Should we start saving in Roth accounts?

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kadye
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Should we start saving in Roth accounts?

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Grt2bOutdoors
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Re: Should we start saving in Roth accounts?

Post by Grt2bOutdoors »

Yes, save in the Roth. You don’t get social security so consider your Roth savings to be the equivalent of social security.
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Tamarind
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Re: Should we start saving in Roth accounts?

Post by Tamarind »

You should definitely do backdoor Roth IRA. As to whether you should make some of your employer plan contributions to Roth - what is your target expenses in retirement? I imagine it's not $400k. After you planning to retire early if you hit a number, or are your jobs ones you'd want to work until 65 or later?

This info helps you guess at your likely tax rate in retirement. If that rate is lower than your current tax rate, them most of your contributions should be pre-tax. If on the other hand you expect as high it higher income in retirement or to work all the way to full retirement age at your current income, them the value of Roth contributions or conversions increases.
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happymob
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Re: Should we start saving in Roth accounts?

Post by happymob »

No pension of pensions. Do you get one? Or is it just a defined contribution plan in lieu of pension and SS?

Edit - also, do either of you have enough quarters of contributions from previous jobs to get some SS in retirement even without further contributions?
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kadye
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Re: Should we start saving in Roth accounts?

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LilyFleur
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Re: Should we start saving in Roth accounts?

Post by LilyFleur »

At the social security talk I attended (part of a public agency retirement seminar), the social security representative said that retirement is based on a three legged stool. The three legs are: pension, savings, and social security.

I would try to get a pension if at all possible and supplement it with savings.
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Re: Should we start saving in Roth accounts?

Post by Grt2bOutdoors »

LilyFleur wrote: Tue Nov 19, 2019 3:09 pm At the social security talk I attended (part of a public agency retirement seminar), the social security representative said that retirement is based on a three legged stool. The three legs are: pension, savings, and social security.

I would try to get a pension if at all possible and supplement it with savings.
The representative is not well informed. For those who lack access to a pension- a single premium immediate annuity coupled with a few TIPs or I bonds could serve as both pension and social security (depending on amounts saved) or it could be structured as TIPs ladder, annuity, savings. Many roads to Dublin.
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LilyFleur
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Re: Should we start saving in Roth accounts?

Post by LilyFleur »

Grt2bOutdoors wrote: Tue Nov 19, 2019 4:23 pm
LilyFleur wrote: Tue Nov 19, 2019 3:09 pm At the social security talk I attended (part of a public agency retirement seminar), the social security representative said that retirement is based on a three legged stool. The three legs are: pension, savings, and social security.

I would try to get a pension if at all possible and supplement it with savings.
The representative is not well informed. For those who lack access to a pension- a single premium immediate annuity coupled with a few TIPs or I bonds could serve as both pension and social security (depending on amounts saved) or it could be structured as TIPs ladder, annuity, savings. Many roads to Dublin.
The OP has access to a pension but is turning it down. I would recommend the pension AND various tax-deferred accounts if at all possible. I know plenty of government employees who choose to do both. Plenty of Bogleheads as well.
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Watty
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Re: Should we start saving in Roth accounts?

Post by Watty »

kadye wrote: Tue Nov 19, 2019 4:21 am Initially, our thinking was "who knows what our income will be in a few years? What if DH don't get tenured? etc. so throw as much saving to pre-ta as possible." But now, DH got tenured and DW is making good progress too, we are reassessing.
Especially during my 50's I saw a lot more people than I would have expected run into career or life setbacks like divorces, health problems or the death of a spouse. I also saw some people just get burnt out. Even without burnout once you get more than enough money to last you for the rest of your life it gets harder to go into work everyday.

Even with tenure you are a long ways from being certain that you will have a large pension and be in a high tax bracket when you are retired.

A lot can change in the next 50+ years too even if your careers do go well.

