Pimp my retirement

[FutureInternist]

I just wanted to get some input on my financial plan.

Income - 240,000
Married, filing jointly. No kids yet.

When I first started, I didn't really have an idea of what to do so just did the basic 403b (max at 18k) with 401 A (employee match).

Researched 457, Roth, 529 etc. and talked to several colleagues but opinions vary.

Have appt with our financial guy next week but wanted some food for thought for the meeting.

1. With Roth gains not being taxed, does it make sense to max out 18k in 403b as a post-tax rather than pretax? I guess we would lower our tax bracket by doing it pretax from 33% --> 28%, but the heavy hit on taxes at the end of regular 403b seems like a doozy.

2. 457 b seems to be the same as 403b i.e pretax, but does not have the option to do it as a Roth, so the issue with that is based on hospital policy, those accounts can be "raided" if there is ever a bankruptcy or a major lawsuit. So Q is why does it, or does not, make sense to put another 18k in 457?

3. 529 - My understanding is that it can be opened in nephew/nieces name and transferred to your kid when you have one. Since this is post-tax it won't lower tax bracket is there an advantage to doing so now, when we don't have kids?

Thanks

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[Plastikos]

Roths have income limits, you wont be able to use it as an attending. There would only be heavy hits your taxes at the tail end if you saved/earned so much you had a massive retirement fund, which would be awesome. Those funds go in at your marginal rate and come out at an effective rate so its even better.

 

[Mad Jack]

Roths have income limits, you wont be able to use it as an attending. There would only be heavy hits your taxes at the tail end if you saved/earned so much you had a massive retirement fund, which would be awesome. Those funds go in at your marginal rate and come out at an effective rate so its even better.

Backdoor your Roth dude, don't be a scrub.
Backdoor Roth IRA - Bogleheads

 

[cpants]

I just wanted to get some input on my financial plan.

Income - 240,000
Married, filing jointly. No kids yet.

When I first started, I didn't really have an idea of what to do so just did the basic 403b (max at 18k) with 401 A (employee match).

Researched 457, Roth, 529 etc. and talked to several colleagues but opinions vary.

Have appt with our financial guy next week but wanted some food for thought for the meeting.

1. With Roth gains not being taxed, does it make sense to max out 18k in 403b as a post-tax rather than pretax? I guess we would lower our tax bracket by doing it pretax from 33% --> 28%, but the heavy hit on taxes at the end of regular 403b seems like a doozy.

2. 457 b seems to be the same as 403b i.e pretax, but does not have the option to do it as a Roth, so the issue with that is based on hospital policy, those accounts can be "raided" if there is ever a bankruptcy or a major lawsuit. So Q is why does it, or does not, make sense to put another 18k in 457?

3. 529 - My understanding is that it can be opened in nephew/nieces name and transferred to your kid when you have one. Since this is post-tax it won't lower tax bracket is there an advantage to doing so now, when we don't have kids?

Thanks

First, save 6 months of expenses in a savings account. Then, max out 403b with pre-tax funds. Then, backdoor roth for you and your wife. Then, 457b vs. taxable account. Hold off on 529.

In response to your specific questions:
1. For high income earners it is generally more beneficial to max out pre-tax investments rather than Roth options (aside from backdoor Roth IRA). That is because you will likely be taxed at a lower rate in retirement.

2. Nongovernmental 457b allows you to save an additional 18k pre-tax on top of the 403b funds. The difference is that this is considered "deferred compensation". The company still holds the money, and pays it out to you at retirement time. As a result it is potentially vulnerable to creditors of your company and usually cannot be transferred if you leave the job (you don't lose the money but it stays with the original company). So, there are some downsides, and unless you work for a large and very stable company, I would think hard about it. Governmental 457b is much better, and you should definitely max that out if you have that (assuming you don't work for a governmental organization?). If you don't participate you can fund taxable accounts with that money as next step.

3. 529's are good to invest in, especially after you have kids, but for now I would focus on funding your retirement and saving for other goals. On your income, you will have plenty of time to save for college after kids are born. Things happen...you may not even be able to have children or have a special needs kid and then you will be sitting with a big chunk of cash that can only be used for higher education. Obviously not wishing those things on you, but better to wait at least until the kids are born to start saving.

Who is your "financial guy" and how did you find him? Be very cautious with financial professionals. They see us as big dumb whales. Bad advice, especially early on, can cost you hundreds of thousands in savings and delay your retirement.

 

[FutureInternist]

First, save 6 months of expenses in a savings account. Then, max out 403b with pre-tax funds. Then, backdoor roth for you and your wife. Then, 457b vs. taxable account. Hold off on 529.

