Age + amount to no longer max out tax-advantage?

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chrismj
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Age + amount to no longer max out tax-advantage?

Post by chrismj »

Is there an age + amount of investment to no longer max out, or even stop contributing to, tax-advantaged accounts?

I'm a federal employee (36 years old, 13 years of service) under FERS and TSP. If I work 40 years and max out TSP and Roth IRAs (and index invest under taxable accounts) I'm looking at a decent income at age 63 and even higher at 70 with delayed Social Security, plus my wife's teacher pension, Roth IRA, and Soc Sec.

What do you consider when trying to smooth out the investment income so that you retire earlier with taxable investment accounts to bridge the gap until you can start withdrawing from TSP/FERS/SocSec? I'd rather have two balanced "buckets" of investments, with one I can use in my 50s (or 40s?) instead of having more than I want or need in my 70s.

Should I pull back on either/both of TSP and Roth and invest in my taxable at some point? Starting now? Never?

Maybe there's something else to consider.
terran
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Re: Age + amount to no longer max out tax-advantage?

Post by terran »

Beyond maybe having 5 years of spending in accessible accounts (taxable + Roth contributions) I wouldn't worry about the accessibility issue as there are a number of ways to access retirement accounts early. Having too high a marginal tax bracket in retirement due to pension, social security and high tax deferred balances is a concern that's work running some calculations on (FV, PV, and PMT functions in excel should do the trick), but I would say the correct answer to the concern of excessive tax deferred balances is switching to Roth if available not switching to taxable.
tj
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Re: Age + amount to no longer max out tax-advantage?

Post by tj »

chrismj wrote: Thu May 13, 2021 9:36 pm Is there an age + amount of investment to no longer max out, or even stop contributing to, tax-advantaged accounts?

I'm a federal employee (36 years old, 13 years of service) under FERS and TSP. If I work 40 years and max out TSP and Roth IRAs (and index invest under taxable accounts) I'm looking at a decent income at age 63 and even higher at 70 with delayed Social Security, plus my wife's teacher pension, Roth IRA, and Soc Sec.

What do you consider when trying to smooth out the investment income so that you retire earlier with taxable investment accounts to bridge the gap until you can start withdrawing from TSP/FERS/SocSec? I'd rather have two balanced "buckets" of investments, with one I can use in my 50s (or 40s?) instead of having more than I want or need in my 70s.

Should I pull back on either/both of TSP and Roth and invest in my taxable at some point? Starting now? Never?

Maybe there's something else to consider.
Ugh, you're considering 40 years in the government? I'll be 36 in a few days, but I'm only 2 years in, my MRA is 57 and I don't see why I would want to work a day longer than my 57th birthday.

I theoretically could reduce my TSP contributions to 5% and I'd be fine financially, but why do that? I'd just be paying more taxes now. Perhaps i'll build up my retirement accounts so large that i can retire before age 57. I suppose that's why I haven't scaled back. If anything, I'm doing the opposite, I had a large taxable account from real estate sale and in order to max out my retirement accounts, I lean on my taxable accounts a bit for spending.

It would never make sense to completely eliminate your TSP contributions since you get free money by contributing 5%.
Katietsu
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Re: Age + amount to no longer max out tax-advantage?

Post by Katietsu »

terran wrote: Thu May 13, 2021 10:10 pmI would say the correct answer to the concern of excessive tax deferred balances is switching to Roth if available not switching to taxable.
I agree with this assuming that your intention is to save for a time after you leave employment.

At some point, you may decide that maxing out savings for post employment life is not necessary. Then you would need to decide whether you had more immediate spending wants or if you will continue to save.
jimkinny
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Re: Age + amount to no longer max out tax-advantage?

Post by jimkinny »

This is from the Boglehead wiki Roth vs TIRA
[urlhttps://www.bogleheads.org/wiki/Traditional_versus_Roth][/url]
retiredjg
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Re: Age + amount to no longer max out tax-advantage?

Post by retiredjg »

I think there is a balance in each situation. I don't think there is an age+ amount that works for a variety of situations.

With 2 pensions in your future, you should probably be looking at more Roth savings than tax-deferred. Also, depending on how much you save and how much you spend in retirement, you may not need to work as long as you are planning.

If you retire in or after the year you reach 55, your TSP is available without penalty. Your Roth IRA contributions (not earnings) are also available anytime without penalty. So saving a lot in taxable may not be as important as you think. Saving some in taxable is likely a good choice.

