Portfolio/tax help request

[futurenoodle]

Howdy,

I'm currently trying to optimize our retirement investment portfolios and tax efficiency, and am curious to know what/if I am missing something about our financial situation.

After viewing our financial situation below, I suppose question is as follows: Have I optimized our retirement investments? Are we navigating the tax situation correctly? Should I be contributing to a taxable brokerage account? Should we contribute more to mortgage principal, invest in a taxable account, or increase contributions to the 457 plans?

Thank you in advance for your advice/tips/insights.




Tax filing status: Married, filing jointly. No children.
HHI: $130,000.00 VLCOL area.
Age 37 and 40
No SS
Tax rate: 22% federal and 4.5% state
Pension at 55 for each around 50k each.
Monthly net savings after all bills/insurance/taxes/retirement contributions: $1,700.00


Emergency fund: 10k cash. Checking account. Kept liquid cash for home repairs or health emergencies.

Debt: Mortgage. 163k remaining at 6%. No other debts currently.
Monthly extra principal payments: $300.00

His roth IRA: 100k
AA: 80/10/10 (VIIIX/VEMPX/VBTIX)
Annual Contribution: $7,000.00

His 457: 14k
AA: 85/15 (VIIIX/VEMPX)
Annual Contribution: $3,600.00

Her roth IRA: 90k
AA: 80/10/10 (VIIIX/VEMPX/VBTIX)
Annual Contribution: $7,000.00

Her 457: 16k
AA: 85/15 (VIIIX/VEMPX)
Annual Contribution: $4,800.00


Funds available:
Very few funds available from employer aside from the Vanguard Target Retirement funds and the funds I chose instead as listed above. The only few funds left all have expense ratios over .75 compared to the 0.02 and 0.04 of the VIIIX and VEMPX I have selected above. The VBTIX is also 0.04 ER.

After the standard deduction and pre-tax retirement contributions are made down to the 12% rate, should I be putting cash into a taxable brokerage account outside of my employer or continue funding the 457? Should I increase the extra mortgage payments?


One of the major goals is to build enough wealth to move from our current VLCOL area to a moderate COL area. Main reason is that in this current rural area the lack of health care would not be acceptable in later years.

Thank you for the help trying to maximize our savings, optimize our investments, and be tax efficient. Let me know if more information or context is required.

[retired@50]

With the extra savings I'd suggest you put it towards the 457 plan(s) and/or the mortgage.

You're not yet at a point where you need to open a taxable brokerage account.

I'd also like to see the list of choices in the 457 plans for myself.
Finding a bond index fund in the 457 plan would be helpful, or if one isn't available, then consider using a target date fund.

Once the balance in the 457 plan(s) grows a bit, you should be holding your bond funds there instead of inside the Roth IRA(s).

Your portfolio has no international stock. Is that on purpose, or an oversight?

Regards,

[medchemguy]

Move bonds to 457b, assuming that’s pretax. Only equities in Roth, unless you can’t accommodate all desired bond position in pretax.

Also, open a brokerage account if you don’t have and put any and all cash savings, including emergency fund, into a money market fund to maximize interest. Currently VUSXX (Vanguard) MMF is paying about 4.5%.

Finally, once you have enough cash in the MMF on hand for emergency and other anticipated near term needs, consider putting additional savings into something like VTI, a total market stock index fund, in the (taxable) brokerage account.

[futurenoodle]

With the extra savings I'd suggest you put it towards the 457 plan(s) and/or the mortgage.

You're not yet at a point where you need to open a taxable brokerage account.

I'd also like to see the list of choices in the 457 plans for myself.
Finding a bond index fund in the 457 plan would be helpful, or if one isn't available, then consider using a target date fund.

Once the balance in the 457 plan(s) grows a bit, you should be holding your bond funds there instead of inside the Roth IRA(s).

Your portfolio has no international stock. Is that on purpose, or an oversight?

Regards,

Thank you for responding.

I'm completely self-taught about this stuff, and was wondering if international was worth it since the only options that I have are to switch everything I have to a target date fund (which holds like 35% of all equity in international) or use the international equity options which each have .75 ER or more.

I would tell you the funds, but the employer has shut their website down until next Monday.

I just didn't want 35% of my equity position to be in international, and I didn't want to pay .75 ER for equities when I could buy the VIIIX for 0.02.

That was my line of reasoning on the no international equity.

Also, at what point in your view do I start using a brokerage account instead of increasing contributions to 457?

[futurenoodle]

Move bonds to 457b, assuming that’s pretax. Only equities in Roth, unless you can’t accommodate all desired bond position in pretax.

Also, open a brokerage account if you don’t have and put any and all cash savings, including emergency fund, into a money market fund to maximize interest. Currently VUSXX (Vanguard) MMF is paying about 4.5%.

Finally, once you have enough cash in the MMF on hand for emergency and other anticipated near term needs, consider putting additional savings into something like VTI, a total market stock index fund, in the (taxable) brokerage account.

Thank you for responding. Another person seemed to suggest that I wasn't "ready" for a taxable account yet?

Admittedly, I also don't know much about when I should know when to stop increasing 457 contributions vs opening a taxable account.

Lastly, I'm not sure if I can transfer the bonds from the 457 to the roth IRA - so what bonds are in there may have to stay.

For future contributions, are you saying to only put equities in the roth IRA and to only put any of my bond allocation in the 457? Also, at our contributions rates for our 457s (his 300/month and hers 400/month), what amount of that should be into a bond fund to attain a 10% AA ?


