Any reason not to max out three plans?

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pinetree
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Any reason not to max out three plans?

Post by pinetree » Mon Aug 12, 2019 9:01 am

Hello from a longtime lurker!

My spouse’s employer (public university) offers a 403(b) plan and a 457 plan. My employer offers a 457 plan. We are currently maxing out my 457 and spouse’s 403(b). I just received a significant and unexpected raise, which would allow us to max out spouse’s 457, bringing total pre-tax contributions to $57,000/year.

We have no debt (currently renting for various reasons so no mortgage). We are contributing to a 529 for our two young kids. We have an emergency fund.

Any reason not to take advantage of the additional pretax space?

Thanks much for any thoughts!

retiredjg
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Re: Any reason not to max out three plans?

Post by retiredjg » Mon Aug 12, 2019 9:33 am

Many people will tell you to do it all. And that is what I used to think as well. I no longer think it is automatically a good idea to put that much into tax-deferred accounts.

Why the change of mind? I started noticing people who said they had too much in tax-deferred accounts. Many had done just what you are considering. Their problem was that after retiring, they were facing a "tax torpedo" at about the time that RMDs start - 70.5ish. That also happens to be when many people start taking SS. There were repeated reports of being pushed into a higher tax bracket than while working. And the problem worsened when one survived the other because the survivor is frequently pushed into a higher bracket just by being single.

What's the point of deferring taxes at 22% only to pay 28% on the same money at a later time? You end up with less money!

Filling 3 tax-deferred accounts could be a good idea if you know you can retire early and do Roth conversions on a significant amount of that money before reaching RMD age. Things that work against that are a pension and retiring later. If you have a pension, you will have less "space" to do Roth conversions at a lower tax rate. If you retire later, you have less time to do Roth conversions before RMDs start.

Not knowing anything else about your situation, I'd say to use the extra 457b plan for Roth contributions, not tax-deferred contributions. But this decision needs to be made in light of your current tax bracket and a reasonable guess at what your tax bracket will be in retirement. In other words, some of this decision is simply a guess.

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TomatoTomahto
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Re: Any reason not to max out three plans?

Post by TomatoTomahto » Mon Aug 12, 2019 9:40 am

What retiredjg said. We will be tax torpedoed in a few years, but can somewhat blame the unavailability of Roth during our careers. The tax deferral looks appealing until you figure out how large your RMDs will be by the time you turn 70.5.
Okay, I get it; I won't be political or controversial. The Earth is flat.

02nz
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Re: Any reason not to max out three plans?

Post by 02nz » Mon Aug 12, 2019 9:46 am

Key variables:

- Do you have pensions?
- Do the defined-contribution plans have Roth options? Many do.
- Are you maxing out Roth IRAs?
- How much do you have already in tax-deferred balances?
- Age?
- Fed and state tax bracket?

HeelaMonster
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Re: Any reason not to max out three plans?

Post by HeelaMonster » Mon Aug 12, 2019 10:02 am

retiredjg wrote:
Mon Aug 12, 2019 9:33 am
Many people will tell you to do it all. And that is what I used to think as well. I no longer think it is automatically a good idea to put that much into tax-deferred accounts.

Why the change of mind? I started noticing people who said they had too much in tax-deferred accounts. Many had done just what you are considering. Their problem was that after retiring, they were facing a "tax torpedo" at about the time that RMDs start - 70.5ish. That also happens to be when many people start taking SS. ......
I endorse this cautionary note. As described in my own first ever post (below), I am now in this position, having taken full advantage of tax-deferred contributions to employer accounts. Over 30 years, they grew into a nice stockpile for retirement, which is great to have... but too much of a good thing. I have long since converted all of our personal IRA funds to Roth, and any current contributions are converted immediately through the backdoor. But we are still facing a big hit when RMDs kick in, and have some work to do between now and then (8 years under current rules).

viewtopic.php?f=1&t=287910

HomeStretch
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Re: Any reason not to max out three plans?

Post by HomeStretch » Mon Aug 12, 2019 10:16 am

TomatoTomahto wrote:
Mon Aug 12, 2019 9:40 am
What retiredjg said. We will be tax torpedoed in a few years, but can somewhat blame the unavailability of Roth during our careers. The tax deferral looks appealing until you figure out how large your RMDs will be by the time you turn 70.5.
+1.

Make some of your annual retirement contributions to a Roth 457/403b/IRA. You can model projections of current/future tax scenarios to figure out the pretax/Roth contribution split. Or perhaps just create a target like 75% pretax, 25% Roth.

But also take a close look at the current year’s tax projection. It could make sense in specific situations to deviate from the 75/25 split - for example, if contributing more to pretax would keep you under the NIIT threshold.
Last edited by HomeStretch on Mon Aug 12, 2019 10:18 am, edited 2 times in total.

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Wiggums
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Re: Any reason not to max out three plans?

Post by Wiggums » Mon Aug 12, 2019 10:18 am

If I knew then, what I know now...

But in my defense, Roth didn’t exist back then

But not the worse problem to have.

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pinetree
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Re: Any reason not to max out three plans?

Post by pinetree » Mon Aug 12, 2019 11:03 am

02nz wrote:
Mon Aug 12, 2019 9:46 am
Key variables:

- Do you have pensions?
- Do the defined-contribution plans have Roth options? Many do.
- Are you maxing out Roth IRAs?
- How much do you have already in tax-deferred balances?
- Age?
- Fed and state tax bracket?
- Yes, we both have pensions. Mine will be relatively generous as I started in public service at age 31 and I am in the higher tier. Spouse started in public service at an older age and is in second tier so will be smaller.

- Need to research whether our plans have Roth options. I believe my 457 does but need to confirm. Spouse’s might also.

- Current tax deferred balance is between 600k and 700k

- Ages are 42 and 44

- Marginal fed tax rate is 24%

Others have asked about Roth IRA contributions - we are not eligible due to income level.