There are many things to consider. If your pensions and SS are likely to cover a good portion of your retirement expenses, you need to be aware that building up a very large tax-deferred balance that you do not need may end up being a bit of a problem in your older age. Retiring earlier and putting more in Roth will help reduce the chances of this happening.
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chrismj
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Re: Age + amount to no longer max out tax-advantage?

Post by chrismj »

Katietsu wrote: Thu May 13, 2021 11:19 pm
terran wrote: Thu May 13, 2021 10:10 pmI would say the correct answer to the concern of excessive tax deferred balances is switching to Roth if available not switching to taxable.
I agree with this assuming that your intention is to save for a time after you leave employment.

At some point, you may decide that maxing out savings for post employment life is not necessary. Then you would need to decide whether you had more immediate spending wants or if you will continue to save.
What if we're already maxing out Roth contributions ($12,000 a year, two people)? So max Roth and max TSP is $31,500 this year. At any point do I cut back on TSP and move to taxable to have more income to bridge the gap before Minimum Retirement Age requirements?

For FERS, I can work 20 years and then withdraw at MRA of 60. So in this 'least working years' scenarios I would be 43 after 20 years of service and bridging the gap until 60 with taxable account withdrawals. Obviously all at reduced amounts later for TSP, FERS pension, and Social Security, and very reduced income age 43-60.

So that's the lowest end of the range and the highest end is working until 63 (or beyond) and maxing out TSP and Roth the whole time. I would have taxable investments too so I know that at some point I could stop working early and fund with that, whether that's one year or 15 is what i'm trying to figure out.

How severe of a hit to Soc Sec do you take if you only work 25 years but then wait 15 years to withdraw? Is there any point along the 40 year timeline where those max TSP contributions would be better in the taxable account to lower the years worked?
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chrismj
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Re: Age + amount to no longer max out tax-advantage?

Post by chrismj »

From what i've read on this forum it sounds like a very robust retirement can be had at about $80k (today's dollars), and much lower than that if you don't travel internationally all that often.

When I run the retirement calculators with all of my inputs we're well over $100k for retirement. So with these back of the envelope numbers I'm trying to figure out how to move that extra $20k+ down from my 70s and 80s and into my 50s and 60s.
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teen persuasion
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Re: Age + amount to no longer max out tax-advantage?

Post by teen persuasion »

Did you read terran's link to Mad FIentist?

A Roth conversion ladder gets you access to tax deferred accounts pre-59.5.
tj
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Re: Age + amount to no longer max out tax-advantage?

Post by tj »

teen persuasion wrote: Fri May 14, 2021 8:03 am Did you read terran's link to Mad FIentist?

A Roth conversion ladder gets you access to tax deferred accounts pre-59.5.
The topic starter wants to retire at 63. Roth conversions aren't needed.
CoastLawyer2030
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Re: Age + amount to no longer max out tax-advantage?

Post by CoastLawyer2030 »

As a fellow government employee, and someone who is also interested in retiring before the standard retirement age, I would never, ever, in a million years let my employer dictate to me when I can retire based on some sort of arcane formula.

I'm generally flabbergasted when people who have been working here since 1996 say "I have eight years and one month left." I often wonder what the heck they have been doing with their money for 25 years. These types of "countdown" conversations happen once per week.

All of this is a rant to say you should think outside the box, save as much as comfortably possible, and not let all these acronyms dictate to you when you should retire. I would echo the posts from terran and retiredjg for your particular strategy to accomplish this.
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teen persuasion
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Re: Age + amount to no longer max out tax-advantage?

Post by teen persuasion »

tj wrote: Fri May 14, 2021 8:47 am
teen persuasion wrote: Fri May 14, 2021 8:03 am Did you read terran's link to Mad FIentist?

A Roth conversion ladder gets you access to tax deferred accounts pre-59.5.
The topic starter wants to retire at 63. Roth conversions aren't needed.
Later posts were discussing options between 43 and 63 at the latest.

He recognizes that saving right up to 63 gives him more than he needs, wants to explore other options, asked about taxable as a bridge from a possible early retirement to normal retirement age access to TSP, SS, etc. The Roth conversion ladder is another option if retiring early.
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chrismj
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Re: Age + amount to no longer max out tax-advantage?

Post by chrismj »

teen persuasion wrote: Fri May 14, 2021 8:03 am Did you read terran's link to Mad FIentist?

