Author Topic: Advice for retirement investments  (Read 3528 times)

captainawesome

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Advice for retirement investments
« on: May 04, 2015, 10:02:20 AM »
Recently my wife decided to leave her full time job to pursue her career in coaching more agressively.  As such, her previous income of ~$40k per year will no longer apply, and we will rely solely on my income, with some income coming in from coaching (approx $1K per month).  We have no kids yet and no debt beyond our mortgage, so we have the ability to max out retirement contributions for our IRAs and my TSP, with the remainder of our extra income going to taxable accounts.  Previously she would contribute to her 401k, I would contribute to Roth TSP and Roth IRA, but with a change in income, I'm wondering if it would be more beneficial to switch to Traditional vs Roth contributions to reduce our taxable income (or some combination thereof).

Projected, our taxable income would look something like this (based on 2014 W2 info, filing jointly):
Military Officer O-3 - $64983.60
Contractor (Coach) - $12000 (estimated)
Subtotal:  $76983.60
Retirement Contributions: $29000
Total before Itemized or Standard Deduction: 47983.60

Generally it always made sense to contribute to Roth anything if you are in the Military, since a majority of income isn't taxed, and most people fall in lower tax brackets to begin with, so contributing to traditional retirement accounts didn't make sense.  However, contributing to traditional accounts would keep us in the 15% bracket vs 25% bracket in case her salary increases over the year. I've tried to do a bit of research, but I think I am on information overload. I know this has been addressed in the forum in other cases, and probably other blogs as well, but any advice from other mustachians out there would be greatly appreciated. I've tried fostering this conversation at work, but I get nothing but I get blank stares when I talk about maxing contributions out every month.  Thanks!
« Last Edit: May 04, 2015, 01:21:16 PM by captainawesome »

matchewed

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Re: Advice for retirement investments
« Reply #1 on: May 04, 2015, 10:10:52 AM »
Usually saving through traditional means a faster path to FIRE. There are scenarios where this isn't true but yours does not seem to be one from what I can see at a glance. You use Roths as a method to avoid RMDs or now if you think you will be spending more on taxes in the future.

MDM

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Re: Advice for retirement investments
« Reply #2 on: May 04, 2015, 10:55:53 AM »
Depending on what is meant by "taxable" in the OP, it appears you will be
 - in the 15% federal bracket whether you go traditional or Roth, and
 - receive a $400 saver's credit if you go traditional so you would save ~16.4% by going traditional.

Need to compare that 16.4% (plus state & local) to the marginal rate (including state & local) you expect when withdrawing.  What do you project for your rate when withdrawing?

captainawesome

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Re: Advice for retirement investments
« Reply #3 on: May 04, 2015, 01:56:38 PM »
@MDM I did not include non-taxed pay to include things like Housing or subsistence allowances, or special pay, for my total income.  As a PA resident, I am exempt from State and Local Tax (my wife is not) if I am stationed outside of PA.  As such,  I am currently exempt from State and Local Tax. I was using 25%, but now estimating 15%.

I think the toughest part is trying to determine what my future tax rate will be upon retirement.  I would love to completely retire after my 20 and live off of a military pension until I can withdraw from retirement accounts, but I have a feeling that I would probably pick up some sort of job just to keep busy and do it for fun rather than have to.  That could push us back up into the 25% easily with spouse income, retirement, and a "bridge" career. 

Once I figure out where the best avenue for retirement money, then hopefully I can adjust my witholdings appropriately. 

MDM

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Re: Advice for retirement investments
« Reply #4 on: May 04, 2015, 02:10:09 PM »
@MDM I did not include non-taxed pay to include things like Housing or subsistence allowances, or special pay, for my total income.  As a PA resident, I am exempt from State and Local Tax (my wife is not) if I am stationed outside of PA.  As such,  I am currently exempt from State and Local Tax. I was using 25%, but now estimating 15%.
Thanks, that makes sense.  There is a difference between "taxable pay" (that you explained well here) vs. "taxable income" (as defined by line 43 on federal form 1040). 

Quote
I think the toughest part is trying to determine what my future tax rate will be upon retirement.  I would love to completely retire after my 20 and live off of a military pension until I can withdraw from retirement accounts, but I have a feeling that I would probably pick up some sort of job just to keep busy and do it for fun rather than have to.  That could push us back up into the 25% easily with spouse income, retirement, and a "bridge" career. 
If you will be in the 25% bracket later and are in the 15% bracket now, then Roth is the clear choice.

Nords

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Re: Advice for retirement investments
« Reply #5 on: May 09, 2015, 06:25:01 PM »
@MDM I did not include non-taxed pay to include things like Housing or subsistence allowances, or special pay, for my total income.  As a PA resident, I am exempt from State and Local Tax (my wife is not) if I am stationed outside of PA.  As such,  I am currently exempt from State and Local Tax. I was using 25%, but now estimating 15%.