In response to your specific questions:
1. For high income earners it is generally more beneficial to max out pre-tax investments rather than Roth options (aside from backdoor Roth IRA). That is because you will likely be taxed at a lower rate in retirement.

2. Nongovernmental 457b allows you to save an additional 18k pre-tax on top of the 403b funds. The difference is that this is considered "deferred compensation". The company still holds the money, and pays it out to you at retirement time. As a result it is potentially vulnerable to creditors of your company and usually cannot be transferred if you leave the job (you don't lose the money but it stays with the original company). So, there are some downsides, and unless you work for a large and very stable company, I would think hard about it. Governmental 457b is much better, and you should definitely max that out if you have that (assuming you don't work for a governmental organization?). If you don't participate you can fund taxable accounts with that money as next step.

3. 529's are good to invest in, especially after you have kids, but for now I would focus on funding your retirement and saving for other goals. On your income, you will have plenty of time to save for college after kids are born. Things happen...you may not even be able to have children or have a special needs kid and then you will be sitting with a big chunk of cash that can only be used for higher education. Obviously not wishing those things on you, but better to wait at least until the kids are born to start saving.

Who is your "financial guy" and how did you find him? Be very cautious with financial professionals. They see us as big dumb whales. Bad advice, especially early on, can cost you hundreds of thousands in savings and delay your retirement.

Thanks for the reply.

I already have 1 year of savings plus additional for soon to be (hopefully) adoption

I guess my theory was that at the current income level, with max 18K+18K (403b + 457b) + 6500 (HSA) I would drop down from 35% to 28% but the actual savings would be 5% of 30K (since the cutoff is $231,450) which is negligible.
Since the backdoor Roth is capped at $5500, I was looking for other avenues to put $ into Roth since 18K growing untaxed from now (but lower take home income) seems like a better deal than 18K growing but later to be taxed. Any lowered take home income can be compensated for, by working extra shifts.
Also if I am going to use post-tax income for an account, why not just use it for a Roth 403b, rather than one that I will have to pay taxes on later?

For 457b, you are correct, however I did learn that since it is deferred compensation you can access the money any time AFTER you quit current job, w/o penalty at the standard tax rate (which you would have to pay anyway, but will likely be higher than if you waited till retirement)

"Financial guy" is just the Fidelity rep that hospital pays for, and that is why I am here getting 2nd, 3rd & 4th opinions.

Another Q would be whether it is possible to pay the fees associated with managing funds (currently 0.12%) since paying for it out of the retirement account lowers the potential growth of that money. So on 100,000 I would pay $72, but that $72 could "grow" to $310 in 30 years (@ 4%), then you add the next year's fees, and the next & you could end up losing a chunk.

Thanks again

 

[cpants]

Thanks for the reply.

I already have 1 year of savings plus additional for soon to be (hopefully) adoption

I guess my theory was that at the current income level, with max 18K+18K (403b + 457b) + 6500 (HSA) I would drop down from 35% to 28% but the actual savings would be 5% of 30K (since the cutoff is $231,450) which is negligible.
Since the backdoor Roth is capped at $5500, I was looking for other avenues to put $ into Roth since 18K growing untaxed from now (but lower take home income) seems like a better deal than 18K growing but later to be taxed. Any lowered take home income can be compensated for, by working extra shifts.
Also if I am going to use post-tax income for an account, why not just use it for a Roth 403b, rather than one that I will have to pay taxes on later?

For 457b, you are correct, however I did learn that since it is deferred compensation you can access the money any time AFTER you quit current job, w/o penalty at the standard tax rate (which you would have to pay anyway, but will likely be higher than if you waited till retirement)

"Financial guy" is just the Fidelity rep that hospital pays for, and that is why I am here getting 2nd, 3rd & 4th opinions.

Another Q would be whether it is possible to pay the fees associated with managing funds (currently 0.12%) since paying for it out of the retirement account lowers the potential growth of that money. So on 100,000 I would pay $72, but that $72 could "grow" to $310 in 30 years (@ 4%), then you add the next year's fees, and the next & you could end up losing a chunk.

Thanks again

If you do the math, the tax effects of investing post-tax Roth money vs. pre-tax 403b or IRA money is essentially the same---assuming your tax rate in retirement will be the same as it is now. Using pre-tax money will result in a higher ending balance that you owe tax on vs. posttax (Roth) money results in a lower tax-free balance at retirement. It offsets. However, you are likely to be in a lower tax bracket at time of retirement, and therefore taking the deduction now is preferable. If you google this you can probably find a better explanation with the math done for you.

