Finance novice searching for answers

[GA teacher 0]

18 hours ago, ScottO said:

If the fees are the same, the 457 has friendlier withdrawal options(no 10% penalty) if you're no longer with your employer and in need of the money. I would put all my eggs in that basket. Without knowing your total household income and tax bracketry I wouldn't know how to suggest your division of pre-tax to post-tax.

If you're married, it looks like you want to aim for dollars your earn over ~$105k to stay out of the 22% bracket and go in to pre-tax accounts. Single, ~$52k.
With anything below, you may want to consider post-tax, Roth, accounts. You'd pay the 12% on that earned income today, but nothing years from now.

Things come out pretty close regardless of how you place your bets on your future existence though. There's a calculator in this article you can play with:
https://www.nerdwallet.com/blog/investing/roth-ira/roth-tops-traditional-iras-up-to-six-figures/

Thank you for the calculator article.  If I'm calculating correctly, I pay 17% in taxes combined state and federal.  I basically did monthly tax amt divided by monthly salary amt.    And I couldn't figure out the next steps in the calculator...  I'm single and I make about 70k/yr.  I just looked up 2020 tax bracket and attached it here.   Does this mean if I put away (hypothetically) $30,000 in post-tax account, I will be in 12% tax bracket?  And does that 10% in tax savings really make that much difference in the long run?

[GA teacher 0]

19 hours ago, tony said:

GA Teacher

It's pretty much up to you to decide how to proceed.  Like I said previously, I like the idea of having my retirement money free and clear of the tax man upon retirement if for nothing else knowing the money is all mine.  Paying RMD 's can't be fun and I'm not looking forward to it. When I started out, pre tax was my only option. Later down the road when post tax options became available I went 100% in.  So I have both and I'm retired now  . I also have some taxable accounts. I like the flexibility of having different types of accounts.

it is impossible to know the precise direction of future tax rates, but you can look at the present for some clues to the future. High deficits and high levels of national debt suggest possible higher taxes in the future. If you believe taxes are likely to be higher in the future and I do , you might want to lean more toward a Roth or after tax account , because that plan allows you to withdraw money tax-free when you retire.   However, there are some strong advocates for going  100% tax advantaged too. I'm jus offering a personal  opinion.

Hope this helps..

You are helping me so much, Tony!  Thank you for your opinions.  They are teaching me how to think financially 🙂 I definitely feel like we'll have higher taxes later in the future with all the federal help given during these unfortunate times.  Would you be able to explain to me how much tax I'll be paying maybe like 20 years later if I earned over hypothetically 200k in a pre-tax account? 

[ScottO 0]

 

13 minutes ago, GA teacher said:

Wow!  Thank you, ScottO.  It's nice to see the allocation that Vanguard uses for their Target Fund.  What do you mean by "100% VINIX looks wild..."?  

Also, is "$6K/yr" the max for an IRA?

Being 100% in stocks can be a wild ride, as they are more volatile than bonds. $100k in stocks after a 40% drop would be valued at $60K, the sudden drop can be unnerving if you're not already trusting in the market and comfortable with the long term "buy and hold" strategy. It's worth reading Bogle's Little Book of Common Sense Investing and A Random Walk Down Wall Street:

https://www.worldcat.org/title/little-book-of-common-sense-investing-the-only-way-to-guarantee-your-fair-share-of-stock-market-returns/oclc/1005001379/editions?referer=di&editionsView=true
https://www.worldcat.org/title/random-walk-down-wall-street/oclc/1139648127/editions?referer=di&editionsView=true

Vanguard doesn't advocate for being more than 90% in stocks. They don't see the benefit in relation to the added risk. Having a bond allocation smooths the ride and allows for rebalancing, but it can be seen as leaving money on the sidelines.

$6k is the max for an IRA. It changes each year.

12 minutes ago, GA teacher said:

Thank you for the calculator article.  If I'm calculating correctly, I pay 17% in taxes combined state and federal.  I basically did monthly tax amt divided by monthly salary amt.    And I couldn't figure out the next steps in the calculator...  I'm single and I make about 70k/yr.  I just looked up 2020 tax bracket and attached it here.   Does this mean if I put away (hypothetically) $30,000 in post-tax account, I will be in 12% tax bracket?  And does that 10% in tax savings really make that much difference in the long run?