We are interested in early-ish retirement (targeting mid 50’s).

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FiveK
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Re: Any reason not to max out three plans?

Post by FiveK » Mon Aug 12, 2019 11:08 am

pinetree wrote:
Mon Aug 12, 2019 9:01 am
Any reason not to take advantage of the additional pretax space?
As already noted, there are definitely reasons to do some back of the envelope estimating to help your decision making.

See towards the bottom of the Investment Order post for one way to estimate your traditional withdrawal marginal tax rate. Using that - or any other estimation method of your choice - how does that rate compare with your current marginal rate for traditional contributions?

Laika
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Re: Any reason not to max out three plans?

Post by Laika » Mon Aug 12, 2019 11:15 am

The potential tax consequences down the road shouldn't be turned into a huge issue so long as you have enough savings to live a satisfying, worry-free life.

If you are a Boglehead who is wealthy enough to have significant 401k, etc., savings, you likely also have significant non-advantaged savings. I'd suggest that the question shouldn't simply be whether to max out retirement savings or not, but to consider the ratio of "tax-advantaged" to non-advantaged funds.

If all of your savings have been going into tax-advantaged accounts, then yes, the question by the OP should be looked at carefully. But if it's a modest percentage, I dare say it shouldn't be as concerning.

And, of course, the tax situation can change on a dime anyway. The future is unknown, and banking on it remaining unchanged over decades is unwise.

Personally, I've been fully-funding all available retirement programs, but they only make up maybe 1/4 of my total. One reason I fully fund them is for "tax diversity" given the unknowns in the future.

02nz
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Re: Any reason not to max out three plans?

Post by 02nz » Mon Aug 12, 2019 11:23 am

pinetree wrote:
Mon Aug 12, 2019 11:03 am
02nz wrote:
Mon Aug 12, 2019 9:46 am
Key variables:

- Do you have pensions?
- Do the defined-contribution plans have Roth options? Many do.
- Are you maxing out Roth IRAs?
- How much do you have already in tax-deferred balances?
- Age?
- Fed and state tax bracket?
- Yes, we both have pensions. Mine will be relatively generous as I started in public service at age 31 and I am in the higher tier. Spouse started in public service at an older age and is in second tier so will be smaller.

- Need to research whether our plans have Roth options. I believe my 457 does but need to confirm. Spouse’s might also.

- Current tax deferred balance is between 600k and 700k

- Ages are 42 and 44

- Marginal fed tax rate is 24%

Others have asked about Roth IRA contributions - we are not eligible due to income level.

We are interested in early-ish retirement (targeting mid 50’s).
Given the new information, I would favor traditional. The 24% bracket starts at about $190K of income (for married couples, and accounting for standard deduction). Unless you have that much in projected income already (in today's dollars, because tax brackets go up with inflation) from your pensions and current traditional balance, traditional contributions make more sense.

If you retire in 10 years and do 100% traditional until then, that's another $570K in contributions (today's dollars), add to existing balance + growth, so maybe $1.5 million tax-deferred balance at retirement, in today's dollars. At a 3.5% withdrawal rate (a bit more conservative than usual 4%, because of early retirement), that's about $52K, which even with your pensions I'm guessing would be well short of $190K.

And that's before accounting for the Roth conversion opportunity of early retirement. Currently, a married couple with no other income can convert about 100K a year and pay just 9% (average) federal tax. You could have quite a lot of years in which you can do Roth conversions at very attractive tax rates, although exactly how much depends on the amount of your pension, whether you can defer them, and whether you paid into SS.

Of course it doesn't have to be all Roth or all traditional - you can always tilt toward Roth if your traditional balance grows more quickly than expected. As for the Roth IRA, can you do a backdoor? This is an option as long as you don't have traditional IRA balances, or can roll those into your 403b/457b plans.
Last edited by 02nz on Mon Aug 12, 2019 11:25 am, edited 1 time in total.

retiredjg
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Re: Any reason not to max out three plans?

Post by retiredjg » Mon Aug 12, 2019 11:25 am

pinetree wrote:
Mon Aug 12, 2019 11:03 am
- Yes, we both have pensions. Mine will be relatively generous as I started in public service at age 31 and I am in the higher tier. Spouse started in public service at an older age and is in second tier so will be smaller.
Assuming things don't change a lot, bout how much of your ordinary living expenses will the pensions cover?

Can you estimate what your tax bracket would be today just as the result of the pensions?

Will either or both of you have SS?


- Marginal fed tax rate is 24%
About where in this large bracket do you fall? Bottom, middle, top would be close enough.


We are interested in early-ish retirement (targeting mid 50’s).
Will the pensions start mid 50's or will there be a lag time?

rkhusky
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Re: Any reason not to max out three plans?

Post by rkhusky » Mon Aug 12, 2019 11:28 am

pinetree wrote:
Mon Aug 12, 2019 11:03 am
Others have asked about Roth IRA contributions - we are not eligible due to income level.

We are interested in early-ish retirement (targeting mid 50’s).
Definitely check out the two-step Backdoor Roth IRA technique.

Try to estimate your final portfolio balance at retirement and how much of your tax-deferred you could Roth convert every year until age 70.

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TomatoTomahto
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Re: Any reason not to max out three plans?

Post by TomatoTomahto » Mon Aug 12, 2019 11:36 am

Wiggums wrote:
Mon Aug 12, 2019 10:18 am
If I knew then, what I know now...
But in my defense, Roth didn’t exist back then
But not the worse problem to have.
+1 I agree. Some youngsters think we just erred in planning. They don't realize how recent backdoor Roth, Roth 401k, etc. are.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Watty
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Re: Any reason not to max out three plans?

Post by Watty » Mon Aug 12, 2019 11:39 am

pinetree wrote:
Mon Aug 12, 2019 9:01 am
We have no debt (currently renting for various reasons so no mortgage).
....

