Too much tax-deferred retirement

[Paravert]

me:  full time hospital employed doc with 403b, 457b, employer match 401k.  Wife:  very part time doc with solo 401k.  Both 39 years old.  Together we have just under $700k in tax-deferred retirement, $22k in backdoor Roths, $100k money market nest egg, $500k in taxable account (inheritance), $80k in 529a with 4 small kids ages 8-5.  We put about $70k a year into tax-deferred retirement. $40k/yr into 529a, $11k/yr into backdoor Roth.  We make about $600k/yr.

I'm worried about RMD's making tax deferral counterproductive.  Should I start using my employer's Roth 401k to max at $18k/yr instead of the tax-deferred 403b?

[Kennyt7]

Seriously, be glad you will have a boatload as it allows you to take more risk in retirement instead of a heavy conservative portfolio

[J.D.]

My situation is pretty similar to yours.  I'm a 40 year old full time employed er doc with a 401k with match, and a 457.  My wife is a homemaker.  We each do backdoor Roth IRA's every year and I also have a solo401k for moonlighting 1040 income.  I also have 3 kids each with 529.  The money I have in retirement accounts/taxable/529 is strikingly similar to what you have as well.

After recently reading Retire Secure I've decided for 2016 to switch from the tax deferred "traditional" 401k option to the Roth 401k option not only for tax diversification in retirement but also due to concerns about RMD's.  Of coarse there is a very good chance that the government requires RMD's on Roth accounts by the time I reach retirement age but at least (hopefully) the RMD's will not be taxable events.

 

Another reason is that I realized I have never heard anyone say any of the following:  I wish I hadn't invested in a Roth 401k, Roth IRA or I wish I hadn't done that Roth conversion.

 

In reality though no matter what you do, sounds like you are setting yourself up for a wonderful and comfortable retirement down the road.

[Peds]

fed bracket, state taxes, any years of early retirement to do conversions?more info is needed....

 

likely i would stay the course and not switch everything to roth. maybe one of your 401ks.

[jz]

Todd,

The downside of Rothing today, is that you are likely at your peak earnings and tax bracket, at 43% + state.   Let's round this to 50%. At 5% real return on equity,  it will take you 14 years to earn that 50% tax cut back again.   When do you plan to use this money?   age 50? 70?

The strategy is to Roth your money when you are at low tax brackets and use it when you are at a higher tax bracket.

My husband and I Rothed some money in the  46% tax bracket and I regret it.

 

[childay]

Interesting thread but I think the high tax bracket makes it hard to argue for Roth 401k

[dr.j]

You are going to have plenty of money in retirement.  First off, be glad about that.

For minimizing taxes at retirement, it's is very important to have tax-diversity.  You want to be able to draw from multiple pots (Roth, tax-deferred, and taxable) so you are not stuck with one retirement strategy.  For example, some folks only have a 401k at retirement.  Your RMDs are not required until 70 1/2 however, so you'll need additional streams of income before then which is where Roth and taxable accounts will help.

I don't think that investing in a Roth 401k at your current income and highest tax bracket is wise.  Would you rather pay the tax bill now or at retirement?

Are you planning to retire early?

[Automatic]

You should always defer taxes when saving at a relatively young age. I don't have a magic formula, but I'd say if your under 45, then the tax deferral will be more valuable than not. As long as spending more won't necessarily contribute to your increased happiness, I would continue maxing out all tax-advantaged retirement accounts (including HSA), even with a large account balance. Remember, your tax-deferred savings are based on the taxrate of your LAST dollar and that when you withdraw those monies, they will be based on your FIRST dollar. beyond that, we can only guess at future rates.

[Paravert]

Thanks for the replies.  First off, I don't want to convert anything I already have saved.  At some point, it does make sense to start post-tax savings for diversity sake, but if I "retire" early - take an academic job, piddle around at a VA, or simply scale back to 2-3 days a week at age 60, I should have time to do some Roth conversions before RMDs hit at 70&1/2.  I'll keep banking pre-tax for now.  Hopefully in 10 years I'll have the college accounts funded and the mortgage paid off.  With lower fixed expenses, saving post-tax then won't sting so much.

[jfoxcpacfp]

With all due respect, I disagree with @Automatic 's statement that "You should always defer taxes when saving at a relatively young age. I don’t have a magic formula, but I’d say if your under 45, then the tax deferral will be more valuable than not."

The earlier you begin stashing money in a Roth IRA, the longer that money will have to grow tax free. If everyone had the discipline to invest the tax savings generated by their 401k deductions and in a well-balanced equity mutual/ETF portfolio, rebalanced annually, rather than, say, buying a larger house or taking a nicer vacation, I might be more inclined to agree. And that may be what most of the dedicated readers of WCI do, but that's not my experience with the majority of people under the age of 45.

[PHANTASOS]

You never mentioned what type of employer (government vs non-government) you work for, as this may influence opinions on the wisdom of using your 457.  Make sure you understand this one thoroughly.

I have access to enough pre-tax retirement space that if we continue on this trajectory for the next 25 years we would have more pre-tax savings than would be optimal.  If we ever get into a situation where RMDs would put us above the 25% federal tax bracket (that is pretty far off, even for aggressive savers), I would begin in-plan conversions (if available to me then) or in-plan distributions to a traditional IRA which I would then convert to a Roth IRA.

However, I am not going to start making those Roth conversions before I need to - I am not making any assumptions about the future.

For the foreseeable future, my only Roth with be the annual backdoor Roth IRA x2.

As a useful exercise, look up the IRA Required Minimum Distribution Worksheet (from the IRS) and the current tax brackets, and figure out how much you need to have saved pre-tax before RMDs force you into the problems you are imagining (hint: it is a lot, and you probably don't want to start doing Roth's yet, even though your savings look great so far).

[Toshi]

I don't understand the issue with RMDs. If you're worried about them being too large then just retire already!

[Ricky]

I like the tax break now.  If you took that 70K and used a roth instead it would cost you about 100K, (70k plus your tax rate.)  Why not just do the 401k, then invest the other 30-35k in a taxable account.  You could always convert some later when your tax bracket is lower.

 

Either way, its a nice problem to have as I don't have near the tax deferred space that I would like.

[MSKrad]

I would argue to leave the money in tax deferred space and retire in 50's or 60's.   Use those years to convert your tax deferred retirement accounts into Roth accounts at a lower tax rate before your RMD's begin.

 

Overall strategy should be to spread out your taxable income over as many years as possible.  This strategy will allow you fill up lower tax brackets during the years you have no work income and reduce your eventual RMD's at age 70s.

 

 

[TheGipper]

I think the best and safest bet is to continue with traditional and skip Roth 401k for high income earners.  Two big reasons:

 

1)  Despite what we constantly hear, tax rates are likely to go down in the future.  This is particularly true of the EFFECTIVE tax rate that most matters to you during your later retirement years of RMDs and Roth conversions.  Think about it.  One things Dems and Repubs agree on is tax breaks for the middle class, that is not going to change.  Also there is a non-trivial chance that if we elect a Republican president and keep a R congress, the top tax rate will go down dramatically.  Maybe not a 15% flat tax, but not enough to kick you in the nuts if you converted to Roth the year before.  Bottom line, don't pay up to 50% federal/state taxes now when you may have the chance to Roth later when tax laws change or during early retirement at a much lower rate.

2)  You very well will be in a situation in which you have 10+ low income years to Roth convert a large amount before SS/RMDs at age 70, during which you can live off your taxable account or primary home sale $.