Importance of have taxable account for retirement

[michaelc]

Hello,

I am 60 male, single, no kids and ZERO debt. My current retirement savings is right at 800K. However, these assets are the total for my 403(b) and my Roth. My 403(b) has 625K and my Roth has 175K. I DO NOT have a taxable account for retirement and now I am wondering if this is a mistake. I have 2 plans in my employer's 403(b), which is with TIAA. The Defined Plan is what my employer voluntarily contributes, which is 9.5%. The Deferred Plan is the supplemental plan that the employee contributes, which I do at 13%. I was thinking about stopping contributing to my Deferred Plan, and use that 13% to open a taxable account for retirement with Vanguard. It comes out to $725 a month. I have 5-7 more left till retirement, so that can add up and than I will have 3 sources for retirement savings...My 403(b), Roth and Vanguard taxable account.

My current health insurance continues in retirement at my current premium, which is a HUGE plus, but I must stay employed there to 65 and have 25 years of service, which I will have 32 years at 65.

So my question is how important is it to have a 3rd source for retirement in a taxable account?

Also, I do have 2 Ally Bank online savings accounts at $55,000.

Would this be a wise move?

Thanks
Michael in NJ

[mhalley]

I don’t know that I would call it important but it is nice to have all 3 types of accounts. For example, you can do Roth conversions and use the taxable account to pay the taxes. Whether this is a good plan depends on amount you have in various accounts, timing and amount of SS, other income, etc etc. But it all depends on the individual situation.

[Silverado]

I am betting it is very important. We have about 30% in taxable, and dump more in it each year than we do in tax deferred. I expect the flexibility to really help optimize things in the years between 55 and pension/social security.

[steadyosmosis]

Hello,

I am 60 male, single, no kids and ZERO debt. My current retirement savings is right at 800K. However, these assets are the total for my 403(b) and my Roth. My 403(b) has 625K and my Roth has 175K. I DO NOT have a taxable account for retirement and now I am wondering if this is a mistake. I have 2 plans in my employer's 403(b), which is with TIAA. The Defined Plan is what my employer voluntarily contributes, which is 9.5%. The Deferred Plan is the supplemental plan that the employee contributes, which I do at 13%. I was thinking about stopping contributing to my Deferred Plan, and use that 13% to open a taxable account for retirement with Vanguard. It comes out to $725 a month. I have 5-7 more left till retirement, so that can add up and than I will have 3 sources for retirement savings...My 403(b), Roth and Vanguard taxable account.
My current health insurance continues in retirement at my current premium, which is a HUGE plus, but I must stay employed there to 65 and have 25 years of service, which is will have 32 years at 65.

So my question is how important is it to have a 3rd source for retirement in a taxable account?

Also, I do have 2 Ally Bank online savings account at $55,000.

Would this be a wise move?

Thanks
Michael in NJ

No mention of marginal tax rates for the OP,
but I saved 22+% on taxes while maxing-out tax-deferred accounts,
and I'm now withdrawing some of it at no more than 12% tax cost.
Glad I did not put those dollars into a taxable account.

[michaelc]

Hello,

I am 60 male, single, no kids and ZERO debt, in great health. My current retirement savings is right at 800K. However, these assets are the total for my 403(b) and my Roth. My 403(b) has 625K and my Roth has 175K. I DO NOT have a taxable account for retirement and now I am wondering if this is a mistake. I have 2 plans in my employer's 403(b), which is with TIAA. The Defined Plan is what my employer voluntarily contributes, which is 9.5%. The Deferred Plan is the supplemental plan that the employee contributes, which I do at 13%. I was thinking about stopping contributing to my Deferred Plan, and use that 13% to open a taxable account for retirement with Vanguard. It comes out to $725 a month. I have 5-7 more left till retirement, so that can add up and than I will have 3 sources for retirement savings...My 403(b), Roth and Vanguard taxable account.
My current health insurance continues in retirement at my current premium, which is a HUGE plus, but I must stay employed there to 65 and have 25 years of service, which is will have 32 years at 65.

So my question is how important is it to have a 3rd source for retirement in a taxable account?

Also, I do have 2 Ally Bank online savings account at $55,000.

Would this be a wise move?

Thanks
Michael in NJ

No mention of marginal tax rates for the OP,
but I saved 22+% on taxes while maxing-out tax-deferred accounts,
and I'm now withdrawing some of it at no more than 12% tax cost.
Glad I did not put those dollars into a taxable account.

My salary is 72K so 22% tax bracket, I believe.

[livesoft]

My salary is 72K so 22% tax bracket, I believe.

But what is your taxable income? With your standard deduction you could be deferring enough of your earned income to be in the 12% tax bracket.

[michaelc]

My salary is 72K so 22% tax bracket, I believe.

But what is your taxable income? With your standard deduction you could be deferring enough of your earned income to be in the 12% tax bracket.

To be honest, im not sure. Can you tell me how I can find this out?

[Triple digit golfer]

How can it be a mistake? What's the alternative, to forego tax advantaged investments?

[michaelc]

How can it be a mistake? What's the alternative, to forego tax advantaged investments?

That's is why I am asking! I am trying to learn and get constructive advice.

[michaelc]

I am looking at my 2021 tax returns.....

federal taxable income: $46,322.00
state taxable income: $63,831.00

[backpacker61]

I would take full advantage of your tax-advantaged retirement savings plans before investing in a taxable account. Immediate tax benefit and stronger protections from legal judgements.

I don't see that you have an issue.

[sailaway]

What other sources of income will you have in retirement?

What are your expenses?

Do you have a Roth option for your 403b?