Thank you for your attention.

Can you help me understand why bonds should go into 457?

[retired@50]

With the extra savings I'd suggest you put it towards the 457 plan(s) and/or the mortgage.

You're not yet at a point where you need to open a taxable brokerage account.

I'd also like to see the list of choices in the 457 plans for myself.
Finding a bond index fund in the 457 plan would be helpful, or if one isn't available, then consider using a target date fund.

Once the balance in the 457 plan(s) grows a bit, you should be holding your bond funds there instead of inside the Roth IRA(s).

Your portfolio has no international stock. Is that on purpose, or an oversight?

Regards,

Thank you for responding.

I'm completely self-taught about this stuff, and was wondering if international was worth it since the only options that I have are to switch everything I have to a target date fund (which holds like 35% of all equity in international) or use the international equity options which each have .75 ER or more.

I would tell you the funds, but the employer has shut their website down until next Monday.

I just didn't want 35% of my equity position to be in international, and I didn't want to pay .75 ER for equities when I could buy the VIIIX for 0.02.

That was my line of reasoning on the no international equity.

Also, at what point in your view do I start using a brokerage account instead of increasing contributions to 457?

Since your Roth IRA(s) are much larger than the 457 account(s) you won't be holding anywhere near 35% of your equity in international stock.

Using some round numbers it appears you have around $220k in the various accounts, with $30k in the 457 plans. If 35% of the 457 plan balance is international stock, that would be around $10,500 out of $220k. That's less than 5% in international stock.

If the target date fund has a low expense ratio (under 0.15%) then I'd suggest you use it.

Regards,

[HipCoyote]

Lastly, I'm not sure if I can transfer the bonds from the 457 to the roth IRA - so what bonds are in there may have to stay.

For future contributions, are you saying to only put equities in the roth IRA and to only put any of my bond allocation in the 457? Also, at our contributions rates for our 457s (his 300/month and hers 400/month), what amount of that should be into a bond fund to attain a 10% AA ?


Thank you for your attention.

Can you help me understand why bonds should go into 457?

You cannot transfer the bonds from the Roth, you sell the bonds in the Roth and buy same amount of similar bond funds in the 457. The reason being that you want the Roth to grow as much as possible because withdrawals are not taxable. A high balance Roth is the desired end goal. Bonds do not have the same growth potential, so put those into the pre-tax accounts such as the 457. This way you maintain an overall AA as you desire, but the Roth is positioned to grow more than the 457.

Re Pensions. I am wondering how you came up with $50 k pensions when you are so far off from retirement? $50k now is not a lot in 20 years. The reason I point this out is to pay very close attention to your pension plan...does it have COLAs, how viable/solvent is the pension system, etc. Also, I see that you have 457s so assume these are governmental 457s and that your pensions are government. Knowing your pension will also tell you how promotions will affect our eventual pension base.

I see a reference to no SS. I assume that means no social security payments now (of course). But I nearly got trapped into a situation where I did not pay into the SS system at all for nearly all my governmental career (public safety). All well and good until medicare time came along. Luckily I had had the quarters of working from the various consulting gigs I took and a small business I started when I retired. My wife, also a public safety person, did not have the quarters. But thankfully, all worked out and we do get Medicare part B paid for (at least I think it is Part B from memory.)

Some 457 plans are great and some are not. Ours was exceptional. Very low cost funds, well run and we also had advisors on staff to help us. Check out your 457 plan for costs, services, etc.

To me, your emergency fund is a bit low. I'd stuff more money into that now. A new roof or AC could easily eat up $10k in a minute.

[mhadden1]

Tax rate: 22% federal and 4.5% state

I would go ahead and try to build up the 457 tax-deferred - probably you can reduce your taxable income enough to get down to the 12% tax bracket. Perhaps you will move to a state with no income tax when you withdraw. Not sure what the contribution limits are for 457 but maybe you can even max it out.

Good luck!

[medchemguy]

Thank you for responding. Another person seemed to suggest that I wasn't "ready" for a taxable account yet? Ready is when you have $s that aren’t needed for the next 24 months and you understand the risk of investing. But that’s me, and you’re you. So you need to decide if you’re ready, or not.

Admittedly, I also don't know much about when I should know when to stop increasing 457 contributions vs opening a taxable account. I’d say do both, but if this isn’t a government (ie public school,etc), then you will want to better understand the terms of the 457. You can start by searching this forum for info on 457s. If a govt type 457, then consider the tax savings realized by pretax contributions vs the flexibility of taxable brokerage investments (can sell and use $ whenever).

Lastly, I'm not sure if I can transfer the bonds from the 457 to the roth IRA - so what bonds are in there may have to stay. Since these $s are in a tax advantage account you can sell in one any buy in the other. You can sell you bonds in the Roth and use those proceeds to buy stocks. And you can sell an equivalent amount of stock in the 457 and use the proceeds to buy bonds. All without impact on your tax situation.

For future contributions, are you saying to only put equities in the roth IRA and to only put any of my bond allocation in the 457? Yes. Also, at our contributions rates for our 457s (his 300/month and hers 400/month), what amount of that should be into a bond fund to attain a 10% AA ? You can split the contributions to the 457s between stocks and bonds to a ratio that makes sense for you.



Thank you for your attention.

Can you help me understand why bonds should go into 457? Because you want investments that grow the most over time in the after tax account.

