Max out TSP, 457, AND 403b

tbone555 · Post by **tbone555** » Thu Apr 13, 2017 2:12 pm

First time posting. I will keep it short and sweet.

Family income is $184k. We already max my TSP and her government 457. Should we also max her 403b since we still have headroom in the 25% tax bracket? Doing so would mean we can't save in taxable until we get future raises (3-5% per year is conservative expectation.

With out giving all the details, we are both 36 and have about $100k in Roth IRAs and $200k in TSP/457. We also have a rental property that returns about 10% cash on cash and 529's for our kids. I am 100% stock. Lived through great recession and have the fortitude to stay invested. Plus have Federal pension when I'm 62.

JGoneRiding · Post by **JGoneRiding** » Thu Apr 13, 2017 2:21 pm

If you can afford it go for it! Just make sure you live a little too. I would do the 403b before after tax

retiredjg · Post by **retiredjg** » Thu Apr 13, 2017 2:39 pm

I think an argument can be made for both sides of this question. And of course there is no way to reliably predict what taxes will look like when you retire so this decision is largely a guess.

As long as you can stay in the 25% bracket, I think I'd put the extra money into taxable. As your salary goes up, then start using the 403b as needed to get back down into the 25% bracket.

I'm thinking that your pension and both on SS payments may push you into or near the 25% bracket in retirement anyway. If so, paying 25% now is no worse than paying 25% later as you take the money out.

When you start the RMDs on the large TSP and 457 (and possibly 403b) accounts when you hit 70.5, that may push you even further up the tax brackets. When one dies, the survivor will almost surely be pushed into a higher bracket.

There is such a thing as having too much tax deferral and I think you are approaching it. If you were in the 39.6% bracket, it might be different, but I'm not sure I'd add more deferrals while in the 25% bracket.

Another option is to pay more on the mortgage (or any other sort of debt) if you have one. It would make no sense to me to put money into the 403b if there is any debt.

tbone555 · Post by **tbone555** » Thu Apr 13, 2017 2:45 pm

Thanks to both replies so far. Indeed I do have mortgage debt. $517k @ 3.7% 30 year. 29 years left.

I am one to use the mortgage debt as leverage to invest, wether that be in a 403b or a rental property. I recognize some disagree with this, but at least I feel like I am doing it with my eyes wide open so-to-speak. I only put 10% down on my house because I could do a piggy bank loan with the average rate at 3.7% fixed for 30 years (note that second loan is fixed, not a heloc). This allows me to have more liquidity to invest. More risk, yes I suppose....

tbone555 · Post by **tbone555** » Thu Apr 13, 2017 2:51 pm

Perhaps a good compromise is to continue to max both our Roth IRAs and do the 403b when we bump into higher bracket as you suggested.

retiredjg · Post by **retiredjg** » Thu Apr 13, 2017 2:58 pm

I didn't mention it, but I would definitely continue with the Roth IRAs.

fposte · Post by **fposte** » Thu Apr 13, 2017 3:13 pm

retiredjg wrote: When you start the RMDs on the large TSP and 457 (and possibly 403b) accounts when you hit 70.5, that may push you even further up the tax brackets. When one dies, the survivor will almost surely be pushed into a higher bracket.

It's a long time away for the OP, but if it's allowable within your system, a governmental 457 should allow you to roll contents into an IRA without penalty starting at 59.5. Because of being in a system with a 403b, a 457, and a pension, I'm likely to be in a higher bracket when I retire, so I'm anticipating rolling the 457 or at least part of it and then converting it to Roth while I'm still working.

tbone555 · Post by **tbone555** » Thu Apr 13, 2017 5:17 pm

I have to think more about Roth conversions as regards to tax planning. Also need to think when my wife might be able to retire and how that will factor into our plans.

Thanks for the insight.

tbone555 · Post by **tbone555** » Sat Sep 30, 2017 9:15 am

Starting to think about maxing TSP and 403B, then Maxing Roth 457. This could really help with early returment as we could withdraw tax-free from the Roth 457 once my wife quits her job.

