Roth vs Traditional? Is my calculation correct? HELP!

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fortfun
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Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Sun Jan 12, 2020 9:56 pm

DW has the option for traditional OR Roth in her 403b AND 457. I only have traditional in my 401k AND 457. How do we decide which to use for hers? Does someone have a spreadsheet for this? My hunch is to do Roth for DWs.

Situation Now:
180k gross salary - about 60k for deductions (his 401k & 457, taxes, medical premiums, pension contribution, defined contribution, HSA, etc) - 25k (standard deduction) = 95K adjusted gross income. This assumes DWs 403b and 457 are Roth.

Income in retirement (early retirement 51 & 53, five years from now):
His pension: 70k + investments 60k (mostly pretax) = 130k (I guess I continue to subtract 25k, and medical insurance premiums, etc???)

Capital group has this calculator but it doesn't help much.
https://www.capitalgroup.com/individual ... alyzer.htm
Last edited by fortfun on Sun Jan 12, 2020 10:23 pm, edited 1 time in total.

rkhusky
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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by rkhusky » Sun Jan 12, 2020 10:02 pm

What tax rate will you pay to contribute to a Roth.
What tax rate will you pay to withdraw from Traditional accounts in retirement?
If the former is higher, choose Traditional. Otherwise choose Roth.

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fortfun
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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Sun Jan 12, 2020 10:07 pm

rkhusky wrote:
Sun Jan 12, 2020 10:02 pm
What tax rate will you pay to contribute to a Roth.
What tax rate will you pay to withdraw from Traditional accounts in retirement?
If the former is higher, choose Traditional. Otherwise choose Roth.
Not sure. That's why I'm asking :) I guess somewhere between 22 and 24.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by rkhusky » Sun Jan 12, 2020 10:07 pm

Are your sure about your deductions above? Taxes aren't tax deductible. Not sure about pension and defined contributions either.

But if your Traditional contributions do in fact drop you into the 12% tax bracket, then having your wife contribute to Roth makes sense.

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2pedals
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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by 2pedals » Sun Jan 12, 2020 10:14 pm

Have you look at the bigfoot's RPM? Tax deferred now and Roth conversions after retirement might make more sense if you income is lower in early retirement (before RMDs and SS).

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

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Sun Jan 12, 2020 10:16 pm

rkhusky wrote:
Sun Jan 12, 2020 10:07 pm
Are your sure about your deductions above? Taxes aren't tax deductible. Not sure about pension and defined contributions either.

But if your Traditional contributions do in fact drop you into the 12% tax bracket, then having your wife contribute to Roth makes sense.
Just looked at pay stub. Taxes are listed under "withholding." I assumed that meant they weren't counted as Net Pay. Pension contribution is listed as "pretax deduction." I'm not a CPA, so I'm not clear on Net Pay, gross pay, deductions, and withholdings. Maybe it is time a pay a visit to a CPA.
Last edited by fortfun on Sun Jan 12, 2020 10:21 pm, edited 1 time in total.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Sun Jan 12, 2020 10:18 pm

2pedals wrote:
Sun Jan 12, 2020 10:14 pm
Have you look at the bigfoot's RPM? Tax deferred now and Roth conversions after retirement might make more sense if you income is lower in early retirement (before RMDs and SS).

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
I have not. Just downloaded it now. Thanks for sharing. Whoa! That's a serious spreadsheet--might need to wait till morning :)

rkhusky
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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by rkhusky » Sun Jan 12, 2020 10:21 pm

In terms of figuring out your tax rate in retirement, you need to know when you will take SS, the amount you might be able to Roth convert between retirement and taking SS, and perhaps between retirement and age 72 when RMD's begin. You'll need to estimate what your Traditional balances will be at age 72, when RMD's start, which will then determine what your RMD's will be and what tax rate you will pay on them.

For example, if you expect to have about $2M in Traditional accounts by age 72, then that would result in about a $75K RMD, which when added to your pension of $70K, would put you in the 22% tax bracket, with about half of the RMD taxed at 12% and half taxed at 22%. In that case, contributing to Roth while in the 12% tax bracket would make sense.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by rkhusky » Sun Jan 12, 2020 10:23 pm

fortfun wrote:
Sun Jan 12, 2020 10:16 pm
rkhusky wrote:
Sun Jan 12, 2020 10:07 pm
Are your sure about your deductions above? Taxes aren't tax deductible. Not sure about pension and defined contributions either.

