Planning for Retirement

[stemer]

This is our dream scenario as well, retiring in Europe.

Does anyone know if income from withdrawals while permanently leaving abroad falls under the "expat" tax laws where you have to reach a certain amount of income in the foreign country (I think it is $80K) to be taxed in the US or the tax in the US is inevitable when drawing from a 401k/403b regardless of where you live? 

[monarda]

I just found these very interesting pages:
A calculator
https://dqydj.com/net-worth-by-age-calculator-united-states/
and a summary
https://dqydj.com/net-worth-brackets-wealth-brackets-one-percent/

Striking difference between average and median (of course we know how much of an insane amount that top 1% really has).

I must say that I was surprised to see that with or without our primary residence equity included, we were sitting around the 80th percentile. We really do live pretty modestly.

It says a lot about the state of wealth inequality.  We all have seen these kinds of graphs from Sanders and Warren campaigns (and others), but somehow this one makes a stronger impression on me.

[monarda]

And I also just found this page helpful:
https://investornews.vanguard/how-much-does-retirement-health-care-cost/

[AJ_Katz]

Okay folks, I've increased contributions to my 403b for this month and noticed immediately in my paycheck how the extra $1200 deducted did not result in $1200 off my paycheck, it was only about $900 less, because they were pre-tax dollars.  It really drove home to me how the Traditional vs. Roth makes a difference and means I could up that contribution to $1500 per month.

But now I'm struggling to understand which choice is better for my 403b contributions...  Roth or Traditional.  I understand the general mantra is to calculate your estimated tax bracket at retirement and if you'll be at a higher tax bracket at retirement you should go Roth and if at a lower bracket go Traditional.  Despite that, I see a lot of information online pushing the Roth, saying things like "go Roth if you have the option." 

But I simply don't think it's as simple as that.  In retirement, I won't need as much in income because there won't be a monthly deduction from my paycheck for social security or medicare.  Also, although SS income will also be taxable, only up to 85% of retirement income is taxable and the dollars that I am contributing are dollars that are being taxed at the top end of my tax bracket, whereas a good amount of the income earned in retirement will be at the lower ends of my tax bracket.  I am currently 25 years out from retirement and have my 403b contributions going into a higher risk index fund, so it seems like to go Roth on these contributions misses out on compound growth -- especially if I am able to contribute my current tax savings into the fund as opposed to spending it now.  However, there does seem to be a benefit of having at least some funds in Roth since they allow zero-penalty early withdraw...  which is something I would only use if we were in a financial hardship.  The other consideration is that you cannot contribute to the Roth if you make more than $140k, so in later years I may or may not have the option to contribute.  And there are likely other factors to consider too.

It seems like the mantra of going Roth is the best advice for the average person who will likely be short on funds in retirement.  I'm not sure it's the right for me.  Does anyone have a good strategy or resources to help tackle this?

[ciao_yall]

Okay folks, I've increased contributions to my 403b for this month and noticed immediately in my paycheck how the extra $1200 deducted did not result in $1200 off my paycheck, it was only about $900 less, because they were pre-tax dollars.  It really drove home to me how the Traditional vs. Roth makes a difference and means I could up that contribution to $1500 per month.

But now I'm struggling to understand which choice is better for my 403b contributions...  Roth or Traditional.  I understand the general mantra is to calculate your estimated tax bracket at retirement and if you'll be at a higher tax bracket at retirement you should go Roth and if at a lower bracket go Traditional.  Despite that, I see a lot of information online pushing the Roth, saying things like "go Roth if you have the option." 

But I simply don't think it's as simple as that.  In retirement, I won't need as much in income because there won't be a monthly deduction from my paycheck for social security or medicare.  Also, although SS income will also be taxable, only up to 85% of retirement income is taxable and the dollars that I am contributing are dollars that are being taxed at the top end of my tax bracket, whereas a good amount of the income earned in retirement will be at the lower ends of my tax bracket.  I am currently 25 years out from retirement and have my 403b contributions going into a higher risk index fund, so it seems like to go Roth on these contributions misses out on compound growth -- especially if I am able to contribute my current tax savings into the fund as opposed to spending it now.  However, there does seem to be a benefit of having at least some funds in Roth since they allow zero-penalty early withdraw...  which is something I would only use if we were in a financial hardship.  The other consideration is that you cannot contribute to the Roth if you make more than $140k, so in later years I may or may not have the option to contribute.  And there are likely other factors to consider too.

It seems like the mantra of going Roth is the best advice for the average person who will likely be short on funds in retirement.  I'm not sure it's the right for me.  Does anyone have a good strategy or resources to help tackle this?

If you are already traditional, remember that the only way to go to Roth is to convert all your current accounts. That means paying taxes on ALL the balances when you make the conversion.

