403(b)/Roth calculators and thoughts

[arty_]

I met with the TIAA person and ran some numbers (I'm 56), and he advised starting a ROTH asap because at the rate I am saving tax-deffered, I'll have more income in retirement.

I am seeking guidance on (1) how to think about the percentage of money I put towards the 403(b), vs. the ROTH (which is also a 403(b), not an IRA) and (2) where I can find an online calculator where I can put in the net I want to receive each month, and all my state taxes and various deductions, and will let me play with the percentages of roth and 403(b) to find some sort of sweet spot.

Advice? Just put it all in a Roth, and deal with the taxes now? 50/50? I don't quite know how to think about it, nor run the possibilities. I've just got a raise since I took on an interim chair position. I want to maximize my retirement money while I have this little bump (1-2 years).

[Hibush]

This all depends on your current vs future expected tax rate. If they are the same, it is actually a wash.

What the advisor is recommending is to ease off on the 403b so that your minimum distribution won't put you into a higher tax bracket than the one you are in now. 

The math on this is simple arithmetic, but the answer non-intuitive. Let's say you have $1000 today and could put it in Roth or 403b. How much will it be worth, after taxes in retirement?

Let's say you pay 30% in income tax in each time period. And that the investment you choose increases in value by 50% between now and when you use the funds.

With Roth, you pay taxes now and invest $700. At withdrawal, that is worth $1,050 and you get that tax free.
With 403b, you invest $1,000 tax deferred. At withdrawal, that is worth $1,500. Paying 30% in taxed ($450) leaves you with...$1,050.

There is no way to know for sure what your 403b will be worth in 20 years, nor what the minimum distribution and tax rates will be. But you can put in some historic numbers and do the calculation. Twenty years of contribution and investment return can result in a big number.

There is one other subtlety. If you end up in the fortunate position that an all-403b plan would have a minimum distribution greater than your immediate needs in the early years of retirement, then you might end up withdrawing and paying tax on more than you would prefer. The Roth funds don't have a minimum distribution, so you can leave them for later in life. I don't worry about that because it only matters if you expect your tax rate to drop substantially.

[arcturus]

Congratulations on doing so well in terms of saving for your retirement! There is no certainty for any retirement calculations, as it depends on your future contributions (probably a reasonable value to estimate), growth (depends on your asset allocation and future returns, so a wide range of possible values), and length of time (also a reasonable value to estimate). Tax rates are also uncertain, but it is reasonable to use the tax brackets in place at the present time. In my case, I have calculated expected values of my retirement accounts at the start of required minimum distributions (RMDs) and project that I will have more income then than I have currently. Thus, if the tax rates and brackets remain the same as now, I will be in a higher tax bracket than now, so it makes sense to contribute to a Roth 403b so that my RMDs will be lower, and, in any event, I am taxed on those funds at the present (expected lower) tax bracket. I can also put more "real" funds into a Roth 403b since these are post-tax dollars, but the maximum contribution limit ($26k for those over 50) is the same value as for pre-tax dollars. I am therefore saving more and (possibly) paying a lower tax rate. It is probably this same sequence of assumptions that led the TIAA person to recommend a Roth 403b for you.

That said, there are a couple of things to balance. Going from tax-deferred to Roth 403b means that your reported W2 income will be higher (no deferred income), so you will want to look carefully as to whether it is useful to defer *some* funds to remain within a specified tax bracket. Second, Roth 403b's do have required minimum distributions (they are just tax-free, since you have already paid taxes). It is often recommended that you roll Roth 403b's into a Roth IRA at time of retirement so that you do not have RMDs (under current tax law, Roth IRAs are the only retirement vehicle that do not have RMDs). Thus, you should choose investments that can be rolled in the Roth 403b (i.e., probably not TIAA traditional).

Any match by your employer must be in tax-deferred dollars, so if you and your employer are contributing, you will still have some tax-deferred contributions even if you go 100% Roth 403b.

If you have not already done so, I also highly recommend investing in a Roth IRA (maximum contribution $7k for those over 50).

[nonsensical]

This all depends on your current vs future expected tax rate. If they are the same, it is actually a wash.

In this scenario, isn't the Roth better because all distributions are tax-free? So you'd never pay taxes on any gains, whereas you would pay taxes on gains taken from a traditional retirement account. Right?

[clean]

We are about the same age.  I started saving in IRA and 403 B accounts long ago.  My balances in the 'traditional' accounts is now much larger than the Roth balances.
The bottom line is that at 72 now (used to be 70 1/2) you MUST begin Required Minimum Distributions.  While you can decide how much of your retirement deposits go in pre and post tax, in 15 years or so you WILL be taking money out.  You Will pay taxes on the balances withdrawn from the traditional accounts.  You dont even have to take distributions from the Roth accounts if you choose not to.

So the relevant question is essentially:
Will taxes go UP or Down in the next 15 years?


Another issue to consider is Taxes On Social Security.  IF you income is above about $44000, then up to 85% of your social security income will be taxed as well.  So imagine being 75 and being forced to withdraw say, $100, 000 (and paying taxes on that!) and then paying taxes on 85% of your say $30000 annual social security income.


Final Consideration:
Are you married?  Right now, you are paying taxes as a couple (using the married tax rate).  Some day one of you will be single.  So now imagine that you are Forced to pay taxes on the 100000 withdrawal, then another 85% of your social security income AT THE SINGLE person rate! 

