How Much Tax Should One Avoid?

[stuper1]

One small quibble with WiseOne"s list...ROTH then 401K max...but of course up to the match always first. With regard to taxes, even with equal tax rates now and when retired always defer because you will be able to compound better. You can find some internet simulations on the impact of taxes on final nest eggs and it ain't pretty. Lower tax rates now higher later gets tough...spreadsheet and lots of assumptions to make that call.

Kbg,

You statement above seems contradictory to me, but probably it's because I don't understand. You say that, after contributing to 401k up to company match and maxing HSA, contribute to Roth max and then 401k max. Then, you say that with regard to taxes, you should always defer taxes when possible. Isn't that a contradiction if you are maxing out the Roth and only later maxing out the 401k? The Roth is not tax deferred, because you pay the taxes up front.

[Kbg]

A ROTH doesn't defer taxes, it eliminates them on the backside. (Unless Congress decides to change it's mind one day...)

A couple of good years in the market will more than make up the difference you have to pay in taxes upfront on a ROTH.

Note: There is an assumption here that you are youngish.

[stuper1]

A ROTH doesn't defer taxes, it eliminates them on the backside. (Unless Congress decides to change it's mind one day...)

A couple of good years in the market will more than make up the difference you have to pay in taxes upfront on a ROTH.

Note: There is an assumption here that you are youngish.

Exactly, a Roth doesn't defer taxes. You said to "always defer", but you also said to max out the Roth before you max out the 401k. Isn't that a contradiction? If I want to defer, shouldn't I max out the 401k before I max out the Roth?

[Kbg]

Spreadsheets are wonderful things. An HP12C works nicely as well. Check out the bottom line FV or PV.

[Kbg]

Spreadsheets are wonderful things. An HP12C works nicely as well. Check out the bottom line FV or PV.

Yes always defer unless avoidance is possible, don't you think?

[WiseOne]

remember that you are saving taxes at your marginal rate now, but the withdrawals at the other end will be at your *average* tax rate.

Aren't traditional IRA (and similar) withdrawals taxed at the marginal rate at the time of withdrawal? It's as though you'd earned that income at the time of withdrawal instead of when you actually earned it. No?

Unless you've got a large source of regular income in retirement, not all the RMD will be taxed at the marginal rate. I'm assuming no pension since the OP didn't mention this. SS by itself would be unlikely to get you all the way up to 25% in one shot.

The relative order in which one should save into a Roth is interesting. Dualstow should weigh in here as he does mainly Roth for retirement contributions because of his tax bracket, and he argued rather persuasively that this was the right move. If you are only just above the 15% bracket, perhaps the priority should be 401K for any money that would otherwise be taxed at 25%, then Roth (as PS suggested). If you're well above 15%, then tax deferral is a higher priority. If you're entirely in 15%, then there's little advantage to tax deferral and you might as well not bother with the 401K above company match - everything else should go into the Roth or taxable.

It's kind of weird that there's such a big leap from 15% to the 25% bracket, whereas above 25% there are only small rate increases (28% etc) until you get to AMT land. If the "flat tax" change is made I imagine there will be a big rethinking of investment structures.

[Mark Leavy]

Some really good info on this thread.

Whenever I see WiseOne and Kbg and Tenn argue in favor of a point that I don't follow myself, I have to assume that I am missing something.

For what it is worth, here is my simplified view of taxes.

I view all tax loophole/savings opportunities the same way that I view coupons and loyalty programs. Those savings are never “free”. Someone is hoping to benefit and dollars to donuts that person isn’t necessarily thinking of my best interests.

IRA's, Roths, Health Savings Accounts. Those are "Good Things". Good People would save money in them and "By God" we'll give you a tax break if you "Do the Right Thing".

Well... I'm not necessarily one of those good citizens and my spreadsheet shows a few different options...

(Note - I attribute a very high value to opportunity cost)

Not that I won't try and exploit a few tax loopholes now and then when I find them, but... if my spreadsheet says "More options with cash in the bank" vs. "Better Tax treatment with 401K", then I sit up a few nights and figure out which is better for *ME* - assuming that whatever legislation that is currently active is temporal.

Taxes and Legislation try to make the world better on average, based on the majority morality. That may or may not fit your life goals. Don't make all of your decisions strictly on tax savings or you will be subscribing to the generally accepted "good behavior".