Any reason not to take advantage of the additional pretax space?
If you don't plan on being a lifetime renter then you might want to keep enough money in taxable accounts to cover your eventually home purchasing plans.

It sounds like your retirement situation is pretty secure. It might be time to tip the "now vs later" spending balance more toward the "now" side and start spending more on things like travel now or a modest amount of lifestyle creep. There are likely things you can do now when you are relatively young and have kids living at home that will not be an option when you are 70+ years old.

People often underestimate it but there is a significant chance that at least one of you will not live to the the traditional retirement age of 65 or that one of you will have life limiting health problems then. Now may be a good time to start doing things on your "bucket list" that you want to do together. This life expectancy calculator is very simplistic you should play with it to see the odds of you both living another 20 or 30 years.

https://personal.vanguard.com/us/insigh ... ement-tool

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CyclingDuo
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Re: Any reason not to max out three plans?

Post by CyclingDuo » Mon Aug 12, 2019 11:48 am

pinetree wrote:
Mon Aug 12, 2019 9:01 am
Hello from a longtime lurker!

My spouse’s employer (public university) offers a 403(b) plan and a 457 plan. My employer offers a 457 plan. We are currently maxing out my 457 and spouse’s 403(b). I just received a significant and unexpected raise, which would allow us to max out spouse’s 457, bringing total pre-tax contributions to $57,000/year.

We have no debt (currently renting for various reasons so no mortgage). We are contributing to a 529 for our two young kids. We have an emergency fund.

Any reason not to take advantage of the additional pretax space?

Thanks much for any thoughts!
We can attest to taking advantage of maxing out three plans if and when available (two 403b's and one 457b) during years where it makes sense on the household budget. If doing so, does this get your MAGI under the threshold to also make Roth IRA contributions? Are all the plans with low wrap fees (annual administrative fees) and underlying low cost ER funds?

I guess, without knowing your full situation with regard to your future housing, one reason for not doing it might be if you have plans for purchasing a home in the future before your retire, and having the savings set aside in taxable/Roth to be able to do that rather than all of the funds being tied up in the 403b/457b plans. Maybe you already have this mapped out, just asking as you only mention 529's and an emergency fund?

Another reason might be when looking ahead to your taxation once you retire in your 50's and how the pension, SS, and RMD's will impact your taxes. Will you utilize Roth conversions? Have you thought about having some of the money in taxable where the potential for utilizing cap gains and ordinary dividends rather than ordinary income could provide one more source of income in gap years before taking SS and required RMD's? Could be you have enough income to max the pre-tax plans out as well as set aside some in taxable for a house fund if the goal is to purchase one at some point down the road.

That being said, sounds like you are both doing great! Keep up the good work and accumulation.
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GerryL
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Re: Any reason not to max out three plans?

Post by GerryL » Mon Aug 12, 2019 11:50 am

I'll just add that you should aim for flexibility in the types of accounts you will be able to draw from when you are no longer pulling a paycheck: Tax-deferred, tax-free and taxable. This is especially true if you aim to retire early.

02nz
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Re: Any reason not to max out three plans?

Post by 02nz » Mon Aug 12, 2019 11:52 am

+1 to Watty's and GerryL's posts above. Having a mix is very useful.

One advantage of Roth IRAs is the ability to withdraw contributions tax- and penalty-free at any age, as long as you satisfy a 5-year clock since your first contribution. So it's quite a bit more flexible. I would definitely look into the backdoor Roth IRA and probably prioritize that above hitting $57K on the employer-sponsored accounts.

rkhusky
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Re: Any reason not to max out three plans?

Post by rkhusky » Mon Aug 12, 2019 11:58 am

You can withdraw from a 401k before 59.5 without penalty, if you retire in the year you turn 55 or later. I didn’t know about this when I was planning for retirement and stressed about not having enough in taxable. You can also withdraw contributions from a Roth IRA without tax or penalty.

Not sure about the 457 and 403 varieties, but I expect the same holds true for at least one of them.

Roth IRA should take priority over 529 contributions.

Here is the Cliff notes version of backdoor Roth:
Open Traditional and Roth IRA accounts
Contribute to Traditional account
The next day or two move the money from Traditional to Roth
Do not deduct IRA contribution on taxes next year

If you have existing Traditional IRA funds from rollovers or direct contribution, the Roth conversion above will incur taxes.
Last edited by rkhusky on Mon Aug 12, 2019 12:08 pm, edited 1 time in total.

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Watty
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Re: Any reason not to max out three plans?

Post by Watty » Mon Aug 12, 2019 12:08 pm

There were a number of posts about the "risk" of saving too much and having more than needed in retirement and ending up in a high tax bracket. This is a bit more complex than it might seem.

Over the years and especially going through my 50s I saw more people than I would have expected run into various setbacks with careers, layoffs, health, the death of a spouse, and general "life happens" problems.

In your retirement planning it is important to save a lot early on so that you will be better able to handle any financial setbacks later in life.

I got lucky and despite a few heath scares we did not have any big financial setbacks so by the time I was in my early 50's my numbers were looking pretty good so I cut my 401k contributions to be just enough to get my employers match and I increased my spending more on things like travel. I eventually retired earlier than I had planned on when I was in my late 50's.

Anyway for some people if you end up in a high retirement tax bracket one factor may be that you got lucky and did not run into any of big financial setbacks that you needed to be prepared for.

The stock market is also ten+ years into a record bull market which means that at least so far people that have retired in the last ten years(like me) may also have more than they planned on because they got lucky with the sequence of returns risk. I retired about four years ago and my portfolio value is about the same as when I retired and these have been some of my more expensive years because I have not started Social Security or Medicare yet and we have been traveling a lot too.

Anyway if you end up having a lot of funds and are in a high retirement tax bracket there is a lot more involved than just having saved too much.

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pinetree
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Re: Any reason not to max out three plans?