For example, let’s say you want a 50/50 portfolio and you have $200 ==> you put $100 in stocks and $100 in bonds. And you wanted to split these investments equally between a pretax (457) and after tax (Roth) account. Now say the stocks double (100% increase) in value to $200 and the bonds only went up 25% to $125. Now you are able to and want to withdraw all the funds and the tax rate is 20%. Two scenarios below.

Option 1:
Bonds in pretax (457) ==> $125 now is taxed ==> $25 tax due
Stocks in Roth ==> $200 not taxed ==> $0 tax due
Total tax due is $25
Net after taxes = $300

Option 2:
Bonds in Roth ==> $125 not taxed ==> $0 tax due
Stocks in pretax (457) ==> $200 now is taxed ==> $40 tax due
Total tax due $40
Net after taxes = $285

You started with $200 for either scenario, Option 1 or Option 2. Do you want $285 or $300 at the end? And FWIW, the account values with be much greater in the end, and hence the discrepancy will be greater as well.

My comments in blue text above
—————-
Edited: grammar and fixed a math error.

[futurenoodle]

Tax rate: 22% federal and 4.5% state

I would go ahead and try to build up the 457 tax-deferred - probably you can reduce your taxable income enough to get down to the 12% tax bracket. Perhaps you will move to a state with no income tax when you withdraw. Not sure what the contribution limits are for 457 but maybe you can even max it out.

Good luck!

I think after we take the standard deduction and then deduct our pre-tax contributions, we are already in the 12%...

the contribution limits for 457 are like 20-23k, more than we could even reach.

[futurenoodle]

Thank you for responding. Another person seemed to suggest that I wasn't "ready" for a taxable account yet? Ready is when you have $s that aren’t needed for the next 24 months and you understand the risk of investing. But that’s me, and you’re you. So you need to decide if you’re ready, or not.

Admittedly, I also don't know much about when I should know when to stop increasing 457 contributions vs opening a taxable account. I’d say do both, but if this isn’t a government (ie public school,etc), then you will want to better understand the terms of the 457. You can start by searching this forum for info on 457s. If a govt type 457, then consider the tax savings realized by pretax contributions vs the flexibility of taxable brokerage investments (can sell and use $ whenever).

Lastly, I'm not sure if I can transfer the bonds from the 457 to the roth IRA - so what bonds are in there may have to stay. Since these $s are in a tax advantage account you can sell in one any buy in the other. You can sell you bonds in the Roth and use those proceeds to buy stocks. And you can sell an equivalent amount of stock in the 457 and use the proceeds to buy bonds. All without impact on your tax situation.

For future contributions, are you saying to only put equities in the roth IRA and to only put any of my bond allocation in the 457? Yes. Also, at our contributions rates for our 457s (his 300/month and hers 400/month), what amount of that should be into a bond fund to attain a 10% AA ? You can split the contributions to the 457s between stocks and bonds to a ratio that makes sense for you.



Thank you for your attention.

Can you help me understand why bonds should go into 457? Because you want investments that grow the most over time in the after tax account.

For example, let’s say you want a 50/50 portfolio and you have $200 ==> you put $100 in stocks and $100 in bonds. And you wanted to split these investments equally between a pretax (457) and after tax (Roth) account. Now say the stocks double (100% increase) in value to $200 and the bonds only went up 25% to $125. Now you are able to and want to withdraw all the funds and the tax rate is 20%. Two scenarios below.

Option 1:
Bonds in pretax (457) ==> $125 now is taxed ==> $25 tax due
Stocks in Roth ==> $200 not taxed ==> $0 tax due
Total tax due is $25
Net after taxes = $300

Option 2:
Bonds in Roth ==> $125 not taxed ==> $0 tax due
Stocks in pretax (457) ==> $200 now is taxed ==> $40 tax due
Total tax due $40
Net after taxes = $285

You started with $200 for either scenario, Option 1 or Option 2. Do you want $285 or $300 at the end? And FWIW, the account values with be much greater in the end, and hence the discrepancy will be greater as well.

My comments in blue text above
—————-
Edited: grammar and fixed a math error.

It is a govt. 457 (teachers).

Does that change the equation on the question I have about opening a taxable vs vs increasing contributions in 457 vs increasing principal payments on my 6% interest?

Thank you so much for your time.

[futurenoodle]

Lastly, I'm not sure if I can transfer the bonds from the 457 to the roth IRA - so what bonds are in there may have to stay.

For future contributions, are you saying to only put equities in the roth IRA and to only put any of my bond allocation in the 457? Also, at our contributions rates for our 457s (his 300/month and hers 400/month), what amount of that should be into a bond fund to attain a 10% AA ?


Thank you for your attention.

Can you help me understand why bonds should go into 457?

You cannot transfer the bonds from the Roth, you sell the bonds in the Roth and buy same amount of similar bond funds in the 457. The reason being that you want the Roth to grow as much as possible because withdrawals are not taxable. A high balance Roth is the desired end goal. Bonds do not have the same growth potential, so put those into the pre-tax accounts such as the 457. This way you maintain an overall AA as you desire, but the Roth is positioned to grow more than the 457.

Re Pensions. I am wondering how you came up with $50 k pensions when you are so far off from retirement? $50k now is not a lot in 20 years. The reason I point this out is to pay very close attention to your pension plan...does it have COLAs, how viable/solvent is the pension system, etc. Also, I see that you have 457s so assume these are governmental 457s and that your pensions are government. Knowing your pension will also tell you how promotions will affect our eventual pension base.