A Roth conversion ladder gets you access to tax deferred accounts pre-59.5.
I missed the link and that does seem to answer most of my questions. This is interesting:

"The first is that even if you don’t want to mess with things like Roth Conversion Ladders or SEPP distributions, it still makes sense to max out your pre-tax retirement accounts and then just pay the early-withdrawal penalty!"

That's a nice lever to have, where you can pay what could be viewed as a convenience fee (instead of a penalty fee) to access your money early and not perform any complex planning or forecasting, and still not be far behind the better withdrawal options.

What about social security? If i'm a max contributor of FICA taxes for my last 15-30years of work and I start cutting those down is the amount I receive later disproportionately reduced compared to if I started working at a later age and worked all the way to withdrawing Soc Sec? Are those later years just worth more because usually wages are higher from inflation?
Topic Author
chrismj
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Re: Age + amount to no longer max out tax-advantage?

Post by chrismj »

terran wrote: Thu May 13, 2021 10:10 pm Beyond maybe having 5 years of spending in accessible accounts (taxable + Roth contributions) I wouldn't worry about the accessibility issue as there are a number of ways to access retirement accounts early. Having too high a marginal tax bracket in retirement due to pension, social security and high tax deferred balances is a concern that's work running some calculations on (FV, PV, and PMT functions in excel should do the trick), but I would say the correct answer to the concern of excessive tax deferred balances is switching to Roth if available not switching to taxable.
Thanks for the link. I missed it earlier when kids were yelling in the background.
tj
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Re: Age + amount to no longer max out tax-advantage?

Post by tj »

chrismj wrote: Fri May 14, 2021 9:10 am
teen persuasion wrote: Fri May 14, 2021 8:03 am Did you read terran's link to Mad FIentist?

A Roth conversion ladder gets you access to tax deferred accounts pre-59.5.
I missed the link and that does seem to answer most of my questions. This is interesting:

"The first is that even if you don’t want to mess with things like Roth Conversion Ladders or SEPP distributions, it still makes sense to max out your pre-tax retirement accounts and then just pay the early-withdrawal penalty!"

That's a nice lever to have, where you can pay what could be viewed as a convenience fee (instead of a penalty fee) to access your money early and not perform any complex planning or forecasting, and still not be far behind the better withdrawal options.

What about social security? If i'm a max contributor of FICA taxes for my last 15-30years of work and I start cutting those down is the amount I receive later disproportionately reduced compared to if I started working at a later age and worked all the way to withdrawing Soc Sec? Are those later years just worth more because usually wages are higher from inflation?
I believe your past earnings get inflation adjustments until age 60. It's irrelevant the timing of the years that you work.
tigermilk
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Re: Age + amount to no longer max out tax-advantage?

Post by tigermilk »

Fellow fed. I waited a bit too long to move away from tax advantaged, but at age 52 (in a couple of weeks) I only contribute to the Roth TSP, Roth IRA, and HSA. I transitioned to Roth TSP a couple of years ago and wish I had done it earlier. And this year I dialed back my contributions to the TSP. I now contribute just $13k per year to TSP rather than $26k, though still max out Roth IRA. I also pile savings into a taxable account. I dialed back because I realized I will have more than enough in the TSP and also to enhance the taxable account to provide more flexibility before retirement . My FERS pension and SS will cover our expenses, so I only need to worry about the bridge years. For that, I have more than enough in the TSP to the point it will be a mad scramble to spend/convert that pre-tax money before SS kicks in (will do age 70).

So yes, it can make sense depending on the numbers and your goals.
terran
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Re: Age + amount to no longer max out tax-advantage?

Post by terran »

chrismj wrote: Fri May 14, 2021 9:10 am I missed the link and that does seem to answer most of my questions. This is interesting:

"The first is that even if you don’t want to mess with things like Roth Conversion Ladders or SEPP distributions, it still makes sense to max out your pre-tax retirement accounts and then just pay the early-withdrawal penalty!"

That's a nice lever to have, where you can pay what could be viewed as a convenience fee (instead of a penalty fee) to access your money early and not perform any complex planning or forecasting, and still not be far behind the better withdrawal options.
Be a little careful with this, especially if you plan to try to qualify for ACA subsidies during early retirement. The idea is that if your current marginal rate is greater than 10% more than your expected marginal rate in early retirement then it actually makes sense to pay the penalty as the overall marginal rate in retirement is still lower than while working even when including the penalty. Since ACA subsidies drop with taxable income (like from traditional retirement account withdrawals) this is essentially another "tax" on top of your normal tax rate in retirement.