Post by pinetree » Mon Aug 12, 2019 3:45 pm

retiredjg wrote:
Mon Aug 12, 2019 11:25 am
pinetree wrote:
Mon Aug 12, 2019 11:03 am
- Yes, we both have pensions. Mine will be relatively generous as I started in public service at age 31 and I am in the higher tier. Spouse started in public service at an older age and is in second tier so will be smaller.
Assuming things don't change a lot, bout how much of your ordinary living expenses will the pensions cover?

Can you estimate what your tax bracket would be today just as the result of the pensions?

Will either or both of you have SS?


- Marginal fed tax rate is 24%
About where in this large bracket do you fall? Bottom, middle, top would be close enough.


We are interested in early-ish retirement (targeting mid 50’s).
Will the pensions start mid 50's or will there be a lag time?
- I’m finding it hard to forecast what our expenses will be that far out, primarily because (a) children will be entering college around the same time we hit our early retirement target, and (b) we will likely purchase a house between now and then. We intend to fully fund in-state public university for both kids (hence the 529 contributions, which I think of as akin to Roth contributions since, if our early retirement plan works, we will be retiring right when higher education expenses kick in.) Another X factor is my income, which has the potential to go up significantly through advancement, which would increase my pension and put us in a very favorable position. So in other words, I have no idea what percentage of our expenses would be covered by our pensions! :|

- Spouse will have SS. If I get it, it will be tiny because my employer opts out of SS. I had a number of years contributing before this employer but not sure how it will all play out. I assume no SS for me in all my projections.

- We fall at the high end of the 24% tax bracket

- No lag time for pensions. Eligibility starts at 50 years with min five years of service (of course every year of additional service increases the pension exponentially).

02nz
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Re: Any reason not to max out three plans?

Post by 02nz » Mon Aug 12, 2019 3:56 pm

pinetree wrote:
Mon Aug 12, 2019 3:45 pm
- I’m finding it hard to forecast what our expenses will be that far out, primarily because (a) children will be entering college around the same time we hit our early retirement target, and (b) we will likely purchase a house between now and then. We intend to fully fund in-state public university for both kids (hence the 529 contributions, which I think of as akin to Roth contributions since, if our early retirement plan works, we will be retiring right when higher education expenses kick in.) Another X factor is my income, which has the potential to go up significantly through advancement, which would increase my pension and put us in a very favorable position. So in other words, I have no idea what percentage of our expenses would be covered by our pensions!
All of those things can be projected. You should work out at least some forecasts, based on conservative estimates about income. If you have no idea about expenses and how much will be covered, then you don't really have an "early retirement plan."

Do you have funds set aside for the home purchase?

retiredjg
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Re: Any reason not to max out three plans?

Post by retiredjg » Mon Aug 12, 2019 4:15 pm

Well, here's my best guess.

If you contribute the max to 3 tax-deferred accounts for many years, your tax-deferred balance is going to be too large and become "a good problem to have" in retirement (which is still a problem :happy if you think about it).

With good pension income, you will never fall into a very low tax bracket (although it may be lower than now). With good pension income, which will likely cover a significant portion of your living expenses in retirement, you will not have much need to use your tax-deferred savings just to live on.

In order to trim down a large tax-deferred account, you will need to Roth convert a lot each year - maybe $100k? - and that is going to keep your tax bracket higher for a good number of years.

My suggestion for now is to continue using at least 1.5 tax-deferred accounts, maybe shifting half of one to Roth 401k/457b just for now until your salary goes up (assuming that reducing your tax deferral now does not push you higher than the 24% bracket). When your salary goes up, fill two plans with tax-deferred contributions.

For the 3rd account, use Roth 457 instead of traditional. Or just start saving a downpayment for a home eventually.

As you near 50 years old, it should become more apparent how things are going to work out and how much longer you need to work.

MathIsMyWayr
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Re: Any reason not to max out three plans?

Post by MathIsMyWayr » Mon Aug 12, 2019 5:37 pm

As others have already noted, the most serious problem you may face during retirement may be a tax situation if you expect the forced income (ss, pensions, interest & dividends from taxable) to be large. You will face RMD on top of this forced income which may push you into a higher marginal tax bracket than during the working years. In this case, contributions to Roth may be a viable alternative to pre-tax contributions. One dilemma in optimizing the balance between pre-tax vs. Roth is that it is often too late when you recognize it. Income usually increases over years and the tax rate may be too high for contribution to Roth to be beneficial. The best time to contribute to Roth is during the early years of career when income is low, but nobody has a crystal ball. If OP contribute $57k for the next 15 years, he will have about $2,300k assuming a real return rate of 4%. It will be about $3,000k with a return rate of 6.5%. After FIRE, he has about 15 years to withdraw the pre-tax for living expenses and Roth conversion. It appears that he may be able to reduce the pre-tax amount significantly. Probably OP should stick to pre-tax contributions.

mariezzz
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Re: Any reason not to max out three plans?

Post by mariezzz » Mon Aug 12, 2019 8:04 pm

pinetree wrote:
Mon Aug 12, 2019 9:01 am
Hello from a longtime lurker!

My spouse’s employer (public university) offers a 403(b) plan and a 457 plan. My employer offers a 457 plan. We are currently maxing out my 457 and spouse’s 403(b). I just received a significant and unexpected raise, which would allow us to max out spouse’s 457, bringing total pre-tax contributions to $57,000/year.

We have no debt (currently renting for various reasons so no mortgage). We are contributing to a 529 for our two young kids. We have an emergency fund.

Any reason not to take advantage of the additional pretax space?

Thanks much for any thoughts!
Max it all out if you can.
Keep in mind: your 457 doubles as an emergency fund, protecting you in the case that you lose your job. That means you can consider reducing what you keep in your official 'emergency fund' (or put some in a Roth IRA).

But, as others have said: at some point, you may want to consider putting some money in a Roth IRA (or other Roth, if they're available), if you think your income in retirement will be high. But, there are some good arguments out there that say for most people, avoiding taxes now is the better approach. In the future, you may decide to work part-time, or retire early, and that would be a good time to shift money to a Roth.

