Author Topic: Taxable vs pre-tax Higher Ed  (Read 1083 times)

JupiterGreen

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Taxable vs pre-tax Higher Ed
« on: January 14, 2022, 11:29:43 AM »
I hope this is the correct place to put my question, please let me know if there is a better place for it.

We are US based and both work in higher education. We may be addicted to pre-tax accounts. What is your opinion about pivoting all the extra money we're putting into our 403bs towards our taxable accounts from here out? Our employers will still contribute either way. If we do change the allocations I believe it will jump us up a tax bracket. Here is the breakdown right now:

We each have an employer funded 403b (TIAA CREF), we both pay extra into a 457b (TIAA CREF), we both pay extra into a 403b supplemental (TIAA CREF), All of these are pre-tax accounts. In 2021 we paid:
$33,636 into pre-tax accounts (leaving $13,274 taxed, salary for earner #1 is $46,919) 
$39,000 into pre-tax accounts (leaving $40,328 taxed, salary for earner #2 is $79,328)
total combined pre-tax contributions 2021: $72,000 (Gross salary combined is $126,238)

« Last Edit: January 25, 2022, 05:44:19 AM by JupiterGreen »

EvenSteven

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Re: Taxable vs pre-tax Higher Ed
« Reply #1 on: January 14, 2022, 11:51:12 AM »
I hope this is the correct place to put my question, please let me know if there is a better place for it.

We are US based and both work in higher education. We may be addicted to pre-tax accounts. What is your opinion about pivoting all the extra money we're putting into our 403bs towards our taxable accounts from here out? Our employers will still contribute either way. If we do change the allocations I believe it will jump us up a tax bracket. Here is the breakdown right now:

We each have an employer funded 403b (TIAA CREF), we both pay extra into a 457b (TIAA CREF), we both pay extra into a 403b supplemental (TIAA CREF), All of these are pre-tax accounts. In 2021 we paid:
$33,636 into pre-tax accounts (leaving $13,274 taxed, salary for earner #1 is $46,919) 
$39,000 into pre-tax accounts (leaving $40,328 taxed, salary for earner #2 is $79,328)
total combined pre-tax contributions 2021: $72,000 (Gross salary combined is $126,238)

Total retirement saved thus far: $1,306,936
Breakdown of accounts:
Retirement pre-tax: $878,491
TIAA $357,667
TIAA $520,824

Retirement (taxable total): $428,445
$28,700 Roth
$377,859 brokerage Vanguard
$7,897 Roth
$13,989 brokerage Vanguard

Thank you for any advice and insights you can provide!

I am surprised that your institution doesn't offer a Roth option for the 403b. I would do a Roth 403b before switching to taxable.

I also notice that you categorize your Roth IRAs as taxable, but I think that would complicate your analysis for your future tax rates.

How much longer do you plan on working, and then how much time do you have from retirement until SS and RMDs?

maizefolk

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Re: Taxable vs pre-tax Higher Ed
« Reply #2 on: January 14, 2022, 11:56:29 AM »
What's your regular spending in a typical year and when/if do you hope to press the big red FIRE button?

With two people each with a 403b+457, in principle you should be able to contribute $78,000 last year, so does the money you're not contributing all get spent or are you still building up some level of post-tax buffer from year to year.

With your combined income you'd probably be paying 24% federal plus whatever your state tax rate is on your last dollar if you stopped using the 403b/457 entirely.

DaTrill

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Re: Taxable vs pre-tax Higher Ed
« Reply #3 on: January 14, 2022, 02:11:22 PM »
Beware of TIAA fees.  In some states, TIAA will provide very high fee mutual funds AND charge a management fee on top of that.  I've seen TIAA programs where the lowest cost fund resulted in a 1.5% fee with several approaching 3%.  The fees are well hidden deep in the prospectus and state agreements, most reps will deny they exist.   

Definitely consider ROTH but depends on when you want to FIRE.  Longer time to FIRE, more ROTH, sooner FIRE MORE Trad 457 as you can take it out earlier without penalty in most cases. 

djadziadax

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Re: Taxable vs pre-tax Higher Ed
« Reply #4 on: January 14, 2022, 02:44:20 PM »
Beware of TIAA fees.  In some states, TIAA will provide very high fee mutual funds AND charge a management fee on top of that.  I've seen TIAA programs where the lowest cost fund resulted in a 1.5% fee with several approaching 3%.  The fees are well hidden deep in the prospectus and state agreements, most reps will deny they exist.   

