Retirement questions & tax liability

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Greenville, SC via Chicago, IL
I'll keep this simple as possible and will discuss with my money man.

I currently contribute to a work sponsored 403b. Work doesn't match any funds ( I'll receive a state pension). The 403b contribution limit is like 22k? I contribute $9800 per year @ $800 per month.

I have concerns as I'll be paying taxes at retirement age on my withdrawals/earnings.

Since the market is low, and I don't have much (if any) earnings to report, should I move my funds over and start a ROTH IRA?

With the ROTH, I pay tax upfront, but not on my future earnings/withdrawals. Since the ROTH is capped @ $6000 per year contribution ($500 per month), I would use the extra funds ($300) and purchase ETFs or put the funds towards something else like a cash out insurance policy, etc.

I'm 38 years old. My wife and I each currently earn about 80k. I don't know what I'll be earning at retirement as that's 25+ years from now. I can guess a combined income of 240k?

Thoughts?
 
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Your tax rate is fairly low now, so you and your wife should both max out a Roth IRA each year. It’s probably not a terrible idea to contribute the remainder to the 403b, this gives you a nice mix of pre and post tax accounts. Bogleheads forum is a great place for this kind of info, check it out.
 
I’m glad that a 38 y/o is asking a question like this. I’m not up on 403b plans but they sound like a 401k plan and so withdrawing once retired will have a tax consequence. But the idea is that you will likely be in a lower tax bracket.

It is relatively “easy“ to accumulate 1-2 million in a 401k if you start early and max out. Consider doing that. It also matters which funds the plan uses. The fees can be a killer. The Vanguard funds are my recommendation if you have options on where the $ is deposited.

life insurance is not really an investment product, stay away if that is your goal.
 
I would definitely do the ROTH....taxes are only going to go up to pay for our ever increasing debt and even more 'entitlements'.
I converted some of my 401 to a ROTH last year and got a surprise last month...a nearly $300 a month rise in my Medicare premium which will double when the wife turns 65 this summer (nearly $600 a month). It should go back down next year since the increase in 'income' was a one time event.
 
Do the Roth IRA and the 403B both and max them out. I didn't start to save for retirement until I was 33. I had some good years with my selection in my 401K but a setback with 911. The ROTH didn't come around until about 1993. I had hoped to retire at 58 but it got delayed until I was 62. I've been retired for 16 years now. Retirement is great if you plan for it before you're 50 something.
 
Your advisor will give you the best information, but one thing to consider is that most 403-B accounts are held with insurance companies, where investment choices are limited and performance is generally below average. Otherwise you and your wife should consider maxing out your regular Roth IRA contributions each year before those options disappear with your increasing joint income.
 
Do the Roth. You don’t want to pull money from it, but you can pull the contribution, in case of dire emergency, without penalty.

Since you don’t get matching funds, I’d do Roth first, then 403b. I don’t care about tax issues as much as flexibility in your money.
 
At your age, a Roth is very attractive for future tax liability, as your investment will grow considerably before you need withdrawals.

That said, if the Roth isn’t deductible, you get a boost to your annual contribution through the tax savings of a deductible plan, or a salary deferral like a 401(k).

So, which one yields more $$ in your pocket in retirement?

A financial advisor would be able to run the numbers for you based on current tax bracket, future tax bracket, contribution level and growth estimate.
 
I'm a fan of a ROTH whenever possible....who knows that your tax rate will be in 30+ years and tax free withdraws from that account will be gravy.
And a Roth allows you to much better manage your income to minimize taxes and Medicare surcharges.
 
Of note, Congress recently made some changes to retirement accounts, raising the age at which required minimum distributions must be taken, from 72 to 75. This is up from 70 1/2 just a couple years ago.

So, one of the advantages of a Roth (no required distributions) is eroded slightly by this if you find yourself in the (frankly, enviable) position of not needing to withdraw from your IRA in retirement.

With a defined benefit pension plan, as you have, you may not need your IRA for a while.
 
There can be some penalties if you withdraw from a ROTH before age 59 1/2 or before 5 years from start. The 403B can have the potential to grow more because of more deferred tax dollars invested long term in your portfolio. I like the ideas above that recommend investing in both. Its always good to be diversified without all your eggs in one basket.

As always, everybody has unique situations and you are wise not to put too much trust in internet recommendations from strangers.

Please share with us what your financial advisor recommends.
 
Roth IRA maxed out first, then contribute to 403B.

What about 529 plan for the kids ?
 
Roth IRA maxed out first, then contribute to 403B.

What about 529 plan for the kids ?
529s make sense if, and only if, retirement is fully funded.

Fully funded. Maxed out everything, 403(b), IRA, everything.

You can borrow, scholarship, pay with cash flow, join the military, or use government grants and funding to get a kid through college.

You cannot do any of those to get through retirement. Cultivating a nest egg takes decades. Start early, build aggressively, stay the course. This must be priority ONE for your dollars. Only when this priority is satisfied can you think about 529s.

I’ve paid for six college educations, including some expensive schools. I’ve got a bit of experience in this area.