In case you didn't catch it already, note that Roth contributions (not gains) are available for withdrawal any time without tax or penalty (any time after you stop working for that employer in the case of workplace plans, possibly requiring rollover to an IRA), so that's a good source of income during early retirement if you decide to go with Roth. Paradoxically, traditional accounts can actually give you access to more money early since you can access the amount of conversion (after waiting 5 years) instead of only the amount of the original contribution.
chrismj wrote: Fri May 14, 2021 9:10 am What about social security? If i'm a max contributor of FICA taxes for my last 15-30years of work and I start cutting those down is the amount I receive later disproportionately reduced compared to if I started working at a later age and worked all the way to withdrawing Soc Sec? Are those later years just worth more because usually wages are higher from inflation?
No, it shouldn't matter except in as much as your later year earnings are likely to be higher even after adjusting for inflation just because most people's careers advance as they get older. Past earnings are inflation adjusted when calculating social security benefits, so past wages will be "worth" more than the actual amount of wages. Retiring early will very likely reduce social security below what you see listed on your statement since that assumes you continue to work until retirement age. Your highest 35 inflation adjusted earning years are included in the calculations, so if your projected future earnings are higher than any of your previous earnings then they'll replace the lower earning years. This is more pronounced if you'll have $0 earning years included in the calculations if you retire early.

On the other hand, social security is a progressive system whereby lower earnings are counted more than higher earnings. Over a 35 year working "lifetime," the first $418,320 is counted at 90% resulting in a monthly social security benefit of $896.40, a total of $2,520,840 is counted at 32% for the amount over $418,320 resulting in a monthly benefit of $2,498.32, and a total of $4,998,000 is counted at only 15% for the amount over $2,520,840 for a total monthly benefit of $3,383.02. These three amounts are based on the monthly bend points of $996 and $6002 and the annual wage base of $142,800 (over which you don't pay social security tax) respectively all turned into 35 years of earnings. These amounts will be inflation adjusted along with your actual earnings so the effect of your earnings on the formula will remain consistent in their effect on your benefit calculation.

To put some numbers on this, if you had 15 years of earnings at the full wage base and no other earnings you'd have lifetime earnings of 15 x 142,800 = $2,142,000, divide by 35 years for a $61,200 annual average and by 12 for a $5,100 monthly average. This would result in a 996 x 90% + (5100-996) x 32% = $2,209.68 monthly benefit. If instead you had 30 years at the same full wage base for lifetime earnings of 30 x 142,800 = $4,284,000, divide by 35 years for a $122,400 annual average and by 12 for a $10,200.00 monthly average. This would result in a 996 x 90% + 6002 x 32% + (10200 - 6002) x 15% = $3,446.74 monthly benefit, which as you can see is less than double the amount despite having double the lifetime earnings. The difference from working longer will become smaller if your 15 years of wage base max earnings also includes lower earning years, and lower still if you have 35 years with some earnings, especially once your lifetime earnings go over $2,520,840.

I don't know if federal pensions reduce social security benefits like some state pensions do, so you should look into that if you don't already know the answer.
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chrismj
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Re: Age + amount to no longer max out tax-advantage?

Post by chrismj »

terran wrote: Fri May 14, 2021 10:12 am
chrismj wrote: Fri May 14, 2021 9:10 am What about social security? If i'm a max contributor of FICA taxes for my last 15-30years of work and I start cutting those down is the amount I receive later disproportionately reduced compared to if I started working at a later age and worked all the way to withdrawing Soc Sec? Are those later years just worth more because usually wages are higher from inflation?
No, it shouldn't matter except in as much as your later year earnings are likely to be higher even after adjusting for inflation just because most people's careers advance as they get older. Past earnings are inflation adjusted when calculating social security benefits, so past wages will be "worth" more than the actual amount of wages. Retiring early will very likely reduce social security below what you see listed on your statement since that assumes you continue to work until retirement age. Your highest 35 inflation adjusted earning years are included in the calculations, so if your projected future earnings are higher than any of your previous earnings then they'll replace the lower earning years. This is more pronounced if you'll have $0 earning years included in the calculations if you retire early.

