12:22 pm You have an estate planning problem not a tax deferral problem. At your current trajectory and the rolling back of estate tax to around 7M give or take. I would also be funding my taxable brokerage and contributing to the bare minimum meaning just max out the 401k, HSA etc. Then load up the taxable. People get all bent out of shape over the relatively paltry amount of Roth savings you can generate. But at 51 you don't have and won't have too many turns at the doubling apple to even matter. Money in taxable is not subject to RMD's, you can donate appreciated shares and your heir will get the step up basis.

I have Roth's for my kids which can be substantial growing from teens to 60's and not having to pay taxes, but as I get older, I am not really saving that much relative to my overall net worth
super helpful. appreciate your thoughtfulness.

let me make sure I understood you:


1. keep 403b in roth (23+ 7 for me, 23 for her, total of 53K) or switch it back to tax deferred?
2. should i even fund the 457b? it's 23k for each of us for a total of 66k, pre tax?

3. the cash balance plan, i used to fund with $200k.
would it make sense to pay the taxes on that and place the remainder in the taxable account instead?

5. no roth conversions. reassess if tax bracket changes. is that right?
Topic Author
stay.the.course
Posts: 13
Joined: Thu Apr 04, 2024 4:29 am

Re: overfunding retirement accounts

Post by stay.the.course »

robphoto wrote: Thu Apr 04, 2024 12:23 pm Moving to Florida when retired can really tip the balance towards not converting to Roth now.

Now your taxes on the conversion would be 37% + 5.75%

If you spend the money or convert it when you live in Florida, even if you're in the same bracket, it would be just the 37% (or whatever Federal tax is at the time)
good point.
HomeStretch
Posts: 11774
Joined: Thu Dec 27, 2018 2:06 pm

Re: overfunding retirement accounts

Post by HomeStretch »

GT99 wrote: Thu Apr 04, 2024 11:55 am
HomeStretch wrote: Thu Apr 04, 2024 7:30 am
4. Do you have LTC insurance?

Why would they need LTC insurance? Insurance is for things that you can't afford to happen. If this couple truly intends to work until they're 70 and keeps saving, they'll be able to afford the most lavish long term care out there for 20 years...for both of them.
I have no idea whether OP and spouse have or need LTC insurance. If OP plans to do any retirement projections to determine whether or not to do Roth contributions and/or Roth conversions while in the 37% tax bracket, potential LTC costs are only one if the items I listed for possible consideration when doing those projections.
Topic Author
stay.the.course
Posts: 13
Joined: Thu Apr 04, 2024 4:29 am

Re: overfunding retirement accounts

Post by stay.the.course »

stay.the.course wrote: Thu Apr 04, 2024 12:31 pm
nchunter wrote: Thu Apr 04, 2024 12:22 pm You have an estate planning problem not a tax deferral problem. At your current trajectory and the rolling back of estate tax to around 7M give or take. I would also be funding my taxable brokerage and contributing to the bare minimum meaning just max out the 401k, HSA etc. Then load up the taxable. People get all bent out of shape over the relatively paltry amount of Roth savings you can generate. But at 51 you don't have and won't have too many turns at the doubling apple to even matter. Money in taxable is not subject to RMD's, you can donate appreciated shares and your heir will get the step up basis.

I have Roth's for my kids which can be substantial growing from teens to 60's and not having to pay taxes, but as I get older, I am not really saving that much relative to my overall net worth
super helpful. appreciate your thoughtfulness.

let me make sure I understood you:


1. keep 403b in roth (23+ 7 for me, 23 for her, total of 53K) or switch it back to tax deferred?
2. should i even fund the 457b? it's 23k for each of us for a total of 66k, pre tax?

3. the cash balance plan, i used to fund with $200k.
would it make sense to pay the taxes on that and place the remainder in the taxable account instead?