Schools take FAFSA data and apply their own, institutional, analysis, to determine parental ability to pay, and student need. Results from the same FAFSA data set vary widely. Schools with strong endowments have the ability to make generous offers. Lower tier schools that desire the student will find ways to offer scholarships

Basically, schools view money in three buckets: Kids money (100% available to pay). Parents regular money (some % available to pay, subject to institutional calculation), Parent retirement account (not available to pay).

An example:

2011, a competitive student (Valedictorian, athlete, musician, with sterling SAT scores and a record of community volunteer work) applies to college. Eight applications. Eight admissions. Eight very different financial aid awards. Some data points:

1. Excellent state school offers full room,board, tuition scholarship. Parental cost $0.

2. One of the best private colleges offers $17,000 grant. Parental cost $37,000.

3. Ivy League school offers $36,000 grant. Parental cost $18,000.

4. Another Ivy League schools is shown the aid award from example 3, their peer, and ups their initial offer from $30,000 to $36,000. They want this student.

Discussion with director of financial aid from school 3 was Illuminating. Any subsequently applied outside scholarship reduced the aid award as they had already made a determination of parental ability to pay.

So, while this student ended up at school 3, a step sibling was admitted to several good schools in state. These state schools looked at the same FAFSA data and awarded no aid, so we paid full price for that student.

The risk of a 529, then, is that your diligent saving may end up reducing the financial aid you’re awarded. Further, the child may, or may not, end up going to college.

If you have sacrificed retirement savings to fund the 529, you have lost the opportunity to get retirement right, and handed over every dollar to a school that might have been willing to help your child through a scholarship or grant.

Fully find retirement first.

Always
 
529s make sense if, and only if, retirement is fully funded.

Fully funded. Maxed out everything, 403(b), IRA, everything.

You can borrow, scholarship, pay with cash flow, join the military, or use government grants and funding to get a kid through college.

You cannot do any of those to get through retirement. Cultivating a nest egg takes decades. Start early, build aggressively, stay the course. This must be priority ONE for your dollars. Only when this priority is satisfied can you think about 529s.

I’ve paid for six college educations, including some expensive schools. I’ve got a bit of experience in this area.

Schools take FAFSA data and apply their own, institutional, analysis, to determine parental ability to pay, and student need. Results from the same FAFSA data set vary widely. Schools with strong endowments have the ability to make generous offers. Lower tier schools that desire the student will find ways to offer scholarships

Basically, schools view money in three buckets: Kids money (100% available to pay). Parents regular money (some % available to pay, subject to institutional calculation), Parent retirement account (not available to pay).

An example:

2011, a competitive student (Valedictorian, athlete, musician, with sterling SAT scores and a record of community volunteer work) applies to college. Eight applications. Eight admissions. Eight very different financial aid awards. Some data points:

1. Excellent state school offers full room,board, tuition scholarship. Parental cost $0.

2. One of the best private colleges offers $17,000 grant. Parental cost $37,000.

3. Ivy League school offers $36,000 grant. Parental cost $18,000.

4. Another Ivy League schools is shown the aid award from example 3, their peer, and ups their initial offer from $30,000 to $36,000. They want this student.

Discussion with director of financial aid from school 3 was Illuminating. Any subsequently applied outside scholarship reduced the aid award as they had already made a determination of parental ability to pay.

So, while this student ended up at school 3, a step sibling was admitted to several good schools in state. These state schools looked at the same FAFSA data and awarded no aid, so we paid full price for that student.

The risk of a 529, then, is that your diligent saving may end up reducing the financial aid you’re awarded. Further, the child may, or may not, end up going to college.

If you have sacrificed retirement savings to fund the 529, you have lost the opportunity to get retirement right, and handed over every dollar to a school that might have been willing to help your child through a scholarship or grant.

Fully find retirement first.

Always
This is top dollar advice. @Astro14 should be charging top dollar as a financial advisor here, but you get it for free!
 
A word of caution about Roth IRAs and 401(k)s:

Some noted investment advisors including Ric Edelman have warned that you shouldn't count on Roths staying tax-free indefinitely. Congress could change the rules at any time for "fairness" or any other reason.

Several years ago the feds floated a proposal to make 529 college-savings accounts taxable just like any other savings account—that is, to remove the tax break. The stated reason was that it was mostly well-to-do families funding 529s, with few families in lower tax brackets able to take advantage of the accounts. The proposal raised such a stink then that it was shelved. But what was proposed for 529s could just as easily be implemented for Roths.
 
Remember, the idea of investing is to buy cheap so you can sell high in the future.. The market being down is your opportunity to make investments in sound companies at bargain prices.

The problem, as I see it with a Roth, is that money you pay out now in taxes is money you cannot invest for the future. Tax deferral is desirable so the money (otherwise gone forever in taxes) is still working for you building value in your retirement accounts.

Who knows what the tax rates will be when you retire. But, you won't be forced to make mandatory withdrawals until you are in your 70s, and then the minimum withdrawals mandated are based on your estimated remaining life.
 
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