But if your Traditional contributions do in fact drop you into the 12% tax bracket, then having your wife contribute to Roth makes sense.
Just looked at pay stub. Taxes are listed under "withholding." I assumed that meant they weren't counted as Net Pay. Pension contribution is listed as "pretax deduction." I'm not a CPA, so I'm not clear on Net Pay, gross pay, deductions, and withholdings. Maybe it is time a pay a visit to a CPA.
Does your pay stub list taxable income? That will give a clue what they consider tax deductible.

If pension contribution is pre-tax, then your full pension will be taxable when taken.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Sun Jan 12, 2020 10:26 pm

rkhusky wrote:
Sun Jan 12, 2020 10:21 pm
In terms of figuring out your tax rate in retirement, you need to know when you will take SS, the amount you might be able to Roth convert between retirement and taking SS, and perhaps between retirement and age 72 when RMD's begin. You'll need to estimate what your Traditional balances will be at age 72, when RMD's start, which will then determine what your RMD's will be and what tax rate you will pay on them.

For example, if you expect to have about $2M in Traditional accounts by age 72, then that would result in about a $75K RMD, which when added to your pension of $70K, would put you in the 22% tax bracket, with about half of the RMD taxed at 12% and half taxed at 22%. In that case, contributing to Roth while in the 12% tax bracket would make sense.
Thanks rkhusky. I will not have SS. DW will have the minimum SS payout (assuming she get's one more quarter). Since 90% of our current retirement is pre-tax, it seems prudent to build up the Roth. Thank you for your input on this. I may have reached my DYI level of planning. Might be time to pay a pro.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by willthrill81 » Sun Jan 12, 2020 10:29 pm

fortfun wrote:
Sun Jan 12, 2020 10:26 pm
Since 90% of our current retirement is pre-tax, it seems prudent to build up the Roth.
That might not be true. Assuming 4% withdrawals, it takes over $2.5 million in tax-deferred assets to produce enough income (not including your DW's minimal SS benefit) to fill up to the top of the 12% bracket. Are you already on track to have about that much by retirement?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Sun Jan 12, 2020 10:36 pm

willthrill81 wrote:
Sun Jan 12, 2020 10:29 pm
fortfun wrote:
Sun Jan 12, 2020 10:26 pm
Since 90% of our current retirement is pre-tax, it seems prudent to build up the Roth.
That might not be true. Assuming 4% withdrawals, it takes over $2.5 million in tax-deferred assets to produce enough income (not including your DW's minimal SS benefit) to fill up to the top of the 12% bracket. Are you already on track to have about that much by retirement?
Thanks Willthrill. 70k+/yr pension. If the market gives 5% and we contribute another 500k, we should be a little over 2M in 5 years (at early retirement age of 51 & 53). Lots of IFs there. I plan to use my 457 to get us to DW 59.5, along with Roth conversions.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by willthrill81 » Sun Jan 12, 2020 10:38 pm

fortfun wrote:
Sun Jan 12, 2020 10:36 pm
willthrill81 wrote:
Sun Jan 12, 2020 10:29 pm
fortfun wrote:
Sun Jan 12, 2020 10:26 pm
Since 90% of our current retirement is pre-tax, it seems prudent to build up the Roth.
That might not be true. Assuming 4% withdrawals, it takes over $2.5 million in tax-deferred assets to produce enough income (not including your DW's minimal SS benefit) to fill up to the top of the 12% bracket. Are you already on track to have about that much by retirement?
Thanks Willthrill. 70k+/yr pension. If the market gives 5% and we contribute another 500k, we should be a little over 2M in 5 years (at early retirement age of 51 & 53). Lots of IFs there. I plan to use my 457 to get us to DW 59.5, along with Roth conversions.
Gotcha. Then it sounds like the pension is going to at least partly fill up your 12% bracket in retirement. In that case, doing at least some Roth contributions in the 22% and even the 24% bracket probably make sense. However, it's probably best to overshoot how much you think you'll need in tax-deferred accounts since you can withdraw significant amounts from them to pay for big medical, including LTC, expenses while paying minimal taxes due to the ability to deduct qualified medical expenses exceeding 10% of your AGI.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by KlangFool » Sun Jan 12, 2020 10:41 pm

fortfun wrote:
Sun Jan 12, 2020 9:56 pm
DW has the option for traditional OR Roth in her 403b AND 457. I only have traditional in my 401k AND 457. How do we decide which to use for hers? Does someone have a spreadsheet for this? My hunch is to do Roth for DWs.

