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Tax sheltered accounts galore...which to take advantage of?

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  • Tax sheltered accounts galore...which to take advantage of?

    I am in the fortunate position to have to offered a number tax sheltered accounts: 403b (roth or traditional), 457b, and 401a (x2).  I plan on maxing out all of these accounts (both 401a accounts have a match).  Can I contribute to all these and contribute to a backdoor roth as well?

  • #2
    Yes

    Comment


    • #3
      401a is going to be limited to the pre-set percentage contribution generally (defined contribution).  This will be pretax as well as whatever employer match there is.

      403b employee limit is 19,000 for 2019.

      457 employee limit is 19,000 for 2019.

      403b is better than 457 generally although depends if governmental (qualified) or not.  If so then look at investment choices within each if you're deciding between them.

      Roth is $6,000 for 2019.  I assume you're no longer a resident?

      Comment


      • #4
        Thanks for the reply.  Yes, no longer a resident.

        Can you explain your thoughts on 457?  To me, roth contributions to 403b trump everything.  I have been a bit turned off by pre-tax retirement accounts in general for the following reasons (please let me know if I am off base):

        1) I have a feeling I will work past the typical retirement age, and likely will have income putting me into an overall tax rate in the 25% range for the majority of my life.  It seems from what I can tell that earnings on traditional IRAs are taxed as income, not capital gains, meaning that I would be paying 10% more tax (Assuming 15% capital gains tax) in a traditional IRA.

        2) tax rates are labile, so in the event our tax structure moves to overall higher tax rates akin to many european countries, I could end up in a tax break in retirement that is higher and maybe even significantly so.

         

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        • #5
          Take the tax break now.  Who knows what is going to happen in 20-30 years.

          Remember the difference between marginal and effective tax rate.

          If you end up with RMD problems then you did something right.

           

          You are right that roth money is better but it is too expensive for you during your peak earning years.

          Comment


          • #6
            do you believe in the concept of tax diversification?  I have read some people think diversifying your retirement accounts with respect to how they are taxed may be prudent. In this case, about 35-40% of my the money i put towards retirement would be tax exempt (roth contributions) and 60-65% would be tax deferred.

            Comment


            • #7
              In 2019, limits are $19,000 elective deferrals to 403(b), another $19,000 to 457(b) (separate but equal limit), and up to $56,000 to the 401(a).

              That might seem a bit funny. There's a couple reasons for that. Contributions essentially come in 3 main forms:
              - employee elective deferrals (most common)
              - employee after-tax contributions
              - employer contributions, such as match, profit-sharing

              These follow a few rules, mostly setting limits, with 2019 numbers:

              - §402(g) sets a limit of $19,000 for employee elective deferrals to all qualified defined contribution plans - 401(k), 403(b), TSP - combined. So if you have two 401(k)s, and you put $10,000 of elective deferrals in one, you can only put $9,000 of elective deferrals in the other. 457(b) plans are *not* qualified plans, and their limit is completely separate, but is the same number. This limit is just for elective deferrals or Roth contributions, *not* for after-tax (non-Roth) or employer contributions. 401(a) are usually employer-only, and as such aren't subject to this limit.

              - §415(c) sets a limit of $56,000 to all qualified defined contribution plans controlled by each unrelated employer. This is combined employee elective deferrals, employee after-tax contributions, and employer contributions. So if you max employee deferrals to a 401(k) at $19,000, the employer can put in another $37,000 to bring it up to $56,000. If there are no employee contributions to it, the employer can put in the whole amount. If you have jobs at unrelated employers, or if you're self-employed on the side and don't own >50% of the other company, then the $56,000 limits are separate.

              While most of these plans are considered to be "controlled" by the employer, a 403(b) plan is considered to be controlled by the *individual*; hence self-employed plans' limits are reduced by total 403(b) contributions, so if you contributed $19,000 and the employer "matched" $7,000, then you could contribute up to $56,000 - 19,000 - 7,000 = $30,000 to a self-employed plan. This also means that the 401(a) is controlled by them and the 403(b) is controlled by you, so there are separate limits.