Please let me know if this is a good way of thinking.

retiredjg · Post by **retiredjg** » Sat Sep 30, 2017 9:24 am

Sounds like a good plan to me.

tbone555 · Post by **tbone555** » Fri Oct 13, 2017 9:43 am

I am contemplating taking a max (50k) tsp loan so I can maximize contributions to my TSP, her 403b and her Roth 457 over the next couple of years. Am I crazy?

retiredjg · Post by **retiredjg** » Fri Oct 13, 2017 9:52 am

Yes.

tbone555 · Post by **tbone555** » Fri Oct 13, 2017 9:57 am

Thought so. My thinking is I can fill that space up while paying the TSP loan back at the low G-fund rate. I realize some of the 50k will be waiting to be invested because I can only fund these accounts with each pay period. Then in two years or so our income would rise enough to be able to fill all three tax advantage accounts.

tbone555 · Post by **tbone555** » Sat Oct 21, 2017 9:17 am

It appears that I would have to wait to 59.5 to take qualified distributions from a Roth 457.

https://www.irs.gov/retirement-plans/re ... h-accounts

If this is the case, does it not make more sense to do a traditional 457 and Roth 403b? Then we would have the option of taking qualified distributions from the trade 457 if my wife leaves employment before 59.5?

retiredjg · Post by **retiredjg** » Sat Oct 21, 2017 9:45 am

tbone555 wrote: ↑Sat Oct 21, 2017 9:17 am It appears that I would have to wait to 59.5 to take qualified distributions from a Roth 457.

https://www.irs.gov/retirement-plans/re ... h-accounts

If this is the case, does I not make more sense to do a traditional 457 and Roth 403b? Then we would have thought option of taking qualified distributions from the trade 457 if my wife leaves employment before 59.5?

I can see why you would think that, but I do not believe your conclusion is correct. As I understand it, a 457 plan is not a qualified plan. A 401k or a 403b is a qualified plan. So I think that portion of what you read only applies to 401k and 403b. However, I'm not a benefits person....grain of salt.

But do consider this. If the age 59.5 rule does not apply to 457 plans, why would it apply to a Roth 457?

tbone555 · Post by **tbone555** » Sat Oct 21, 2017 6:36 pm

I think it is correct:

https://financegourmet.com/blog/retirem ... 457-plans/

Roth 457 aren't subject to 10% early withdrawal penalty (same as trad 457) BUT early withdrawals are counted as ORDINARY income! Crazy!

So it seems I will stick with trade 457 to keep the early withdraw upon separation benefit and use a Roth 403b when I have enough income to add to it.

tbone555 · Post by **tbone555** » Sat Oct 21, 2017 6:46 pm

I suspect only the earnings will be subject to taxes if withdrawn before 59.5

Very confusing indeed.

retiredjg · Post by **retiredjg** » Mon Oct 23, 2017 9:39 am

I finally had a chance to read that last link. I found it somewhat confusing. At one point, it almost sounds like the contributions will be taxed a second time and I feel sure that is not what the author intended.

I agree that only the earnings will be subject to taxes if withdrawn before 59.5. I don't know if the earnings come out last (which is what happens with Roth IRA) or if the earnings come out pro-rated. Either way, I don't believe the earnings will be a large portion of the withdrawal so I would not be worried about it. I'd use Roth 457b myself because I don't think you need more tax-deferred savings.

And you will need some untaxed money in your income to fill up the portion of your income that is not taxed at all because it is exemptions and deductions.

tbone555 · Post by **tbone555** » Mon Nov 06, 2017 9:07 am

retiredjg wrote: ↑Mon Oct 23, 2017 9:39 am I finally had a chance to read that last link. I found it somewhat confusing. At one point, it almost sounds like the contributions will be taxed a second time and I feel sure that is not what the author intended.

I agree that only the earnings will be subject to taxes if withdrawn before 59.5. I don't know if the earnings come out last (which is what happens with Roth IRA) or if the earnings come out pro-rated. Either way, I don't believe the earnings will be a large portion of the withdrawal so I would not be worried about it. I'd use Roth 457b myself because I don't think you need more tax-deferred savings.

And you will need some untaxed money in your income to fill up the portion of your income that is not taxed at all because it is exemptions and deductions.

Thank you!

tbone555 · Post by **tbone555** » Tue Jan 23, 2018 4:20 pm

Now our combined income is $200k since I got my usual raise and my wife got a promotion. I'm wondering if I should start prioritizing taxable investing to some degree. All of my investments (net worth is about $600k) are tied up in tax-advantaged and real estate.