Definitely consider ROTH but depends on when you want to FIRE.  Longer time to FIRE, more ROTH, sooner FIRE MORE Trad 457 as you can take it out earlier without penalty in most cases. 

This is the first time I hear this info and am blown away! How is this not more common knowledge on this forum! I have a 457b and was thinking I have to roll it to an tIRA and do Roth Ladder. Now I am learning I don't need to do that at all - halleluja!

maizefolk

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Re: Taxable vs pre-tax Higher Ed
« Reply #5 on: January 14, 2022, 02:48:37 PM »
Beware of TIAA fees.  In some states, TIAA will provide very high fee mutual funds AND charge a management fee on top of that.  I've seen TIAA programs where the lowest cost fund resulted in a 1.5% fee with several approaching 3%.  The fees are well hidden deep in the prospectus and state agreements, most reps will deny they exist.   

Definitely consider ROTH but depends on when you want to FIRE.  Longer time to FIRE, more ROTH, sooner FIRE MORE Trad 457 as you can take it out earlier without penalty in most cases. 

This is the first time I hear this info and am blown away! How is this not more common knowledge on this forum! I have a 457b and was thinking I have to roll it to an tIRA and do Roth Ladder. Now I am learning I don't need to do that at all - halleluja!

Vast majority of folks don't have access to 457 accounts (since only state governments, local governments, and some nonprofits are allowed to offer them). I think that's why we don't talk about it more.

But it is a really sweet perk if you do have access to one. Along with the ability to defer 2x the normal 401k limit if you work for an employer like the OP who offers both a 403b and a 457.

JupiterGreen

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Re: Taxable vs pre-tax Higher Ed
« Reply #6 on: January 14, 2022, 03:24:33 PM »
Quote
I am surprised that your institution doesn't offer a Roth option for the 403b. I would do a Roth 403b before switching to taxable.

I also notice that you categorize your Roth IRAs as taxable, but I think that would complicate your analysis for your future tax rates.

How much longer do you plan on working, and then how much time do you have from retirement until SS and RMDs?


Thank you. And thanks for catching that I put the Roths in the wrong place. I don't believe our University offers a Roth, but that is definitely something I will look into thank you!

Honestly, I really have not thought about or analyzed the tax implications of any of this and I definitely need more of a financial education before I have the ability to do that.  I am 48 spouse is 49, we are not sure when we are going to FIRE. We like our jobs but hate where we live so we are hoping to pull the plug sooner rather than later.
« Last Edit: January 14, 2022, 03:26:20 PM by JupiterGreen »

JupiterGreen

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Re: Taxable vs pre-tax Higher Ed
« Reply #7 on: January 14, 2022, 03:36:48 PM »
Thank you to everyone who took the time to respond, it is much appreciated.

Quote
What's your regular spending in a typical year and when/if do you hope to press the big red FIRE button?

With two people each with a 403b+457, in principle you should be able to contribute $78,000 last year, so does the money you're not contributing all get spent or are you still building up some level of post-tax buffer from year to year.

With your combined income you'd probably be paying 24% federal plus whatever your state tax rate is on your last dollar if you stopped using the 403b/457 entirely.

Thank you. We haven't been tracking our spending lately. I would have posted a case study but honestly I'm not proud of our 2021 lack of budget plus we had some unexpected expenses. We are going to learn from it and move forward. So our plan for this year is to track and budget more to figure out an appropriate number and also to figure out what to do with these pre-tax accounts. I was originally thinking 50K as a FIRE number, but we would be moving from a LCOL to a HCOL so again this is still TBD. As far as why we didn't contribute the maximum, we simply don't make enough money. I'm fairly certain we contribute the maximum we able to, but I will check on that.

Quote
Beware of TIAA fees.  In some states, TIAA will provide very high fee mutual funds AND charge a management fee on top of that.  I've seen TIAA programs where the lowest cost fund resulted in a 1.5% fee with several approaching 3%.  The fees are well hidden deep in the prospectus and state agreements, most reps will deny they exist.   