              Self-employed plans are limited to 20% of net profits after subtracting half of self-employment tax (sole proprietor) or 25% of compensation (S-corp). This is actually the same number since it's 80/20 compensation to contribution either way. The S-corp still has to earn the money it contributes. So if your side job earns $110,000 with $10,000 of expenses, and you earned over the SS max from your employed job ($128,400 for 2018, idk what for 2019), then net profit is $110,000 - 10,000 = $100,000, your self-employment tax is $100,000 · 0.9235 · 0.029 = $2,678, and you can contribute (100,000 - [2,678÷2]) · 0.20 = $19,732 to a one-participant 401(k).

              The final wrinkle is the §401(a)(17) limit of compensation that can be used to figure employer contributions. This is 5x the §415(c) limit, so it's $280,000. This means that if a company has a 5% "match," you contribute $19,000 in elective deferrals, and your compensation is $320,000, then since that's over the limit they will match 5% · 280,000 = $14,000.

              ...so you should be able to get $19,000 403(b), $19,000 457(b), and $56,000 max to 401(a), depending on the plan structure for percent contributions to it. They usually have a mandatory percent. It's uncommon to max a 401(a) since they'd have to contribute 20% of compensation to max it.

              Comment


              • #8
                Hard choices.   Depends on your point of attack and choices and where you fall into the tax brackets.  Before this year, there were a lot of folk sitting on edges of the brackets just because of the median is here and the amount of deductions most have.

                The tax reform has changed a lot of these factors.   Many sit firmly in 24% now with some fortunate to play in 32% bracket (those in 35% probably don't sweat these details anyways).   That along with the SALT eliminated and the standard deduction elevated, the amounts played around is further simplified.    If you ARE right around $315k AGI, the choice of putting your 403b as traditional is clear -- do it.   That's an automatic 8% federal earnings on last dollars in.

                So:

                1.  Max match of 401a

                2.  if AGI is near 315k; choose traditional 403b and the toggle

                Then it's a mental exercise on which tax shelter is better for you.  In general, at the beginning, tax deferred is preferred to get more in and compound that faster.   Roth does have advantages as tax-free earnings do catch up eventually AND avoids RMDs if you've won the game and looking for tax efficiencies to the next generation.

                 

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                • #9
                  For most high income people, I expect taxable accounts > Pre-Tax deferred accounts > After-Tax deferred accounts (Roth) during peak earning years. 17-20 years into attending income for spouse and me, we are probably 65% taxable, 30% pre-tax deferred and 5% Roth. We have been maximally funding all available retirement accounts and back door Roths (for as long as that has been allowed). The plan in early retirement will be to roll over all the pre-tax 401k/401a/403b assets to traditional IRAs and slowly convert to Roth IRAs at lower tax bracket than during accumulation years. Tax diversification is great, but income levels and tax brackets impact how much one can “evenly” diversify whilst being savvy under current tax law and saving at a high percentage of income.

                  Comment


                  • #10




                    do you believe in the concept of tax diversification?  I have read some people think diversifying your retirement accounts with respect to how they are taxed may be prudent. In this case, about 35-40% of my the money i put towards retirement would be tax exempt (roth contributions) and 60-65% would be tax deferred.
                    Click to expand...


                    Yes I do,  but don't let the tax diversification tail wag the savings dog??? (someone help me get this saying right)

                    Anyways, most of us low high earners.  (200-300K) will likely save the vast majority of our retirement money in tax deferred accounts.  It is just so much cheaper for us to do so.  My tax bracket including state tax is 31%.  It "only" costs me 13K to save the max 18500 in my tax deferred account.  That is 5k I can save in a back door roth or put into my taxable account.  Saving tax money now is more valuable then later.

                    You are right I am going to end up with the majority of my money pretax and I will need to pay taxes on it when I pull it out in retirement but I can do roth conversions on low earning years and my effective tax rate is going to very likely be lower then my marginal tax rate now.

                     

                    Now the real high earners 400K and more will have huge taxable accounts so their percent of money pretax will be smaller in comparison.  Just because they do not have enough tax deferred space to save adequately.

                    Comment


                    • #11
                      You got the tax tail saying correct. Completely agree with your last paragraph. For double high income couples this is very true.