I see a reference to no SS. I assume that means no social security payments now (of course). But I nearly got trapped into a situation where I did not pay into the SS system at all for nearly all my governmental career (public safety). All well and good until medicare time came along.


To me, your emergency fund is a bit low. I'd stuff more money into that now. A new roof or AC could easily eat up $10k in a minute.

I'm trying to follow! (excuse if I have misunderstandings)..

Okay, so I was under the impression that anything in the roth IRA account is non-taxed, including future distributions that happen to be from selling bonds. I just wasn't sure I understood why bonds should be in pre-tax 457 and not in roth IRA, but I trust your all's wisdom and will continue learning.

As for the pensions, that was a complete guess but the teacher pensions in this state are air-tight (inviolable contract) as ruled by our state supreme court. Future teachers, unfortunately no, but ours are untouchable. There is an insignificant COLA which is like 1-1.5%, which is another reason why we are trying to build supplemental retirement income with these various buckets. According to today's formula, it would be around 50k - as the formula stays the same but wage increases are glacial in this field, it's probably likely 55-65k each at 55.

We do not contribute to Social Security nor are we allowed to receive any distributions from former employment, sadly.

[futurenoodle]

Thank you for responding. Another person seemed to suggest that I wasn't "ready" for a taxable account yet? Ready is when you have $s that aren’t needed for the next 24 months and you understand the risk of investing. But that’s me, and you’re you. So you need to decide if you’re ready, or not.

Admittedly, I also don't know much about when I should know when to stop increasing 457 contributions vs opening a taxable account. I’d say do both, but if this isn’t a government (ie public school,etc), then you will want to better understand the terms of the 457. You can start by searching this forum for info on 457s. If a govt type 457, then consider the tax savings realized by pretax contributions vs the flexibility of taxable brokerage investments (can sell and use $ whenever).

Lastly, I'm not sure if I can transfer the bonds from the 457 to the roth IRA - so what bonds are in there may have to stay. Since these $s are in a tax advantage account you can sell in one any buy in the other. You can sell you bonds in the Roth and use those proceeds to buy stocks. And you can sell an equivalent amount of stock in the 457 and use the proceeds to buy bonds. All without impact on your tax situation.

For future contributions, are you saying to only put equities in the roth IRA and to only put any of my bond allocation in the 457? Yes. Also, at our contributions rates for our 457s (his 300/month and hers 400/month), what amount of that should be into a bond fund to attain a 10% AA ? You can split the contributions to the 457s between stocks and bonds to a ratio that makes sense for you.



Thank you for your attention.

Can you help me understand why bonds should go into 457? Because you want investments that grow the most over time in the after tax account.

For example, let’s say you want a 50/50 portfolio and you have $200 ==> you put $100 in stocks and $100 in bonds. And you wanted to split these investments equally between a pretax (457) and after tax (Roth) account. Now say the stocks double (100% increase) in value to $200 and the bonds only went up 25% to $125. Now you are able to and want to withdraw all the funds and the tax rate is 20%. Two scenarios below.

Option 1:
Bonds in pretax (457) ==> $125 now is taxed ==> $25 tax due
Stocks in Roth ==> $200 not taxed ==> $0 tax due
Total tax due is $25
Net after taxes = $300

Option 2:
Bonds in Roth ==> $125 not taxed ==> $0 tax due
Stocks in pretax (457) ==> $200 now is taxed ==> $40 tax due
Total tax due $40
Net after taxes = $285

You started with $200 for either scenario, Option 1 or Option 2. Do you want $285 or $300 at the end? And FWIW, the account values with be much greater in the end, and hence the discrepancy will be greater as well.

My comments in blue text above
—————-
Edited: grammar and fixed a math error.

I didn't see where I could scroll down where you directly addressed my questions. Thank you, again, for your knowledge and attention.

[medchemguy]

My comments in blue text above
—————-
Edited: grammar and fixed a math error.

It is a govt. 457 (teachers).

Does that change the equation on the question I have about opening a taxable vs vs increasing contributions in 457 vs increasing principal payments on my 6% interest?

Thank you so much for your time.

Yeah, the public university/school 457b is good, it’s what I have. I’d say it’s better than a 403b or 401k or IRA in that when you leave the job you can access without penalty, regardless of age. That is you don’t need to be over 59.5 to access without penalty.

In terms of whether to put money into the 457 or a brokerage account, that’s up to you. A big driver for most is the tax deferred nature of the pretax contributions. Especially if they are in a high tax bracket (24%+).

You may want to see if you have a Roth option available in your 457. If so, you may be able to make some Roth contributions and still keep your marginal rate in the 12% bracket. Which should be the case if filing MFJ and total income is $130K minus your $8400 (4800+3600) pretax 457 contributions and other pretax deductions from pay (ie health insurance premiums).

Anytime you can make Roth contributions and stay in the 12% bracket, you should try.

Here’s a calculator you can play around with to figure out if you can do some Roth and stay in 12 %.

https://engaging-data.com/tax-brackets/

Added comment: if you do have access to the Roth in the 457, then adding additional here (Roth) over the brokerage is a no brainer - at least from my perspective.

[futurenoodle]

It is a govt. 457 (teachers).

Does that change the equation on the question I have about opening a taxable vs vs increasing contributions in 457 vs increasing principal payments on my 6% interest?

Thank you so much for your time.

Yeah, the public university/school 457b is good, it’s what I have. I’d say it’s better than a 403b or 401k or IRA in that when you leave the job you can access without penalty, regardless of age. That is you don’t need to be over 59.5 to access without penalty.