Situation Now:
180k gross salary - about 60k for deductions (his 401k & 457, taxes, medical premiums, pension contribution, defined contribution, HSA, etc) - 25k (standard deduction) = 95K adjusted gross income. This assumes DWs 403b and 457 are Roth.

Income in retirement (early retirement 51 & 53, five years from now):
His pension: 70k + investments 60k (mostly pretax) = 130k (I guess I continue to subtract 25k, and medical insurance premiums, etc???)

Capital group has this calculator but it doesn't help much.
https://www.capitalgroup.com/individual ... alyzer.htm
fortfun,

<<70k + investments 60k (mostly pretax) = 130k >>

You need at least 1.5 million (25X) in pre-tax in order for this to be true. Do you have that?

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by KlangFool » Sun Jan 12, 2020 10:43 pm

fortfun wrote:
Sun Jan 12, 2020 10:36 pm
willthrill81 wrote:
Sun Jan 12, 2020 10:29 pm
fortfun wrote:
Sun Jan 12, 2020 10:26 pm
Since 90% of our current retirement is pre-tax, it seems prudent to build up the Roth.
That might not be true. Assuming 4% withdrawals, it takes over $2.5 million in tax-deferred assets to produce enough income (not including your DW's minimal SS benefit) to fill up to the top of the 12% bracket. Are you already on track to have about that much by retirement?
Thanks Willthrill. 70k+/yr pension. If the market gives 5% and we contribute another 500k, we should be a little over 2M in 5 years (at early retirement age of 51 & 53). Lots of IFs there. I plan to use my 457 to get us to DW 59.5, along with Roth conversions.
fortfun,

It is the pre-tax amount that matters. Not the whole amount. Roth portion generates zero taxable income.

KlangFool

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by aristotelian » Sun Jan 12, 2020 10:52 pm

Can you defer the pension for an increased benefit? If so, you could have many years of early retirement in a lower tax bracket, which would favor pretax. If not, it is probably a wash between Roth and Traditional, in which case you could always do some of each.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by willthrill81 » Sun Jan 12, 2020 10:55 pm

Another factor to consider is what will happen if/when either the OP or his spouse passes away. Will the pension remain in the full payout amount? If so, the surviving spouse may be faced with the problem of being thrust into a higher tax bracket due to RMDs from tax-deferred accounts. Likely the best solution to this is to do Roth contributions/conversions when you would otherwise expect an approximate wash between traditional and Roth accounts.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Sun Jan 12, 2020 10:57 pm

KlangFool wrote:
Sun Jan 12, 2020 10:41 pm
fortfun wrote:
Sun Jan 12, 2020 9:56 pm
DW has the option for traditional OR Roth in her 403b AND 457. I only have traditional in my 401k AND 457. How do we decide which to use for hers? Does someone have a spreadsheet for this? My hunch is to do Roth for DWs.

Situation Now:
180k gross salary - about 60k for deductions (his 401k & 457, taxes, medical premiums, pension contribution, defined contribution, HSA, etc) - 25k (standard deduction) = 95K adjusted gross income. This assumes DWs 403b and 457 are Roth.

Income in retirement (early retirement 51 & 53, five years from now):
His pension: 70k + investments 60k (mostly pretax) = 130k (I guess I continue to subtract 25k, and medical insurance premiums, etc???)

Capital group has this calculator but it doesn't help much.
https://www.capitalgroup.com/individual ... alyzer.htm
fortfun,

<<70k + investments 60k (mostly pretax) = 130k >>

You need at least 1.5 million (25X) in pre-tax in order for this to be true. Do you have that?