With the 457, once you end employment with the employer who provided the account: you can withdraw money and pay only income tax on it (no 10% early withdrawal penalty, like you pay with 401ks, 403bs, IRA, unless you meet some of the conditions where the penalty does not apply).

lakpr
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Re: Any reason not to max out three plans?

Post by lakpr » Mon Aug 12, 2019 8:38 pm

Just a caution, something that I learnt myself recently: that Roth 457s work like a non-deductible tIRA if you plan to withdraw from the plan prior to age 59.5. That is, the earnings on your Roth 457 contributions apparently do not gain their “Roth”ness until you attain 59.5 years of age.

To keep matters clean, if a portion of the contributions to 403b/457 plans is going to be Roth, I would suggest full traditional 457 plan and Roth 403b plan.

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CyclingDuo
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Re: Any reason not to max out three plans?

Post by CyclingDuo » Tue Aug 13, 2019 8:11 am

pinetree wrote:
Mon Aug 12, 2019 3:45 pm
- I’m finding it hard to forecast what our expenses will be that far out, primarily because (a) children will be entering college around the same time we hit our early retirement target, and (b) we will likely purchase a house between now and then. We intend to fully fund in-state public university for both kids (hence the 529 contributions, which I think of as akin to Roth contributions since, if our early retirement plan works, we will be retiring right when higher education expenses kick in.) Another X factor is my income, which has the potential to go up significantly through advancement, which would increase my pension and put us in a very favorable position. So in other words, I have no idea what percentage of our expenses would be covered by our pensions! :|

- Spouse will have SS. If I get it, it will be tiny because my employer opts out of SS. I had a number of years contributing before this employer but not sure how it will all play out. I assume no SS for me in all my projections.

- We fall at the high end of the 24% tax bracket

- No lag time for pensions. Eligibility starts at 50 years with min five years of service (of course every year of additional service increases the pension exponentially).
The good news is that as a couple you are building on the diversity of income in the traditional three legged stool of income streams in retirement: pension, SS (more on your wife's side, than yours), and the risk portfolio.

Image

The other good news is that each year you both continue working, you are building on all three streams of income. You also have the ability/flexibility to extend your working years when you approach your current goal age of retiring if you find - come the time the kids are entering college - that you need to cash flow a lot of their expenses and utilize your human capital to continue to build on all three income streams for the future.

We also found it difficult in our 40's to predict what expenses would even look like in our 50's, 60's and beyond for retirement. It's not really until the kids are out of the house and out of college working on their own that you settle into your known newly adjusted household cashflow. Example, we are 57/61 and the last graduation from graduate school for our children was this past May 2019, so it has become clearer each year over the course of the past 5 years to dial in what our newly adjusted household cash flow and lifestyle is like sans children and college education expenses. What you experience between now in your 40's and your actual retirement age after the college degrees of your children has way too many variables to be consistent to be able to forecast the true expenses, but you can start to guesstimate along the way.

Our suggestion would be to just keep building up the bases of all three streams of income the best you can for the traditional three legged stool year in and year out from now until you get closer to your retirement age goals. Due to you not having as much coming to you from the SS leg of the three legged stool, obviously concentrating on the other two legs and filling the pension and the risk portfolio streams to fund your retirement will be your focus. You will easily be able to assess your situation much better once you get to your early 50's to see what the income streams would produce, what your housing costs are, what your expenses will be during the college tuition/room/board years, and what your expenses will be post graduations.

CyclingDuo
"Everywhere is within walking distance if you have the time." ~ Steven Wright

lostdog
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Re: Any reason not to max out three plans?

Post by lostdog » Tue Aug 13, 2019 8:43 am

We're also in our early 40's. We used to max out the 401k. We recently decided we already had enough in tax deffered and didn't want to get slammed with RMD's way into the future. Our plan now is to balance evenly between the two types of accounts. We contribute the same amount to after tax and tax deffered since we don't know much about future taxes.

We figure balancing between the two different types will work out. We have a good amount in the taxable account. A nice healthy balance between the two types.
Last edited by lostdog on Tue Aug 13, 2019 8:51 am, edited 1 time in total.

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TomatoTomahto
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Re: Any reason not to max out three plans?

Post by TomatoTomahto » Tue Aug 13, 2019 8:48 am

^ if you have a company match, that goes to tax deferred, so we max out Roth and then a matching amount goes to t401k.
Okay, I get it; I won't be political or controversial. The Earth is flat.

HeelaMonster
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Re: Any reason not to max out three plans?

Post by HeelaMonster » Tue Aug 13, 2019 9:13 am

CyclingDuo wrote:
Tue Aug 13, 2019 8:11 am
We also found it difficult in our 40's to predict what expenses would even look like in our 50's, 60's and beyond for retirement. It's not really until the kids are out of the house and out of college working on their own that you settle into your known newly adjusted household cashflow. Example, we are 57/61 and the last graduation from graduate school for our children was this past May 2019, so it has become clearer each year over the course of the past 5 years to dial in what our newly adjusted household cash flow and lifestyle is like sans children and college education expenses. What you experience between now in your 40's and your actual retirement age after the college degrees of your children has way too many variables to be consistent to be able to forecast the true expenses, but you can start to guesstimate along the way.
Good post, CyclingDuo. We certainly found this to be true. Expenses have both trimmed and stabilized in last five years, and cashflow has skyrocketed, coincident with kids graduating and getting out on their own (and that was clearly more than "coincidence!"). There are still ways to spend money on them, to be sure... but now it's more "voluntary" and sporadic, and not locked in to household budget. Finances and lifestyle are "dialed in" enough now that I have pulled the trigger on retirement without any qualms, age 62.

123
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Re: Any reason not to max out three plans?