[Knot Theory]

Thanks for all the thoughts everyone. Sorry I had to be gone for a family emergency.

I will try to clarify a few details soon about my exact situation. I did ramble a bit, I get diarrhea of the keyboard sometimes.

[WiseOne]

IRA's, Roths, Health Savings Accounts. Those are "Good Things". Good People would save money in them and "By God" we'll give you a tax break if you "Do the Right Thing".

Well... I'm not necessarily one of those good citizens and my spreadsheet shows a few different options...

(Note - I attribute a very high value to opportunity cost)

Not that I won't try and exploit a few tax loopholes now and then when I find them, but... if my spreadsheet says "More options with cash in the bank" vs. "Better Tax treatment with 401K", then I sit up a few nights and figure out which is better for *ME* - assuming that whatever legislation that is currently active is temporal.

While Knot Theory is gathering data, I'd be interested to hear more of what your spreadsheet is telling you.

I've been debating setting a cap on the amount of tax-deferred retirement savings, which will mean throttling back 401K contributions. Something like no more than 60% of total savings. There are real disadvantages to being over-stuffed with tax-deferred savings, and ending up with income in the 25% tax bracket as a result during retirement. Like, losing property tax rebates, getting hit with taxes on Social Security income, and having to pay capital gains taxes.

[Mark Leavy]

While Knot Theory is gathering data, I'd be interested to hear more of what your spreadsheet is telling you.

I've been debating setting a cap on the amount of tax-deferred retirement savings, which will mean throttling back 401K contributions. Something like no more than 60% of total savings. There are real disadvantages to being over-stuffed with tax-deferred savings, and ending up with income in the 25% tax bracket as a result during retirement. Like, losing property tax rebates, getting hit with taxes on Social Security income, and having to pay capital gains taxes.

It's really quite the individual thing, isn't it?

I have been living off of my investments for about 5 years now - and am still a decade younger than a traditional retirement age.

Even so... about 5 years before I stopped having "earned wages", I realized that my future was opportunistic - and uncharted. So I stopped putting money into any 401K plans. I had no idea what the future would bring, and had had some ups and downs in the past. So, for me, I realized that a ready pool of super liquid cash with no strings attached was extremely valuable to me as a safety valve.

I definitely lost some money due to not taking advantage of deferred taxes, but having that cash in a savings account helped me ride a few ups and downs when starting a business - and that worked out favorably in the long run.

I have another startup now that is doing fine (a few years old). But also has the occasional hiccup and so it is nice if I can offer a short term bridge loan now and then. Thus, I still don't put any cash in IRA's or 401k's. It is just too handy to have it liquid.

That is just my situation and I really believe that everyone's life, opportunities and temperament are different. There is no right or wrong. My only caution is to take a critical look at any incentives - and see if they are working in your best interests.

[Knot Theory]

You might want to post this over on Bogleheads. It sounds like the kind of question that would be better answered over there.

I love bogleheads. I made an account but never really posted there, mostly because it's so information dense, anything you want to know has been discussed 20 times already, haha.

My very first asset allocation was in an actively managed aggressive growth stock mutual fund. A "Dave Ramsay" fund, because I young and ignorant and had no idea who Jack Bogle even was. Oh to think how ignorant I was! I adopted the Bogle-esque 3-fund portfolio some years ago however and have been very pleased with it:

https://www.bogleheads.org/wiki/Three-fund_portfolio

Though I have recently tweaked my allocation to 45 US index/15 Ex- US index/ 40 Bond Index, which isn't that drastically different I just have been thinking about being a little more conservative with the allocation for the last two years and finally decided to do this going forward.

Anyway I think bogleheads is great, but one thing that's always bothered me about the Boglehead approach is that it doesn't do a great job of trying to address "off spreadsheet" risks or the fact that asset "classes" (a la The Coffehouse Investor) often aren't actually that distinctive from one another to merit all the fuss.

I got my hands on Harry Browne's original book some time ago, and well, here I am now. This is honestly the first attempt I've ever seen to really try to navigate between assuming society is going to chug along like it has and assuming everything is going to hell . I joke, but it's such an elegant approach it's made me question what I've been doing this whole time, if I'm not just as ignorant after reading Mr. Bogle's books as I was when I opened my first IRA.