5. no roth conversions. reassess if tax bracket changes. is that right?
correction: 457B is 23 x 2 = $46k (not $66k)
nchunter
Posts: 74
Joined: Fri Sep 06, 2013 1:58 pm

Re: overfunding retirement accounts

Post by nchunter »

stay.the.course wrote: Thu Apr 04, 2024 12:31 pm
nchunter wrote: Thu Apr 04, 2024 12:22 pm You have an estate planning problem not a tax deferral problem. At your current trajectory and the rolling back of estate tax to around 7M give or take. I would also be funding my taxable brokerage and contributing to the bare minimum meaning just max out the 401k, HSA etc. Then load up the taxable. People get all bent out of shape over the relatively paltry amount of Roth savings you can generate. But at 51 you don't have and won't have too many turns at the doubling apple to even matter. Money in taxable is not subject to RMD's, you can donate appreciated shares and your heir will get the step up basis.

I have Roth's for my kids which can be substantial growing from teens to 60's and not having to pay taxes, but as I get older, I am not really saving that much relative to my overall net worth
super helpful. appreciate your thoughtfulness.

let me make sure I understood you:


1. keep 403b in roth (23+ 7 for me, 23 for her, total of 53K) or switch it back to tax deferred?
2. should i even fund the 457b? it's 23k for each of us for a total of 66k, pre tax?

3. the cash balance plan, i used to fund with $200k.
would it make sense to pay the taxes on that and place the remainder in the taxable account instead?

5. no roth conversions. reassess if tax bracket changes. is that right?
I would keep it in Roth, you are always going to be paying a higher marginal rate. Roth does not decrease your AGI for current year tax purposes, but you have the 457b also to do that. It's really a question of pay now or pay later. If you pay now, you are getting rid of one future tax liability out of the way. Plus your employer may not always have a Roth option. Mine doesn't , so use it to your advantage.

Your deferral accounts are way out of whack from post tax amounts relative to most high income earners. Mine is the inverse, I have maxed out deferred but sock away in brokerages. But at this point the extra 46k into 4.5M won't matter too much, so if you can afford it, keep doing it

Regarding the cash balance, I would probably pay the tax and bolster my brokerage amount with the 140k left over or so to buy equities for the reason I listed. You will always be forced to be in high tax rates with your NW, I'd bite the bullet and tax the potential for the step up basis, no RMD's, ability to donate and the fact the gains are only 20% in the future for Long term capital gains.

Either way you are fine, but you just have to accept you make a lot and will be paying alot. I would just want a better balance in a brokerage for increased liquidity and dictating my distributions on my terms and not some formula that may or may not be tweaked by an actuary table
User avatar
Watty
Posts: 29166
Joined: Wed Oct 10, 2007 3:55 pm

Re: overfunding retirement accounts

Post by Watty »

overfunding retirement accounts
Just a quibble.

Most likely you did not overfund the retirement accounts by contributing too much.

A more likely reason that you have so much money in the retirement accounts is that the stock market has been in a historic bull market(with a few dips) since the financial crisis lows in 2009 and that your investments have grown to be several times what you could have reasonably expected.

I agree with the comments about this mainly being an estate planning issue so that you should talk with an estate planning lawyer to figure out what to do.

Keep in mind that RMDs only start out at about 4% and don't get above 7% until you are in your late 80s. If your investments can grown at 7%, on average, then you will not need to start actually drawing down your retirement accounts until you are in your late 80s.
Topic Author
stay.the.course
Posts: 13
Joined: Thu Apr 04, 2024 4:29 am

Re: overfunding retirement accounts

Post by stay.the.course »

nchunter wrote: Thu Apr 04, 2024 2:21 pm
stay.the.course wrote: Thu Apr 04, 2024 12:31 pm
nchunter wrote: Thu Apr 04, 2024 12:22 pm You have an estate planning problem not a tax deferral problem. At your current trajectory and the rolling back of estate tax to around 7M give or take. I would also be funding my taxable brokerage and contributing to the bare minimum meaning just max out the 401k, HSA etc. Then load up the taxable. People get all bent out of shape over the relatively paltry amount of Roth savings you can generate. But at 51 you don't have and won't have too many turns at the doubling apple to even matter. Money in taxable is not subject to RMD's, you can donate appreciated shares and your heir will get the step up basis.