I would be very cautious about paying a lot of taxes now to use a Roth account just to save on taxes when you are 80(if you live that long) and the RMDs start getting high. The "worst case" is that you end up wealthy and with a large pension and have to pay lots of taxes which is hardly a terrible outcome, and you can even avoid the high taxes by giving the money to a charity later on.
kadye wrote: Tue Nov 19, 2019 4:21 am Question: Should we be saving more into roth?
There is a wiki on choosing a Roth or deductible traditional retirement account if you have not seen it.

https://www.bogleheads.org/wiki/Traditional_versus_Roth

An additional complication is that the federal tax brackets are scheduled to revert to the old rate after 2025 if there are no future tax law changes. That would mean that the 24% tax bracket would go back to 28%. I don't have a crystal ball but there is also a reasonable that that there could be other future tax increases for high income people that might affect you.
kadye wrote: Tue Nov 19, 2019 4:21 am After we payoff the student loan, we plan to max all saving accounts going forward, which comes to about $180k with employer matches.
That is almost 45% of your income which sounds great but unless you want to retire real early I think you would be oversaving.

You already have $670K in retirement accounts which could also double several times if you retire at anywhere near a normal retirement age. If you also save an additional $180K a year for 25+ years that will grow to be a ridiculous amount.

One other issue to consider is that you may leave a huge estate someday if you save at anywhere near that rate. If that happens then the tax rate of your heirs will be a large factor in your decision about if you should use a Roth or not. If you end up leaving your money to a charity or if your heirs are in a lower tax bracket then using the Roth would be a poor choice because your tax rate now would be higher than when the money is eventually withdrawn.

I would cut that back to maybe $80K, 20% of your income, and then use the other money to build up your emergency fund, make a car fund to pay cash for future cars that you will need, and to pay off the house quickly. In your tax bracket I would put all of that in deductible retirement accounts.

It would be good to make a spreadsheet to set up a rough budget until you are 100 years old to calculate just how large a retirement fund you will really need. There will be a lot of unknowns but you can just make real conservative assumptions about those. That would allow you figure out how much you will actually need to save each year.

Once you have enough saved to be financially independent then what to do with your excess money is another question. I would guess that you are maybe 10 to 15 years from getting to that point and a lot can change by then so I would not worry about that too much now.
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kadye
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Re: Should we start saving in Roth accounts?

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retiredjg
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Re: Should we start saving in Roth accounts?

Post by retiredjg »

kadye wrote: Tue Nov 19, 2019 4:21 am After we payoff the student loan, we plan to max all saving accounts going forward, which comes to about $180k with employer matches.
There is no way all of this should go into tax-deferred accounts. Not even close.

Tax deferral is a good thing, but it is possible to save to much in tax-deferred accounts and it comes back to bite you later on in the form of RMDs (required minimum distributions) in your later years. I think this is a possibility you have not considered. Those huge RMDs can push you into high brackets.

I suggest that you fill no more than 2 tax-deferred buckets each year ($19k x 2). Put the rest of your savings into Roth and taxable.

The decision between pretax vs roth savings lies on two predictions. 1) the tax bracket could change. That is, Congress could pass a law that changes taxes. 2) my income could be substantially higher in the withdrawal phase than it is now.
You are correct in some ways. But why on earth would you take more income in withdrawal than now? If you were retired today, would you be needing more than $400k to live on? Even with extensive travel, would you be spending $400k?

If it is because you are thinking of tomorrow's dollars, you can't do that - you cannot compare tomorrow's dollars to today's tax brackets. The best you can do is compare today's dollars to todays tax law.
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Re: Should we start saving in Roth accounts?

Post by HomeStretch »

Your annual long-term savings rate with employer match will be $180k. If you/spouse make $76k in pretax employee deferrals plus receive $20k (guessing) in pretax employer matches, that means you are saving ~50% in tax-deferred accounts and the remaining ~50% of your savings would be HSA, Roth or Taxable. IMO that 50/50 savings mix is reasonable coupled with a 1-year student loan repayment and adequate liquid short/medium term savings for a house.