Yours is a common story. When I was in a similar situation, I decided to not worry about trying to shoe-horn a PP asset mix into a 401k. Instead, I simply chose a decently conservative stock/bond allocation and maxed out the 401k. As you said, you'll eventually change jobs, so once you roll over this 401k into an IRA, you can easily put that money in a PP allocation.

That's fortunate in its own way. I have learned many problems in life that seem novel and unique to me, because they're happening to me, actually aren't unique at all.

I do wish there was a better answer than do the best you can, but I guess that's the only answer we have in life anyway.

Welcome, Knot!

I'm not sure precisely what you're asking, but here's my answers to a few of your questions:

- Tax deferral now, especially if you have a lot of years between now and withdrawal time, is almost always a win. Play around with a spreadsheet and you'll see. The magic of tax-free compounding is unbeatable. Also, remember that you are saving taxes at your marginal rate now, but the withdrawals at the other end will be at your *average* tax rate.

Right, I'm completely on board there, but I'll try to clarify what I was getting at:

The Bogle-esque indexing of stocks and bonds (or as close to indexing as I can come) I've been doing is unquestionably not the worst thing in the world, but the problem is, it assumes that the United States dollar doesn't collapse, it assumes that the country is overall prosperous in the future with the booms outweighing the busts, deflation doesn't occur ever again, etc.

The truth is, I've come to the opinion that while buying a 60/40 stock/bond index portfolio makes a lot of sense, it involves a lot of childlike naivete to assume that portfolio is going to perform. Didn't Mr. Bogle himself recently say the return on stocks in the next ten years is only going to be 2% or so and the bonds less than that? Granted, he could easily be wrong.

The real point is, now that I've seen the flaws in this approach, it seems to me that it's a question of judgment whether it's wise to do what makes sense on paper because we just don't know what's going to happen, or whether it would be wise to implement this knowledge now despite the opportunity costs for the same reason.

- There are lots of posts at Bogleheads about the order of accounts to save into. I believe it's 401K up to company match, then HSA, then 401K until maxed out, then Roth IRA, then taxable savings. HOWEVER - save for cash needs before maxing out the 401K. This includes emergency fund and savings for big ticket items like house purchase. The EF eventually can be absorbed into the PP, but that won't be possible early on.

Taxable liquidity is always an issue. It sounds like you could well end up in a situation where 100% of your savings are tax-advantaged, which is a bit uncomfortable. That's why piling up a cash cushion should be a high priority.

Well I have a weird situation.

I am the worst of all things, a government employee. That means in my state I'm among the few workers who pays a special income tax known as a pension contribution that gives me a 9.5% haircut off my government salary. Really, I'm losing 19% of my pay because my agency has to match my contribution to the pension, but I digress.

This is good and bad, but the "good" part includes that 9.5% is tax deferred (the state holds my personal contributions in an account I would receive if I quit the state and requested a payout, I earn 5% interest on this).

Then because I'm a gubbamint stooge, I have both a 401k and a 457 plan. So ~10% of my gross going into the pension and two plans (and from what I can tell, the contributions to one don't count toward capping the other) worth of space means I can defer a lot more taxes than a lot of people can. So this is very good, but it makes trying to decide what the hell I'm going to do difficult sometimes, not because I don't understand what's mathematically good but because it involves a lot of "what kind of life am I going to have" decisions (for example, in some spreadsheets I think I could be FI at age 52, but to avoid a 15% penalty on pension payments I'd have to lose 3 more years of my life going to work).

Basically, if I didn't have to pay for the pension and instead got a 9.5% match on 401k contributions, it would shave many years off my working career. But, theoretically, retiring this way should be rather robust as I would have my personal savings, the pension, and Social Security (though the stewardship of the latter two leaves much to be desired and I doubt I'll ever see a penny from either).

Don't bother with the PP in an unsuitable 401k; just do the best you can and try for a 60/40 portfolio, or whatever best matches your tolerance for stock market volatility.

If possible contribute enough to your 401K to lower your top tax bracket to 15%. Once that's your top bracket, your capital gains tax rate is 0%, so you can safely contribute the remaining investment funds to a taxable account.