KlangFool
Thanks KlangFool. In 5 years, we probably will. Depends on what the market does but assuming 60k/yr pretax contributions and 5% returns on what we already have, should bring it up to around 1.5m. Pretax would be my 401k, 457, DWs HSA & defined contribution. That would leave about 40k in Roths in her 403b & 457 plus our Roth IRAs.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Sun Jan 12, 2020 11:00 pm

aristotelian wrote:
Sun Jan 12, 2020 10:52 pm
Can you defer the pension for an increased benefit? If so, you could have many years of early retirement in a lower tax bracket, which would favor pretax. If not, it is probably a wash between Roth and Traditional, in which case you could always do some of each.
Thanks aristotelian. No increased benefit for deferring this pension, without working more years.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Sun Jan 12, 2020 11:02 pm

willthrill81 wrote:
Sun Jan 12, 2020 10:55 pm
Another factor to consider is what will happen if/when either the OP or his spouse passes away. Will the pension remain in the full payout amount? If so, the surviving spouse may be faced with the problem of being thrust into a higher tax bracket due to RMDs from tax-deferred accounts. Likely the best solution to this is to do Roth contributions/conversions when you would otherwise expect an approximate wash between traditional and Roth accounts.
Thanks willthrill. I'll pick full spousal benefits (reduced to 70k/yr). I think we are at that "wash" point now, with all the other pre-tax contributions that we are making. I appreciate your thoughtful answer. I've also PMed retiredjg, so I know she will have some good info.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by 2pedals » Sun Jan 12, 2020 11:11 pm

With the understanding that I do not know much about your situation, I think I would do some Roth contributions now say 25%-50% of DW contributions for future flexibility if you don't have much Roth. After retirement I would be trying to do some strategic Roth conversions. When your income is low and when you do not use much of your pre-tax do some partial Roth conversions to fill your lower tax buckets up. Hard to see you talking a 70k pension plus 60k every year in retirement. I would expect you have some relatively lumpy high years and low years for pre-tax withdrawals. With a long retirement your should have plenty of flexibility worked into your plan.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Sun Jan 12, 2020 11:13 pm

rkhusky wrote:
Sun Jan 12, 2020 10:23 pm
fortfun wrote:
Sun Jan 12, 2020 10:16 pm
rkhusky wrote:
Sun Jan 12, 2020 10:07 pm
Are your sure about your deductions above? Taxes aren't tax deductible. Not sure about pension and defined contributions either.

But if your Traditional contributions do in fact drop you into the 12% tax bracket, then having your wife contribute to Roth makes sense.
Just looked at pay stub. Taxes are listed under "withholding." I assumed that meant they weren't counted as Net Pay. Pension contribution is listed as "pretax deduction." I'm not a CPA, so I'm not clear on Net Pay, gross pay, deductions, and withholdings. Maybe it is time a pay a visit to a CPA.
Does your pay stub list taxable income? That will give a clue what they consider tax deductible.

If pension contribution is pre-tax, then your full pension will be taxable when taken.
No, just this:

Code: Select all

Description Amount YTD Amount
Gross Wages $8,628.09 $105,305.25
Pre-Tax Deductions $3,715.17 $46,377.60
Taxes $700.33 $8,430.22
After-Tax Deductions $106.00 $1,055.00
Net Pay $4,106.59 $49,442.43

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Sun Jan 12, 2020 11:16 pm

2pedals wrote:
Sun Jan 12, 2020 11:11 pm
With the understanding that I do not know much about your situation, I think I would do some Roth contributions now say 25%-50% of DW contributions for future flexibility if you don't have much Roth. After retirement I would be trying to do some strategic Roth conversions. When your income is low and when you do not use much of your pre-tax do some partial Roth conversions to fill your lower tax buckets up. Hard to see you talking a 70k pension plus 60k every year in retirement. I would expect you have some relatively lumpy high years and low years for pre-tax withdrawals. With a long retirement your should have plenty of flexibility worked into your plan.
Thanks 2 pedals. Yes, we will need to do some conversions to get us to 59.5, as my 457 will not cover 6 years of expenses.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by celia » Sun Jan 12, 2020 11:23 pm

It appears you put a lot into tax-deferred each year so those accounts are probably large and will continue to grow. You will likely do Roth conversions once you retire until age 72. That will add to your taxable income in the years you convert and will be subject to the tax rates at that time. Since we are now at record low tax rates, I’m guessing you will pay higher tax rates then, all else being equal.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Sun Jan 12, 2020 11:28 pm

celia wrote:
Sun Jan 12, 2020 11:23 pm
It appears you put a lot into tax-deferred each year so those accounts are probably large and will continue to grow. You will likely do Roth conversions once you retire until age 72. That will add to your taxable income in the years you convert and will be subject to the tax rates at that time. Since we are now at record low tax rates, I’m guessing you will pay higher tax rates then, all else being equal.
Thanks Celia. Sounds like you think roth 403b & 457 would be prudent?