I'm not sure if I'm asking a specific question, just wondering if anyone has thoughts about the value of taxable investing for flexibility now and in the future?

rguina · Post by **rguina** » Tue Jan 23, 2018 7:42 pm

tbone555 wrote: ↑Tue Jan 23, 2018 4:20 pm Now our combined income is $200k since I got my usual raise and my wife got a promotion. I'm wondering if I should start prioritizing taxable investing to some degree. All of my investments (net worth is about $600k) are tied up in tax-advantaged and real estate.

I'm not sure if I'm asking a specific question, just wondering if anyone has thoughts about the value of taxable investing for flexibility now and in the future?

I max out my retirement accounts whenever possible, but I'm also a fan of having some of my money outside of tax-deferred accounts.

This gives you more long-term flexibility and the ability to make strategic withdrawals, purchases, or additional investments should the opportunity arise. This could include another rental property, cashing in some investments for emergencies or large expenses, paying for college costs not covered by your 529 plans, or just the knowledge that you have that money readily available if needed.

Taxable investments also give you ready access to funds if you retire before you are eligible to make withdrawals from retirement accounts (and at long-term capital gains rates instead of your tax bracket at that time).

So yes, flexibility is good. Just make sure you invest in tax efficient funds if you invest in a taxable account.

tbone555 · Post by **tbone555** » Tue Jan 23, 2018 7:54 pm

Thanks for the insight. All solid points that point to the need for me to ramp up some taxable investing. I will consider this even more now that we have lower tax brackets.

retiredjg · Post by **retiredjg** » Wed Jan 24, 2018 8:54 am

tbone555 wrote: ↑Tue Jan 23, 2018 4:20 pm Now our combined income is $200k since I got my usual raise and my wife got a promotion. I'm wondering if I should start prioritizing taxable investing to some degree. All of my investments (net worth is about $600k) are tied up in tax-advantaged and real estate.

I'm not sure if I'm asking a specific question, just wondering if anyone has thoughts about the value of taxable investing for flexibility now and in the future?

Is this extra money or would the money come from one of the plans you are funding now?

And where is your money going now?

tbone555 · Post by **tbone555** » Wed Jan 24, 2018 8:59 am

New money from raises. Currently fund $18k TSP $18k government 457, $11k for Roth IRAs.

Yearly expenses around $120k with 2 yound kids.

I would consider cutting back a bit on TSP since I'm am building a pension...

CyclingDuo · Post by **CyclingDuo** » Wed Jan 24, 2018 9:08 am

tbone555 wrote: ↑Wed Jan 24, 2018 8:59 am New money from raises. Currently fund $18k TSP $18k government 457, $11k for Roth IRAs.

Yearly expenses around $120k with 2 yound kids.

I would consider cutting back a bit on TSP since I'm am building a pension...

Do you have good, low cost funds available in the voluntary 403b plan? With your recent raise, it might be worth sending some money into it. There is no rule that you have to "max" it out. Some could go into the 403b, as well as some in taxable investments for shorter term goals (goals that are shorter than retirement that is).

retiredjg · Post by **retiredjg** » Wed Jan 24, 2018 9:12 am

Since you are filling 2 tax-deferred plans and 2 Roth IRAs, your next step should be taxable or more Rothness. Or a combination of the two.

As I mentioned above, I would NOT put any more money into tax deferral. You might even consider reducing it (by using some Roth TSP instead of traditional TSP).

Here is a link that discusses why people with a pension might prefer more Roth. Be sure to read the included links to get the full story.

https://thefinancebuff.com/most-tsp-par ... h-tsp.html

tbone555 · Post by **tbone555** » Wed Jan 24, 2018 10:01 am

Thanks for all the responses. I have decent funds in the 403b through fidelity.

I will do more Roth if I increase my savings in tax advantaged.

tbone555 · Post by **tbone555** » Thu Jul 12, 2018 6:11 pm

Still analyzing my plan for more tax advantaged. I am working the numbers, but think my wife and I could retire at 57. This gives 13 years before RMDs where we can do roth conversions and withdrawals.

That said, with our combined state+federal rate at about 32% is there an argument to do 3 x $18.5 in tax deffered?