70K - 12k = 58k... so then whatever you're making above $40,126 is being taxed at 22%... every $1 dollar you put in your pocket, it's actually .78 cents (and even less depending on state taxes.) If you put those dollars into a tax deferred account, they are whole dollars that earn you compounding money.

[krow36 0]

6 hours ago, GA teacher said:

Thank you for the calculator article.  If I'm calculating correctly, I pay 17% in taxes combined state and federal.  I basically did monthly tax amt divided by monthly salary amt.    And I couldn't figure out the next steps in the calculator...  I'm single and I make about 70k/yr.  I just looked up 2020 tax bracket and attached it here.   Does this mean if I put away (hypothetically) $30,000 in post-tax account, I will be in 12% tax bracket?  And does that 10% in tax savings really make that much difference in the long run?

Roughly, if your employer says your basic income (before taxes) is 70k/yr, and you contribute 30k to tax-deferred accounts (traditional IRA, 403b or 457), then your Adjusted Gross Income (AGI) would be 40k. Your Taxable Income is your AGI minus your Standard Deduction (12.5k). So your taxable income would be 27.5k, which is towards the bottom of the 12% income tax bracket. Check your Form 1040 to see your Taxable Income.

Tax deferred accounts are pre-tax because you won't pay the income tax on the money you put in them until you take a distribution in retirement. They reduce your taxable income for the year of contribution. Roth accounts and taxable brokerage accounts are post-tax because the money you put in them is taxed (or will be at tax time). They do not reduce you taxable income.

It's very desirable to be in the 12% income tax bracket if you have a significant taxable (brokerage) account. Dividends and capital gain distributions are taxed at 0% in the 12% bracket and at 15% in the 22% bracket. 

It's not a big deal if your income edges into the next higher bracket, but you should be aware that 22% is almost double 12%. Only the income above the top of the 12% bracket is taxed at 22%.

 

[GA teacher 0]

Thank you both, ScottO and krow36, so much!  I had to read and re-read your replies and still need much more practice in calculating and understanding fully, but I didn't want to delay saying how I much I appreciate all your help and thorough teaching.  I didn't even know that we had such thing as "standard deduction"  haha.  I may have more questions after practicing the math, but thank you again, and I hope you guys all enjoy the 4th!  Stay safe!!

[EdLaFave 0]

On 6/29/2020 at 9:44 PM, GA teacher said:

What would you do with this savings plan: http://publish.gwinnett.k12.ga.us/gcps/home/public/about/business-and-finance/retirement/content/home/plan/403b-457b-rsp 

I think everybody has covered this, but your only fairly priced fund in that lineup is the Vanguard Institutional fund. Unfortunately, that doesn't include any bonds or international stocks so it would be best to use another account (like an IRA) to buy bonds or international stocks if you so desire.

I don't think you've said how much you invest per year. The 2020 IRA limit is $6,000 for those under 50 and $7,000 for those over 50. IRAs have rock bottom costs and basically let you buy any fund you want. You should be maxing out your IRA and only invest in the 403b/457b if you have extra money after maxing the IRA.

I'm not sure people have pointed this out yet, but it looks like your plan gives you the option to open up a Schwab account. I'd look into that because if they aren't charging you an arm and a leg then you might be able to get access to really low cost funds that'll let you build a fully diversified portfolio.

On 6/30/2020 at 12:23 PM, GA teacher said:

I heard post-tax is better than pre-tax without much research

For most people, this is very likely false.

Unfortunately, nobody can definitively answer this question because it depends on unknowable information and unknowable future events.

For those with pensions, it is more likely (notice that I didn't say likely, I'm not saying the odds are higher than 50%, I'm just saying it is more likely) that after-tax contributions will be superior relative to those without pensions.

If you want to get into the details, I'm ready to go.

On 6/30/2020 at 12:23 PM, GA teacher said:

Because of this, I was thinking maybe I can do 100% VINIX like Tony suggested and count on the pension as substitution for bonds/fixed income?

In my view, the only reason for bonds is to prevent behavioral errors that destroy portfolios.