If your salary is $72k and you are deferring 13% and then you have standard deduction, it sounds like you might just barely be in the 22% bracket, but if you have other deductions, like an HSA, it might be less. (ETA, yep looks like you are just inside the 22% bracket). Might be worthwhile to keep deferring, unless you are awaiting a large pension you haven't mentioned.

[Calvert]

https://www.bogleheads.org/wiki/Priorit ... nvestments

Read the wiki Prioritizing Accounts. Taxable is last. You just haven't had the need if you can use the other accounts. You are good.

[michaelc]

What other sources of income will you have in retirement?

What are your expenses?

Do you have a Roth option for your 403b?

If your salary is $72k and you are deferring 13% and then you have standard deduction, it sounds like you might just barely be in the 22% bracket, but if you have other deductions, like an HSA, it might be less. (ETA, yep looks like you are just inside the 22% bracket). Might be worthwhile to keep deferring, unless you are awaiting a large pension you haven't mentioned.

sailaway,

Thanks,

My other source of income in retirement for, of course ,will be social social which is showing at 67 payment of $2769, at 70 $3485. My expenses in retirement will be around $3500 or so a month. My 403(b) just recently added a Roth option, but I have not taking advantage of it yet. I do not have a pension. I am 100% debt free an plan on retiring debt free.

[bsteiner]

Your taxable account is what’s left after you fund your retirement accounts. That could be a great deal or nothing or anything in between, depending on your income and expenses.

[Longdog]

Is your employer's contribution of 9.5% tied in any way to your own contributions? If you stop contributing entirely, will they continue to put in 9.5%?

[JD101]

My understanding is you need taxable account to pay for the taxes due on non Roth accounts. Roth accounts may be used to pay taxes on IRA/401k accounts but generally Roth account is the last to be drawn out. I'm not sure if there is a little problem here, your taxable account will generally have stock funds to avoid ordinary gains and this can be down at the time you need to withdraw money to pay taxes. Someone more knowledgeable can comment on this.

[Makefile]

My understanding is you need taxable account to pay for the taxes due on non Roth accounts. Roth accounts may be used to pay taxes on IRA/401k accounts but generally Roth account is the last to be drawn out. I'm not sure if there is a little problem here, your taxable account will generally have stock funds to avoid ordinary gains and this can be down at the time you need to withdraw money to pay taxes. Someone more knowledgeable can comment on this.

That's most relevant when someone under 59 1/2 wants to do taxable Roth conversions, and they can't use pre-tax funds to pay the taxes without incurring the 10% penalty. After that, one might still convert 100% of their withdrawal and pay the taxes from another source, in order to optimize the conversion as much as possible.

If it's just a withdrawal and not a conversion, money is fungible and I don't follow the logic here.

[michaelc]

Is your employer's contribution of 9.5% tied in any way to your own contributions? If you stop contributing entirely, will they continue to put in 9.5%?

Long dog,

No the plans are totally separate! My employers 9.5% is called the Defined Plan and the Deferred Plan is the supplemental plan that the employee can voluntarily contribute any % there desire. So the 9.5% is NOT tied to my own contributions and the 9.5% continues regardless.

[Makefile]

Your taxable account is what’s left after you fund your retirement accounts. That could be a great deal or nothing or anything in between, depending on your income and expenses.

Agreed. High-income investors have taxable accounts not because of some shrewd calculation of taxable vs. tax deferred vs. Roth but because their tax advantaged space is full. Sometimes the 59 1/2 rule comes up in discussion in FIRE areas as a reason to have taxable assets prior to that, but the OP here is 60.

[michaelc]

Your taxable account is what’s left after you fund your retirement accounts. That could be a great deal or nothing or anything in between, depending on your income and expenses.

Agreed. High-income investors have taxable accounts not because of some shrewd calculation of taxable vs. tax deferred vs. Roth but because their tax advantaged space is full. Sometimes the 59 1/2 rule comes up in discussion in FIRE areas as a reason to have taxable assets prior to that, but the OP here is 60.

What assets would make one a "high income investor"?

[calmaniac]

Michael, it sounds like you are in pretty good shape as is. It does not sounds as if having a taxable account is going to move the needle for you. Lots more important variables for you, such as when to take Social Security.

For people with 25% and higher income tax marginal rates and for those planning to leave inheritances to others, having some assets in taxable accounts may have some advantages (i.e., step up in basis = tax free inheritance). It does not sounds as if either of those are an issue for OP.

For much of my career I did not have access to an employee sponsored retirement plan, so most of our investments (≈60%) are in a taxable brokerage account and only 27% are in TSP/457/IRA pre-tax retirement accounts. Because we have substantial pension income and good sized assets, I'm actually glad with this distribution, as our RMDs will be manageable (≈$80k/year). If the taxable:pre-tax ratio was reversed, we'd be looking at even higher taxes in retirement! YMMV

[Makefile]

Your taxable account is what’s left after you fund your retirement accounts. That could be a great deal or nothing or anything in between, depending on your income and expenses.

Agreed. High-income investors have taxable accounts not because of some shrewd calculation of taxable vs. tax deferred vs. Roth but because their tax advantaged space is full. Sometimes the 59 1/2 rule comes up in discussion in FIRE areas as a reason to have taxable assets prior to that, but the OP here is 60.

What assets would make one a "high income investor"?

If they have more than $29,000 to save in 2022, or $37,500 if over 50, or $72,500 including employer contributions if they have access to a Mega Backdoor Roth, or $81,000 if they have access to a Mega Backdoor Roth and are also over 50. All of those investors would have to use a taxable account.

Investors under those amounts, if they feel dubious about tax deferral, always have the option to flip some of their contributions to Roth before doing taxable.

[ram]

You already have 55000 in a "taxable" account. You can use it for anything including retirement.

Yo do not need any additional taxable account savings.

So invest in tax deferred accounts and save on taxes.