You need to do backdoor Roth's no matter what, because that is essentially free money -- turning a taxable investment into a tax-free one. The blend in your 403b is up for debate, but due to the likelihood of a lower bracket at retirement, investing pre-tax money is probably a better deal for you.

0.12% management fee is not terrible to do the work for you, but it is your responsibility to make sure he is investing in low cost diversified investments in line with your goal. It is pretty common for these "advisors" to put your money into funds that maximize commissions and fees for them, not returns for you.

Do not let anyone sell you whole life insurance.

 

[cpants]

Here, I'll do the math for you:

Say you have $10,000 in salary to invest. Assume 7% return, 10 years until retirement, 30% income tax.

Invest post tax (Roth IRA/Roth 403b) -- you save $7,000 after income tax. In 10 years, that will have grown to 13,770. You withdraw the whole $13,770 tax-free.
Invest pre-tax (403b) -- you save the full $10,000 tax free. In 10 years that will have grown to $19,671. On withdrawal you pay 30% tax of $5,901, leaving you with $13,832 to take home.

As you can see, the two take-home amounts are basically the same. If your tax rate is a few percent lower in retirement, tax-deferred wins handily. It's advantageous to have some Roth and some tax-deferred savings so that you can play games with your tax rate, capital gains taxes on taxable account, etc during retirement.

 

[FutureInternist]

If you do the math, the tax effects of investing post-tax Roth money vs. pre-tax 403b or IRA money is essentially the same---assuming your tax rate in retirement will be the same as it is now. Using pre-tax money will result in a higher ending balance that you owe tax on vs. posttax (Roth) money results in a lower tax-free balance at retirement. It offsets. However, you are likely to be in a lower tax bracket at time of retirement, and therefore taking the deduction now is preferable. If you google this you can probably find a better explanation with the math done for you.

You need to do backdoor Roth's no matter what, because that is essentially free money -- turning a taxable investment into a tax-free one. The blend in your 403b is up for debate, but due to the likelihood of a lower bracket at retirement, investing pre-tax money is probably a better deal for you.

0.12% management fee is not terrible to do the work for you, but it is your responsibility to make sure he is investing in low cost diversified investments in line with your goal. It is pretty common for these "advisors" to put your money into funds that maximize commissions and fees for them, not returns for you.

Do not let anyone sell you whole life insurance.

This is the part I don't get, since my plan was to invest the full 18k as Roth not sure why balance would be lower?

I would then also put in the additional $5500 as back door Roth.

I have already been shunned by collegaues for mentioning whole life insurance

 

[FutureInternist]

Here, I'll do the math for you:

Say you have $10,000 in salary to invest. Assume 7% return, 10 years until retirement, 30% income tax.

Invest post tax (Roth IRA/Roth 403b) -- you save $7,000 after income tax. In 10 years, that will have grown to 13,770. You withdraw the whole $13,770 tax-free.
Invest pre-tax (403b) -- you save the full $10,000 tax free. In 10 years that will have grown to $19,671. On withdrawal you pay 30% tax of $5,901, leaving you with $13,832 to take home.

As you can see, the two take-home amounts are basically the same. If your tax rate is a few percent lower in retirement, tax-deferred wins handily. It's advantageous to have some Roth and some tax-deferred savings so that you can play games with your tax rate, capital gains taxes on taxable account, etc during retirement.

I agree with your math, but my issue was that given 18k pre-tax max but only 5500 Roth max, the chances of them ending up with same balance would be pretty low.....Or am I missing something?

18k at 4% over 30 years = 1.2 million, whereas 5500 at same #s = 300k

I agree that if the option is EITHER 403b or Roth then 403b wins but if I am able to finagle it so that all my 403b is Roth and still do additional 5500 as back door Roth, then it seems to work out better to do everything post-tax.

As I get older and can handle leas shifts, I can shift back to pre-tax 403b

Thanks

 

[cpants]

I agree with your math, but my issue was that given 18k pre-tax max but only 5500 Roth max, the chances of them ending up with same balance would be pretty low.....Or am I missing something?

18k at 4% over 30 years = 1.2 million, whereas 5500 at same #s = 300k

I agree that if the option is EITHER 403b or Roth then 403b wins but if I am able to finagle it so that all my 403b is Roth and still do additional 5500 as back door Roth, then it seems to work out better to do everything post-tax.

As I get older and can handle leas shifts, I can shift back to pre-tax 403b

Thanks

Again, I think you are looking at this the wrong way. Roth 403b likely does not win, as you are in a higher tax bracket now then when you are withdrawing the money. If anything you should be weighted to pretax contributions early in your career, which you will be about 3:1 if you max regular 403b and Roth IRA.