In terms of whether to put money into the 457 or a brokerage account, that’s up to you. A big driver for most is the tax deferred nature of the pretax contributions. Especially if they are in a high tax bracket (24%+).

You may want to see if you have a Roth option available in your 457. If so, you may be able to make some Roth contributions and still keep your marginal rate in the 12% bracket. Which should be the case if filing MFJ and total income is $130K minus your $8400 (4800+3600) pretax 457 contributions and other pretax deductions from pay (ie health insurance premiums).

Anytime you can make Roth contributions and stay in the 12% bracket, you should try.

Here’s a calculator you can play around with to figure out if you can do some Roth and stay in 12 %.

https://engaging-data.com/tax-brackets/

Added comment: if you do have access to the Roth in the 457, then adding additional here (Roth) over the brokerage is a no brainer - at least from my perspective.

Wow, upon reading your all's insights and using that tool, it appears I have made a mistake by using a pre-tax 457 while in the marginal 12% by mistake. What are your thoughts?

For example, our Gross HHI is 130k, but our pension contributions are pre-tax (lower's taxable income) and those total to around $8,400 each ($16,800 total)

130k - standard deduction MFJ ($29,200) - $16,800 (pre-tax pension contributions) = $84,000 taxable income (not including healthcare deduction or the pre-tax 457).

Since the 22% bracket for 2024 MFJ begins around $94,301.00 and our taxable income is around $84,000.00, doesn't this mean that I should be investing in another roth account up to 10,000 to optimize tax liability?

Does that also change the scenario in terms of having bonds in the 457 vs the roth IRA if I change the 457 to a roth instead of pre-tax?

[medchemguy]

Yeah, the public university/school 457b is good, it’s what I have. I’d say it’s better than a 403b or 401k or IRA in that when you leave the job you can access without penalty, regardless of age. That is you don’t need to be over 59.5 to access without penalty.

In terms of whether to put money into the 457 or a brokerage account, that’s up to you. A big driver for most is the tax deferred nature of the pretax contributions. Especially if they are in a high tax bracket (24%+).

You may want to see if you have a Roth option available in your 457. If so, you may be able to make some Roth contributions and still keep your marginal rate in the 12% bracket. Which should be the case if filing MFJ and total income is $130K minus your $8400 (4800+3600) pretax 457 contributions and other pretax deductions from pay (ie health insurance premiums).

Anytime you can make Roth contributions and stay in the 12% bracket, you should try.

Here’s a calculator you can play around with to figure out if you can do some Roth and stay in 12 %.

https://engaging-data.com/tax-brackets/

Added comment: if you do have access to the Roth in the 457, then adding additional here (Roth) over the brokerage is a no brainer - at least from my perspective.

Wow, upon reading your all's insights and using that tool, it appears I have made a mistake by using a pre-tax 457 while in the marginal 12% by mistake. What are your thoughts?

For example, our Gross HHI is 130k, but our pension contributions are pre-tax (lower's taxable income) and those total to around $8,400 each ($16,800 total)

130k - standard deduction MFJ ($29,200) - $16,800 (pre-tax pension contributions) = $84,000 taxable income (not including healthcare deduction or the pre-tax 457).

Since the 22% bracket for 2024 MFJ begins around $94,301.00 and our taxable income is around $84,000.00, doesn't this mean that I should be investing in another roth account up to 10,000 to optimize tax liability?

Does that also change the scenario in terms of having bonds in the 457 vs the roth IRA if I change the 457 to a roth instead of pre-tax?

I’m a bit confused about the $8400 each (highlighted in red above). Is this in addition to what you listed in your initial post?

If that $8400 each pension contribution is made by the school directly and is NOT included in your W-2 income (not included in the Box 3 number) then don’t include that in the calculations when trying to figure your tax bracket. You can include 457 contributions that you defer to reduce your taxable income, but not those made directly by the school (so-called match, set %, etc). Make sense?

Not trying to confuse you, just trying to make sure you understand. And if you end up deferring more to a Roth such that you end up in the 22% marginal rate, it’s not the end of the world. Lots of people make Roth deferrals at the 22% rate, or even higher…I certainly have.

Per the question on bonds. Ideally bonds should go in a pretax plan and Roth should be equity (stocks) only. That said, of course bonds in Roth is acceptable if need be. And thus, you could consider making some pre-tax 457 and some Roth 457. And if you can’t do that in a given pay period, then you make 1-2 months of pre-tax (bonds) and switch to Roth (equities) for the rest of the year.

You definitely should be able to have a mix of pre-tax and Roth due to changing your mind about where you want future contributions to go while letting the previous contributions be invested where they were… or changing previous contributions because you want to rebalance your portfolio. You should have some flexibility in how you want to invest within your plan.

Oh yeah, and Happy Thanksgiving!

[futurenoodle]

Wow, upon reading your all's insights and using that tool, it appears I have made a mistake by using a pre-tax 457 while in the marginal 12% by mistake. What are your thoughts?

For example, our Gross HHI is 130k, but our pension contributions are pre-tax (lower's taxable income) and those total to around $8,400 each ($16,800 total)

130k - standard deduction MFJ ($29,200) - $16,800 (pre-tax pension contributions) = $84,000 taxable income (not including healthcare deduction or the pre-tax 457).

Since the 22% bracket for 2024 MFJ begins around $94,301.00 and our taxable income is around $84,000.00, doesn't this mean that I should be investing in another roth account up to 10,000 to optimize tax liability?