A very good point. Doesn't really effect me much right now but I'll have to keep it in mind going forward.

I agree with your preferred implementation. I only have global stock holdings in my 401k's and traditional IRA. I implement the PP where it's not a hassle, meaning mostly the old Roth and taxable; it's pretty tax efficient. Cash and gold almost all taxable. Long bonds don't really kick out much cash anyways, so if you can't fit those in a Roth or something, no big deal. You'd only be shielding $7.50 a year for a $1,090 bond with a 3% coupon in the 25% bracket, vs $3.07 from $1,090 invested in VTSAX at current 1.88% yields. For the $18,000 you can put in a 401k, that's a difference of like $75.

What did you mean by

I did look into having a 401k and a traditional IRA with a broker at the same time, but I am right at the cusp where I don't get the full deduction for doing that

?

Also good points.

To the latter: Apparently you can have a traditional IRA and an employer sponsored 401k type plan, but if your (gross?) income is at a certain level (and mine is just there right now), the tax benefit is phased out for the tIRA.

My thought was initially: Hey, why not just open a tIRA at some brokerage firm where I can invest in anything I want and set up a PP inside of it and reduce my 401k contributions by that amount, I'll still get my tax savings it'll just be a bit messy.

But if the benefit gets phased out, it's like... why bother? If I'm not going to get credit for the deferral I'll just put in my Roth IRA.

It's kind of weird that there's such a big leap from 15% to the 25% bracket, whereas above 25% there are only small rate increases (28% etc) until you get to AMT land. If the "flat tax" change is made I imagine there will be a big rethinking of investment structures.

I know! It really changes your mental calculus. Like I said before, the system just seems to "squeeze" me.

I've been debating setting a cap on the amount of tax-deferred retirement savings, which will mean throttling back 401K contributions. Something like no more than 60% of total savings. There are real disadvantages to being over-stuffed with tax-deferred savings, and ending up with income in the 25% tax bracket as a result during retirement. Like, losing property tax rebates, getting hit with taxes on Social Security income, and having to pay capital gains taxes.

I think this is a more advanced version of where I am. I am nowhere near being able to retire, but I have to find some point between tax d deferral and cash liquidity to achieve a certain piece of mind. In my case, I am trying to:

- Form a 6 month emergency cash cushion. A major decision will be made at my employer in May of 2019, I need to be ready in case it goes badly.
- Pay cash for my next car in 2028. I almost made it last time with a 75% down payment but I'm trying to never finance a car ever again unless it's done strategically to pump my credit score past 800 to get a lower mortgage rate.
- Get together a 20% down payment for a house. Rent increases 7 to 10 percent a year, it is killing me!
- Avoid 25% tax rates.

The first and the third goals are rather desperate ones, so it's just very hard right now to make decisions as these priorities compete.

[WiseOne]

Knot,

It sounds like cash, not long-term investments, is your top priority in taxable right now. I wouldn't dive into the PP just yet.

Perhaps you could continue to throw whatever income would be taxed at 25% into retirement savings, then put the rest into taxable cash to save toward those goals you mentioned.

A word about home-buying...why are rents going up 7-10%/year in your area? If it's because of property tax increases, then buying property won't save you from that. If it's because there's a shortage of available rentals, then buying may be a good idea unless that same squeeze is driving up home prices as well. The decision to buy, really, is about whether you plan to stick around for at least 5-7 years. The way you're talking about your job raises that question, for sure.

[Tyler]

Not that I won't try and exploit a few tax loopholes now and then when I find them, but... if my spreadsheet says "More options with cash in the bank" vs. "Better Tax treatment with 401K", then I sit up a few nights and figure out which is better for *ME* - assuming that whatever legislation that is currently active is temporal.

I'm in the same boat as you, Mark.

Tax-deferred retirement accounts are designed to benefit the very specific goal of saving money to retire on when you hit 60+. Sure you can access money before that if you jump through a few narrow hoops, but in general they're not designed with that purpose in mind. The primary goal is to help the average person 1) save more than zero for retirement, and 2) hopefully forget about that money so they don't touch it too soon.