I think the toughest part is trying to determine what my future tax rate will be upon retirement.  I would love to completely retire after my 20 and live off of a military pension until I can withdraw from retirement accounts, but I have a feeling that I would probably pick up some sort of job just to keep busy and do it for fun rather than have to.  That could push us back up into the 25% easily with spouse income, retirement, and a "bridge" career. 

Once I figure out where the best avenue for retirement money, then hopefully I can adjust my witholdings appropriately.
If you contribute to a traditional TSP and a traditional IRA now (instead of Roths) then at age 70.5 you'll be looking at RMD hassles as well as taxation of your Social Security benefits.  If your income is "too high" then you might even have to pay higher Medicare premiums.

If you think that you're going to start a bridge career and convert your TSP & IRA to Roths, then you'll end up paying most of your conversion taxes in the 25% bracket... maybe even in the 28% bracket.

If you contribute to your Roth TSP and Roth IRA (pay your taxes now) then you won't have conversion hassles.  You'll also be paying most of your taxes in the 15% bracket and very little (if any) in the 25% bracket.  Moving into the 25% bracket just taxes the dollars which are over the 15% limit into that 25% bracket, not all of your taxable income.

Your other option would be to split the difference and contribute a half to each traditional and Roth version of an account.  But that just complicates your life.

Two other research projects would be whether your spouse can contribute her income (beyond her Roth IRA contribution) to her own 401(k), or deduct enough business expenses to wipe out her taxable income.

captainawesome

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Re: Advice for retirement investments
« Reply #6 on: May 15, 2015, 09:51:35 AM »
Thanks for the input.  Nords, unfortunately her work is categorized as an independent contractor, so we would have to look at a solo 401k, need to look further into those.  We did fairly well at looking into her expenses this year (mileage, cell phone costs, travel etc) hoping to keep through the next year.

I've thought about splitting the difference, having my spouse contributions be to a traditional since thats what here previous 401ks were, and keep all my contributions Roth. I'm not up for promotion to O4 for at least 1-2 years, so I want to be able to "set and forget" for a little while.

Would you still recommend Roth even to guys uncertain of their future (always the potential not to make O4) or get out for the reserves?

forummm

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Re: Advice for retirement investments
« Reply #7 on: May 15, 2015, 06:33:54 PM »
Solo 401ks are great. You can put in more than with a regular 401k (the full $18k plus 20% of SE income after the deducting SE tax, i.e. around 18%, up to $53k total). So a $100k SE income would let you contribute around $36k.

captainawesome

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Re: Advice for retirement investments
« Reply #8 on: May 16, 2015, 10:51:36 AM »
Thanks for that. I REALLY need to get smart on that then.

Nords

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Re: Advice for retirement investments
« Reply #9 on: May 16, 2015, 01:30:00 PM »
I've thought about splitting the difference, having my spouse contributions be to a traditional since thats what here previous 401ks were, and keep all my contributions Roth. I'm not up for promotion to O4 for at least 1-2 years, so I want to be able to "set and forget" for a little while.

Would you still recommend Roth even to guys uncertain of their future (always the potential not to make O4) or get out for the reserves?
Yes for Roth IRAs, yes for Roth TSP, and yes for any opportunity to pay taxes now while your taxable active-duty pay is relatively low.  Especially if you can avoid RMDs later.

You could continue making deductible contributions now in the hopes of converting them after you reach financial independence and retire early.  Jeremy & Winnie are doing an impressive job of that at GoCurryCracker.com, and they're converting tax-deferred accounts to Roths without paying any taxes at all.  But if you and your spouse continue to ramp up your income-- and especially if you earn a military pension-- then you'll be spending lots of years in the 15% (or higher) tax bracket.  After I retired my spouse and I thought that 18 years was all the time in the world to convert our IRAs and TSPs to Roths... but we're scrambling to pay taxes now (in the 25% bracket) before her pension starts.  We just finished the IRA conversions and my TSP, and now she's transferring her (traditional) TSP to a traditional IRA next week.

In your case, your income tax bracket is only going to get higher-- even if you leave in 3-4 years for the Reserves and start a bridge career.  If you decide to leave active duty, you can pile up cash in the transition fund for 6-12 months before your last paycheck.  If you need more cash then you can withdraw your Roth IRA contributions anytime (for any reason).  If you go into the Reserves then you'll be making even more TSP and IRA contributions, and you'll probably decide to do those as Roths too.

"Set and forget" sounds very nice, but the military pay system makes it very difficult-- even when they do it without mistakes.