Does that also change the scenario in terms of having bonds in the 457 vs the roth IRA if I change the 457 to a roth instead of pre-tax?

I’m a bit confused about the $8400 each (highlighted in red above). Is this in addition to what you listed in your initial post?

If that $8400 each pension contribution is made by the school directly and is NOT included in your W-2 income (not included in the Box 3 number) then don’t include that in the calculations when trying to figure your tax bracket. You can include 457 contributions that you defer to reduce your taxable income, but not those made directly by the school (so-called match, set %, etc). Make sense?

Not trying to confuse you, just trying to make sure you understand. And if you end up deferring more to a Roth such that you end up in the 22% marginal rate, it’s not the end of the world. Lots of people make Roth deferrals at the 22% rate, or even higher…I certainly have.




Oh yeah, and Happy Thanksgiving!

I see that I didn't mention the pension contributions in the original post, but I am trying to understand whether those contributions are made directly by the school or not and if I deduct the 8400 when trying to determine my taxable income. Box 3 of my W-2 is titled "Social Security wages", and I'm not sure how to determine the answer to this.

Hmm, looking at my pay stub, the pension contributions are taken out of my paycheck automatically. Is that what you mean by the contributions made by the school directly, even though it comes out of my paychecks?


I'm not trying to be confused on purpose, I'm trying. Again, I appreciate your help!

Is there a different way to determine whether these pension contributions that are taken out of my paycheck lower my taxable income for my income bracket calculations, since box 3 of my W2 says Social Security wages?

*Edit* our 2022 return last year has our taxable income listed at $70,500. It seems like that's what you get with gross income - standard deduction - pension contributions - pre-tax 457.

[medchemguy]

I see that I didn't mention the pension contributions in the original post, but I am trying to understand whether those contributions are made directly by the school or not and if I deduct the 8400 when trying to determine my taxable income. Box 3 of my W-2 is titled "Social Security wages", and I'm not sure how to determine the answer to this.

Hmm, looking at my pay stub, the pension contributions are taken out of my paycheck automatically. Is that what you mean by the contributions made by the school directly, even though it comes out of my paychecks?

I'm not trying to be confused on purpose, I'm trying. Again, I appreciate your help! Is there a different way to determine whether these pension contributions that are taken out of my paycheck lower my taxable income for my income bracket calculations, since box 3 of my W2 says Social Security wages?

My comments are below.

First-
Essentially box 3 (W-2) is your gross pay minus your HSA contributions. That is unless you make over the threshold $ amount that is subject to social security tax, then look at box 5 for gross pay minus your HSA contribution (SS tax income limit $168,600 in 2024. If gross income less than this amount, then box 3 and box 5 will be the same). Box 3/5 income is subject to payroll tax (social security tax@6.2%/medicare tax@1.45%) at a rate of 7.65%. Any income over the social security threshold ($168,600 in 2024) is only subject to medicare tax. Do they withhold social security/medicare tax from your pay?

Box 1 is the amount of pay that is subject to income tax for the year. This amount is box 3 (or 5) minus all pre-tax deductions (ie 457 contributions, insurance premiums, etc but not HSA contributions, since that was already accounted for in box 3 and 5) from your pay. This is the amount that is included on line 1a on the 1040 form.

Second-
Look at your recent paycheck stub.

If you take your gross pay and subtract out all indicated deductions (tax withholdings, 457 contributions, insurance premiums, etc) you should get a net pay amount:

Gross Pay - Deductions = Net Pay

It sounds like that pension contribution of $8400 (non-elective, pre-tax) not mentioned in the original post is one of these deductions indicated on your paycheck. Is that correct?

If so, then account for the $8400 when figuring your taxable income. Furthermore, if you don't have any after-tax deductions (Roth or other), then your total net pay on the last pay stub of the year should be the same as the amount in box 1 (W-2). If that's the case, you simply use this box 1 (W-2) amount when determining your taxable income as it will have accounted for the $8400 (non-elective, pre-tax) pension contribution.

Finally, regarding your pay stub, you likely have a section that lists Employer Paid Benefits or Employer Contributions for the pay period and for the year to date. I work as a public university and I see this on my check. I bring this up because I get an employer paid contribution to a retirement plan (happens to be a 401a and not my 457) that is not deducted from my pay but is listed in this section. Also listed in this section on my pay stub are contributions my employer has made to my HSA, medical/dental plan, and life insurance. If the $8400 pension contribution was not made through deduction of pay, but rather as a benefit, then that amount would be listed in this section.

Third-
On your W-2 Box 12 should contain $ amounts and letter codes associated with various non-tax related deductions. For example, contributions (employee and employer combined) made to an HSA are coded W. Contributions to a 457 are coded G. That $8400 should be accounted for in box 12, possibly combined with your elective 457 contributions (coded G); is that the case for your most recent W-2 (2023)?

For a complete list of W-2 Box 12 codes look here: https://www.hrblock.com/tax-center/irs/ ... -12-codes/

Fourth-
Look at last years W-2 (2023) and see if box 13 is checked for Retirement plan. I'm curious to know if thats checked in your case. I'm guessing it is, but I'm not 100% sure.

Bonus Info (haha, that's a joke)-
While I went through the above, please note when it comes to before-tax deductions on the paycheck there are many things that may be unique to your situation. At the university where I work, there are deductions that fall under Salary Reduction Agreements, these are often referred to as Cafeteria Plans. For example, you may have a parking fee that is deducted before-tax. If interested, google cafeteria plan salary reduction agreement to find more info about this type of thing.