A while back I decided that waiting until 60 to retire was a life assumption I was ready to challenge. I wanted to do it before 40 and met my goal with a few years to spare. Well, someone in my situation has a very different viewpoint of the benefits of tax-deferred savings versus liquid money I can spend today. I made a conscious decision as I was accumulating to not necessarily max out my tax-deferred savings, and instead focused on maintaining a set percentage of my net worth in taxable vs. tax-deferred. It's all about not putting all of your eggs into one basket with a lock on it.

Now I fully admit I'm an outlier. I just wanted to point out that tax savings is not necessarily the only thing you can optimize for and sometimes a bit of balance is helpful.

[WiseOne]

Tyler, what's the percentage you set for tax-deferred long-term investments? (Or taxable, lumping in Roth IRA and HSAs).

I few posts back, I was thinking on the order of something like no more than 50-60% for tax-deferred. I'm at 70% currently and that feels like too much.

[ochotona]

One more thing, you can always withdraw your Roth IRA contributions, since you paid taxes on them already. But you can't take out any growth without penalty. If your account value went down? So sorry!

Also, you can't take a distribution from a Roth EVEN IF YOU'RE OLDER THAN 59.5 UNLESS THE ACCOUNT IS FIVE YEARS OLD... wow, who knew?

http://www.rothira.com/blog/the-five-ye ... ithdrawals

I'm in the higher marginal Federal bracket, 28%, but I'm still putting into Roth, because of tax diversification reasons. I am diversifying against the risk that over the next 35-40 years tax rates will become confiscatory. If this happens, I'd rather pre-pay now.

I don't think they'd undo the Roth tax-free promise, but they might definitely cap the amount of the Roth... like you get $2 million in a Roth, then that's all, once it hits that, you can't put any more in ever, maybe even amounts greater than the ceiling get exposed to taxation again. Those ideas have been floated already. Then count on the Govt to neglect to index the ceiling, then $2 million deflates to $500,000 in purchasing power over 40 years, like it did 1977-2017. Or worse.

[Xan]

Even if you're planning to (or could potentially need to) withdraw the money early, it could still be a smart move to put money in tax-advantaged accounts.

Yes, there's a 10% penalty, but at some point that's worth it for tax-free growth, right? And this would be more true the more trading there is in the account.

[Tyler]

Tyler, what's the percentage you set for tax-deferred long-term investments? (Or taxable, lumping in Roth IRA and HSAs).

I few posts back, I was thinking on the order of something like no more than 50-60% for tax-deferred. I'm at 70% currently and that feels like too much.

I won't claim I planned for a target number from the start, but we ended up with 60% taxable and 40% tax-deferred. I'll also point out that I'm naturally frugal with a very high savings rate, and there were a few years in there where I maxed out the 401k while still putting even more money away in taxable so the final percentages may honestly speak more to my personal savings habits than anything else. I only cut back the 401k contributions towards the very end when I realized we already had "enough" long-term and started to think more about mid-term goals.

The main point is that there's more to managing money than reducing taxes paid, and you have to think about how you want to use it and when you need access to it. Even if it could save me a bit of taxes on paper, I'd personally have a tough time locking more than half of my money in a tax-deferred account for the same reason that I'd have a problem locking a large percentage in home equity. Sometimes maximizing efficiency minimizes options.

Even if you're planning to (or could potentially need to) withdraw the money early, it could still be a smart move to put money in tax-advantaged accounts.

Yes, there's a 10% penalty, but at some point that's worth it for tax-free growth, right? And this would be more true the more trading there is in the account.

There will always be situations where stuffing all your money in tax-deferred makes sense, and excessive trading is one of them. I don't think too many of us should fall into that camp, though.

Also, remember that tax-deferred accounts are designed to be appealing to hard-working accumulators where taxes are relatively high. But pair an income level that keeps you under the threshold for zero long-term capital gains with a very tax-efficient investing strategy like the PP, and even a taxable account can enjoy tax-free growth. You still have to pay income taxes up-front, but for me it was a fair price for the added capital flexibility.

[barrett]

Tyler, what's the percentage you set for tax-deferred long-term investments? (Or taxable, lumping in Roth IRA and HSAs).

I few posts back, I was thinking on the order of something like no more than 50-60% for tax-deferred. I'm at 70% currently and that feels like too much.

