Planning for Retirement

[AJ_Katz]

Let me ask the question in   a different way.  Assume that you contribute 50K a year in an account and pay taxes on the income that is deposited.  What are the taxes on that 50K?  On the other hand, consider that the money grew to $2 Million?  What are the taxes on the 2Mil?  would you rather pay taxes on 50K today or 2 Mil in 30 years (at whatever rates are then in effect?)

But in my present budget, I can either invest $14,400 per year as a Roth contribution or $18,000 as Traditional.  So, presumably by going Traditional, I am able to gain interest on an additional $3,600.  Neither is reaching the maximum allowed. 

[clean]

Simple question generated by the preceding discussion: I am currently maxing out on my annual 403b contributions -- $25,000 ($19,000 + $6,000 as someone over 50). Can I still contribute to my Roth IRA (which I set up decades ago and haven't made a contribution to in nearly that long)?

the answer isnt a clear Yes, or No.  It is a function of your income and marital status.

https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2019

IF you are single and make less than 122K, then you can contribute the full amount.  If married, you can contribute the full amount if your household earns less than 192K

Either way, if you make slightly more, you can contribute a lesser amount. If you make 'too much' then you can not contribute at all.  (however, there is a 'trick' called a 'backdoor IRA' where you make a non deductible IRA contribution and then immediately convert it to a roth.  I think that there are some additional record keeping issues with this, so I have not attempted it).

[clean]

But in my present budget, I can either invest $14,400 per year as a Roth contribution or $18,000 as Traditional.  So, presumably by going Traditional, I am able to gain interest on an additional $3,600.  Neither is reaching the maximum allowed.

Just making up some numbers...
Deposit 14400 a year for 30 years from age 40 to 70 and earn 8%.  You will amass $1,631,278 and owe no taxes and none of the money will count against social security for taxes there either.  No minimum distributions are required.  Anything left to spouse or children will pass tax free. (for the financial calculator:
n =30  i= 8  pv=0  pmt = -14400 FV = 1631278.24)

Deposit 18000 for 30 years from age 40 to 70 and earn 8%. You will amass 2,039,097.  Required minimum distribution at 70 1/2 will be about 74420  (see irs pub link below). Even if Tax Rates do NOT change, your tax bill on this will be about 12000 PLUS 85% of your social security would also be subject to taxation.
(for the financial calculator:n =30  i= 8  pv=0  pmt = -18000 FV = 2039097.8)

So while you would save an additional 400K, your tax bill from the RMD would be at least 12K PLUS the taxes on 85% of your social security benefit.

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

Let's make another assumption. 
Assume that you will invest a little safer in retirement so you earn 5% and plan to distribute the money over a 25 year period.
From the Roth you could withdraw 115743 and pay NO Taxes on the withdrawls and likely none on your social security because only your social security check would be used to determine the taxable income.  Even IF you pay taxes on social security, it will not be at either the 24% or 32% bracket!!

For the traditional you could withdraw 144679.  However, IF taxes stay the same,
$9,700 will be taxed at 10%, $29,775 taxed at 12%, $44725 taxed at 22% , $60478 taxed at 24%  (Further, the bracket for the 32% tax rate is only 16 K over this amount, so much of your social security payment will be taxed at 32%!!)

970+3573+9839.5+14515=28897  (PLUS The taxes on your social Security!!)

So the first pass (before taxes on social security), you net (144679-28897 =) 115,782 - again, before you pay taxes on social security.


The bottom line IF TAXES STAY THE SAME, you would get just about the same amount either way in retirement, BUT with a traditional IRA/403b, you definately pay taxes on your social security benefits, so your after tax retirement income is LOWER! 
AND IF TAX RATES GO UP???? You are screwed even more  You will pay even more in taxes and have even less after taxes in retirement.

[AJ_Katz]

@ clean -- okay, I'm convinced!  So how did you end up getting all of your accounts converted to Roth?  We don't have the option for 401a Roth, which I assume is dependent upon the employer offering that option.  So, is it somehow possible to convert existing 401a to Roth in my situation.  Or what about my 403b investments, is it possible to convert those to Roth?

[clean]

Your employer has to offer the Roth version for you to take advantage of this now.  IF you work for a state organization your employer may indeed offer a 403B Roth or a Roth version of a 457 plan.

