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  • jfoxcpacfp
    replied







    Sure, I was just pointing out that the Roth would still be the mother. Could the new, improved HSA be the step-mother?
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    Yes.  Why buy the Roth cow now, when you can wait and possibly get the milk for free.
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    MOOOOOOOOOOOOOOOOOOOOOOOO

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  • TheGipper
    replied




    Sure, I was just pointing out that the Roth would still be the mother. Could the new, improved HSA be the step-mother?
    Click to expand...


    Yes.  Why buy the Roth cow now, when you can wait and possibly get the milk for free.

    Leave a comment:


  • jfoxcpacfp
    replied
    Sure, I was just pointing out that the Roth would still be the mother. Could the new, improved HSA be the step-mother?

    Leave a comment:


  • TheGipper
    replied
    All true, but health care costs make up a large component of retirement costs.

    Worse case scenario, you find you don't need all your HSA funds for health expenses (and the rumored definition of eligible expenses is also dramatically expanded):

    1). You pay the tax, same as you would have with you RMD, just delayed via an interest free loan from Uncle Sam or...

    2). You pass on to your heirs. We will soon see the details of the new plan, but it might very well allow tax free qualified distributions for heirs as well. Again, worst case is years of delaying paying the taxes based on the stretch rules that apply. We shall see. If these become popular (similar to 401ks), it may be politically difficult to roll back any of these changes.

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  • jfoxcpacfp
    replied


    And if the ACA replacement allows untaxed transference of RMDs to HSAs, coupled with inherited HSAs it will be the mother of all tax shelters, drastically reducing the benefit of Roth conversions and early Roth 401k contributions.
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    Let's not forget that the money still must be used for qualified healthcare expenses or distributions are taxable. Same for inherited HSAs by spouse. Any other beneficiary and distributions are taxable regardless. Inheritance before age 65 if used for anything besides healthcare gets a 20% penalty on top.

    Roth IRAs have no such restrictions.

    Leave a comment:


  • jfoxcpacfp
    replied


    You can’t possibly have a bunch of clients who you have gone through this cycle with since you aren’t a vampire and thus are aging as they age.
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    lol, that is really funny. What I said was that few people have the discipline to fund the taxes for later drawdown. That is my experience bwah ha ha ha haaaa


    fear of tax changes is a bad method.
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    I agree. That is not my method, either. We all must base our advice and decisions upon current knowns and make our best guesses about future unknowns. I'm not even sure we can call them educated guesses. I base my recommendations upon the following:

    • Roth IRAs, imo, will not be available in the future, at least in the current form

    • Few people segregate and invest the tax savings from 401k and other tax-deductible contributions to pay future tax liabilities on said deductions and the growth thereon

    • Too many unknowns affecting any one individual's future tax rates at drawdown. I prefer to be conservative and overestimate rather than underestimate tax liability.


    I happen to believe that savings in Roth IRAs up to a certain point will never be taxed i.e. that the government will notify taxpayers and their advisers that taxation will be phased in over a certain period beginning at x date in the future for x taxpayers (based on certain parameters) but obviously that is my personal speculation. Only time will tell.

    Of course, our clients are free to disagree and we have this discussion - how much to fund pre-tax and how much to fill the Roth portion of their 401k when we are fleshing out tax planning. I am not the dictator, merely the advisor.

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  • TheGipper
    replied
    Agree with Rex in that future tax laws could go either way. Roths have become so prevalent I think it's unlikely they'll be taxed, but I could easily see the government demanding that aggregate Roth balances above a certain amount be withdrawn (Hillary proposed this), and it looks likely that the stretch Roth's days are numbered (Senate finance committee voted unanimously in RISE act markup).

    I will grant Johanna that for a high percentage of high income Americans who are financially illiterate, don't save, and are unlikely to find a good, ethical financial advisor later in life, Roth now may end up ahead.

    But for the average reader on this forum, or for those with the interest to learn, we should be contributing to tax-deferred space first.

    The congressional yo-yo on the top income bracket is not as crucial to the discussion as future middle tax brackets, where we hope most of our Roth conversions and tax gain harvesting will happen. I think it's a strong gamble that I will be able to convert a large chunk of my tIRA from age 55-70 at an EFFECTIVE tax rate <30% so I see no need to pay 45% MARGINAL fed and state now.

    And if the ACA replacement allows untaxed transference of RMDs to HSAs, coupled with inherited HSAs it will be the mother of all tax shelters, drastically reducing the benefit of Roth conversions and early Roth 401k contributions.