For now, consider contributing the ~50% available to HSA/Roth/Taxable as follows:
1. Max your HSA
2. Do backdoor Roth’s for each of you
3. If available in your retirement plan(s), invest as much as you can in after-tax contributions that can be converted to Roth (mega Backdoor Roth). BH wiki page link:
https://www.bogleheads.org/wiki/After-tax_401(k)
4. Put remainder of savings in Taxable accounts including possibly I-Bonds.

In the future, if your $180k savings rate drops (due to having a family, purchasing a house, etc.), change some of your employee deferrals from pretax to Roth to maintain at least 50% going to HSA/Roth/Taxable. Consider also:
1. 529 accounts for children (there may be a state tax benefit), and
2. Accelerated repayment schedule for any principal residence mortgage. Consider paying off your mortgage by age 45-50.

When you reach 45-50, reassess your retirement age, savings level, spending level and financial commitments (mortgage balance, minor children support/college expenses, etc.). At that point, if your tax-deferred balances are high enough to put you in the tax torpedo (high RMD income) or Medicare IRMAA surcharge areas, you can move more of your contributions from pretax to Roth.

Kudos on your high savings rate (as long as you are spending on living well now too). Reaching financial independence earlier in life will give you flexibility on when to retire or downshift plus help you weather any unexpected financial storms like job loss.
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Re: Should we start saving in Roth accounts?

Post by retiredjg »

Kadye, I think "50/50 and reassess later" would be fine if you didn't already have $670k in tax deferred accounts. Since you do, I think 50/50 is too much to go into tax-deferred accounts.

At your ages, they don't really "need" to grow the tax-deferred accounts much as they may grow enough on their own. However, getting some tax-deferral is good anyway. :happy

You need to be considering early retirement to give yourself some years to convert a large tax-deferred pool to Roth.
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Watty
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Re: Should we start saving in Roth accounts?

Post by Watty »

One other thing to look into is if the AMT would be a factor, I don't have a clue about that.
kadye wrote: Wed Nov 20, 2019 7:47 am To all who recommend I do roth savings, please help me understand why. Here is my thinking against it.

The decision between pretax vs roth savings lies on two predictions. 1) the tax bracket could change. That is, Congress could pass a law that changes taxes. 2) my income could be substantially higher in the withdrawal phase than it is now.
I tend to think that the deductible retirement accounts are the better choice but in fairness there a couple of other things that favor the Roth.

3) You could be divorced or widowed when the money is withdrawn from the retirement account and then be filing taxes in the higher single tax brackets.
4) You might retire in a state with higher state tax rates. Of course if you retire in a state with low or no state income tax the Roth would be less favorable.
5) In retirement not having the taxable income from a traditional IRA might cause higher IRMAA taxes.

Some things that might not have been mentioned in favor of using the deductible accounts.

a) You may be able to do Roth conversions later if they look better then. You may be able to structure your income so that you can do that in a reasonable tax bracket. Even if you have to do them in the 32% federal tax bracket instead of 24% which is only 8% higher.

b) If you invest $100K in a deductible retirement account then you would also have about $29K in tax savings to invest in a taxable account or use to pay down your mortage. Any capital gains on the investment would likely be taxed at 15%(plus state taxes) and if they are held until they are inherited by your estate then under current tax laws they would go at a stepped up cost basis and the capital gains taxes would never need to be paid. The taxable investments would likely also generate some qualified dividends which would be taxed at the lower long term capital gains tax rate.
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Re: Should we start saving in Roth accounts?

Post by HomeStretch »

Kadye, one way to check whether it makes sense or not to split your tax deferred/non tax deferred contributions 50/50 and reassess later in 7 years at your age 45, is to look at the number of years of annual retirement expenses* that you have now in your tax deferred savings ($670k). If your annual expenses will be $155k/year**, you have 4.3 years currently saved in tax deferred. If you contribute $76k per year to tax deferred, in 7 years you will have about 8 years saved in tax deferred before earnings. Perhaps less than 8 years if your savings rate drops after buying a house. So thinking about it in those terms may help your decision on how much to allocate between tax deferred and non tax deferred.