I have Roth's for my kids which can be substantial growing from teens to 60's and not having to pay taxes, but as I get older, I am not really saving that much relative to my overall net worth
super helpful. appreciate your thoughtfulness.

let me make sure I understood you:


1. keep 403b in roth (23+ 7 for me, 23 for her, total of 53K) or switch it back to tax deferred?
2. should i even fund the 457b? it's 23k for each of us for a total of 66k, pre tax?

3. the cash balance plan, i used to fund with $200k.
would it make sense to pay the taxes on that and place the remainder in the taxable account instead?

5. no roth conversions. reassess if tax bracket changes. is that right?
I would keep it in Roth, you are always going to be paying a higher marginal rate. Roth does not decrease your AGI for current year tax purposes, but you have the 457b also to do that. It's really a question of pay now or pay later. If you pay now, you are getting rid of one future tax liability out of the way. Plus your employer may not always have a Roth option. Mine doesn't , so use it to your advantage.

Your deferral accounts are way out of whack from post tax amounts relative to most high income earners. Mine is the inverse, I have maxed out deferred but sock away in brokerages. But at this point the extra 46k into 4.5M won't matter too much, so if you can afford it, keep doing it

Regarding the cash balance, I would probably pay the tax and bolster my brokerage amount with the 140k left over or so to buy equities for the reason I listed. You will always be forced to be in high tax rates with your NW, I'd bite the bullet and tax the potential for the step up basis, no RMD's, ability to donate and the fact the gains are only 20% in the future for Long term capital gains.

Either way you are fine, but you just have to accept you make a lot and will be paying alot. I would just want a better balance in a brokerage for increased liquidity and dictating my distributions on my terms and not some formula that may or may not be tweaked by an actuary table
very sound advice.
i appreciate you.
User avatar
whodidntante
Posts: 13364
Joined: Thu Jan 21, 2016 10:11 pm
Location: outside the echo chamber

Re: overfunding retirement accounts

Post by whodidntante »

I like the strategy of pre-tax contributions in high marginal tax rate years and doing Roth conversions in low-income years. Unless you want to keep earning at a high level as long as your health holds up. Me, I suspect I'll pump the brakes and earn less at some point.
Topic Author
stay.the.course
Posts: 13
Joined: Thu Apr 04, 2024 4:29 am

Re: overfunding retirement accounts

Post by stay.the.course »

whodidntante wrote: Thu Apr 04, 2024 2:45 pm I like the strategy of pre-tax contributions in high marginal tax rate years and doing Roth conversions in low-income years. Unless you want to keep earning at a high level as long as your health holds up. Me, I suspect I'll pump the brakes and earn less at some point.
good point.
defer roth conversion until income/earnings go down.
User avatar
Hacksawdave
Posts: 929
Joined: Tue Feb 14, 2023 4:44 pm

Re: overfunding retirement accounts

Post by Hacksawdave »

If you are in the 37% tax bracket (starts at $693,750) and are saving $96K, this equates to a saving rate of 13.85%. If there was an explanation where the other 49% went to, then maybe I could understand the ‘overfunding’ part.

All your taxable investments and tax deferred withdrawals are impacted by the NIIT tax. Have you invested in any municipal funds for tax-free and NIIT-free income?
Topic Author
stay.the.course
Posts: 13
Joined: Thu Apr 04, 2024 4:29 am

Re: overfunding retirement accounts

Post by stay.the.course »

Hacksawdave wrote: Thu Apr 04, 2024 5:15 pm If you are in the 37% tax bracket (starts at $693,750) and are saving $96K, this equates to a saving rate of 13.85%. If there was an explanation where the other 49% went to, then maybe I could understand the ‘overfunding’ part.

All your taxable investments and tax deferred withdrawals are impacted by the NIIT tax. Have you invested in any municipal funds for tax-free and NIIT-free income?
I am saving $200 k into cash balance plan, $46 k into 457b tax deferred (for both), $53k into roth 403b (for both husband and wife). We are also paying down a house mortgage aggressively.