Take the above example assuming tax rate of 30% now and at retirement:
Invest post tax (Roth IRA/Roth 403b) -- you save $7,000 after income tax. In 10 years, that will have grown to 13,770. You withdraw the whole $13,770 tax-free.
Invest pre-tax (403b) -- you save the full $10,000 tax free. In 10 years that will have grown to $19,671. On withdrawal you pay 30% tax of $5,901, leaving you with $13,832 to take home.

But, what happens if you are only paying 25% taxes in retirement, for example?
Invest post tax (Roth IRA/Roth 403b) -- you save $7,000 after income tax. In 10 years, that will have grown to 13,770. You withdraw the whole $13,770 tax-free.
Invest pre-tax (403b) -- you save the full $10,000 tax free. In 10 years that will have grown to $19,671. On withdrawal you pay 25% tax of $4,917, leaving you with $14,754 to take home.

Your moonlighting schedule is irrelevant to the question.

Of course if you contribute 18k to pretax and 5500 to Roth every year, then the end balance will be much more in your 403b. The end goal isn't to have equal balances in Roth and tax deferred, it's to maximize your retirement savings and minimize taxes.

 

[Plastikos]

Just max out all your pretax that you possibly can now. If its either or its a no brainer. If its where to put any extra, that may be different but in reality, pretax will still likely win out big. It would be pretty unlikely to end up in the same exact marginal tax bracket when you retire. Even if you did, a tax deferred account will still win since its withdrawn at the marginal rate, and as you take it out it fills the bracket buckets, 10/15/25/28/33 so only whatever last little bit is in that higher bracket. You'd have to do great to have this issue, which in reality is totally controllable as you can simply shift your allocation if you amass a tidy nest egg away from any RMD type account, take less work or use sabbaticals/early retirement to mega backdoor into a roth. So many tricks.

Max tax deferred for now, learn more as you go. Listen to colleagues, stay away from whole life.

 

[FutureInternist]

Just max out all your pretax that you possibly can now. If its either or its a no brainer. If its where to put any extra, that may be different but in reality, pretax will still likely win out big. It would be pretty unlikely to end up in the same exact marginal tax bracket when you retire. Even if you did, a tax deferred account will still win since its withdrawn at the marginal rate, and as you take it out it fills the bracket buckets, 10/15/25/28/33 so only whatever last little bit is in that higher bracket. You'd have to do great to have this issue, which in reality is totally controllable as you can simply shift your allocation if you amass a tidy nest egg away from any RMD type account, take less work or use sabbaticals/early retirement to mega backdoor into a roth. So many tricks.

Max tax deferred for now, learn more as you go. Listen to colleagues, stay away from whole life.

So 18k 403b grows to 1.2 million but if I only withdraw up to 75k a year (way overkill) then I only pay 15% tax on it, which would outweigh any benefit of lowering your take home pay now?

If that is correct then that was the missing piece I wasn't getting, namely you can adjust your distribution yearly to stay in a lower tax bracket.

Thanks again

 

[Plastikos]

So 18k 403b grows to 1.2 million but if I only withdraw up to 75k a year (way overkill) then I only pay 15% tax on it, which would outweigh any benefit of lowering your take home pay now?

If that is correct then that was the missing piece I wasn't getting, namely you can adjust your distribution yearly to stay in a lower tax bracket.

Thanks again

The point is you get both of those benefits. Tax deferral now at the highest rate, and taking it out at a (usually) much lower effective one.

You have to withdraw at certain amount by age 70 depending on your balance, but as long as you hit that number you can do whatever amount you want. Thats why some would advise against over filling that bucket, but at 18k/yr it doesnt seem like a big problem.

If you retire before 70 you can of course roll over, take distributions, put it into roth, all kinds of tricks to access it before then and decrease your RMDs to reasonable levels.

 

[FutureInternist]

The point is you get both of those benefits. Tax deferral now at the highest rate, and taking it out at a (usually) much lower effective one.

You have to withdraw at certain amount by age 70 depending on your balance, but as long as you hit that number you can do whatever amount you want. Thats why some would advise against over filling that bucket, but at 18k/yr it doesnt seem like a big problem.

If you retire before 70 you can of course roll over, take distributions, put it into roth, all kinds of tricks to access it before then and decrease your RMDs to reasonable levels.

Thanks dude or dudette.

 

[sweetlenovo88]

1. Bogleheads, whitecoatinvestor, dave ramsey if you have debt,
2. VTSAX