Whatever the savings split you decide on, it makes sense to have savings in each of tax deferred, roth/HSA and Taxable. Avoid too much in Tax Deferred. I suggested in a prior post to look into whether you have a mega backdoor Roth available. If you can get more after-tax savings into a Roth account rather than a Taxable account, it will be very advantageous in retirement.

——————————
* “Annual retirement expenses “ includes taxes, healthcare and lumpy expenses like car purchases or large home repairs.

** With HH income of $400k - estimated payroll/income taxes of $100k - $180k savings (after loan is repaid) = living expenses $120k. If retirement expenses are similar, your annual expenses with income taxes might be $150k plus lumpy expenses of say $5k for a total of $155k/yr.
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FiveK
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Re: Should we start saving in Roth accounts?

Post by FiveK »

kadye wrote: Wed Nov 20, 2019 7:47 amUsing this math, my EFFECTIVE tax rate....

Please let me know if you see a flaw in the math.
Yes, the flaw is using effective tax rate on withdrawal for comparison.

That is the first of two common misconceptions regarding traditional vs. Roth.

Take a look at that wiki section (or the whole article). Does that make it clear why the comparison should be marginal vs. marginal, not marginal vs. effective?

Not saying whether traditional or Roth would be better for you now, just commenting on how you should be analyzing it for yourselves.
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kadye
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Re: Should we start saving in Roth accounts?

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FiveK
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Re: Should we start saving in Roth accounts?

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kadye wrote: Thu Nov 21, 2019 2:43 pm But if I don't have any other income source at retirement (e.g. SS, pension, etc.), should I not be comparing how much tax I pay now (which is at the marginal rate) vs. how much tax I pay later (which is at the effective or average rate)?
No, because any contributions you make now will be withdrawn on top of withdrawals you could make based on previous contributions.

Does that (and/or the explanation in the wiki) make sense?
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kadye
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Re: Should we start saving in Roth accounts?

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FiveK
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Re: Should we start saving in Roth accounts?

Post by FiveK »

kadye wrote: Thu Nov 21, 2019 5:44 pm ... got to dynamically think about the effect of my choice (between pre and post tax savings) on future opportunities to save on a pre and post tax basis. It also implies that I should shift gradually to roth savings because I will have larger savings over time. This is fascinating.
Yes, that implication is one reasonable way to look at it.

Another defensible argument is to contribute to Roth earlier and switch to traditional later in the career when one will (presumably) be saving higher marginal rates.

The "traditional first" approach has the benefit that if earnings don't turn out as large (either voluntarily or involuntarily) as one forecast, marginal withdrawal rates will be lower and thus make that the correct choice in hindsight.

The "Roth first" approach has the benefit that if things turn out exactly as forecast (so the shift to traditional can be "market timed") one can reach higher spendable amounts after taxes in retirement and thus make that the correct choice in hindsight.

I wouldn't advise someone to use "Roth first" if the current marginal rate is 22% or higher, but if one believes in the clarity of one's own crystal ball....

Whatever you do - good luck!
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Re: Should we start saving in Roth accounts?

Post by retiredjg »

FiveK wrote: Thu Nov 21, 2019 2:48 pm
kadye wrote: Thu Nov 21, 2019 2:43 pm But if I don't have any other income source at retirement (e.g. SS, pension, etc.), should I not be comparing how much tax I pay now (which is at the marginal rate) vs. how much tax I pay later (which is at the effective or average rate)?
No, because any contributions you make now will be withdrawn on top of withdrawals you could make based on previous contributions.

Does that (and/or the explanation in the wiki) make sense?
Doesn't make sense to me, at least not yet.

Ordinarily, I'd agree that it is marginal to marginal (assuming no brackets are crossed). But if the only income in retirement is from tax-deferred funds, it does seem proper to consider effective rate in retirement.