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by Watty » Sun Jan 12, 2020 11:31 pm

fortfun wrote:
Sun Jan 12, 2020 9:56 pm
Does someone have a spreadsheet for this?
You can use tax software to do various scenarios for your taxes before an after retirement.

This would also include your state tax returns which can make a difference.

That will also include the impact of the taxes on your Social Security which can be tricky to understand because the way it work is so complicated.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

You also need to look at your numbers three ways, as a couple and as if either of your survives the other and files tax returns in the higher single tax brackets.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by celia » Sun Jan 12, 2020 11:40 pm

fortfun wrote:
Sun Jan 12, 2020 11:28 pm
celia wrote:
Sun Jan 12, 2020 11:23 pm
It appears you put a lot into tax-deferred each year so those accounts are probably large and will continue to grow. You will likely do Roth conversions once you retire until age 72. That will add to your taxable income in the years you convert and will be subject to the tax rates at that time. Since we are now at record low tax rates, I’m guessing you will pay higher tax rates then, all else being equal.
Thanks Celia. Sounds like you think roth 403b & 457 would be prudent?
You need some kind of ‘balance’ among tax-deferred, Roth, and taxable. Your percentages will be different than what others have. But don’t be like another Boglehead who had 100% in tax-deferred when he retired! You need some tax diversity there by paying some of the taxes at diverse tax rates over time. :happy
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by willthrill81 » Sun Jan 12, 2020 11:42 pm

celia wrote:
Sun Jan 12, 2020 11:40 pm
fortfun wrote:
Sun Jan 12, 2020 11:28 pm
celia wrote:
Sun Jan 12, 2020 11:23 pm
It appears you put a lot into tax-deferred each year so those accounts are probably large and will continue to grow. You will likely do Roth conversions once you retire until age 72. That will add to your taxable income in the years you convert and will be subject to the tax rates at that time. Since we are now at record low tax rates, I’m guessing you will pay higher tax rates then, all else being equal.
Thanks Celia. Sounds like you think roth 403b & 457 would be prudent?
You need some kind of ‘balance’ among tax-deferred, Roth, and taxable.
You don't always need all three. We will likely never have a taxable account, nor would we have a need for one. We contribute over 50% of our gross to tax-advantaged accounts, including HSAs (with no RMDs) and Roth IRAs, and are likely to start doing Roth conversions beginning next year and continuing for 30 years.

I can definitely see a situation arising where someone gets a really late start to retirement saving and is benefited most (under current tax law at least) by only contributing to tax-deferred accounts.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by 2pedals » Mon Jan 13, 2020 12:27 am

fortfun wrote:
Sun Jan 12, 2020 11:16 pm
2pedals wrote:
Sun Jan 12, 2020 11:11 pm
With the understanding that I do not know much about your situation, I think I would do some Roth contributions now say 25%-50% of DW contributions for future flexibility if you don't have much Roth. After retirement I would be trying to do some strategic Roth conversions. When your income is low and when you do not use much of your pre-tax do some partial Roth conversions to fill your lower tax buckets up. Hard to see you talking a 70k pension plus 60k every year in retirement. I would expect you have some relatively lumpy high years and low years for pre-tax withdrawals. With a long retirement your should have plenty of flexibility worked into your plan.
Thanks 2 pedals. Yes, we will need to do some conversions to get us to 59.5, as my 457 will not cover 6 years of expenses.
I am not understanding your statement that you will need to do some conversions. Roth conversions are optional and they are merely moving assets from tax-deferred to non-taxable and you will incur a taxable event to do so. If you need to take withdrawals for spending they will not be converted from tax-deferred to non-taxable (Roth). You will be only withdrawing from your account wherever that money comes from.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by celia » Mon Jan 13, 2020 4:45 am

2pedals wrote:
Mon Jan 13, 2020 12:27 am
I am not understanding your statement that you will need to do some conversions. Roth conversions are optional and they are merely moving assets from tax-deferred to non-taxable and you will incur a taxable event to do so. If you need to take withdrawals for spending they will not be converted from tax-deferred to non-taxable (Roth). You will be only withdrawing from your account wherever that money comes from.
OP and spouse appear to not have much in taxable but plan to retire in 5 years at ages 51 and 53. They will need money for living expenses and anything they withdraw from tax-deferred before 59.5 will have a 10% early withdrawal penalty on top of the taxes.