Definitely consider ROTH but depends on when you want to FIRE.  Longer time to FIRE, more ROTH, sooner FIRE MORE Trad 457 as you can take it out earlier without penalty in most cases.

We have no choice, TIAA CREF is are only option. Thank you for the advice, I appreciate it.

maizefolk

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Re: Taxable vs pre-tax Higher Ed
« Reply #8 on: January 14, 2022, 05:19:50 PM »
Okay, if your shoveling all but $56k/year into tax deferred retirement accounts and you need ~$50k/year to live on, you have this random internet poster's permission to dial back the contributions at least a little.

From a pure tax optimization point of view continuing to contribute to retirement accounts to the maximum you are able until you actually FIRE probably makes sense. You've got plenty of taxable savings to see you through filling a 5 year roth conversion ladder and even if you didn't you have magical 457 accounts you can draw from at any time with no tax penalty other than owning income tax on the money you take out.

On the other hand, you could reduce your contributions to the point that you're paying taxes on as much as $109k/year (vs $56k/year today) and still have a marginal federal tax rate of 12%. I wouldn't advice cutting your contributions to the point where your income is much above that, because at that point you'd start paying 22% on the additional income (start of the 22% MFJ tax bracket assuming you take the standard deduction) to be able to invest it now vs paying somewhere between 0-12% in taxes on the same income if you put it in your 403b or 457 and wait until retirement to pay the income tax.

And I hear you on TIAA. Sometimes even small things make a difference though. My employer uses them too, but just by moving my money out of target date retirement funds and buying the same TIAA component funds the target date fund was invested in I ended up saving something like 0.3% a year. Doesn't sound like all that much but it adds up over time.

EvenSteven

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Re: Taxable vs pre-tax Higher Ed
« Reply #9 on: January 14, 2022, 05:34:08 PM »
Quote
I am surprised that your institution doesn't offer a Roth option for the 403b. I would do a Roth 403b before switching to taxable.

I also notice that you categorize your Roth IRAs as taxable, but I think that would complicate your analysis for your future tax rates.

How much longer do you plan on working, and then how much time do you have from retirement until SS and RMDs?


Thank you. And thanks for catching that I put the Roths in the wrong place. I don't believe our University offers a Roth, but that is definitely something I will look into thank you!

Honestly, I really have not thought about or analyzed the tax implications of any of this and I definitely need more of a financial education before I have the ability to do that.  I am 48 spouse is 49, we are not sure when we are going to FIRE. We like our jobs but hate where we live so we are hoping to pull the plug sooner rather than later.

Yeah, checking about a Roth option for your 403b would be a good idea before making the change to taxable.

I also didn't notice you mention if this was a governmental 457b or a non-governmental 457b. There can be big and consequential differences between the two. I could be wrong, but I believe that all governmental 457b plans have a Roth option, so that would be another option if you think you are getting too much in tax-deferred accounts. If it is a non-governmental 457b, there can be weird rules around when the funds become taxable, so you should also look into that.

JupiterGreen

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Re: Taxable vs pre-tax Higher Ed
« Reply #10 on: January 15, 2022, 10:40:25 AM »
Quote
Okay, if your shoveling all but $56k/year into tax deferred retirement accounts and you need ~$50k/year to live on, you have this random internet poster's permission to dial back the contributions at least a little.

From a pure tax optimization point of view continuing to contribute to retirement accounts to the maximum you are able until you actually FIRE probably makes sense. You've got plenty of taxable savings to see you through filling a 5 year roth conversion ladder and even if you didn't you have magical 457 accounts you can draw from at any time with no tax penalty other than owning income tax on the money you take out.

On the other hand, you could reduce your contributions to the point that you're paying taxes on as much as $109k/year (vs $56k/year today) and still have a marginal federal tax rate of 12%. I wouldn't advice cutting your contributions to the point where your income is much above that, because at that point you'd start paying 22% on the additional income (start of the 22% MFJ tax bracket assuming you take the standard deduction) to be able to invest it now vs paying somewhere between 0-12% in taxes on the same income if you put it in your 403b or 457 and wait until retirement to pay the income tax.