    Leave a comment:


  • jfoxcpacfp
    replied




    I respectfully disagree with Johanna. I subscribe to the Harry Sit “aka the finance buff” theory that for high income professionals traditional 401k almost always trumps Roth 401k (of course still do your backdoor Roths).

     
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    Prepaying taxes and putting them out of mind while your money grows tax free, imo, is preferable to leaving your finances up to the whim of a capricious government. In my experience (just mine, I realize), clients typically do not set aside and invest the tax savings as part of planned growth. Instead, at retirement, the savings that should have accumulated over a number of years will typically have been absorbed into spending. (Of course, if they happen to be working with an excellent financial planner over the course of their careers, there is hope   )

    Whether to save in a pre- or post-tax account is an interesting academic exercise but from a practical standpoint, I recommend the Roth because few people have the discipline to fund the taxes for later drawdown (save, perhaps, for active participants on this forum). Yes, you will have savings for retirement and use that money to pay taxes on RMDs, but will you have set aside and invested for growth the specific taxes you saved on the 401k contributions to pay the taxes at future inflated rates? If you are going to make the assertion that the current 401k contribution is preferable to the Roth, or even a taxable account I might add, that is the question you must consider.

    Plenty of room here for a variety of viewpoints, as long as we remain open minded and respectful. Always appreciated.

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  • jfoxcpacfp
    replied




    Also, I find it fascinating that in HHS secretary Tom Price’s ACA replacement bill (which is rumored to be almost identical to the one that will be introduced in committee next week):

    There are many great changes with HSAs, but the one that caught my eye was:

    RMDs will be allowed to be transferred to HSAs!
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    Very, very interesting. That's what happens when a pro is in charge of HHS. Thanks for sharing!

    Leave a comment:


  • TheGipper
    replied
    Also, I find it fascinating that in HHS secretary Tom Price's ACA replacement bill (which is rumored to be almost identical to the one that will be introduced in committee next week):

    There are many great changes with HSAs, but the one that caught my eye was:

    RMDs will be allowed to be transferred to HSAs!

    Leave a comment:


  • litovskyassetmanagement
    replied




    I respectfully disagree with Johanna. I subscribe to the Harry Sit “aka the finance buff” theory that for high income professionals traditional 401k almost always trumps Roth 401k (of course still do your backdoor Roths).

    With proper planning (i.e. building up a taxable account and delaying SS and IRA distributions till age 70), there should always be a low income early retirement period in which you can do a series of Roth conversions while delaying SS and RMDs till age 70. This strategy is powerful for everyone but really powerful for the retire early crowd that might have 30+ years of “pre-70 retirement time”

    Exception:
    1). If you really expect your tIRA balance to get to the 10M+ range, you probably should contribute to your Roth 401k now as your RMDs will immexiately push you into top tax bracket anyway and there won’t be enough early retirement time to convert enough. But who can predict job stability and healthy with certainty. Better to err on the tIRA side for now, you can always convert later when your tax-deferred accounts are actually approaching 10M
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    Yes, but even if your tax-deferred balance is as high as $10M, the only limitation would be how much in after-tax assets you have available to pay the tax and how long you have until 70 and 1/2.  Even if the conversion pushes you into the higher brackets temporarily, this might be a good trade-off if for the next several decades you won't pay any RMD taxes (and in some cases when one has a lot of tax-deferred assets, maybe it won't be possible to convert it all - but doing this analysis can help save potentially millions in unnecessary taxes).  The result does depend on lots of variables, but I think that if you anticipate yourself in a specific situation (which can be estimated beforehand) you can determine the best general approach.  I agree that maximizing tax-deferred is priority #1 because even if you are in the same bracket in retirement, your average rate is lower on distribution, especially if your contribution was made while you were in the highest bracket.

    Leave a comment:


  • TheGipper
    replied
    I respectfully disagree with Johanna. I subscribe to the Harry Sit "aka the finance buff" theory that for high income professionals traditional 401k almost always trumps Roth 401k (of course still do your backdoor Roths).