Post by 123 » Tue Aug 13, 2019 9:26 am

I agree with the issues of the "tax torpedo" when RMD time arrives. A mix of tax deferred and taxable investments can be a lot easier to manage for the sake of taxes.

Having a high balance in tax-deferred accounts is comforting, seductive, and addictive. The true tax cost of contributing to tax-deferred plans is somewhat hidden, sure you pay taxes eventually but you lose the advantage of capital gains tax breaks along the way. Over 20 - 50 years of investing those add up.
The closest helping hand is at the end of your own arm.

02nz
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Re: Any reason not to max out three plans?

Post by 02nz » Tue Aug 13, 2019 9:30 am

123 wrote:
Tue Aug 13, 2019 9:26 am
Having a high balance in tax-deferred accounts is comforting, seductive, and addictive. The true tax cost of contributing to tax-deferred plans is somewhat hidden, sure you pay taxes eventually but you lose the advantage of capital gains tax breaks along the way. Over 20 - 50 years of investing those add up.
Huh? What capital gains tax breaks? And what advantage do they give over tax-deferred accounts?

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CyclingDuo
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Re: Any reason not to max out three plans?

Post by CyclingDuo » Tue Aug 13, 2019 9:34 am

HeelaMonster wrote:
Tue Aug 13, 2019 9:13 am
CyclingDuo wrote:
Tue Aug 13, 2019 8:11 am
We also found it difficult in our 40's to predict what expenses would even look like in our 50's, 60's and beyond for retirement. It's not really until the kids are out of the house and out of college working on their own that you settle into your known newly adjusted household cashflow. Example, we are 57/61 and the last graduation from graduate school for our children was this past May 2019, so it has become clearer each year over the course of the past 5 years to dial in what our newly adjusted household cash flow and lifestyle is like sans children and college education expenses. What you experience between now in your 40's and your actual retirement age after the college degrees of your children has way too many variables to be consistent to be able to forecast the true expenses, but you can start to guesstimate along the way.
Good post, CyclingDuo. We certainly found this to be true. Expenses have both trimmed and stabilized in last five years, and cashflow has skyrocketed, coincident with kids graduating and getting out on their own (and that was clearly more than "coincidence!"). There are still ways to spend money on them, to be sure... but now it's more "voluntary" and sporadic, and not locked in to household budget. Finances and lifestyle are "dialed in" enough now that I have pulled the trigger on retirement without any qualms, age 62.
Congratulations on pulling the trigger! :beer

With the newly found freedom of being empty nesters and college education expenses behind us, we're "testing" things out this year by trying to live on what we think is our newly adjusted budget that we could sustain for the next few decades, and socking away everything else into savings to see how we fare. If successful, then reaching that point of pulling the plug without any qualms will be in our future.

We've also reached the point that we are both pursuing some income producing side passions which has been fun. Not quitting the day jobs just yet, but enjoy the exploration...
"Everywhere is within walking distance if you have the time." ~ Steven Wright

Spirit Rider
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Re: Any reason not to max out three plans?

Post by Spirit Rider » Tue Aug 13, 2019 9:54 am

rkhusky wrote:
Mon Aug 12, 2019 11:58 am
You can withdraw from a 401k before 59.5 without penalty, if you retire in the year you turn 55 or later. I didn’t know about this when I was planning for retirement and stressed about not having enough in taxable. You can also withdraw contributions from a Roth IRA without tax or penalty.

Not sure about the 457 and 403 varieties, but I expect the same holds true for at least one of them.
If you separate from either a 401k or a 403b plan in a year you are >= age 55, there is an exception to the 10% early withdrawal penalty on pre-tax assets. You can separate at any age from a 457b without an early withdrawal penalty on pre-tax assets.

However as previously mentioned, withdrawals from designated Roth accounts from 401k, 403b and 457b accounts prior to age 59 1/2 are not qualified. The earnings are subject to both ordinary income tax and and a 10% early withdrawal penalty.

Roth contributions and 457b pre-tax anytime, Roth conversions five years, 401k/403b pre-tax year >= age 55 and 401k/403b/457b designated Roth and Roth earnings >= age 59 1/2 all provide an age diversification timeline for early retirement.

lomarica01
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Re: Any reason not to max out three plans?

Post by lomarica01 » Tue Aug 13, 2019 11:08 am

Yes, because a more balanced approach might work out better in the long run. As others have posted, your future tax implications are huge. If you project out your future account values at retirement age and when you need to take rmd's they will most likely be much higher than you ever dreamed. then the good problem to have is withdrawing it, paying the taxes and then figuring out how to spend it. When you add your pension, some withdraws, ss and then rmd's it will add up very fast.

So I would suggest less tax deferred and more Roth and after tax investments. this also will give you more flexibility as the tax rules and other rules change over the next 20-40 years.

Again good problem to have

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Re: Any reason not to max out three plans?

Post by bsteiner » Tue Aug 13, 2019 11:17 am

Most people don't have $57,000 a year to set aside in retirement plans.

But to the extent you're able to contribute to retirement plans, it provides a substantial income tax benefit. Your share (1 minus the tax rate) grows tax-free for many years.

If the tax rate on the distributions will be higher (or the same, or even a little lower) than the current tax rate, then Roth contributions will provide even more tax benefits.

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pinetree
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Re: Any reason not to max out three plans?

Post by pinetree » Tue Aug 13, 2019 12:58 pm

OP here. Thank you everyone for your comments. You’ve given me a lot to think about that wasn’t on my radar. Appreciate the valuable feedback.

Since several people asked/commented re: a house down payment: yes, we already have cash set aside for a house purchase, which we expect to make in 2-4 years.

I researched our Roth options in our employer plans and my 457 plan DOES allow Roth contributions (neither of spouse’s plans allow Roth). As noted by a couple commenters, withdrawals of the Roth contributions can only be made starting at 59.5 without penalty, unlike the pretax contributions, which can be withdrawn anytime after separation of service without penalty. We may very well make use of this Roth option after considering all the factors mentioned above (projected retirement income from pensions and SS, projected tax bracket vs. current, etc.).