And I hear you on TIAA. Sometimes even small things make a difference though. My employer uses them too, but just by moving my money out of target date retirement funds and buying the same TIAA component funds the target date fund was invested in I ended up saving something like 0.3% a year. Doesn't sound like all that much but it adds up over time.

Thank you this was extremely helpful. Though they are discussed here often, we havenít even began to look at Roth ladders so that goes on my research list. We arenít big fans of TIAA CREF either, but this is what we get in higher ed. With that said, youíve made me realize there are advantages especially with continuing to fund the 457. Iíll take a look at the TIAA fees to see if we can do better. It is amazing (as you say) what a small number can do over a long period of time

Quote
Yeah, checking about a Roth option for your 403b would be a good idea before making the change to taxable.

I also didn't notice you mention if this was a governmental 457b or a non-governmental 457b. There can be big and consequential differences between the two. I could be wrong, but I believe that all governmental 457b plans have a Roth option, so that would be another option if you think you are getting too much in tax-deferred accounts. If it is a non-governmental 457b, there can be weird rules around when the funds become taxable, so you should also look into that.

Thank you. We work for a state university and are state employees not federal so I am guess it is a non-governmental 457b. Youíve given me a lot to think about and look into. I greatly appreciate it as we are not as financially literate as we need to be. Analyzing the data has not been our top priority because our work is all consuming. We are actively trying to change that now, so again thanks for your help and perspective.

« Last Edit: January 15, 2022, 10:42:52 AM by JupiterGreen »

maizefolk

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Re: Taxable vs pre-tax Higher Ed
« Reply #11 on: January 15, 2022, 12:52:18 PM »
Since you work at a public university I don't think you need to worry. Your and your partner's 457 accounts are certainly the governmental flavor of 457 plan. There are a bunch of differences but the key one is that if you participate in a nongovernmental 457 plan and your employer goes bankrupt you can lose the money you had saved in the plan since it technically remains an asset of your employer.

The TL;DR on Roth Conversion Ladders: People who don't have access to 457 accounts are often worried about having "too much money" in retirement accounts since they know they won't be able to take money out of those accounts until their 50s or 60s. One exception is that it is permissible to withdraw Roth contributions at any time without paying tax or penalty. It's also permissible to convert traditional retirement savings into Roth accounts (you just pay regular income tax on the money you've converted). After five years, that conversion of a traditional IRA/401k/403b to Roth now counts as a contribution and you can withdraw it tax and penalty free, no matter how old or young you are. So, in year 6 of retirement the money you converted out of your retirement account in year 1 becomes accessible. In year 7 the money you converted in year 2 becomes accessible and so on. That means that, as long as you have enough money outside of traditional retirement accounts (so the sum of taxable savings + Roth contributions + 457) to cover your first five years of spending, you never have to worry about having too much in traditional retirement accounts, since you can tap into all of those funds with a five year lead time.

I greatly appreciate it as we are not as financially literate as we need to be. Analyzing the data has not been our top priority because our work is all consuming. We are actively trying to change that now, so again thanks for your help and perspective.

I don't know what either you or your partner do at the university, but what you are describing seems particularly common in our line of work. It really can be all consuming in ways that can become quite negative. I know from personal experience. But the flip side is it looks like the stuff you've been doing on autopilot has done a great job of positioning you to have a lot of freedom and a lot of options as you continue onward in life. That's wonderful news and it's something you should both be proud of.

DaTrill

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Re: Taxable vs pre-tax Higher Ed
« Reply #12 on: January 15, 2022, 01:00:22 PM »
Beware of TIAA fees.  In some states, TIAA will provide very high fee mutual funds AND charge a management fee on top of that.  I've seen TIAA programs where the lowest cost fund resulted in a 1.5% fee with several approaching 3%.  The fees are well hidden deep in the prospectus and state agreements, most reps will deny they exist.   

Definitely consider ROTH but depends on when you want to FIRE.  Longer time to FIRE, more ROTH, sooner FIRE MORE Trad 457 as you can take it out earlier without penalty in most cases. 