    With proper planning (i.e. building up a taxable account and delaying SS and IRA distributions till age 70), there should always be a low income early retirement period in which you can do a series of Roth conversions while delaying SS and RMDs till age 70. This strategy is powerful for everyone but really powerful for the retire early crowd that might have 30+ years of "pre-70 retirement time"

    Exception:
    1). If you really expect your tIRA balance to get to the 10M+ range, you probably should contribute to your Roth 401k now as your RMDs will immexiately push you into top tax bracket anyway and there won't be enough early retirement time to convert enough. But who can predict job stability and healthy with certainty. Better to err on the tIRA side for now, you can always convert later when your tax-deferred accounts are actually approaching 10M

    Leave a comment:


  • jfoxcpacfp
    replied




     But I guess I’m wondering about the pre-planning – i.e. where should money go now so that it’s ideally placed in the future?
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    If I had to give an "in general" answer, it would (almost) always be to favor Roth over deductible. There are no rules of thumb that apply to everybody, but that is as close as I can get and that is the most oft-used rot that I would pull out of my pocket. As long as Roths are available, IMO, it's hard to go wrong stuffing them with as much as you possibly can, regardless of what tax bracket you or your financial planner "think" you will be in during retirement.

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  • litovskyassetmanagement
    replied




    I appreciate everyone’s comments and the book recommendation – will definitely add this to the list.  No doubt this is complex, and I think an optimal strategy nearing the time of draw-down would involve some sit-down sessions with a financial planner.  But I guess I’m wondering about the pre-planning – i.e. where should money go now so that it’s ideally placed in the future?  For my wife and I our savings are pretty simple – Roth/backdoor every year, 401k (traditional or Roth decision), and the remainder in a taxable account.  Since it’s really the account type that affects the draw-down strategy in the future, I look to what account type decisions we have now.  The only real decision is traditional 401k vs Roth 401k.  And after doing some projections it really does look like the traditional 401k money creates a more complex and possibly worse scenario in the future – for those currently in the 25% tax bracket (which we are currently in for the next 2 years).  In my original post I should have been more specific – I was curious about the pre-planning and optimization in the pre-retirement years (even decades ahead) for the draw-down, not about what accounts should be tapped first in the draw-down period.  I feel like the latter is a derivative of the former, which seems to be most dependent on the traditional vs Roth decision.  Was also trying to show that the effects of the taxable account (which will presumably have a much larger future balance) are not insignificant with respect to that decision and often overlooked.  Too many websites and calculators don’t do this complex decision justice IMO.
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    I've been working on a relatively simple drawdown strategy.  There is no way to 'optimize' it in the sense that as others pointed out, this would have to be done year to year, but the gist of it is to convert tax-deferred assets to Roth right after retirement or after you stop working full time and drop several brackets (even if that takes you to higher brackets temporarily).  One can use after-tax assets (which have to be built up accordingly to a rather significant level) to provide income and to pay taxes for Roth conversions.  There should not be much in tax-deferred assets left after this strategy is implemented (the idea is to do this prior to 70 and 1/2 whenever possible).  The income is provided with after-tax assets, while the Roth assets just compound, and you can draw on those when you need it (or not).  This simplifies things significantly, and while there are many assumptions, and each individual will require a separate customized analysis, the benefit for those who have significant tax-deferred assets can be tremendous over time.  Of course, it depends on longevity and other factors, and each portfolio has to be carefully structured (for example, very little risk with after-tax portfolio near retirement, which should also be tax-efficient), and if the government still allows this in the future, Roth conversions can potentially be done right inside your retirement plan.  One way to facilitate this is to take a 1099 gig temporarily and open your own 401k plan so that you have full control over your assets.  This also affords asset protection, since IRA asset protection is limited by states.  And planing for this should be done as early as possible, even if to familiarize yourself with the ideas and what's involved (as well as to put together strategies for after-tax and tax-deferred portfolios).  I'm sure there are many variations on this theme, and most of the online calculators are a bit too simplistic and too rigid in their assumptions, so I prefer working with a simplified set of assumptions (such that if I'm wrong, the error will not be significant), and to optimize on the go (such as deciding how much to convert to Roth, when and how to pay for it, making use of any tools at your disposal at the time, since tax laws will presumably change over time, and potentially significantly so, and so we can only analyze what we can control, so we have to be prepared to make big changes to our strategy if things are significantly different in the future).

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  • StarTrekDoc
    replied
    Being ENT, you won't be in 25% for long.  I'd hit Roth until you get higher -- and then the 'simple' tea leaf question:  will my marginal tax rate be higher now or in retirement?

    Historically, we are at the lowest marginal rates ever.  I grew up looking at parents in the 40-60% marginal tax brackets.  My outlook and logic is that Uncle Sam can hit me now with peak earnings where I have certainty, and prefer that over the uncertain future (and likelihood of higher marginal EARNINGs rates).

    https://commons.wikimedia.org/wiki/File:Historical_Marginal_Tax_Rate_for_Highest_and_ Lowest_Income_Earners.jpg

     

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