I wish I had read this thread ten years ago! When I "retire" next year at age 59.5, I'll be roughly at 54% tax-deferred, 40% taxable and 6% Roth. Even that 54% I think is too high but tax deferral has generally been just too tempting for me. I've never been in a very high bracket but I am self employed, and in addition to the the initial savings, I also consider that paying lower taxes now means making lower estimated payments for the ensuing 12 months or so. In recent years I also take into account that making a bigger solo 401(k) contribution helps me hit the sweet spot for ACA subsidies.

So I'll be as aggressive as possible with Roth conversions over the next decade or so but there are some things already baked into the retirement tax cake. For example, I have big whacks of EE savings bonds maturing between 2021-2023 and the interest on those is quite high. So that's three years that I won't be able to convert much to the Roth without bumping myself into a higher bracket.

WiseOne, your 70% strikes me as really high but I think you have a lot more time than I do to turn the tax ship around. The thing is, and this will be obvious to anyone who is older, it's hard to build up Roth accounts relative to tax-deferred when the latter have a 30-year head start!

Another factor to consider is where one is at with cost basis in taxable accounts. The higher the cost basis, the more flexibility one has with using those funds in retirement.

[WiseOne]

Thanks Barrett! Yes, I'm slowly but surely getting the Titanic away from that iceberg with increased taxable savings.

It sounds like you're caught in a bit of a dilemma, as I guess you have to balance the Obamacare subsidies with having a higher percentage of savings in tax-deferred accounts. 54% sounds manageable though. The problem is that there's not much of a window between Obamacare and age 70 for you, correct? so not much opportunity to really push on Roth-converting the tax-deferred savings? It might be that giving up the Obamacare subsidy after you hit Medicare age and it's only Li's subsidy in question is the way to go. Can you estimate how much you can safely withdraw after age 70 without triggering Social Security taxes, then use that to decide if those Obamacare subsidies are really worth it? Also, check into whether your town has special breaks on property taxes for senior citizens, and whether there are income limits. In NYC, an income of under $50K over age 65 gets you a 50% property tax break.

It would be nice if there were an online calculator for this - there's retirement calculators out there but none that take taxes/subsidies into account.

[Knot Theory]

Knot,

It sounds like cash, not long-term investments, is your top priority in taxable right now. I wouldn't dive into the PP just yet.

Perhaps you could continue to throw whatever income would be taxed at 25% into retirement savings, then put the rest into taxable cash to save toward those goals you mentioned.

Sad but true. The more I read my own words the more I realize that's the adult thing to do, as much as it will pain me in ten years to realize the opportunity cost.

But when is it ever any different?

A word about home-buying...why are rents going up 7-10%/year in your area? If it's because of property tax increases, then buying property won't save you from that. If it's because there's a shortage of available rentals, then buying may be a good idea unless that same squeeze is driving up home prices as well. The decision to buy, really, is about whether you plan to stick around for at least 5-7 years. The way you're talking about your job raises that question, for sure.

Indeed, it's a complex mess. Locally, the following factors are at play:

[*]Over 150 people a day move to this city.
[*]NIMBYism is incredibly strong and the city council refuses to make realistic zoning laws despite everyone crying about "stealth dorms" and the cost of housing... which are a direct result of NIMBYism. It's amazing how much they cry about these things and then immediately block any effort to build more housing or allow housing options in between single family homes and high rises to be built. There's no row houses, town houses, 6 plexes, etc. here to speak of and virtually all of the new apartments built are higher end units.

One aspect of the job situation is even if things do go badly for me there (good chance they will not I should note), I am most likely to get another job here in the same locale because it's where my experience is the most valuable to employers.

Housing, if you look at it, is a racket between different socioeconomic classes anyway. Most people's FIRE plans involve getting someone like me to give them my money via rent or else passively letting my needs give them lots of tax free capital appreciation. That's fine as far as it goes, but some day I sincerely want to be the one on the other side of this racket.

[Pointedstick]

It sounds like you live in the bay area. If so, my advice is to escape while you still can. I lived and worked there for a while, and especially for those who didn't buy property 15 years ago, it becomes an even more insane lunatic nightmare madhouse every day, by virtually important every metric: housing prices, property, income, and sales taxes, commute times, political attitudes, witchhunting behavior, employment blacklisting, sense of community, desirable place to raise kids.