I wont attempt to give advice, but I will note that I am in the process NOW of saving aggressively in my ROTH accounts.  I am also beginning to convert my current traditional IRA account to a Roth account and paying the added taxes now, as a married person, in the hopes that I wont HAVE to take the required minimum distribution and paying taxes on my social security at the single person rate!

[arcturus]

This all depends on your current vs future expected tax rate. If they are the same, it is actually a wash.

In this scenario, isn't the Roth better because all distributions are tax-free? So you'd never pay taxes on any gains, whereas you would pay taxes on gains taken from a traditional retirement account. Right?

If your tax rates are the same now as when you take distributions, then it does not matter whether it is Roth or tax-deferred. The total *amount* of tax is different, but the end result for cash in-hand is the same, due to the commutative property of multiplication. Hibush showed an example mathematical calculation. The key is that if you are paying tax up front, you have fewer dollars for your investment, so you have less gains than if you start with tax-deferred, and therefore end up with the same total dollars at the end.

However, if you are able to max-out your 403b contribution in both cases, then using a Roth 403b account will allow you to put *more money* into a tax-advantaged account, since Roth dollars have already been taxed. That is a different calculation than illustrated by Hibush. In this case, you are comparing how much you are putting into a Roth account with that which you would put into the combination of a tax-deferred account AND a taxable account. In this case, the Roth account has less tax-drag, and is likely to be a better choice.

Nonetheless, there is a lot of literature indicating that Roth 403b's are not necessarily a good choice (usually in the context of 401k's, but it is the same idea). Most folks are in a lower tax bracket in retirement (no paycheck), so using tax-deferred accounts for the majority of your 403b is usually the best choice. Roth 403b's (401k's) are usually only recommended if you think your income will be higher in retirement (due to RMDs) than it is right now.

That said, I still highly recommend Roth IRA contributions, which have a different set of considerations than Roth 403b.

[Vkw10]

Roth 403b has Required Minimum Distribution. Roth IRA does not, but it has a low contribution limit.

In addition to having up to 85% of Social Security taxed if my income is too high, I'm concerned about the Medicare surcharge (IRMAA). In 2020, the standard Medicare Part B premium is $144.60 per month. But if your modified adjusted gross income is high, you could get hit with IRMAA and pay more. https://www.medicare.gov/your-medicare-costs/part-b-costs
.

I was on track to be subject to IRMAA when I had to start taking RMDs on my tax-deferred accounts, so I've switched part of my saving to Roth accounts. I plan to draw on my tax-deferred accounts in early retirement and leave the Roth accounts alone.

[Hegemony]

The actual important thing is not whether you do Roth or not-Roth. The most important thing is to sock the maximum in whichever you can, or both. The choice of vehicle may make a small difference, or may not — it depends on a lot of variables which you can't guess at with foolproof precision. But what you want is to save a ton, as soon as possible.

[clean]

If your tax rates are the same now as when you take distributions, then it does not matter whether it is Roth or tax-deferred.

Even IF (note the BIG IF) rates stay the same, you may well find that more "tlaxes" are in your future.  As already indicated non Roth distributions will count toward the amount of your social security that is taxable.  (Note that even interest on Municipal Bonds - which are federal tax free- are still included to determine how much of your social security income is subject to the up to 85% subject to taxes.  Note too, as indicated by VKW, that your medicare premiums are also determined by your taxable income (2 years in advance!!)

and again, IF you are married, once one of you (til death do you part) become single again, then you will pay the taxes at the single tax rate and your standard  deduction falls from the roughly 24000 married rate to the 12000 something single rate  (so you pay a higher rate on more money!)

So I contend that you tax rate will NOT be constant!  Even IF there is no change in the rates (and I m sure that they will go up), your situation is not static and you or your spouse will find one of you paying the single rate, with lower deductions, and therefore paying a greater percentage of income.

[Vkw10]

Try the IRS withholding calculator, too. Run some scenarios with 100% or 75% or 50% or 25% of your retirement funds going to a tax-deferred plan. You may decide to do some tax-deferred and some Roth based on taxes and net pay.

I would recommend at least some Roth, although I'd put max in Roth IRA before contributing to Roth 403b since the Roth IRA doesn't require RMD. How much goes in each depends on multiple factors, including impact on net pay and your thoughts on future tax rates.

[clean]

Roth 403b has Required Minimum Distribution. Roth IRA does not

learn something new everyday! 
Even if there is a RMD for the Roth 403b, though, the distributions will not be taxed.
The income limit on Roth IRAs is lower and you can contribute a lot more into the 403B than the IRA. 

[dismalist]

All the above contributions, and they are insightful and good, show why it's best to scrap the current income tax system and substitute it with a consumption tax system. Then we wouldn't have to do all this work figuring out what to put our few pennies into. :-)

[Hibush]

All the above contributions, and they are insightful and good, show why it's best to scrap the current income tax system and substitute it with a consumption tax system. Then we wouldn't have to do all this work figuring out what to put our few pennies into. :-)

The reason we don't do that is that people who accumulate vast riches end up paying nothing to the general welfare, and those whose means are so low that they need to spend their whole income end up paying the largest proportion.

The idea is popular because the former group wields considerable political power.