If your employer does not offer them, then I would suggest that you contribute enough in the plan that they DO offer to get the full amount of the match, and then contribute $6000 to the Roth IRA. IF you are married, you can also contribute $6000 for your spouse as well.  As you indicated that you want to contribute a total of 14400, IF married, then you can get 12000 of that done with the Roth IRA.  IF not married, then you can still contribute $6K to the Roth.  I assume from your numbers indicate that your income is 85K, and often the match is 6%, so that is 5100.  SO IF you are single, you still have a bit more that you can contribute, so for anything that is left, perhaps consider a regular trading account.  You will have to pay taxes on any realized gains, but you wont have to pay taxes on any gains you do not realize, and you wont have to pay taxes on the principle in retirement.

[pigou]

But in my present budget, I can either invest $14,400 per year as a Roth contribution or $18,000 as Traditional.  So, presumably by going Traditional, I am able to gain interest on an additional $3,600.  Neither is reaching the maximum allowed.

If you're not hitting any limits and tax rates are unchanged, then there's no difference between the two.

If you have an investment "I," a tax rate "t," a rate of return "r," and you invest for "n" years, you get:

Traditional: [I * (1 + r)^n] * (1 - t)
Roth: [I * (1 - t)] * (1 + r)^n

And because multiplication is commutative, these are equivalent.

[spork]

About two weeks ago I moved half of my retirement account assets into bond funds, after a 28 percent return during calendar year 2019. I don't think today's market drop is a temporary blip.

[Cheerful]

I don't think today's market drop is a temporary blip.

Jack Bogle:  "Nobody knows nothing."

Per Boglehead philosophy, I have an asset allocation plan and I try to stay with it.

[Hegemony]

Well, when the market drops, time to buy stocks — on discount.

[spork]

Well, when the market drops, time to buy stocks — on discount.

Depends on when your retirement timeline is, your net assets, and what's in your portfolio. Today the FTSE index is down 2.5% since opening and Dow/S&P futures are down. The U.S. market is going to have another big drop today. I would not be surprised if we see a drop of 10-20% in the stock market for 2020 given the global slowdown in economic growth before COVID-19 ever made headlines. If you're 75 years old with all your investments in stocks then you will probably never recoup the lost value.

[spork]

So . . . the S & P has lost more than 12% in six trading days. The media is fixated on COVID-19 as the cause, but I still think we're seeing a bubble pop because of a pre-virus economic slowdown. 

[pigou]

If you're 75 years old with all your investments in stocks then you will probably never recoup the lost value.

That seems pretty unlikely. Let's see if this is a short-term correction related to worries about how governments will respond to the virus vs. whether there really is something fundamental underlying it.

If countries in Europe start to close borders and/or flights between Europe and the US get canceled, that's when we'll see massive economic damage. I think there's a growing concern that this could happen, because politicians are responsive to people panicking -- especially in an election year. Plus, the US president is tweeting conspiracy theories and, coming at absolutely no surprise, nobody is reassured by having Pence in charge of the US response either.

While it's impossible to say what's causing market adjustments, it'd be one hell of a coincidence if this were not related to the spread in Europe.  Plus, we now have countries closing schools for no good reason... the economic damage coming from bad policy is probably going to cause more deaths than the virus.

[clean]

In addition to the virus, (with news today of someone in California with no known ties to the illness, indicating that it has already spread to the US) I think that the strength of Bernie Sanders in the recent elections is not conducive to market confidence. 

Lots of paper losses have been felt, especially this week. I expect that Friday  (2/28) will have a big bounce as few will want to go into a weekend with the potential for more bad news from the SC elections and more days of potential news of the virus spread. 

IF you are a long term buyer, some of these prices are looking pretty good. However, be careful how you measure them!  Many use the P/E ratio to judge how 'expensive' a stock is. However, the E in that equation is now in great question!

If you're 75 years old with all your investments in stocks then you will probably never recoup the lost value.

IF you ARE 75 years old with all of your investments in stocks, then you have probably been ill advised.  IF, on the other hand, your 'investments' are in stocks, but you have 5 years of projected expenses in cash, then it is not likely that it matters much.  Alternatively, IF your 'investments' total a few million dollars, then even losing 10 or even 20% may not have much of a factor in your lifestyle. 

For what it is worth, I just adjusted my 403B contributions, increasing them so that I will invest more starting April 1 (as I missed the deadline to get more deducted 3/1).  I contribute the maximum I am allowed so this simply moves the contributions forward. 

[spork]

Once again we are seeing a black swan event in the economy -- no one thought seriously about the possibility of the stock market and Treasury market crashing at the same time.

[downer]

Looks like I'm going to be working for another few extra years now.
Assuming of course I survive the virus.