This is the first time I hear this info and am blown away! How is this not more common knowledge on this forum! I have a 457b and was thinking I have to roll it to an tIRA and do Roth Ladder. Now I am learning I don't need to do that at all - halleluja!

TIAA reps will try to convince near retirees they have to keep the "Annuity" with TIAA and set up an expensive plan to withdraw funds.  Once you separate from employer everyone can rollover funds to any other broker, skip the TIAA fees, buy any ETF or MF and save $10,000+/year if balance is over $1,000,000.  TIAA hires young inexperienced reps who will just repeat the company line "Retirees must rollover Annuity funds to TIAA traditional IRA... or else..."  Every state is different, but I've never seen a TIAA plan that is competitive with self-directed or basic discount broker.   

DaTrill

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Re: Taxable vs pre-tax Higher Ed
« Reply #13 on: January 15, 2022, 01:03:41 PM »
Quote
I am surprised that your institution doesn't offer a Roth option for the 403b. I would do a Roth 403b before switching to taxable.

I also notice that you categorize your Roth IRAs as taxable, but I think that would complicate your analysis for your future tax rates.

How much longer do you plan on working, and then how much time do you have from retirement until SS and RMDs?


Thank you. And thanks for catching that I put the Roths in the wrong place. I don't believe our University offers a Roth, but that is definitely something I will look into thank you!

Honestly, I really have not thought about or analyzed the tax implications of any of this and I definitely need more of a financial education before I have the ability to do that.  I am 48 spouse is 49, we are not sure when we are going to FIRE. We like our jobs but hate where we live so we are hoping to pull the plug sooner rather than later.

Yeah, checking about a Roth option for your 403b would be a good idea before making the change to taxable.

I also didn't notice you mention if this was a governmental 457b or a non-governmental 457b. There can be big and consequential differences between the two. I could be wrong, but I believe that all governmental 457b plans have a Roth option, so that would be another option if you think you are getting too much in tax-deferred accounts. If it is a non-governmental 457b, there can be weird rules around when the funds become taxable, so you should also look into that.

Every state and every plan is different.  Some states Fidelity/TIAA/VALIC will offer both, other states, Fidelity/TIAA/VALIC will offer just Traditional.  One has to do the legwork themselves as finding a competent person in HR to navigate this stuff is rare. 

djadziadax

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Re: Taxable vs pre-tax Higher Ed
« Reply #14 on: January 15, 2022, 04:32:31 PM »
That means that, as long as you have enough money outside of traditional retirement accounts (so the sum of taxable savings + Roth contributions + 457) to cover your first five years of spending, you never have to worry about having too much in traditional retirement accounts, since you can tap into all of those funds with a five year lead time.


Does this also mean that if you have a 457b, and separate from the employer, you can withdraw funds from it penataly-free and the rest keeps accumulating tax free? This is like the golden egg of FIRE retirement accounts!!!

So would this be the optimal order of fund withdrawal between the brokerage/457b/Roth?
And what would be the best asset allocation between those accounts?






maizefolk

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Re: Taxable vs pre-tax Higher Ed
« Reply #15 on: January 15, 2022, 04:52:44 PM »
That means that, as long as you have enough money outside of traditional retirement accounts (so the sum of taxable savings + Roth contributions + 457) to cover your first five years of spending, you never have to worry about having too much in traditional retirement accounts, since you can tap into all of those funds with a five year lead time.


Does this also mean that if you have a 457b, and separate from the employer, you can withdraw funds from it penataly-free and the rest keeps accumulating tax free? This is like the golden egg of FIRE retirement accounts!!!

So would this be the optimal order of fund withdrawal between the brokerage/457b/Roth?
And what would be the best asset allocation between those accounts?

At least if you have a governmental 457 account (which is what I have and so know the most about), typically, yes. I think some plans are written in ways to limit how often or how many times you can withdraw money from them but no limits like that are required by law.

When you take money out of the 457 it counts as income and you'd owe income tax on the withdrawal. This is same as taking money out of a traditional IRA/401k/403b once you are old enough for it to be allowed to do for those accounts without penalty.

