Limiting tax-deferred savings

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sophie
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Limiting tax-deferred savings

Post by sophie » Sat Jan 05, 2019 11:52 am

This comes up every so often and it's always an interesting discussion, so I thought it's time to revisit. I think the last discussion was Ochotona's idea of doing Roth conversions now, to take advantage of the temporary 3% income tax break.

I've been tax deferring everything in sight, which has left me with ~70% of savings in tax-deferred (which excludes HSA and Roth). That seems like too much. When I posted the question in Bogleheads about whether to limit 401K contributions to get this percentage down, and what percentage is good to shoot for, I got kinda laughed off the scene because there's no question one should always maximize deferrals. I guess you could consider pre-retirement Roth conversions similarly, if that's a possibility. For most of us, you can't Roth-convert from an active employer's 401K though.

So I guess two questions for discussion:

Is there a reason to expand taxable savings? Here's a few: 1) physical gold, 2) US savings bonds, and 3) tax loss harvesting.

What's a decent range of tax-deferral proportion of savings to shoot for? Is 70% too high? Is this a level that could get you in trouble with RMDs in future?
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pugchief
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Re: Limiting tax-deferred savings

Post by pugchief » Sat Jan 05, 2019 12:47 pm

Sophie, I don't see how you can go wrong deferring as much tax as possible now assuming you are in the 32% or higher bracket and/or live in a high tax state/city. A bird in the hand, etc. One may not live to see RMDs and you don't know what your tax situation will be X years in the future anyway. Ya, rates will prob go up in the future, but maybe they won't.
stuper1
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Re: Limiting tax-deferred savings

Post by stuper1 » Sat Jan 05, 2019 3:12 pm

Try to estimate what tax bracket you will be in when you get to age 70+ and RMDs kick in, keeping in mind that the Trump tax cuts expire in however many years. Compare that to your current tax bracket. Unless you will clearly be in a higher tax bracket when you get to 70, then I would keep deferring.
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Cortopassi
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Re: Limiting tax-deferred savings

Post by Cortopassi » Sat Jan 05, 2019 3:14 pm

I agree with Pug. You have 100% guaranteed savings now tax deferred. Who knows 20 years from now they won't change the rules to stave off some crisis?

And, just saying, there are many ways physical gold can likely avoid getting taxed. I have yet to ever sell gold, only buy, but anyone I have seen in the coin shop exchanging gold for cash never has paperwork written up.
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ochotona
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Re: Limiting tax-deferred savings

Post by ochotona » Sat Jan 05, 2019 5:04 pm

useful RMD calculator, it might help you see a future RMD problem, if any

https://www.schwab.com/public/schwab/in ... lators/rmd
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sophie
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Re: Limiting tax-deferred savings

Post by sophie » Sun Jan 06, 2019 10:08 am

Ah, if only I were in the 32% bracket...sorry, no. Then the decision would be a lot clearer.

Currently, federal is 24%. In retirement I expect to be in 22%, except it might actually be 25% if the current tax cuts are allowed to expire. State/local taxes are 11% and that will the same before & after retirement. It applies to all income including capital gains and dividends.
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Re: Limiting tax-deferred savings

Post by jacksonM » Sun Jan 06, 2019 10:17 am

This is the year my RMD's start. Also SS since I've been delaying for the max.

With my wife still working that's going to put us into a much higher tax bracket than the previous two years of retirement when I had zero income.

Best I can figure right now I've discovered the true purpose of my tax-deferred savings. I think most, if not all, of my first RMD will have to go towards paying the tax on the SS benefits. So the government giveth and the government taketh away.

About 40% of our portfolio is my tax-deferred savings and it goes to almost 70% if you count my wife's but at least she won't be taking RMD's for a while.

I always maxed out my 401k contributions while I was still working and am still doing the same with my wife's. The only thing I did to limit the retirement tax time bomb was to try to arrange things so that the assets with the least potential for growth were in my tax-deferred account. This requires you to make a guess as to which assets those will be, of course.
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Re: Limiting tax-deferred savings

Post by barrett » Sun Jan 06, 2019 5:46 pm

Sophie,

What issues do you see when you plug your approximate numbers into i-ORP?

Here is the link to the extended planner just in case:

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

I tried running some hypothetical numbers and it seems that one limitation is that one can only do Roth conversions for four or five years because there is then nothing left in taxable accounts to live on & also pay the IRA to Roth conversion taxes. Of course if you are going to work to age 65, then you'd only be doing the conversions for five years max anyway.

Two assumptions that i-ORP makes are that the 12% bracket will expire at the end of 2025 and that SS will only pay 77 cents on the dollar starting in 2034 (you can override that assumption if you are an optimist).

I'd be curious to see if it sheds any light on your concern.
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sophie
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Re: Limiting tax-deferred savings

Post by sophie » Tue Jan 08, 2019 7:25 am

Well, it's more a first-world problem than a concern....was just hoping to start some discussion on the issue.

I plugged in some hypothetical numbers to i-ORP. I think it always tells you to tax-defer the maximum, and doesn't consider optimizing this. When I input $1 million in savings and said retire at 60 with Obamacare planning, it told me to Roth-convert at the pace of $200K/year between 65 and 70. This would put me into the 32% bracket post retirement, which would clearly be a bad deal compared to the pre-tax savings of 24%.

btw i-orp is significantly improved since I last saw it!
barrett
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Re: Limiting tax-deferred savings

Post by barrett » Tue Jan 08, 2019 10:20 am

sophie wrote:
Tue Jan 08, 2019 7:25 am
Well, it's more a first-world problem than a concern....was just hoping to start some discussion on the issue.

I plugged in some hypothetical numbers to i-ORP. I think it always tells you to tax-defer the maximum, and doesn't consider optimizing this. When I input $1 million in savings and said retire at 60 with Obamacare planning, it told me to Roth-convert at the pace of $200K/year between 65 and 70. This would put me into the 32% bracket post retirement, which would clearly be a bad deal compared to the pre-tax savings of 24%.

btw i-orp is significantly improved since I last saw it!
Hmm, that sounds odd. Sophie, on the extended i-ORP planner, you can choose to limit your Roth conversions up to a certain tax bracket. If you click on "IRA to Roth IRA Conversions", you get this explanation:

1) No partial conversions,
2) Allow conversions to the top of the selected Federal income tax bracket.
3) Allow ORP to compute the true optimal conversion level.

Maybe do another run with the 22% bracket, 24% bracket or whatever. Not trying to sell anyone on i-ORP but yours is the kind of problem it is designed to solve. Good luck!

BTW, for the 2018 tax year, I'm contributing more than I'd like to my solo 401(k) - as opposed to solo 401(k) Roth - just to bring down my AGI & optimize ACA subsidies. There is way to much incentive to game the system but that's for another thread.
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jhogue
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Re: Limiting tax-deferred savings

Post by jhogue » Tue Jan 08, 2019 11:47 pm

In principle, pugchief is right: you probably won’t go too far wrong by deferring as much as you can, as soon as you can, for as long as you can.

That said, it also makes sense to build in tax diversification over time using Roth IRAs, Roth conversions, HSAs, savings bonds, or even variable annuities.

Why? The simplest explanation is that, like the agnostic asset diversification of the HBPP, no one can predict with much certainty what the tax code will be in 20 or 30 years.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Limiting tax-deferred savings

Post by Kbg » Thu Jan 10, 2019 7:36 am

What is this I-ORP you speak of and where can I find it?
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