I feel fortunate and surprised to be contemplating the “problem” of having too much money in retirement. As noted by one commenter, at some point we may consider modest lifestyle increases. Although I am generally allergic to the idea, we do love to travel and it will become a more attractive prospect as our children reach the age when travel with them is not a total pain in the butt.

Thanks again!

markcoop
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Re: Any reason not to max out three plans?

Post by markcoop » Tue Aug 13, 2019 1:06 pm

I haven't seen much discussion on the differences between the plans. I think it's valuable to rank your plans. I know in my case I have a 401K, 403B and 2 Roth IRAs available to me. I am over 50. I decided to max my 401k (very low fees and employer match) at $25k (plus about $10K in matching dollars), max the 2 Roth IRAs ($14k) and not contribute to the 403B (by far the worst fees, although recently got a little better). That gives me tax diversification (about 72% tax deffered, 28% Roth), close to $50K being save (that is enough to meet my goals) and flexibility with the Roth money being able to withdraw contributions. In fact, the $50K is more than I think I really can afford, but with the ability to withdraw the Roth money, I do it without concerns.
Mark

heyyou
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Re: Any reason not to max out three plans?

Post by heyyou » Tue Aug 13, 2019 2:57 pm

I would rather have a tax problem in retirement, than to have less tax deferred savings in retirement. We have to withdraw a smaller but growing % from the tax deferred account, then pay a fraction of that in taxes, then we can spend the rest.

The key is to not view the entire tax deferred balance as yours to spend, 3/4 (or some other fraction) is yours to keep, and the balance belongs to the IRS.

Age 70.5 is not so bad, the divisor is 27.4, a mandatory withdrawal of 3.65% from tax deferred accounts, which is taxed at your highest rate, but you keep the rest of the 3.65% of your withdrawal.
At age 79, it is 19.5 for a 5.13% withdrawal to be taxed, but you then keep the rest of that withdrawal.
You can send those withdrawals to qualified charitable organizations to avoid paying the tax on them.

Sun and Webb at Boston College's Center for Retirement Research found that using each annual RMD % on the entire portfolio amount, was a good retirement spending method. It accounts for market fluctuations (spend less after losses, spend more after gains) and increases annually for shorter remaining longevity. The disadvantage is some income fluctuation, but Social Security income would help buffer that.

Life is just easier for those who expect to have to pay taxes later on our tax deferred accounts.

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf scroll for RMD table
https://crr.bc.edu/wp-content/uploads/2 ... 19-508.pdf withdrawal % amounts on page 7 of this link

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pinetree
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Re: Any reason not to max out three plans?

Post by pinetree » Tue Aug 13, 2019 3:08 pm

heyyou wrote:
Tue Aug 13, 2019 2:57 pm
I would rather have a tax problem in retirement, than to have less tax deferred savings in retirement. We have to withdraw a smaller but growing % from the tax deferred account, then pay a fraction of that in taxes, then we can spend the rest.

The key is to not view the entire tax deferred balance as yours to spend, 3/4 (or some other fraction) is yours to keep, and the balance belongs to the IRS.

Age 70.5 is not so bad, the divisor is 27.4, a mandatory withdrawal of 3.65% from tax deferred accounts, which is taxed at your highest rate, but you keep the rest of the 3.65% of your withdrawal.
At age 79, it is 19.5 for a 5.13% withdrawal to be taxed, but you then keep the rest of that withdrawal.
You can send those withdrawals to qualified charitable organizations to avoid paying the tax on them.

Sun and Webb at Boston College's Center for Retirement Research found that using each annual RMD % on the entire portfolio amount, was a good retirement spending method. It accounts for market fluctuations (spend less after losses, spend more after gains) and increases annually for shorter remaining longevity. The disadvantage is some income fluctuation, but Social Security income would help buffer that.

Life is just easier for those who expect to have to pay taxes later on our tax deferred accounts.

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf scroll for RMD table
https://crr.bc.edu/wp-content/uploads/2 ... 19-508.pdf withdrawal % amounts on page 7 of this link
Thank you for this deeper dive into RMDs. I have some familiarity with them from talking to my parents about their finances, but I’d like to understand in more detail. I’ll check out your links.

retiredjg
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Re: Any reason not to max out three plans?

Post by retiredjg » Tue Aug 13, 2019 4:03 pm

pinetree wrote:
Tue Aug 13, 2019 12:58 pm
I researched our Roth options in our employer plans and my 457 plan DOES allow Roth contributions (neither of spouse’s plans allow Roth). As noted by a couple commenters, withdrawals of the Roth contributions can only be made starting at 59.5 without penalty, unlike the pretax contributions, which can be withdrawn anytime after separation of service without penalty. We may very well make use of this Roth option after considering all the factors mentioned above (projected retirement income from pensions and SS, projected tax bracket vs. current, etc.).
My recommendation is to stop tax-deferred contribution to His 457b and only put Roth contributions into His 457b. Put tax-deferred contributions into Her 403b and 457b.

If you retire early, you can use the pensions and Her 457b and taxable for living expenses. Convert Her 403b to Roth over the years before RMDs start. Regardless of what the rules are about the Roth 457b distributions, all that money will become available at age 59.5.

One thing you do want to do is to start a Roth IRA for each of you now if you don't have one already. Even a small contribution will get the clock started. You want His and Her Roth IRAs to already be 5 years old when you hit 59.5, even if there is only a few dollars in there. It just makes things cleaner and easier.

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pinetree
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Re: Any reason not to max out three plans?

Post by pinetree » Tue Aug 13, 2019 4:18 pm

retiredjg wrote:
Tue Aug 13, 2019 4:03 pm

One thing you do want to do is to start a Roth IRA for each of you now if you don't have one already. Even a small contribution will get the clock started. You want His and Her Roth IRAs to already be 5 years old when you hit 59.5, even if there is only a few dollars in there. It just makes things cleaner and easier.
Can we open Roth IRAs now even if we are not eligible to contribute due to our current income level? Can the accounts just sit there empty?