Husband and I have a healthy balances in our traditionals - enough that the bath we would have to take on taxes now makes it pretty much unthinkable to convert to Roth accounts now.

[AJ_Katz]

If you are already traditional, remember that the only way to go to Roth is to convert all your current accounts. That means paying taxes on ALL the balances when you make the conversion.

Husband and I have a healthy balances in our traditionals - enough that the bath we would have to take on taxes now makes it pretty much unthinkable to convert to Roth accounts now.

Hmm...I hadn't thought about conversions.  I was only thinking about monthly contributions to my 403b, which provides the option to make the contribution either as Traditional and/or Roth.

[ciao_yall]

If you are already traditional, remember that the only way to go to Roth is to convert all your current accounts. That means paying taxes on ALL the balances when you make the conversion.

Husband and I have a healthy balances in our traditionals - enough that the bath we would have to take on taxes now makes it pretty much unthinkable to convert to Roth accounts now.

Hmm...I hadn't thought about conversions.  I was only thinking about monthly contributions to my 403b, which provides the option to make the contribution either as Traditional and/or Roth.

I believe, if you have anything in an IRA or similar account, you have to be 100% Roth or 100% Traditional.

We decided to elect Traditional early on figuring our earnings would be higher while working than in retirement.

The other consideration is if you want to leave money to heirs - IRAs are a taxable part of your estate, but I don't believe Roth ones are.

[onthefringe]

If you are already traditional, remember that the only way to go to Roth is to convert all your current accounts. That means paying taxes on ALL the balances when you make the conversion.

Husband and I have a healthy balances in our traditionals - enough that the bath we would have to take on taxes now makes it pretty much unthinkable to convert to Roth accounts now.

Hmm...I hadn't thought about conversions.  I was only thinking about monthly contributions to my 403b, which provides the option to make the contribution either as Traditional and/or Roth.

I believe, if you have anything in an IRA or similar account, you have to be 100% Roth or 100% Traditional.

I am fairly sure this is not the case. For example at this page the statement "The most you can contribute to all of your traditional and Roth IRAs is the smaller of" suggests you can simultaneously have both.

This page suggests the same is true for traditional and Roth 403b.

[clean]

I believe, if you have anything in an IRA or similar account, you have to be 100% Roth or 100% Traditional.

This is NOT true.  There is a limit to your total IRA (and 403/401) contributions, but you can contribute to both as long as the total is within the limit.

Here are some questions to consider for the retirement contribution Roth/traditional questions:

1.  Do you pay a state income tax now?  If so, you may be better off using a traditional 403, especially if you plan to move to a  state that does not charge a state income tax.  that way you are not paying state income tax on your Roth retirement contributions and if you move to a state with no income tax, you wont pay taxes on the distributions, either.

2.  Up to 85% of your social security distributions will be taxed as regular income if your retirement income is above a certain (rather low) limit.  However, roth distributions are not included in the calculation to determine if your social security benefits are taxed.  Ideally, if All of your income was from a roth account and social security, then the limit would not be breached, and your social security benefits would escape being taxed.

3.  A Roth 401/403 is not more accessible than a traditional  401/403.... "here does seem to be a benefit of having at least some funds in Roth since they allow zero-penalty early withdraw."  This is true if this is referring to an IRA, though.  (just wanted to be sure that no one is confusing the term 'Roth')

4.  Consider that distributions from traditional IRAs and 401/403 accounts will be taxed as regular/ordinary income.  However, much of the gains will be earned from investments, which would usually be taxed at capital gains rates.  Im not sure where to take the logic on this, but to the extent that you use up your contributions limits, saving/investing in a traditional investment brokerage account may have some slight advantages as that money has already been taxed and the earnings will be taxed at a lower rate, but that is probably an issue for later on.

5.  In equilibrium,  (if the tax rates are the same in retirement and while working), then it wont make any difference if you have a limited income.  The difference matters when the tax rates are different.  The question is really whether your tax rate will be higher or lower? 
In as much as social security will be taxed as income, and the traditional 401/403 and IRAs have Required Minimum Distribution (RMD) requirements (Roth accounts do not), then there is some question in my mind that people will actually be in a lower tax bracket.... and that is before the political risk that tax rates will not have to go up to deal with the past deficiet spending and everything else! 

For me, on this idea, I think that I have more ability to control my tax liability TODAY and will have much less ability to shield money from taxes. 

(One coworker retired at 70 with quite a nest egg.  His RMD  is more than he earned in the last years he worked.  HIS tax rate is NOT going to be lower!!

For what it is worth, I hope to be ABLE to retire at 60.  Im not sure I will be WILLING, but I want to be able.  I have been contributing significant amounts into retirement accounts for just about as long as I have worked.  When I started working, there was no ROTH option.  I am currently contributing 25K a year (19K plus the 6k over 50 catch up).  I am considering beginning conversions in my IRA accounts (from Traditional to Roth) and pay more taxes now.  My employer match must go in pretax, so I am still increasing my traditional 403b account. 