Assuming a person has taxable, 457, and Roth accounts in retirement, I'd prioritize withdrawals from the 457 over using taxable savings. If your total taxable income is low in retirement you might as well at least withdraw enough to fill up at least your standard deduction each year, and potentially up to the top of the 12% federal income tax bracket depending on your expected spending in retirement and any special circumstances regarding ACA eligibility and/or state tax rates.

Yeah 457s are an an amazing type of account if you're lucky enough to work in a field/for an employer who is both able to offer them and chooses to offer them. My own employer does offer a 457, but with the weird caveat that we're only allowed to contribute to our 457 account if we're ALREADY on track to max out our 403b. I have no idea why.

djadziadax

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Re: Taxable vs pre-tax Higher Ed
« Reply #16 on: January 15, 2022, 06:10:57 PM »

Assuming a person has taxable, 457, and Roth accounts in retirement, I'd prioritize withdrawals from the 457 over using taxable savings.

Why would you do that instead of taxable? You would have to pay the same amount of taxes on money taken out of both, I know I must be missing something but what is it?

maizefolk

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Re: Taxable vs pre-tax Higher Ed
« Reply #17 on: January 15, 2022, 06:53:31 PM »
Good question. Let me start by saying that for a person with enough money saved up to live off of for the rest of their life in a mixture of taxable (post-tax), Roth, and 457 accounts, they have already won the game. There are essentially no bad options, just different degrees of optimal.

So why would I spend 457 money first? Because money in my 457 account, like all traditional retirement accounts, is money that is eventually going to be subject to income tax no matter what I do. Since we have a very progressive income tax structure in the USA, the way I can minimize the total amount of tax I'll pay on my 457 balance is to spread my withdrawals out over the maximum number of years so most of it is in low income tax brackets. I'd pay much less total income tax on $40k of income a year for the next 40 years than I will on 39 years of zero income and one year where I take out and am taxed on $1.6M. Since the year I'll die is probably outside of my control, the only way I can spread my withdrawals over more years is to start tapping into the 457 earlier.

Compare that to my Roth funds, which neither I nor my -- entirely hypothetical unfortunately -- heirs will ever have to pay taxes on.* I can maximize the size of that tax free benefit by waiting as long as possible to tap into those accounts but realistically I can spend that money whenever I need to without it messing up my income planning for the year. Until I choose to spend it, it provides flexibility in the face of an uncertain future.

Post-tax (taxable) is somewhere in between. Unlike a 457 (or traditional IRA/401k) it isn't subject to income tax. If I suddenly needed $300,000 next year (maybe I'm buying a house with cash? Or a golden visa?), withdrawing it from a 457 would mean paying $75,000 in federal income tax. Sell $300,000 in appreciated stock in a taxable account would mean I'd likely end up only owing on the order of $16,500 in capital gains taxes (Assuming the stock had appreciated 50% since I bought it). In addition, while I'll eventually have to pay capital gains tax on my taxable investments if I sell them in my lifetime, if I delay selling stock so long I die before getting around to it, my hypothetical heirs don't have to pay any tax on them at all since they'll benefit from stepped up cost basis.

So there you have it. Traditional IRA, 401k/457 accounts WILL be subject to a progressing income tax eventually so there is value in spreading the use of the money over as many years as possible. Appreciated stock in a taxable account MIGHT be taxed eventually (but if so at a low rate) and it might not at all, and Roth certainly won't be, so there is no reason to spend down either earlier, and potentially some modest benefit to delaying doing so if you have other pots of money, like a 457, that can cover your needs.

*So long as I don't withdraw more than my initial contributions before reaching traditional retirement age.

JupiterGreen

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Re: Taxable vs pre-tax Higher Ed
« Reply #18 on: January 15, 2022, 07:37:46 PM »
Quote
I don't know what either you or your partner do at the university, but what you are describing seems particularly common in our line of work. It really can be all consuming in ways that can become quite negative. I know from personal experience. But the flip side is it looks like the stuff you've been doing on autopilot has done a great job of positioning you to have a lot of freedom and a lot of options as you continue onward in life. That's wonderful news and it's something you should both be proud of.

Thank you that is very kind. I am 48 and my partner (husband) is 49. So it won't be long until he's 55 and we can take advantage of that as well.