The only thing it has going for it is plentiful six-figure jobs. But the wealth is an illusion. Between the crazy housing prices, the high taxes, and the fact that you phase out of every favorable tax category, you don't actually see as much of it as you would expect. If you're in tech, your skills are portable. There are tech jobs outside of the bay area. Good ones. Better ones. Move to Denver, or Austin, or Dallas, or heck even Albuquerque!

I'm currently in New Mexico, earning a little under 75% of my peak bay area earnings, but living like a king, and my company treats me like a human being, not a replaceable cog in a machine. The difference in attitude is just amazing. And I'm able to keep myself below the 15% tax bracket, so I pay no capital gains taxes. I contribute just enough to tax-deferred accounts to get under the cut-off point.

[barrett]

It sounds like you're caught in a bit of a dilemma, as I guess you have to balance the Obamacare subsidies with having a higher percentage of savings in tax-deferred accounts. 54% sounds manageable though. The problem is that there's not much of a window between Obamacare and age 70 for you, correct? So not much opportunity to really push on Roth-converting the tax-deferred savings? It might be that giving up the Obamacare subsidy after you hit Medicare age and it's only your wife's subsidy in question is the way to go. Can you estimate how much you can safely withdraw after age 70 without triggering Social Security taxes, then use that to decide if those Obamacare subsidies are really worth it?

You know, I have been so focussed on the tax side if the equation that I was forgetting to think about ACA subsidies going forward. Damn, that complicates things even further, not to mention that it's near impossible to imagine what future health care costs will be for anyone planning to pull the work plug before age 65. The wife is 50.5 and planning to keep working for at least several more years. And then there's the high probability that I'll work some and have some income in retirement.

My basic understanding is that the correct strategy when drawing from different retirement assets is to try to keep taxes at a fairly consistent level. In reality though it seems that one can only have a rough idea what the plan is and that the best way to execute it is too look at all the numbers each year in early December or so, and then decide whether or not to do a Roth conversion, harvest a tax loss or whatever.

[Libertarian666]

Tyler, what's the percentage you set for tax-deferred long-term investments? (Or taxable, lumping in Roth IRA and HSAs).

I few posts back, I was thinking on the order of something like no more than 50-60% for tax-deferred. I'm at 70% currently and that feels like too much.

I wish I had read this thread ten years ago! When I "retire" next year at age 59.5, I'll be roughly at 54% tax-deferred, 40% taxable and 6% Roth. Even that 54% I think is too high but tax deferral has generally been just too tempting for me. I've never been in a very high bracket but I am self employed, and in addition to the the initial savings, I also consider that paying lower taxes now means making lower estimated payments for the ensuing 12 months or so. In recent years I also take into account that making a bigger solo 401(k) contribution helps me hit the sweet spot for ACA subsidies.

So I'll be as aggressive as possible with Roth conversions over the next decade or so but there are some things already baked into the retirement tax cake. For example, I have big whacks of EE savings bonds maturing between 2021-2023 and the interest on those is quite high. So that's three years that I won't be able to convert much to the Roth without bumping myself into a higher bracket.

WiseOne, your 70% strikes me as really high but I think you have a lot more time than I do to turn the tax ship around. The thing is, and this will be obvious to anyone who is older, it's hard to build up Roth accounts relative to tax-deferred when the latter have a 30-year head start!

Another factor to consider is where one is at with cost basis in taxable accounts. The higher the cost basis, the more flexibility one has with using those funds in retirement.

Assuming you are married, this is exactly the type of analysis that my retirement analyzer program does.
I'll be happy to send you a link to download a copy if you are interested in it.
The same offer holds for all other forum participants, of course.

[Kbg]

Interested!

[barrett]

I am interested as well, tech. I'd be curious if you know about the Optimal Retirement Planner (i-ORP) and how that compares to what you have created. Here is the link to that one:

https://www.i-orp.com/gamma/extended.html

It's value/accuracy have been debated over on Bogleheads and a bit on MMM. It suggests that we should be very aggressive with Roth conversions between ages 59.5 and 70.5 for me (wife is 8.5 years younger).

I THINK your retirement analyzer also considers the impact of annuities and life insurance, correct? One of the things that we have been debating is whether or not to nix our life insurance over the next two years.