It seems I'm missing the point of your statement above?
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FiveK
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Re: Should we start saving in Roth accounts?

Post by FiveK »

retiredjg wrote: Fri Nov 22, 2019 9:49 am
FiveK wrote: Thu Nov 21, 2019 2:48 pm
kadye wrote: Thu Nov 21, 2019 2:43 pm But if I don't have any other income source at retirement (e.g. SS, pension, etc.), should I not be comparing how much tax I pay now (which is at the marginal rate) vs. how much tax I pay later (which is at the effective or average rate)?
No, because any contributions you make now will be withdrawn on top of withdrawals you could make based on previous contributions.

Does that (and/or the explanation in the wiki) make sense?
Doesn't make sense to me, at least not yet.

Ordinarily, I'd agree that it is marginal to marginal (assuming no brackets are crossed). But if the only income in retirement is from tax-deferred funds, it does seem proper to consider effective rate in retirement.

It seems I'm missing the point of your statement above?
Even when the only retirement income is from tax-deferred funds, all the previous years' contributions are "sunk costs" or "water under the bridge" or whatever metaphor one would use to describe "something that can't be changed, as opposed to something (e.g., new contributions) that we can choose."

Consider a 50 year old who has already accumulated a $500K traditional balance. Even without any further contributions, that could reasonably double to $1 million by age 65.

Taking a 4%/yr withdrawal then gives $40K/yr.

Any traditional contributions at age 51 (or later) will increase the traditional balance at age 65, thus allowing more than $40K/yr withdrawal.

The taxation on the amount above $40K/yr will occur at the marginal rate on that amount, not the effective rate on the total income.

Is that any clearer?
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Re: Should we start saving in Roth accounts?

Post by aristotelian »

I would do traditional 401k and backdoor Roth IRA. Keep an eye on the size of your 401k vs your anticipated retirement tax bracket. You can always switch down the road if it is clear that you will end up in a higher tax bracket (which is rare). If you get to that point, that is a good sign that you are ready to retire.

Do you have the ability to make after-tax contributions to your 401k's? This is also known as Megabackdoor Roth and would greatly increase the amount you can shelter.
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kadye
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Re: Should we start saving in Roth accounts?

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Re: Should we start saving in Roth accounts?

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Re: Should we start saving in Roth accounts?

Post by retiredjg »

FiveK wrote: Fri Nov 22, 2019 1:04 pm
retiredjg wrote: Fri Nov 22, 2019 9:49 am
FiveK wrote: Thu Nov 21, 2019 2:48 pm
kadye wrote: Thu Nov 21, 2019 2:43 pm But if I don't have any other income source at retirement (e.g. SS, pension, etc.), should I not be comparing how much tax I pay now (which is at the marginal rate) vs. how much tax I pay later (which is at the effective or average rate)?
No, because any contributions you make now will be withdrawn on top of withdrawals you could make based on previous contributions.

Does that (and/or the explanation in the wiki) make sense?
Doesn't make sense to me, at least not yet.

Ordinarily, I'd agree that it is marginal to marginal (assuming no brackets are crossed). But if the only income in retirement is from tax-deferred funds, it does seem proper to consider effective rate in retirement.

It seems I'm missing the point of your statement above?
Even when the only retirement income is from tax-deferred funds, all the previous years' contributions are "sunk costs" or "water under the bridge" or whatever metaphor one would use to describe "something that can't be changed, as opposed to something (e.g., new contributions) that we can choose."

Consider a 50 year old who has already accumulated a $500K traditional balance. Even without any further contributions, that could reasonably double to $1 million by age 65.

Taking a 4%/yr withdrawal then gives $40K/yr.

Any traditional contributions at age 51 (or later) will increase the traditional balance at age 65, thus allowing more than $40K/yr withdrawal.

The taxation on the amount above $40K/yr will occur at the marginal rate on that amount, not the effective rate on the total income.

Is that any clearer?
Some.

And we agree that the fact that they already have a significant tax-deferred account makes a difference.
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