FYI. Combined income could go up to about $215 next year with an expected promotion. Probably hitting $260 in the next 3-5 years and then leveling off and smaller gains from there.Then we would aim for more savings in taxable.

P.S. with an earlyish retiirement my deferred pension will be reduced. I am running the numbers for a reduced pension vs the intangibles of having more years in retirement before we get 'old.'

CyclingDuo · Post by **CyclingDuo** » Fri Jul 13, 2018 5:32 am

tbone555 wrote: ↑Thu Jul 12, 2018 6:11 pm
That said, with our combined state+federal rate at about 32% is there an argument to do 3 x $18.5 in tax deffered?

Do you have enough salary leftover after your $120K expenses, 2 x $18.5, plus Roth IRA's to do it before the raise next year without taking out a loan on your TSP? Are there low-cost funds available in the 403b?

if yes to both - then do it!

retiredjg · Post by **retiredjg** » Fri Jul 13, 2018 7:46 am

tbone555 wrote: ↑Thu Jul 12, 2018 6:11 pm That said, with our combined state+federal rate at about 32% is there an argument to do 3 x $18.5 in tax deffered?

I would recommend against doing this.

It appears you are in the 24% federal tax bracket now. That's a pretty low bracket for a working couple with good income.

In retirement with a pension and probably 2 SS checks and maybe rental income, it appears to me unlikely that your marginal tax rate will ever be less than 24%. This is especially true if the person getting the pension is the higher earner of the couple.

That means you do not get a long term financial benefit by deferring more tax now. Well, you do get the benefit of less tax now, but you don't get the benefit of more money later which is the usual point of deferring taxes until you pay taxes at a lower rate.

Saving in taxable, at a cost of 24% now, is likely to be the better choice over contributing to a third tax-deferred account. Saving in taxable will also give you the cash to pay the taxes during the 13 years you do your Roth conversions. This results in more money in Rothness as well.

FYI. Combined income could go up to about $215 next year with an expected promotion. Probably hitting $260 in the next 3-5 years and then leveling off and smaller gains from there.Then we would aim for more savings in taxable.

I still would not contribute to a third tax-deferred account. Filling two of these is enough, maybe more than enough with the expected pension.

The problem with saving too much in tax-deferred accounts is that chicken comes home to roost when RMDs start. With the pension, SS times 2, maybe some rental income....your RMDs could push you into higher brackets when RMDs start. When one of you dies, the survivor may be pushed into an even higher bracket. And taxes have a good chance of being higher then anyway.

Where is the logic in paying 28% or 30% later when you could be paying 24% now?

I think you would be risking saving too much in tax-deferred accounts if you contribute to this third available tax-deferred account. In fact, I think you should consider switching some of your TSP to Roth.

I realize I have not addressed your state taxes which I guess are pretty high. I suppose that could make a difference if you absolutely know that you will leave your high tax state in retirement and move to a no tax state. I just don't count on being able to know that.

tbone555 · Post by **tbone555** » Fri Jul 13, 2018 8:52 am

Thanks for all the feedback. I truly appreciate it.

Good funds in the 403b.

Having more taxable will give us more flexibility.

Food for thought!!!

Edited to add: cant up contributions to 403b until after getting next raise/promotion.

tbone555 · Post by **tbone555** » Wed May 15, 2019 11:38 am

Quick update. Family income is now $230k. We are maxing 403, 457, and Roth TSP, plus two Roth IRAs. As our income has increased we have kept lifestyle creep mostly in check. I would love to retire as early as possible.

retire2022 · Post by **retire2022** » Wed May 15, 2019 11:54 am

Op

Thanks for update it could be useful to know how many year until retirement and your assets allocation

Good luck

tbone555 · Post by **tbone555** » Wed May 15, 2019 11:58 am

Asset allocation is 100% total US stock market. Starting to buy total international with new money.

I'm 39. Probably would not retire before 57 when. I can keep Federal Health insurance for life.

tbone555 · Post by **tbone555** » Mon Apr 05, 2021 6:18 pm

tbone555 wrote: ↑Thu Apr 13, 2017 2:12 pm First time posting. I will keep it short and sweet.