We are both on the teaching end of higher education. Non-academics don't usually understand how much we are on even when we are off contract or "on break" (teaching, service and/or research). COVID has really put things in perspective because we were asked to do so much more and yet our U is not even requiring that students get vaccines. We've taught F2F the entire time. And our salaries are abysmal for having advanced degrees and for how long we've worked for the U. Additionally, cost of living raises have been on and off (mostly off) so our salaries have actually slipped when viewed from that perspective. But it's not all bad, we like our schedules, and we both have gigs in a field that is outrageously competitive and we are thankful for that. We do legitimately love teaching as well, I guess I'm just venting because it sounds like you are a fellow academic. Thank you again, your posts are so informative. 
« Last Edit: January 15, 2022, 07:52:19 PM by JupiterGreen »

JupiterGreen

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Re: Taxable vs pre-tax Higher Ed
« Reply #19 on: January 15, 2022, 07:49:35 PM »
Quote
TIAA reps will try to convince near retirees they have to keep the "Annuity" with TIAA and set up an expensive plan to withdraw funds.  Once you separate from employer everyone can rollover funds to any other broker, skip the TIAA fees, buy any ETF or MF and save $10,000+/year if balance is over $1,000,000.  TIAA hires young inexperienced reps who will just repeat the company line "Retirees must rollover Annuity funds to TIAA traditional IRA... or else..."  Every state is different, but I've never seen a TIAA plan that is competitive with self-directed or basic discount broker.
Interesting, Iím fairly certain this happened to me when I talked with them some years ago. Iím going to look into that again.

djadziadax

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Re: Taxable vs pre-tax Higher Ed
« Reply #20 on: January 17, 2022, 02:08:13 PM »
Good question. Let me start by saying that for a person with enough money saved up to live off of for the rest of their life in a mixture of taxable (post-tax), Roth, and 457 accounts, they have already won the game. There are essentially no bad options, just different degrees of optimal.

So why would I spend 457 money first? Because money in my 457 account, like all traditional retirement accounts, is money that is eventually going to be subject to income tax no matter what I do. Since we have a very progressive income tax structure in the USA, the way I can minimize the total amount of tax I'll pay on my 457 balance is to spread my withdrawals out over the maximum number of years so most of it is in low income tax brackets. I'd pay much less total income tax on $40k of income a year for the next 40 years than I will on 39 years of zero income and one year where I take out and am taxed on $1.6M. Since the year I'll die is probably outside of my control, the only way I can spread my withdrawals over more years is to start tapping into the 457 earlier.

Compare that to my Roth funds, which neither I nor my -- entirely hypothetical unfortunately -- heirs will ever have to pay taxes on.* I can maximize the size of that tax free benefit by waiting as long as possible to tap into those accounts but realistically I can spend that money whenever I need to without it messing up my income planning for the year. Until I choose to spend it, it provides flexibility in the face of an uncertain future.

Post-tax (taxable) is somewhere in between. Unlike a 457 (or traditional IRA/401k) it isn't subject to income tax. If I suddenly needed $300,000 next year (maybe I'm buying a house with cash? Or a golden visa?), withdrawing it from a 457 would mean paying $75,000 in federal income tax. Sell $300,000 in appreciated stock in a taxable account would mean I'd likely end up only owing on the order of $16,500 in capital gains taxes (Assuming the stock had appreciated 50% since I bought it). In addition, while I'll eventually have to pay capital gains tax on my taxable investments if I sell them in my lifetime, if I delay selling stock so long I die before getting around to it, my hypothetical heirs don't have to pay any tax on them at all since they'll benefit from stepped up cost basis.

So there you have it. Traditional IRA, 401k/457 accounts WILL be subject to a progressing income tax eventually so there is value in spreading the use of the money over as many years as possible. Appreciated stock in a taxable account MIGHT be taxed eventually (but if so at a low rate) and it might not at all, and Roth certainly won't be, so there is no reason to spend down either earlier, and potentially some modest benefit to delaying doing so if you have other pots of money, like a 457, that can cover your needs.

*So long as I don't withdraw more than my initial contributions before reaching traditional retirement age.

This is incredibly valuable insight, Maizefolk! I am grateful you took the time to write a long explainer on this! Makes so much sense when laid out like this.