Stocks have a higher expected return over the long haul (significantly so). If you can handle situations where you lose 50% or 60% of your money in an economic downturn and you keep investing just as you did when the stock market was soaring, then that's what matters. If you'd do something foolish like sell stocks or stop investing, then you need bonds to prevent your portfolio from taking such big hits, but know that you're reducing your expected returns in order to stop yourself from sabotaging your own portfolio!

On 6/30/2020 at 8:50 PM, GA teacher said:

My current balance in post-tax 403 account is about 22% of the balance amount I have in pre-tax 457.  Which account should I be focusing on more or contributing more?

They both seem to have the same investments and fee structures. I believe the 457b has more attracted withdrawal conditions so I'd favor that one. However, what I'd really favor is maxing out that IRA first!

On 7/1/2020 at 6:34 PM, GA teacher said:

I definitely feel like we'll have higher taxes later in the future with all the federal help given during these unfortunate times

You may be right, you may be wrong. Based on my personal politics, I REALLY hope you're right.

However, my advice to you is to take any political views you have and any predictions you have for the future (political or otherwise) and completely throw them away. The only thing we can accurately predict is that short of civilization collapse, the stock market is going to generate positive returns in the long term.

 

[tony 0]

GA Teacher,

 

5 hours ago, EdLaFave said:

I'm not sure people have pointed this out yet, but it looks like your plan gives you the option to open up a Schwab account. I'd look into that because if they aren't charging you an arm and a leg then you might be able to get access to really low cost funds that'll let you build a fully diversified portfolio.

On 6/30/2020 at 12:23 PM, GA teacher said:

Ga teacher

Wow I missed that completely .If that's true that you have that access  to  a  Charles Schwab brokerage  account than that may very well be your ticket to the  diversifying funds you want  and need as Ed mentions. 

On another note I can't believe Ed wants to pay more taxes. I think I know where Ed is coming from but unfortunately our government doesn't spend our money wisely.

[EdLaFave 0]

1 hour ago, tony said:

On another note I can't believe Ed wants to pay more taxes. I think I know where Ed is coming from but unfortunately our government doesn't spend our money wisely.

haha, you're cracking me up Tony, but in all seriousness I wholeheartedly believe:

1. Everybody should have uninhibited access to medical care because it is immoral for people to suffer or die unnecessarily.
2. Everybody should have uninhibited access to education and skill development because it advances civilization and maximizes individuals' potential.
3. Everybody should have uninhibited access to life's basic necessities: healthy food, clean water, safe housing, etc.
4. Everybody should have a climate and environment that allows life to flourish.

These things cost money and I'm happy to help pay for them :)

[ScottO 0]

6 hours ago, EdLaFave said:

I'm not sure people have pointed this out yet, but it looks like your plan gives you the option to open up a Schwab account. I'd look into that because if they aren't charging you an arm and a leg then you might be able to get access to really low cost funds that'll let you build a fully diversified portfolio.

It's hard to tell what the fees on the SDBA would amount to. Contacting Schwab or a VALIC rep might answer a few things:
http://publish.gwinnett.k12.ga.us/gcps/wcm/connect/a7b3aa3e-eea1-4786-b173-7c70ae2bc08c/2020.03.31+Annual+Participant+Fee+Disclosure+403b.pdf?MOD=AJPERES

At a minimum it would cost you $50/yr for the SDBA. Maybe there's someone here with a similar setup?

I use an SDBA with my CalSTRS Pension2 457 and it's not intuitive:

• $50 annual cost.
• At first I was going to have to pay a fee per transaction until I spoke with someone about setting up a systematic mutual fund purchase. I had to pay $15 (I think) for each of the four funds I started out with, but after the systematic setup was established, that fee was no longer imposed.
• Over arching administrative fees still apply (.25% in my case.)
• I have to manually transfer money from an equivalent of VINIX into the SDBA prior to the 15th of each month(when the systematic purchase is triggered.)

I don't have to do any of that with my Vanguard 403b... which reminds me that I need to hassle my district again for better options. I cut them some slack for the first few months of the shelter in place.

Best of luck! Great work pursuing all of this! It'll pay dividends which will compound over time!

[MNGopher 0]

Whether you should be contributing to traditional (pre-tax) or Roth (post-tax) really comes down to comparing your tax bracket in the year you earned the money vs. your tax bracket in the year that you will withdraw the money in retirement.  The latter, is of course an estimate.  You're going to pay taxes one way or another.  You just want to pay them when it's most beneficial for you to do so.  General rule of thumb that I would recommend:  If you are currently in the 10 or 12% bracket do all Roth.  If in the 22% bracket favor the traditional contribution, but some of both is fine.  In the 24% bracket or higher, max traditional before doing any Roth.