Family income is $184k. We already max my TSP and her government 457. Should we also max her 403b since we still have headroom in the 25% tax bracket? Doing so would mean we can't save in taxable until we get future raises (3-5% per year is conservative expectation.

With out giving all the details, we are both 36 and have about $100k in Roth IRAs and $200k in TSP/457. We also have a rental property that returns about 10% cash on cash and 529's for our kids. I am 100% stock. Lived through great recession and have the fortitude to stay invested. Plus have Federal pension when I'm 62.

Four years later, and we have crossed $1M in liquid net worth - about $300k in Roth and $700k in Traditional.

Thankfully I found this sight 10 years ago and have stayed the course with low-cost index investing!

retire2022 · Post by **retire2022** » Mon Apr 05, 2021 7:04 pm

tbone555 wrote: ↑Mon Apr 05, 2021 6:18 pm
Four years later, and we have crossed $1M in liquid net worth - about $300k in Roth and $700k in Traditional.

Thankfully I found this sight 10 years ago and have stayed the course with low-cost index investing!

Very good too much of pretax with pension maybe too much a good thing, does your work plans have Roth Options?

My pretax 457 is 1.5 million at 60 at 72 in twelve years I will be at a higher tax bracket 32% than the 24% tax bracket due to RMD.

BH recommends 50% pretax and 50% Roth

Congrats nevertheless.

retiredjg · Post by **retiredjg** » Tue Apr 06, 2021 7:07 am

tbone555 wrote: ↑Mon Apr 05, 2021 6:18 pm Four years later, and we have crossed $1M in liquid net worth - about $300k in Roth and $700k in Traditional.

Thankfully I found this sight 10 years ago and have stayed the course with low-cost index investing!

Thanks for the update. You are moving right along and it seems retiring at 57 is a definite possibility. That's 16 years away if I did the math right.

I think you will have 2 pensions and large tax-deferred and Roth balances and at least 1 SS income. It seems likely that you will actually need to retire at 57ish in order to have enough time to significantly trim (by doing Roth conversions) the tax-deferred accounts before reaching RMD age.

There is no need to eliminate your tax-deferred balance - just reduce it to the point that RMDs do not present a problem in your 70's and 80's.

Depending on your current tax bracket, you might give some thought to contributing more to Roth for the remaining years of the current tax cuts (through 2025) since you will go up a bracket in 2026. Then in 2026, go back to a ratio similar to what you are doing now.

Using today's tax brackets, can you estimate a bracket if you do retire at 57?

Regarding Roth 457....if your wife decides to use some Roth 457, first determine what her withdrawal options are. Will they allow her to withdraw only traditional 457 if she is less than 59.5? If yes, you have some flexibility.

If not, the entire thing could be rolled into traditional and Roth IRA. The portion in Roth IRA would then be subject to Roth iRA rules which do not pro-rate withdrawals between contributions and earnings.

tbone555 · Post by **tbone555** » Tue Apr 06, 2021 8:33 am

retiredjg wrote: ↑Tue Apr 06, 2021 7:07 am
tbone555 wrote: ↑Mon Apr 05, 2021 6:18 pm Four years later, and we have crossed $1M in liquid net worth - about $300k in Roth and $700k in Traditional.

Thankfully I found this sight 10 years ago and have stayed the course with low-cost index investing!
Thanks for the update. You are moving right along and it seems retiring at 57 is a definite possibility. That's 16 years away if I did the math right.

I think you will have 2 pensions and large tax-deferred and Roth balances and at least 1 SS income. It seems likely that you will actually need to retire at 57ish in order to have enough time to significantly trim (by doing Roth conversions) the tax-deferred accounts before reaching RMD age.

There is no need to eliminate your tax-deferred balance - just reduce it to the point that RMDs do not present a problem in your 70's and 80's.

Depending on your current tax bracket, you might give some thought to contributing more to Roth for the remaining years of the current tax cuts (through 2025) since you will go up a bracket in 2026. Then in 2026, go back to a ratio similar to what you are doing now.

Using today's tax brackets, can you estimate a bracket if you do retire at 57?

Regarding Roth 457....if your wife decides to use some Roth 457, first determine what her withdrawal options are. Will they allow her to withdraw only traditional 457 if she is less than 59.5? If yes, you have some flexibility.

