Pre-Retirement Planning Questions/ NJ Resident

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yankeefan4065
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Pre-Retirement Planning Questions/ NJ Resident

Post by yankeefan4065 » Tue Aug 13, 2019 7:18 pm

Hi All,

I've posted many times requesting guidance for myself and others and have always received valuable advice, questions to ponder, etc. This time I have questions about my own situation. I'm almost 54, single, a New Jersey resident, and have been an educator for 30 years. I'm planning on retiring in approximately 5 years. As an avid reader of the forum I learn new things all the time which raise questions for my own situation. Lately, I've been reading threads about funding tax-deferred, tax-free, and taxable accounts and whether or not to max out tax-deferred space as one gets close to retirement. Here is my current situation and portfolio:

*Age 54
*Single
*NJ
*Fed Tax Rate: 22%
*State Tax Rate: 6.37%
*Pension: available at 55 years of age: approx. 60% of my gross salary
*Lifetime retiree health care paid for those of us who had enough years of service (NJ, however, is in poor financial condition; I would not be surprised if something changed on the benefits front (pension as well as health care)
* no debt/no kids
* 12 month emergency fund

Current Portfolio:

Vanguard Taxable:
Total Market 5.2%

Vanguard 403b (7)
Total Stock Market 18.44%
Total International 10.59%
Total Bond Market 41.94%

Vanguard Roth IRA
Total Stock Market 19.08%
Total Bond Market 4.7%

Approx 53 stock/47 bond
Approx 20% Intl as % of equity



Questions:
1. I've been maxing my 403b and Roth IRA for many years. My taxable account is a small percentage of my total portfolio. (currently 5%). Does it make sense to continue maxing out the 403b for another 5 years or divert some to the taxable account? (My pension, if not reduced, should be able to pay my living expenses).

2. Taking RMD's,along my with pension, and social security would put me in the 24% bracket (if it were today---who knows what the tax rates will be in the future). Upon retirement should I start converting a portion of my 403b to the Roth IRA each year to avoid being in a higher bracket potentially?

3. If I choose that route (#2) do I just transfer into my existing Roth IRA or should I open another one? Can I mix those funds? What about the 5 year rule?

3. A simple question that I'm not sure of-----If I start converting a portion each year how do people pay for that? I wouldn't have enough in my taxable account to pay it. Do most people just have it taken out of the conversion amount? (is that a reason to fund the taxable more now and put less in 403b?)

4. Finally, are there other things I should be thinking about as I approach retirement? I've been so focused on the accumulation stage that I haven't thought about these other issues.

Again, thanks to all who read and/or respond.

Best,
John

ExitStageLeft
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Re: Pre-Retirement Planning Questions/ NJ Resident

Post by ExitStageLeft » Tue Aug 13, 2019 7:50 pm

It's so dependent upon your individual circumstance that we really need to know more details.
- How much will your expenses be?
- How much will the pension be?
- How much will SS be at FRA?
- Is charitable giving part of your planned expenses? (see Qualified Charitable Donation)
- Can you draw from 403b at retirement?

In general terms, it's probably a good idea to do some Roth conversions in the few years after your retire. But if your tax-deferred nest egg is small enough compared to your annual expenses there may be no real benefit. For many folks that delay SS until age 70 the spend-down of the tax-deferred keeps their RMDs reasonable. it just depends...

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yankeefan4065
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Re: Pre-Retirement Planning Questions/ NJ Resident

Post by yankeefan4065 » Tue Aug 13, 2019 8:01 pm

Thanks so much for responding. My 403b represents about 71% of my portfolio. I believe I will be able to withdraw from my 403 at retirement. I think I have to do more calculations regarding expenses in retirement and approximate how much I’ll need to draw from the 403b as the years go before RMDs kick in. There are a lot of variables to think about.

Thanks again

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grabiner
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Re: Pre-Retirement Planning Questions/ NJ Resident

Post by grabiner » Tue Aug 13, 2019 8:18 pm

Does your 403(b) offer a Roth option? If so, you might consider the Roth, particularly if you might retire to a state other than NJ with an income tax. NJ doesn't allow a tax deduction for 403(b) contributions, so if you retire to another state, you avoid state tax by using the Roth. (If you stay in NJ, you will be taxed only on the gains.)