HeelaMonster
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Re: Any reason not to max out three plans?

Post by HeelaMonster » Tue Aug 13, 2019 4:31 pm

pinetree wrote:
Tue Aug 13, 2019 4:18 pm
retiredjg wrote:
Tue Aug 13, 2019 4:03 pm

One thing you do want to do is to start a Roth IRA for each of you now if you don't have one already. Even a small contribution will get the clock started. You want His and Her Roth IRAs to already be 5 years old when you hit 59.5, even if there is only a few dollars in there. It just makes things cleaner and easier.
Can we open Roth IRAs now even if we are not eligible to contribute due to our current income level? Can the accounts just sit there empty?
Have you already made an IRA contribution for 2019? If not, make a contribution to TRADITIONAL IRA, which will be non-deductible (due to same income restrictions). Wait a few days, and immediately convert to Roth IRA. That is the so-called "backdoor" for investors like you, whose income level prevents coming in the front door.

retiredjg
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Re: Any reason not to max out three plans?

Post by retiredjg » Tue Aug 13, 2019 4:42 pm

pinetree wrote:
Tue Aug 13, 2019 4:18 pm
retiredjg wrote:
Tue Aug 13, 2019 4:03 pm

One thing you do want to do is to start a Roth IRA for each of you now if you don't have one already. Even a small contribution will get the clock started. You want His and Her Roth IRAs to already be 5 years old when you hit 59.5, even if there is only a few dollars in there. It just makes things cleaner and easier.
Can we open Roth IRAs now even if we are not eligible to contribute due to our current income level? Can the accounts just sit there empty?
I was hoping you would say you each have a Roth IRA from when you made less money. :happy

You must make a contribution to Roth IRA in order to start the clock. There are two ways for you to make a contribution at this point.

-convert something in tIRA to Roth IRA and let it sit for many years, keeping up with your Form 8606 until you start withdrawals or conversions later on (let me explain this later).

-use the "back door" to contribute to Roth IRA. To do this, you would contribute to a tIRA but your contribution would be non-deductible (because you make too much money). Then convert this IRA a day later to Roth IRA. This only works well if you have nothing else in tIRA.

You have told us you heave $600k to $700k in tax-deferred accounts. If all of this is in 401/403/457, things will be easy. If some of this is in tIRA or rollover IRA or SEP or SIMPLE IRA we need to talk a lot more about this (and you should read the Wiki about "back door" Roth) before we go there.

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pinetree
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Re: Any reason not to max out three plans?

Post by pinetree » Tue Aug 13, 2019 5:12 pm

retiredjg wrote:
Tue Aug 13, 2019 4:42 pm
pinetree wrote:
Tue Aug 13, 2019 4:18 pm
retiredjg wrote:
Tue Aug 13, 2019 4:03 pm

One thing you do want to do is to start a Roth IRA for each of you now if you don't have one already. Even a small contribution will get the clock started. You want His and Her Roth IRAs to already be 5 years old when you hit 59.5, even if there is only a few dollars in there. It just makes things cleaner and easier.
Can we open Roth IRAs now even if we are not eligible to contribute due to our current income level? Can the accounts just sit there empty?
I was hoping you would say you each have a Roth IRA from when you made less money. :happy

You must make a contribution to Roth IRA in order to start the clock. There are two ways for you to make a contribution at this point.

-convert something in tIRA to Roth IRA and let it sit for many years, keeping up with your Form 8606 until you start withdrawals or conversions later on (let me explain this later).

-use the "back door" to contribute to Roth IRA. To do this, you would contribute to a tIRA but your contribution would be non-deductible (because you make too much money). Then convert this IRA a day later to Roth IRA. This only works well if you have nothing else in tIRA.

You have told us you heave $600k to $700k in tax-deferred accounts. If all of this is in 401/403/457, things will be easy. If some of this is in tIRA or rollover IRA or SEP or SIMPLE IRA we need to talk a lot more about this (and you should read the Wiki about "back door" Roth) before we go there.
Spouse has a rollover Roth IRA from Roth contributions made at a former employer. The balance is very low relative to our entire portfolio (about 1.5 percent). I do not have a Roth IRA. I have a rollover traditional IRA with a tiny balance (about $1000 I think).

I started reading about Roth conversions as a result of this thread and my head was spinning. I put it on my to do list for future reading!

retiredjg
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Re: Any reason not to max out three plans?

Post by retiredjg » Tue Aug 13, 2019 5:33 pm

pinetree wrote:
Tue Aug 13, 2019 5:12 pm
Spouse has a rollover Roth IRA from Roth contributions made at a former employer. The balance is very low relative to our entire portfolio (about 1.5 percent).
I think the rollover will count as a "rollover contribution", i.e. the first contribution to this Roth IRA was when the rollover happened and that is when Her 5 year "qualification" clock started. Let me check.


I do not have a Roth IRA. I have a rollover traditional IRA with a tiny balance (about $1000 I think).
Perfect. If this is the only thing you have called "IRA", just convert it to Roth and your 5 year clock starts. Yes, you'll have to pay tax on it and the rate may be a little high, but this is something you want to do now as opposed to later.

I started reading about Roth conversions as a result of this thread and my head was spinning. I put it on my to do list for future reading!
For you, at your current tax rates, Roth conversions are a tool to use in the future.

On the other hand, if you do decide to use the "back door" to contribute to Roth IRA, the "back door" is a two step process....the second step being a Roth conversion. That is something you might decide to use now.

No rush on all this. There is a lot to learn.

rkhusky
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Re: Any reason not to max out three plans?

Post by rkhusky » Tue Aug 13, 2019 5:51 pm

Note that a nondeductible tIRA contribution is simply a normal contribution that you don’t deduct on your taxes.

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