If not, the entire thing could be rolled into traditional and Roth IRA. The portion in Roth IRA would then be subject to Roth iRA rules which do not pro-rate withdrawals between contributions and earnings.

Thanks for your response. I agree that retiring at 57 and doing Roth conversions makes a lot of sense. We will have one pension for sure, but maybe two if my wife stays at her current job. If she leaves, at least we can roll over her contributions plus interest.

Our gross income is now about $245k. So that puts us in the 24% bracket. We are also in 8.4% state tax bracket. We could do more roth in my TSP or her 457. I suppose I should do more roth, I just get hung up on paying that state tax now when we could potentially move to a no-income tax state down the road.

We are at the point this year where we would need to start back-door roth. Maybe I will just do all roth TSP and skip the back door roth. This would increase our roth contributions from $12k to $19k and avoid the small complication of back-door roth.

Another question is after tax investing. All our liquid investing is in tax-advantaged accounts. We could start investing after tax for things like home renovations.

Anyway, these are all good choices to have.

MichDad · Post by **MichDad** » Tue Apr 06, 2021 11:15 am

I'm a retired federal employee. From 2012 to 2018, when I retired, I invested only into the Roth TSP. Only my government match went into the traditional TSP during that period. Similarly, my wife invested only into her firm's Roth 401(k) during the last several years of her employment. We did this because we already had a great deal of traditional TSP / 401(k) assets. In the years since retirement, we've been diligently making substantial Roth conversions. I'm delaying collecting my Social Security benefits until I reach age 70 in part to facilitate our Roth conversions. Ideally, I'd like to see our combined traditional TSP and tIRA balances fall below $500,000 by the time I reach age 72 and face RMDs. Over 50 percent of our retirement portfolio is now in Roth assets. That percentage is increasing every year.

Remember, that when one spouse dies, the surviving spouse will likely move into a higher tax bracket the following year.

In retirement, my only TSP holding (~$1 million) is in the G Fund. It's now our only bond-like asset. The rest of our retirement financial assets are in low-cost, highly-diversified US and international equities index funds. Almost all of those funds have expense ratios below that of the TSP.

MichDad

tbone555 · Post by **tbone555** » Tue Apr 06, 2021 2:03 pm

MichDad wrote: ↑Tue Apr 06, 2021 11:15 am I'm a retired federal employee. From 2012 to 2018, when I retired, I invested only into the Roth TSP. Only my government match went into the traditional TSP during that period. Similarly, my wife invested only into her firm's Roth 401(k) during the last several years of her employment. We did this because we already had a great deal of traditional TSP / 401(k) assets. In the years since retirement, we've been diligently making substantial Roth conversions. I'm delaying collecting my Social Security benefits until I reach age 70 in part to facilitate our Roth conversions. Ideally, I'd like to see our combined traditional TSP and tIRA balances fall below $500,000 by the time I reach age 72 and face RMDs. Over 50 percent of our retirement portfolio is now in Roth assets. That percentage is increasing every year.

Remember, that when one spouse dies, the surviving spouse will likely move into a higher tax bracket the following year.

In retirement, my only TSP holding (~$1 million) is in the G Fund. It's now our only bond-like asset. The rest of our retirement financial assets are in low-cost, highly-diversified US and international equities index funds. Almost all of those funds have expense ratios below that of the TSP.

MichDad

Thank you for your insight. I will up my Roth contributions now so that I can gradually head toward 50/50 trad/roth.

MichDad · Post by **MichDad** » Wed Apr 07, 2021 9:51 am

tbone555 wrote: ↑Tue Apr 06, 2021 2:03 pm I will up my Roth contributions now so that I can gradually head toward 50/50 trad/roth.

I don't think there's any magic to having an allocation of 50/50 traditional to Roth. Imagine, for example, that you had $2 million in traditional and $2 million in Roth at age 72 (a 50/50 allocation), in addition to your taxable investments, FERS pension and Social Security. The RMDs generated by the $2 million in traditional would likely be taxed at a higher rate than necessary if you had made substantially more Roth conversions during the years before you turned age 72.

I just checked our own Roth conversion plan and see that if all goes according to that plan, our traditional to Roth allocation should be around 20/80 when I turn age 72. I want our RMDs to be relatively low because I'm planning that one of us will survive the other and move into the single tax brackets.

MichDad