As far as if tax brackets go up or down in the future, I agree with most people that they will probably go up, since we are at historically low rates that are currently set to expire  in 2025.  I don't really expect them to go up all that much though.  The 12% bracket may revert back to 15 or so, and 22% may go to 25.  These small changes in tax rates wouldn't affect my basic strategy for determining which type of account to contribute to.

 

[EdLaFave 0]

1 hour ago, MNGopher said:

Whether you should be contributing to traditional (pre-tax) or Roth (post-tax) really comes down to comparing your tax bracket in the year you earned the money vs. your tax bracket in the year that you will withdraw the money in retirement. 

I think the average reader will miss the complexity buried in this statement.

Our tax code is progressive, which means the first block of money you earn isn’t taxed at all, the next block is taxed at the lowest rate, the next block at a slightly higher rate, and so on. Your highest tax bracket is referred to as your marginal tax rate. If you divide all the taxes you paid by all the money you earned, that is your effective tax rate.

When you choose to put money into a Roth Tax Advantaged account, each dollar will be taxed based on your marginal tax rate (i.e. your highest tax bracket).

When you choose to put money into a Traditional Tax Advantaged account those dollars will not be taxed until you withdraw them.

To oversimplify the matter let’s say you retire at 50, the tax code is the same, and you live solely off your Traditional Tax Advantaged account (no SS, no pension). The money you withdraw will be subjected to our progressive tax code (some at 0%, some at 10%, some at 12%, and so on). Therefore, your effective tax rate will wind up being far less than the tax rate you would have paid had you contributed to a Roth Tax Advantaged account. Being able to fill in the lower tax brackets when withdrawing Traditional money is a huge advantage over paying taxes at your marginal bracket when contributing to a Roth.

The goal would be to invest just enough money into Traditional accounts such that every dollar you pull out in retirement falls into a tax bracket that is less than or equal to your marginal tax rate at the time you earned that dollar.

Unfortunately (or fortunately depending on your perspective) you will likely have other sources of income in retirement like SS or a pension and those dollars will fill up your lower tax brackets first, which increases the effective tax rate you’ll pay on the money you pull from a Traditional Tax Advantaged account. That isn’t to say Traditional is worse than Roth, but the advantage isn’t as strong as you may have initially thought. 

Another pain point surrounding Traditional is RMDs (required minimum distributions) that you’re required to take when you’re sufficiently old. You may not even need the money, but it has to be withdrawn and taxes have to be paid.

There are exceptions to every rule, but if you assume the tax code remains constant, then the people who come out behind with Traditional accounts will have (significantly) more income in retirement than they had in their working years. To those people I say you should have retired sooner (i.e. not saved so much for retirement) or you should have increased your standard of living while working.

If you’re set on trying to predict future tax codes and feel like the higher tax progressive/liberal agenda is inevitable, keep in mind that same agenda seeks to disproportionately increase taxes on the top quintile. So if you’re not in that group, I wouldn’t worry too much about it. If you are in that group, you’ll be fine no matter what.

Finally, despite all of this detail, I view this to be more of an optimization. Until you’ve focused your effort on minimizing spending and investing in low cost total market index funds, then I wouldn’t spend much energy on Traditional vs Roth. 

[MNGopher 0]

^ That is a good job of explaining the tax brackets, Ed.  I think most people do err on the side of putting too much in Roth accounts.  That's not to say there isn't a place for both, but during your peak earning years most should be going into traditional accounts IMO.  While most teachers have a pension that will fill up the 0 and 10% space in retirement, most pensions will not fill up the 12% bracket, especially if you are MFJ tax status and your spouse doesn't have a pension.

The best time to use Roth accounts are early in your career, or any year your income drops for whatever reason.  Also many teachers will have a decade or more (about 13 years in my case) after retirement but before collecting Social Security when they can convert to a Roth up to the top of the 12% bracket.  Putting money in a Roth during peak earning years is locking in your taxes at 22% (currently) and that can't be undone.  There is a pretty good chance you will be able to take it out of traditional for expenses or convert it to Roth at a lower rate later, if you decide to defer it during high income years.