One way to work around this is to start converting the amount they need for living expenses. In 5 years they can withdraw the amount converted tax-free and leave the growth until age 59.5. An alternative would be to start saving the same amount in taxable. Their taxes for this year will be the same if they convert or save in taxable, but will likely be more than their 2019 tax liability.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by rkhusky » Mon Jan 13, 2020 8:24 am

fortfun wrote:
Sun Jan 12, 2020 11:13 pm
rkhusky wrote:
Sun Jan 12, 2020 10:23 pm
fortfun wrote:
Sun Jan 12, 2020 10:16 pm
rkhusky wrote:
Sun Jan 12, 2020 10:07 pm
Are your sure about your deductions above? Taxes aren't tax deductible. Not sure about pension and defined contributions either.

But if your Traditional contributions do in fact drop you into the 12% tax bracket, then having your wife contribute to Roth makes sense.
Just looked at pay stub. Taxes are listed under "withholding." I assumed that meant they weren't counted as Net Pay. Pension contribution is listed as "pretax deduction." I'm not a CPA, so I'm not clear on Net Pay, gross pay, deductions, and withholdings. Maybe it is time a pay a visit to a CPA.
Does your pay stub list taxable income? That will give a clue what they consider tax deductible.

If pension contribution is pre-tax, then your full pension will be taxable when taken.
No, just this:

Code: Select all

Description Amount YTD Amount
Gross Wages $8,628.09 $105,305.25
Pre-Tax Deductions $3,715.17 $46,377.60
Taxes $700.33 $8,430.22
After-Tax Deductions $106.00 $1,055.00
Net Pay $4,106.59 $49,442.43
You subtract the pre-tax deductions from your gross wages to arrive at your taxable wages. Does that change your calculation as far as your expected taxable income, i.e. is it still less than $105K/yr with wife's contribution to Roth? If so, go ahead and have wife contribute to Roth. Even if some or all of the Roth contribution is taxed at 22%, it is likely that you will be paying 22% (25%) on some of your RMD's after age 72. Given that it is going to be a small fraction of your portfolio, it's not that important a decision.

Will you get your pension(s) at ages 51 and 53? Will that be enough to live on until ages 59.5? If so, you will have room for about $30K in Roth conversions each year, until age 72. So, you could convert maybe $600K of your Traditional to Roth, which would lower your RMD's at age 72, but likely not enough to put all of it in the 12% (15%) tax bracket.

KlangFool
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Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by KlangFool » Mon Jan 13, 2020 9:50 am

celia wrote:
Mon Jan 13, 2020 4:45 am
2pedals wrote:
Mon Jan 13, 2020 12:27 am
I am not understanding your statement that you will need to do some conversions. Roth conversions are optional and they are merely moving assets from tax-deferred to non-taxable and you will incur a taxable event to do so. If you need to take withdrawals for spending they will not be converted from tax-deferred to non-taxable (Roth). You will be only withdrawing from your account wherever that money comes from.
OP and spouse appear to not have much in taxable but plan to retire in 5 years at ages 51 and 53. They will need money for living expenses and anything they withdraw from tax-deferred before 59.5 will have a 10% early withdrawal penalty on top of the taxes.

One way to work around this is to start converting the amount they need for living expenses. In 5 years they can withdraw the amount converted tax-free and leave the growth until age 59.5. An alternative would be to start saving the same amount in taxable. Their taxes for this year will be the same if they convert or save in taxable, but will likely be more than their 2019 tax liability.
celia,

OP has 457. There is no 10% early withdrawal penalty for 457.

KlangFool

KlangFool
Posts: 14574
Joined: Sat Oct 11, 2008 12:35 pm

Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by KlangFool » Mon Jan 13, 2020 9:54 am

OP,

If you want more Roth space, why don't you contribute to Roth IRAs?