Another reason for the Roth is that you will probably retire at about the same tax rate you have now, with the pension and RMDs from your 403(b) (or from the IRA you roll it over to). A traditional account is better than a Roth if you will retire in a lower tax bracket, but it looks like this won't apply to you.
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yankeefan4065
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Re: Pre-Retirement Planning Questions/ NJ Resident

Post by yankeefan4065 » Tue Aug 13, 2019 8:27 pm

Unfortunately it doesn’t offer a Roth option

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grabiner
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Re: Pre-Retirement Planning Questions/ NJ Resident

Post by grabiner » Wed Aug 14, 2019 8:46 am

It's still worth contributing more to the 403(b), since this gives you tax-deferred growth/

If you retire in NJ, converting part of your 403(b) to a Roth IRA will be a good move, because of the NJ tax laws. Your 403(b) withdrawals will be only partly taxable in NJ, but the taxable portion (and thus the effective state tax rate) will grow as the investments grow if you leave the money there. If you retire in a no-tax state, you may want to wait until you have moved there to convert your 403(b). But either way, the advantage of converting is that you reduce your 403(b) balance, and thus avoid RMDs you don't need; you get more tax-deferred growth, and your heirs will eventually inherit the Roth IRA tax-free.

You can include conversions in the same Roth IRA you already have, and even if you have multiple Roth IRAs, they are aggregated for tax purposes. Thus, if you have a Vanguard Roth IRA funded by contributions, and a Fidelity Roth IRA funded by conversions which have not yet met the rules for tax-free withdrawals, you can still withdraw an amount equal to your contributions from the Fidelity Roth IRA free of federal tax. And if part of the withdrawal is taxable in NJ, it will likewise be taxable no matter which Roth IRA you take it from.
Wiki David Grabiner

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yankeefan4065
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Re: Pre-Retirement Planning Questions/ NJ Resident

Post by yankeefan4065 » Wed Aug 14, 2019 9:15 am

Thank you very much for your detailed response. I didn’t realize the Roth’s are aggregated. To clarify:

1. Each year I make a conversion restarts the 5 year clock for that amount of the conversion? However, I can still withdraw contribution amounts with no tax?

2. If I do conversions what would be the best way to pay the tax burden? Also, I assume the way to decide on an amount would be a number that wouldn’t push me into the new tax bracket.

Best,
John

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Re: Pre-Retirement Planning Questions/ NJ Resident

Post by cashboy » Wed Aug 14, 2019 2:16 pm

it is smart to start thinking about this now 'before retirement' rather than 'at retirement'.

i live in nj.

for planning, not sure if you are aware of the tax changes regarding pensions and IRAs:

https://www.state.nj.us/treasury/taxation/njit7.shtml

unfortunately, if you have 1 penny of income over the amounts shown you cannot deduct anything. :oops:

one other thing to consider is moving from nj to a more retirement-friendly state - like pa that does not tax retirement income such as SS, pensions or IRA withdrawals.
FSPSX - FXAIX - FXNAX - CD - CASH - canned beans - rice

Topic Author
yankeefan4065
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Re: Pre-Retirement Planning Questions/ NJ Resident

Post by yankeefan4065 » Wed Aug 14, 2019 3:33 pm

Thank you! I was aware of the exclusions if you’re 62 or older. I was not aware that if you are over the amount you cannot deduct anything.

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grabiner
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Re: Pre-Retirement Planning Questions/ NJ Resident

Post by grabiner » Wed Aug 14, 2019 7:44 pm

yankeefan4065 wrote:
Wed Aug 14, 2019 9:15 am
1. Each year I make a conversion restarts the 5 year clock for that amount of the conversion? However, I can still withdraw contribution amounts with no tax?
This is correct. Conversions come out in order, so if you make a conversion in 2019 and another one in 2020, you can withdraw all contributions plus the 2019 conversion penalty-free in 2024. (However, NJ may still tax you, because it prorates gains, treating non-qualified Roth withdrawals as if the IRA was non-deductible.)
2. If I do conversions what would be the best way to pay the tax burden? Also, I assume the way to decide on an amount would be a number that wouldn’t push me into the new tax bracket.
Pay the tax from your taxable account (and add to the tax cost any capital-gains tax which would be due if you have to sell stock to do that). If you withdraw from your Roth IRA or 403(b) to fund the conversion, you give up some of the tax deferral.

It will usually be correct to go to the top of a tax bracket each year when converting, but you have to check the math to see whether it is the top of your current bracket or the next one. Using up the 22% and 24% brackets to convert more money is a good idea if it avoids RMDs which will be taxed at 28%.
Wiki David Grabiner

Topic Author
yankeefan4065
Posts: 133
Joined: Fri May 23, 2008 9:35 am

Re: Pre-Retirement Planning Questions/ NJ Resident

Post by yankeefan4065 » Wed Aug 14, 2019 8:16 pm

Thank you for all the information. I think I’ll stick with my plan of maxing out both 403b and Roth. As the next few years go by I’ll get a better feel for expenses in retirement, estimated Social Security benefits, future health care costs as NJ deals with its financial problems, and do some modeling on Roth conversions.

Thanks to all!

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