[futurenoodle]

This was so very helpful, thank you for the breakdown. I have tried to put my responses below in blue font.
First-

Box 3/5 income is subject to payroll tax (social security tax@6.2%/medicare tax@1.45%) at a rate of 7.65%. Do they withhold social security/medicare tax from your pay?

With our state employer, we do not make SS contributions and are not eligible to receive SS distributions later in life.


Second-
Look at your recent paycheck stub.


It sounds like that pension contribution of $8400 (non-elective, pre-tax) not mentioned in the original post is one of these deductions indicated on your paycheck. Is that correct?

Yes, it is indicated on the paycheck. Box 1 of my W-2 looks like it is Box 5 minus pension contributions minus pre-tax 457. So then, the pension contributions are pre-tax and thus lower my taxable income. Thanks for helping me understand this!


Third-
On your W-2 Box 12 should contain $ amounts and letter codes associated with various non-tax related deductions. For example, contributions (employee and employer combined) made to an HSA are coded W. Contributions to a 457 are coded G. That $8400 should be accounted for in box 12, possibly combined with your elective 457 contributions (coded G); is that the case for your most recent W-2 (2023)?

Yes, it does show the pre-tax 457 3,600 contribution with code G, and box 12D appears to be a combination of pre-tax 457 and pension contribution.


Fourth-
Look at last years W-2 (2023) and see if box 13 is checked for Retirement plan. I'm curious to know if thats checked in your case. I'm guessing it is, but I'm not 100% sure.

Yes, it is checked for Retirement Plan


Now that the taxable income is understood, what implications are there for optimizing the types of contributions we make. For example, since our taxable income from 2023 is now found gross-deductions/contributions - standard deduction from box 15 of 1030 at around $74,000, does this mean we would be better to invest in a roth account instead of our pre-tax 457s, since we are $15,000 under the marginal 22% bracket? If our employer doesn't offer a roth 457 option (I have to check on this), would that still mean that it's better to continue pre-tax 457 contributions or should we reduce those 457 contributions and contribute more to the 6% mortgage and open a taxable account?

You've been so helpful, I appreciate it and this community.

[retiredjg]

Wow, upon reading your all's insights and using that tool, it appears I have made a mistake by using a pre-tax 457 while in the marginal 12% by mistake. What are your thoughts?

I would not call it a "mistake". Saving money for retirement is never a mistake. But I believe it will be wiser to save more in Roth and maybe taxable.

Once you have enough deductions to get into the 12% bracket (pretty easy for you), further savings should be Roth or taxable in my opinion. Or paying off the mortgage faster.

If you have Roth 457 available, that is an obvious good solution.

Does that also change the scenario in terms of having bonds in the 457 vs the roth IRA if I change the 457 to a roth instead of pre-tax?

Maybe. Maybe not. Do you prefer to have your investments mirrored in each account?

[medchemguy]

Now that the taxable income is understood, what implications are there for optimizing the types of contributions we make. For example, since our taxable income from 2023 is now found gross-deductions/contributions - standard deduction from box 15 of 1030 at around $74,000, does this mean we would be better to invest in a roth account instead of our pre-tax 457s, since we are $15,000 under the marginal 22% bracket? If our employer doesn't offer a roth 457 option (I have to check on this), would that still mean that it's better to continue pre-tax 457 contributions or should we reduce those 457 contributions and contribute more to the 6% mortgage and open a taxable account?

You've been so helpful, I appreciate it and this community.

Anytime you have space in the 12% bracket (or lower) it makes sense to take advantage of the Roth option. If you don't have the Roth option in your 457 plan, it still makes sense to make pre-tax deferrals to the 457, in my opinion. The reason is you can access your contributions/growth penalty free, once you separate from the employer. You'd pay taxes but not a penalty - this is specific to the 457. 401k/403b plans require the account holder to be over age 59.9 in order to access the funds penalty free. The penalty is 10%.

Regarding the choice of putting that extra savings into the mortgage (6%) vs taxable brokerage account vs pre-tax 457, it really comes down to comfort. That said, some things to keep in mind:

• Some folks are driven to reduce their mortgage to $0 ASAP, and for whatever reason this becomes the highest priority. If the interest rate on the mortage is high, then it makes more sense to put money towards the mortgage. If low, not so much. 6% is a little high, but its a bull market. You are already putting an extra $300/mo toward the mortgage, if I recall correctly.

• As stated above, the benefit of the 457 vs other plans (403b/401k/IRAs) wrt withdrawal post separation from the employer make this much more attractive as a "emergency" savings vehicle, in that if you lose your job (emergency) you have access to those funds. Thats a big emergency.

• Brokerage accounts (taxable) are always a good idea. They offer the most financial flexibility available (in my view), but keep in mind you generate income along the way in the form of dividends, though if qualified, they are taxed at the LTCG rate, 0% or 15% for most of us (though there can be the issue of the 27% tax bump if your ordinary taxable income is not yet at the 22% bracket - search this forum and the internet for more on this if interested). Also, if you sell a holding to free up $, you likely will generate some gain that will be tax. That said, some folks use tax loss harvesting (https://www.bogleheads.org/wiki/Tax_loss_harvesting) in their brokerage account to help manage/reduce their taxes.