All investments (retirement and taxable) are in Vanguard total stock market and s&p 500.
Jimsad
Posts: 959
Joined: Mon Mar 20, 2017 5:54 pm

Re: overfunding retirement accounts

Post by Jimsad »

stay.the.course wrote: Thu Apr 04, 2024 6:09 pm
Hacksawdave wrote: Thu Apr 04, 2024 5:15 pm If you are in the 37% tax bracket (starts at $693,750) and are saving $96K, this equates to a saving rate of 13.85%. If there was an explanation where the other 49% went to, then maybe I could understand the ‘overfunding’ part.

All your taxable investments and tax deferred withdrawals are impacted by the NIIT tax. Have you invested in any municipal funds for tax-free and NIIT-free income?
I am saving $200 k into cash balance plan, $46 k into 457b tax deferred (for both), $53k into roth 403b (for both husband and wife). We are also paying down a house mortgage aggressively.

All investments (retirement and taxable) are in Vanguard total stock market and s&p 500.
1. Are you sure you want to terminate cash balance plan ? You will have more taxes to pay !
I terminated my plan as my income went down and plan expenses increased but would have kept it if I could .

2, are you 100% stocks ? Being over 50y , may be add some fixed income?
3. I added direct real estate as I wanted to diversify .
Most bogie heads are against real estate though
KlangFool
Posts: 32103
Joined: Sat Oct 11, 2008 12:35 pm

Re: overfunding retirement accounts

Post by KlangFool »

stay.the.course wrote: Thu Apr 04, 2024 11:42 am
KlangFool wrote: Thu Apr 04, 2024 7:44 am OP,

1) What is your current marginal tax rate?

37% (effective tax rate 35%)


2) Do you pay state income tax?

yes. 5.75%

3) Do you plan to retire in a state with no state income tax?

very likely. Florida.

4) Will you have pension? How much is that?

no pension (except the cash balance plan that I funded myself).

KlangFool
OP,

My opinion and recommendations.

1) Max up your tax deferred accounts. Trad 403b instead Roth 403b. Put the tax savings into the taxable account.

2) It is unlikely that you will continue working until 70 years old.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
toddthebod
Posts: 6450
Joined: Wed May 18, 2022 12:42 pm

Re: overfunding retirement accounts

Post by toddthebod »

stay.the.course wrote: Thu Apr 04, 2024 11:57 am I am starting to think this way too.
I am heavily leaning towards not doing any more conversions (unless my income/earnings/jobs change in the future for the worst, God Forbid).
Plus, my three boys may be in a lower tax bracket.
You need to work with an estate planning attorney. If you expect to be subject to estate taxes, it can be worthwhile to contribute/convert to Roth even in the highest tax bracket as it reduces the size of your estate.
Topic Author
stay.the.course
Posts: 13
Joined: Thu Apr 04, 2024 4:29 am

Re: overfunding retirement accounts

Post by stay.the.course »

KlangFool wrote: Wed May 15, 2024 6:48 am
stay.the.course wrote: Thu Apr 04, 2024 11:42 am
KlangFool wrote: Thu Apr 04, 2024 7:44 am OP,

1) What is your current marginal tax rate?

37% (effective tax rate 35%)


2) Do you pay state income tax?

yes. 5.75%

3) Do you plan to retire in a state with no state income tax?

very likely. Florida.

4) Will you have pension? How much is that?

no pension (except the cash balance plan that I funded myself).

KlangFool
OP,

My opinion and recommendations.

1) Max up your tax deferred accounts. Trad 403b instead Roth 403b. Put the tax savings into the taxable account.

2) It is unlikely that you will continue working until 70 years old.

KlangFool

Klangfool: thank you.
RXfiles
Posts: 474
Joined: Tue May 26, 2020 1:23 pm
Location: Birmingham, AL

Re: overfunding retirement accounts

Post by RXfiles »

you already won OP. spend some money. travel more. buy the sports car etc. :sharebeer 8-)
KlangFool
Posts: 32103
Joined: Sat Oct 11, 2008 12:35 pm

Re: overfunding retirement accounts

Post by KlangFool »

OP,

1) What is your actual tax deferred account size?

2) You may want to consider start giving away some of your money while alive. This is better to let someone inherit the whole amount after you die.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Post Reply