                      Comment


                      • #12




                        You got the tax tail saying correct. Completely agree with your last paragraph. For double high income couples this is very true.
                        Click to expand...


                        So many people mess that saying up.  I did not want to be one of them.

                         

                        Hopefully that will be a "problem" of mine someday :P

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                        • #13
                          All of them. That's my opinion.  we have a high tax burden so we shove as much as we can into anything tax sheltered/tax deferred.

                          Comment


                          • #14
                            I'd like to see people's math on this.  I've considered 2 extreme circumstances with the following assumptions (for ease of math):

                            Assumptions:

                            1) you are in the highest tax bracket, so you save 37 cents on every dollar you deduct

                            2) you contribute 20,000 per year to your account, get 10% return per year (i wish), and the horizon is 30 years

                            Scenarios:

                            1) invest everything into tax deferred account and invest the tax savings (7400 per year) in a taxable account.  you would have $3,289,880 in your 401k/403b etc and 1,217,255 in your private taxable acccount.  assuming 15% capital gains on the taxable account, your nominal tax rate when you take disbursements would have to be 32% or less for it to work out better than if you invested post tax (roth) dollars.

                            2) invest everything into tax deferred account and invest ZERO of the tax savings every year.  you have the same $3,289,880 in your 401k/403b and you had/have 222,000 from tax savings.  you would have to have nominal tax rate of 6.7% or less when taking disbursements for you to do better than roth.

                            Now, there are more variables that make this more complex including when you take certain disbursements, etc., but I am still skeptical of tax deferred investing.  The equation becomes even tighter the lower the tax bracket you are in now and the lower your returns.  If you are in 30% marginal tax rate and at 6% growth you would have to have a nominal tax rate of 25% or less in scenario 1.  For scenario 2, you would have to be in a ~12% nominal tax rate or lower.

                            Thoughts?

                            Comment


                            • #15




                              I’d like to see people’s math on this.  I’ve considered 2 extreme circumstances with the following assumptions (for ease of math):

                              Assumptions:

                              1) you are in the highest tax bracket, so you save 37 cents on every dollar you deduct

                              2) you contribute 20,000 per year to your account, get 10% return per year (i wish), and the horizon is 30 years

                              Scenarios:

                              1) invest everything into tax deferred account and invest the tax savings (7400 per year) in a taxable account.  you would have $3,289,880 in your 401k/403b etc and 1,217,255 in your private taxable acccount.  assuming 15% capital gains on the taxable account, your nominal tax rate when you take disbursements would have to be 32% or less for it to work out better than if you invested post tax (roth) dollars.

                              2) invest everything into tax deferred account and invest ZERO of the tax savings every year.  you have the same $3,289,880 in your 401k/403b and you had/have 222,000 from tax savings.  you would have to have nominal tax rate of 6.7% or less when taking disbursements for you to do better than roth.

                              Now, there are more variables that make this more complex including when you take certain disbursements, etc., but I am still skeptical of tax deferred investing.  The equation becomes even tighter the lower the tax bracket you are in now and the lower your returns.  If you are in 30% marginal tax rate and at 6% growth you would have to have a nominal tax rate of 25% or less in scenario 1.  For scenario 2, you would have to be in a ~12% nominal tax rate or lower.

                              Thoughts?
                              Click to expand...


                              Something might be off.  If I plug in 20K a year for 30 years at 10% I get 3.7MM.  And 7400 a year for 30 years at 10% comes to 1.4MM

                              Not sure where the calculator problem lies.

                               

                              Here try this calculator.

                              https://www.aarp.org/work/retirement-planning/taxable_vs_tax_deferred_calculator/

                               

                              Make sure you check the box to invest savings.

                               

                              Some depends on lifestyle.  We could live very well under 100k a year in retirement which would make our effective tax rate in the mid teens.  Right now so much of my income goes to mortgage, savings, daycare...  All these things I will not need to fund at retirement. (Hopefully, especially daycare yikes!)

                              If you are planning on living a 300K a year retirement you might be right that your effective tax then might be as high as now.

                              Before you stick all your money in roth read through the WCI getting started posts and he mentions several times that peak earning years you belong in the tax deferred camp.

                               

                              I hope this is helpful.

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