What if you contribute to wife's Trad. 403 B and Trad. 457 and put the tax savings into Roth IRAs? Or, some other combination with Roth IRAs?

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Topic Author
fortfun
Posts: 2560
Joined: Tue Apr 19, 2016 7:31 pm

Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Mon Jan 13, 2020 12:11 pm

celia wrote:
Mon Jan 13, 2020 4:45 am
2pedals wrote:
Mon Jan 13, 2020 12:27 am
I am not understanding your statement that you will need to do some conversions. Roth conversions are optional and they are merely moving assets from tax-deferred to non-taxable and you will incur a taxable event to do so. If you need to take withdrawals for spending they will not be converted from tax-deferred to non-taxable (Roth). You will be only withdrawing from your account wherever that money comes from.
OP and spouse appear to not have much in taxable but plan to retire in 5 years at ages 51 and 53. They will need money for living expenses and anything they withdraw from tax-deferred before 59.5 will have a 10% early withdrawal penalty on top of the taxes.

One way to work around this is to start converting the amount they need for living expenses. In 5 years they can withdraw the amount converted tax-free and leave the growth until age 59.5. An alternative would be to start saving the same amount in taxable. Their taxes for this year will be the same if they convert or save in taxable, but will likely be more than their 2019 tax liability.
This is the case. However, we may be able to stretch our traditional 457 funds. Thanks!

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Topic Author
fortfun
Posts: 2560
Joined: Tue Apr 19, 2016 7:31 pm

Re: Roth vs Traditional? Is my calculation correct? HELP!

Post by fortfun » Mon Jan 13, 2020 12:19 pm

rkhusky wrote:
Mon Jan 13, 2020 8:24 am
fortfun wrote:
Sun Jan 12, 2020 11:13 pm
rkhusky wrote:
Sun Jan 12, 2020 10:23 pm
fortfun wrote:
Sun Jan 12, 2020 10:16 pm
rkhusky wrote:
Sun Jan 12, 2020 10:07 pm
Are your sure about your deductions above? Taxes aren't tax deductible. Not sure about pension and defined contributions either.

But if your Traditional contributions do in fact drop you into the 12% tax bracket, then having your wife contribute to Roth makes sense.
Just looked at pay stub. Taxes are listed under "withholding." I assumed that meant they weren't counted as Net Pay. Pension contribution is listed as "pretax deduction." I'm not a CPA, so I'm not clear on Net Pay, gross pay, deductions, and withholdings. Maybe it is time a pay a visit to a CPA.
Does your pay stub list taxable income? That will give a clue what they consider tax deductible.

If pension contribution is pre-tax, then your full pension will be taxable when taken.
No, just this:

Code: Select all

Description Amount YTD Amount
Gross Wages $8,628.09 $105,305.25
Pre-Tax Deductions $3,715.17 $46,377.60
Taxes $700.33 $8,430.22
After-Tax Deductions $106.00 $1,055.00
Net Pay $4,106.59 $49,442.43
You subtract the pre-tax deductions from your gross wages to arrive at your taxable wages. Does that change your calculation as far as your expected taxable income, i.e. is it still less than $105K/yr with wife's contribution to Roth? If so, go ahead and have wife contribute to Roth. Even if some or all of the Roth contribution is taxed at 22%, it is likely that you will be paying 22% (25%) on some of your RMD's after age 72. Given that it is going to be a small fraction of your portfolio, it's not that important a decision.

Will you get your pension(s) at ages 51 and 53? Will that be enough to live on until ages 59.5? If so, you will have room for about $30K in Roth conversions each year, until age 72. So, you could convert maybe $600K of your Traditional to Roth, which would lower your RMD's at age 72, but likely not enough to put all of it in the 12% (15%) tax bracket.
Thanks rkhusky. Your first paragraph has some good numbers to go off of. I think it probably makes sense to Roth both of them. However, the one kink in the plan is being able to use our 457s to get us to 59.5. Mine alone might not be quite enough . However, if I do the special 457 catchup provision (35k/yr?) during my last 3 years, it will be close.

2nd paragraph. My pension will cover our living expenses but I plan to do about 30k/yr of discretionary spending each year, so we will need to dip into savings a bit. Roth conversions are definitely in consideration during that time.

Thanks for your help!

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