If a saver does err on the side of contributing too much in a traditional account and ends up in a higher bracket in retirement, this would mean your investments did really well, and it's not really the worst problem to have.

 

[EdLaFave 0]

2 hours ago, MNGopher said:

they can convert to a Roth up to the top of the 12% bracket.  Putting money in a Roth during peak earning years is locking in your taxes at 22% (currently) and that can't be undone.  There is a pretty good chance you will be able to take it out of traditional for expenses or convert it to Roth at a lower rate later, if you decide to defer it during high income years.

If a saver does err on the side of contributing too much in a traditional account and ends up in a higher bracket in retirement, this would mean your investments did really well, and it's not really the worst problem to have.

 

Quick tidbit if any readers are wanting to dig into the tax code even further. So far we've been talking about Ordinary Income, which comes from your labor, SS, pensions, Traditional Tax Advantaged account withdrawals, and so forth. Ordinary income is taxed based on the 0%, 10%, 12%, 22%, 24%, etc. tax brackets.

However, there is also something I'll call Qualified Income, which comes into play with Taxable accounts and is taxed based on the 0%, 15%, and 20% tax brackets. Most of the dividends index funds distribute are taxed as Qualified Income and if you sell shares you've owned for at least a year the profit is taxed as Qualified Income.

Back to the Roth Conversions...if you're going to have years where your Ordinary Income is really low then you'll get the best of both worlds. For example, I'll retire early so I'll have plenty of years where the only ordinary income being forced on me is the very small percentage of the dividends from my taxable account  that aren't Qualified (i.e. no SS, no pension, no RMDs). The rest of my spending needs will be more than met by something called Tax Gain Harvesting from my Taxable account (but that's another conversation). So I'll have virtually no Ordinary Income, which is awesome!

So it is an absolute no brainer to perform enough Roth Conversions to at least fill up the 0% tax bracket and maybe even the 10% or higher (I still have to do the math). What you accomplish by doing this is:

1. You avoided income taxes at your (high) marginal tax rate when you earned the money and put it into a Traditional Tax Advantaged account.

2. You avoided income taxes again by converting a portion of your Traditional Tax Advantaged account to a Roth Tax Advantaged  account (because that Ordinary Income was used to fill up the 0% tax bracket in the year the conversion was done).

3. You once again avoided income taxes years later when you pull the money out of the Roth Tax Advantaged account.

No taxation at all, you can't beat that!

[GA teacher 0]

On 7/3/2020 at 6:04 PM, EdLaFave said:

haha, you're cracking me up Tony, but in all seriousness I wholeheartedly believe:

1. Everybody should have uninhibited access to medical care because it is immoral for people to suffer or die unnecessarily.
2. Everybody should have uninhibited access to education and skill development because it advances civilization and maximizes individuals' potential.
3. Everybody should have uninhibited access to life's basic necessities: healthy food, clean water, safe housing, etc.
4. Everybody should have a climate and environment that allows life to flourish.

These things cost money and I'm happy to help pay for them 🙂

I just finished a documentary series on capitalism, and their conclusion about an ideal capitalistic society reflects what you wrote here, Ed 🙂  

[GA teacher 0]

On 7/3/2020 at 11:01 PM, MNGopher said:

Whether you should be contributing to traditional (pre-tax) or Roth (post-tax) really comes down to comparing your tax bracket in the year you earned the money vs. your tax bracket in the year that you will withdraw the money in retirement.  The latter, is of course an estimate.  You're going to pay taxes one way or another.  You just want to pay them when it's most beneficial for you to do so.  General rule of thumb that I would recommend:  If you are currently in the 10 or 12% bracket do all Roth.  If in the 22% bracket favor the traditional contribution, but some of both is fine.  In the 24% bracket or higher, max traditional before doing any Roth.

As far as if tax brackets go up or down in the future, I agree with most people that they will probably go up, since we are at historically low rates that are currently set to expire  in 2025.  I don't really expect them to go up all that much though.  The 12% bracket may revert back to 15 or so, and 22% may go to 25.  These small changes in tax rates wouldn't affect my basic strategy for determining which type of account to contribute to.

 

Thank you MNGopher for sharing your strategy 🙂