The final consideration is about future inheritances from parents (not spouses) and the proposed legislation.  Under the current law, if you inherit a retirement account, you can take it out over your expected life .  The new legislation proposals will change that to a 10 year max. So IF you are likely to inherit in retirement, you will have even more income expected to be taxed.

Good luck.  (and for what it is worth, Im fully funding my retirement with ROTH accounts, but i do not pay state income tax here).

[pigou]

In addition to clean's excellent points, a cute upside of Roth accounts is that they have the same nominal limits as traditional accounts. But $6,000 in a Roth account is worth more when you withdraw it than $6,000 in a traditional IRA, since the latter is pre-tax.

[AJ_Katz]

But, correct me if I'm wrong, it's not just a straight comparison of tax brackets before and after retirement. 

Contributions to my Traditional 403b are going to be the income that is at the top part of my tax bracket (32%) because any dollars earned over $84,200 is taxed at 32%, dollars earned between $39,475 to 84,200 is taxed at 22%, dollars earned between $9,700 and $39,475 are taxed 12%, and dollars earned up to $9,700 taxed 10%.  When I take retirement, dollars earned will again be taxed at different rates depending on total income. 

Taxes for Traditional:
Let's make a simple example and say I earn $85k now and at retirement earn the same monthly income from my Traditional 403.  Not all of my $85k income in retirement is going to be subjected to the 32% tax rate, $9,700 will be taxed at 10%, $29,775 taxed at 12%, $44,725 taxed at 22%, and $800 taxed at 32%.  The total amount of income tax paid on that money paid in retirement would be $14,385.

Taxes for Roth:
Again, let's say that I earn $85k now and receive the same amount in retirement.  Since taxes are paid at the time of contribution, and these dollars are at the top of my annual income, it would either be taxed at the 22 or 32% rate.  So, let's say all of my contributions were at the top rate.  That means that I would have paid 32% tax rate on the $85k, which is equal to $27,200.

@ clean -- I appreciate the idea on where to live for tax purposes. My partner and I will not have ties to our location and would be willing to move, especially to some place that has lower property taxes, those are killing us here.  We're also considering the idea of living on the road in an RV for a number of years, which would allow us to set up residence in one of the states without income tax.  I also appreciate the lack of certainty about future tax rates.  I presently do not stand to inherit anything of significance and am not currently able to meet the maximum contribution rate for the 403b ... at least not this year when I've only been able to contribute for a couple of months.  I am considering switching to Roth contributions for 2020, which is why I'm contemplating this issue at the moment.

[clean]

First, I think that your tax brackets are wrong.

http://money.com/money/5456041/tax-brackets-2019/

1   10%   0 to $9,700           $0 to $19,400
2   12%   $9,701 to $39,475   $19,401 to $78,950
3   22%   $39,476 to $84,200   $78,951 to $168,400
4   24%   $84,201 to $160,725   $168,401 to $321,450
5   32%   $160,726 to $204,100   $321, 451 to $408,200
6   35%   $204,101 to $510,300   $408,201 to $612,350

Im not sure that my copy paste of a table will come out, but at 85k and single, your marginal tax rate is 24% (and only 799 is taxed at 24%)


Second issue is about taxes. These brackets are based on your taxable income, not your gross income. You get a standard deduction of about 12,000 to start with, so if you made 85K gross, then your taxable income would be no more than 73000.

IF you contributed to a Roth account you would pay a total of 11918 (no matter what you contributed because you pay taxes on the income when earned). 
To 73K taxable income:
$9,700 will be taxed at 10%, $29,775 taxed at 12%, $33,525 taxed at 22%

970+3573+7375= 11918

If you contributed the full allowance to the Traditional 403 (19000, which may not be easy on an 85K gross income) and are less than 50 years old, then your tax bill would be
$9,700 will be taxed at 10%, $29,775 taxed at 12%, $14525 taxed at 22%

970+3573+3196= 7739

A difference of 4180, but you would never pay taxes on any of the  Roth distributions, but you would pay income taxes on the full 19000 plus earnings when the Traditional contributions are withdrawn.

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?)

That means that I would have paid 32% tax rate on the $85k, which is equal to $27,200.

Note that this is wrong because you are still being charged the rate for each bracket, not the marginal rate on the full amount, and not just because the 32% bracket applies to income over 160K

[spork]

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)?

[Anselm]

I got a late start with retirement savings but I also am considering some extra income with rentals or a part time side business.  Right now I sell items online and the beauty of it is that it does not feel like work.

[Cheerful]

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)?

Yes, you can contribute to your Roth IRA.  For 2019, $7,000 max for age 50 and up.

Contribution rules are separate from your 403b.