On the other hand, social security is a progressive system whereby lower earnings are counted more than higher earnings. Over a 35 year working "lifetime," the first $418,320 is counted at 90% resulting in a monthly social security benefit of $896.40, a total of $2,520,840 is counted at 32% for the amount over $418,320 resulting in a monthly benefit of $2,498.32, and a total of $4,998,000 is counted at only 15% for the amount over $2,520,840 for a total monthly benefit of $3,383.02. These three amounts are based on the monthly bend points of $996 and $6002 and the annual wage base of $142,800 (over which you don't pay social security tax) respectively all turned into 35 years of earnings. These amounts will be inflation adjusted along with your actual earnings so the effect of your earnings on the formula will remain consistent in their effect on your benefit calculation.

To put some numbers on this, if you had 15 years of earnings at the full wage base and no other earnings you'd have lifetime earnings of 15 x 142,800 = $2,142,000, divide by 35 years for a $61,200 annual average and by 12 for a $5,100 monthly average. This would result in a 996 x 90% + (5100-996) x 32% = $2,209.68 monthly benefit. If instead you had 30 years at the same full wage base for lifetime earnings of 30 x 142,800 = $4,284,000, divide by 35 years for a $122,400 annual average and by 12 for a $10,200.00 monthly average. This would result in a 996 x 90% + 6002 x 32% + (10200 - 6002) x 15% = $3,446.74 monthly benefit, which as you can see is less than double the amount despite having double the lifetime earnings. The difference from working longer will become smaller if your 15 years of wage base max earnings also includes lower earning years, and lower still if you have 35 years with some earnings, especially once your lifetime earnings go over $2,520,840.

I don't know if federal pensions reduce social security benefits like some state pensions do, so you should look into that if you don't already know the answer.
Thank you very much. You've fully answered my original questions, and prompted one more.

Am I reading the above correctly that once I hit $2,520,840 of lifetime earnings (based on qualifying $142,800 yearly income) then the remaining working years would increase the monthly benefit a maximum of $884.70 (= $3383.02-2498.32)? That $2,520,840 of qualified lifetime earnings results in 74% of your potential max monthly benefit and the next $2,477,160 of qualified earnings covers the remaining 26%?
makeitcount
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Re: Age + amount to no longer max out tax-advantage?

Post by makeitcount »

fellow fed.
FERS does not reduce SS benefits.
keep in mind that if you pass away before your spouse, the max survivor's benefit is 50% of your pension.
terran
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Re: Age + amount to no longer max out tax-advantage?

Post by terran »

chrismj wrote: Fri May 14, 2021 11:04 am Am I reading the above correctly that once I hit $2,520,840 of lifetime earnings (based on qualifying $142,800 yearly income) then the remaining working years would increase the monthly benefit a maximum of $884.70 (= $3383.02-2498.32)? That $2,520,840 of qualified lifetime earnings results in 74% of your potential max monthly benefit and the next $2,477,160 of qualified earnings covers the remaining 26%?
Yes, that's my understanding of how things work.
dcd72
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Re: Age + amount to no longer max out tax-advantage?

Post by dcd72 »

terran wrote: Fri May 14, 2021 1:22 pm
chrismj wrote: Fri May 14, 2021 11:04 am Am I reading the above correctly that once I hit $2,520,840 of lifetime earnings (based on qualifying $142,800 yearly income) then the remaining working years would increase the monthly benefit a maximum of $884.70 (= $3383.02-2498.32)? That $2,520,840 of qualified lifetime earnings results in 74% of your potential max monthly benefit and the next $2,477,160 of qualified earnings covers the remaining 26%?
Yes, that's my understanding of how things work.
With the caveat, I believe, that only 35 earning years are counted (the highest 35). For example, if one were to make $72,024 each year for 45 years, one's "lifetime earnings" would be $2,520,840, not $3,241,080.
terran
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Re: Age + amount to no longer max out tax-advantage?

Post by terran »

dcd72 wrote: Fri May 14, 2021 1:48 pm
terran wrote: Fri May 14, 2021 1:22 pm
chrismj wrote: Fri May 14, 2021 11:04 am Am I reading the above correctly that once I hit $2,520,840 of lifetime earnings (based on qualifying $142,800 yearly income) then the remaining working years would increase the monthly benefit a maximum of $884.70 (= $3383.02-2498.32)? That $2,520,840 of qualified lifetime earnings results in 74% of your potential max monthly benefit and the next $2,477,160 of qualified earnings covers the remaining 26%?
Yes, that's my understanding of how things work.
With the caveat, I believe, that only 35 earning years are counted (the highest 35). For example, if one were to make $72,024 each year for 45 years, one's "lifetime earnings" would be $2,520,840, not $3,241,080.
Good point, yes. I explained that in my original post, but it bears repeating -- only the highest 35 years are counted.
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