If I have it right you are currently saving $22,400/year for retirement ($7000 x 2 Roth IRA, $3600 + $4800 in pretax 457) plus your employer is contributing $16,800 ($8400 x 2) towards your combined retirements. Total annual towards retirement is $39,200/year, of which $14,000 is Roth. Your combined income (HHI) is $130K/year. You are effectively saving 30% of your combined gross salaries towards retirement. That is awesome!

If it were me, I'd probably split the extra savings mostly between the pre-tax 457 (or Roth if available) and a brokerage account since you are already putting $300/mo towards reducing the mortgage. Maybe I'd go to $500/mo total towards the mortgage (add $200/mo to what you are doing). I think you said that you have an extra $1700/mo after all obligations are covered. If you add the $300/mo for mortgage, then thats $2K/mo extra.

So overall, if I were in your shoes I'd probably split that extra $2K/month as follows:

• $500/mo total to reduce mortgage

• $500/mo more to 457 (Roth if available, otherwise pre-tax)

• $1000/mo into the brokerage account and I'd put 80%+ into a total stock market index fund/ETF, something like VTI or SCHB, and the rest into a short/intermediate term US treasury bond fund (ie VGIT, VGSH, or VTIP) or a money market fund (ie VUSXX). FYI, those bond/money market funds that I listed all invest in US treasuries, so you pay US income tax on the dividends (interest) but not state income tax. That's important if you live in a state that has income tax.

• Makes adjustment as desired.

• ...But thats me, and you are you.

[futurenoodle]

Now that the taxable income is understood, what implications are there for optimizing the types of contributions we make. For example, since our taxable income from 2023 is now found gross-deductions/contributions - standard deduction from box 15 of 1030 at around $74,000, does this mean we would be better to invest in a roth account instead of our pre-tax 457s, since we are $15,000 under the marginal 22% bracket? If our employer doesn't offer a roth 457 option (I have to check on this), would that still mean that it's better to continue pre-tax 457 contributions or should we reduce those 457 contributions and contribute more to the 6% mortgage and open a taxable account?

You've been so helpful, I appreciate it and this community.

Anytime you have space in the 12% bracket (or lower) it makes sense to take advantage of the Roth option. If you don't have the Roth option in your 457 plan, it still makes sense to make pre-tax deferrals to the 457, in my opinion. The reason is you can access your contributions/growth penalty free, once you separate from the employer. You'd pay taxes but not a penalty - this is specific to the 457. 401k/403b plans require the account holder to be over age 59.9 in order to access the funds penalty free. The penalty is 10%.

Regarding the choice of putting that extra savings into the mortgage (6%) vs taxable brokerage account vs pre-tax 457, it really comes down to comfort. That said, some things to keep in mind:

• Some folks are driven to reduce their mortgage to $0 ASAP, and for whatever reason this becomes the highest priority. If the interest rate on the mortage is high, then it makes more sense to put money towards the mortgage. If low, not so much. 6% is a little high, but its a bull market. You are already putting an extra $300/mo toward the mortgage, if I recall correctly.

• As stated above, the benefit of the 457 vs other plans (403b/401k/IRAs) wrt withdrawal post separation from the employer make this much more attractive as a "emergency" savings vehicle, in that if you lose your job (emergency) you have access to those funds. Thats a big emergency.

• Brokerage accounts (taxable) are always a good idea. They offer the most financial flexibility available (in my view), but keep in mind you generate income along the way in the form of dividends, though if qualified, they are taxed at the LTCG rate, 0% or 15% for most of us (though there can be the issue of the 27% tax bump if your ordinary taxable income is not yet at the 22% bracket - search this forum and the internet for more on this if interested). Also, if you sell a holding to free up $, you likely will generate some gain that will be tax. That said, some folks use tax loss harvesting (https://www.bogleheads.org/wiki/Tax_loss_harvesting) in their brokerage account to help manage/reduce their taxes.

If I have it right you are currently saving $22,400/year for retirement ($7000 x 2 Roth IRA, $3600 + $4800 in pretax 457) plus your employer is contributing $16,800 ($8400 x 2) towards your combined retirements. Total annual towards retirement is $39,200/year, of which $14,000 is Roth. Your combined income (HHI) is $130K/year. You are effectively saving 30% of your combined gross salaries towards retirement. That is awesome!

If it were me, I'd probably split the extra savings mostly between the pre-tax 457 (or Roth if available) and a brokerage account since you are already putting $300/mo towards reducing the mortgage. Maybe I'd go to $500/mo total towards the mortgage (add $200/mo to what you are doing). I think you said that you have an extra $1700/mo after all obligations are covered. If you add the $300/mo for mortgage, then thats $2K/mo extra.

So overall, if I were in your shoes I'd probably split that extra $2K/month as follows:

• $500/mo total to reduce mortgage

• $500/mo more to 457 (Roth if available, otherwise pre-tax)

• $1000/mo into the brokerage account and I'd put 80%+ into a total stock market index fund/ETF, something like VTI or SCHB, and the rest into a short/intermediate term US treasury bond fund (ie VGIT, VGSH, or VTIP) or a money market fund (ie VUSXX). FYI, those bond/money market funds that I listed all invest in US treasuries, so you pay US income tax on the dividends (interest) but not state income tax. That's important if you live in a state that has income tax.

• Makes adjustment as desired.

• ...But thats me, and you are you.

This comprehensive, specific, and instructive. If I had your address I’d be sending you a Christmas card. Thank you for helping me navigate our financial journey. I will be sure to look into all of this and consider deeply. Cheers!