Author Topic: Do I 403b? Roth?  (Read 974 times)

luminajd

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Do I 403b? Roth?
« on: July 14, 2019, 05:54:54 AM »
Single, 37 year old, filing HOH, should gross $70,000
currently maxing HSA, about 4K per year to 403B

$58,000 in 403B through work
Pension from previous job will provide $733/month if starting to be used at age 65, per it's benefit statement.

Should I be maxing my 403B? Or Roth 1st? Ive seen the info on here that says with my tax bracket I should be doing 403B, just double checking before I crank up my contributions.

Note Im happy with my EF amount and interest on my house, school, loan, and car is all under 5%

Thanks :)




terran

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Re: Do I 403b? Roth?
« Reply #1 on: July 14, 2019, 08:31:47 AM »
Given the pension you may or may not be one of the rare ones for whom a Roth or partial Roth makes sense. How many dependents do you have? And what sort are they (children, etc)? Do you have an individual or family high deductible health plan? Does your 403(b) offer a Roth option? Do you know when you're planning to retire (ie how many years before you start your pension)?

luminajd

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Re: Do I 403b? Roth?
« Reply #2 on: July 14, 2019, 09:02:24 AM »
Given the pension you may or may not be one of the rare ones for whom a Roth or partial Roth makes sense. How many dependents do you have? And what sort are they (children, etc)? Do you have an individual or family high deductible health plan? Does your 403(b) offer a Roth option? Do you know when you're planning to retire (ie how many years before you start your pension)?
Thanks for the reply!
3 kids, ages 12, 10, 8
HSA family plan
No roth option with 403b
I would like to retire by 60 but I'm assuming im pretty behind the 8 ball and will be working until 65...

terran

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Re: Do I 403b? Roth?
« Reply #3 on: July 14, 2019, 10:03:09 AM »
Ok, let's give this a shot then.I'm making some assumptions here, so if I get anything wrong you can redo the calculations with corrected numbers or post the corrections and I or someone else can help.

I'm assuming you have $70k income before HSA or 403(b) deductions. If you also pay health insurance premiums out of this amount then this would reduce your taxable income further.

I'll assume to can afford to contribute $6000 max to Roth and $13,000 to your 403(b) for a total of $19,000 or the full $19,000 max to the 403(b) plus tax savings on the additional $6000 which will be contributed to Roth.

I'm not super familiar with the child tax credit, so you'll want to run this through some tax software or a demo return to confirm my calculations. Or hopefully someone with kids can chime in.

With maxing Roth:
$70,000 income
-$7000 HSA contribution
-$13,000 403(b) contribution
-$18,350 HOH standard deduction
=$31,650 taxable income

($31,650 taxable income  - $13,850 in the 10%) x 12% tax + $13850 x 10% tax = $3,521 total tax liability - $2000 child tax credit x 3 children = $479 refund (this is under the $1400x3 = $4200 max refundable amount, so you'll get the full $479).

Without maxing Roth
$70,000 income
-$7000 HSA contribution
-$19,000 403(b) contribution
-$18,350 HOH standard deduction
=$25,650 taxable income

($25,650 taxable income  - $13,850 in the 10%) x 12% tax + $13850 x 10% tax = $2,801 total tax liability - $2000 child tax credit x 3 children = $1,199 refund (this is under the $1400x3 = $4200 max refundable amount, so you'll get the full $1,199).

So, by contributing the additional $6000 to your 403(b) you get an additional $720 refund. $720/$6000 = 12%, so your marginal tax savings is 12% (this makes sense since your marginal/top tax rate is 12%). The $720 additional tax savings should be saved in Roth.

This implies current spending of:
$70,000 income
-$7000 HSA
=$63000 before FICA tax
-$63,000 x 7.65% = $4,819.50 FICA
=$58,180.50 FICA
-$19,000 403(b)/roth savings
+$479 tax refund
=$39,659.50 earned/spent.
Does that seem in line with your current spending?

Using excel (or in my case, the free Libre Office program) Future value formula, your current $58,000 savings, $19,000/year savings, a 5% real (inflation adjusted) return, which is maybe slightly low, but also not as pessimistic as some people say we should expect, I get that you would have $965,327.41 at 60 or $1,337,016.56 at 65. I didn't include any employer match you might get in your 403(b) in these numbers, so they could be higher if you get additional money from your employer. Keep in mind that while these are very precise numbers, the output is only as good as the input, so since we have no idea what the future return will be these have to be considered very rough estimates at best.

Using a 3.5% safe withdrawal rate this would provide you with $33,786.46 or $46,795.58 per year respectively. You'll surely see the 4% "rule" bandied about around here instead of the 3.5% I've used here. For that, I'd encourage you to take a look through the posts at https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/.

Along with your pension I think this confirms that you're in the right range with your 60-65 estimate. You'd probably have enough at 60 if your pension started then, so you'd just need to keep working beyond that to cover the pension shortfall and health insurance costs until 65. As you get closer you can also see how secure social security is looking and that might let you retire sooner as you get a better idea of how much and when it will pay.

Either way, under current tax law, since you'll be filing single at that time your $40k of income if all your income was taxable (from the 403(b) and pension), you''ll likely be in the 12% bracket and unlikely to be in a higher bracket. However, taxes are scheduled to go back the pre 2018 brackets in 2025, so that might put you in the 15% bracket, which would indicate you should go with Roth now, but it would be close.

I think I would consider two factors 1) Will you be moving to/from a no or lower income tax state than where you live now when you retire and 2) do you think taxes rates are more likely to go up or down in the future. Since you're pretty close to Roth/traditional not making a difference either way (equal marginal rates now and in retirement)), I think I would probably do a bit of Roth now unless you expect state taxes to go down for you or federal taxes to go down for everyone in the future. Be sure to reevaluate if/when your income increases in the future.











MDM

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Re: Do I 403b? Roth?
« Reply #4 on: July 14, 2019, 10:31:23 AM »
Should I be maxing my 403B? Or Roth 1st? Ive seen the info on here that says with my tax bracket I should be doing 403B, just double checking before I crank up my contributions.
Starting with an AGI of $70K (gross) - $7K (HSA) = $63K, the first $12,800 of traditional contributions would save 12%.  At that rate, Roth may be preferable.  If you can contribute more than that, the Earned Income and Saver's credits kick in and you start a marginal rate ~33%.  But you have to look at the cumulative marginal rate, which depends on your total traditional contribution.  You could use the case study spreadsheet if you'd like to see things in graphical form.

It all depends on what you expect for your marginal rate in retirement.  See Investment Order for one way to estimate that.

luminajd

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Re: Do I 403b? Roth?
« Reply #5 on: July 16, 2019, 06:17:04 AM »
Thank you both for your helpful replies!
I just realized I DO have Roth 403B available to me... what is the advantage of that over a Roth IRA through Vanguard?
I will have to play around with the case study spreadsheet, that appears a bit overwhelming.
Thank you Terran so much for your calculations, it is relieving to see Im not near as behind in saving as I thought I was!

terran

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Re: Do I 403b? Roth?
« Reply #6 on: July 16, 2019, 07:50:26 AM »
Thank you both for your helpful replies!
I just realized I DO have Roth 403B available to me... what is the advantage of that over a Roth IRA through Vanguard?
I will have to play around with the case study spreadsheet, that appears a bit overwhelming.
Thank you Terran so much for your calculations, it is relieving to see Im not near as behind in saving as I thought I was!

The advantage of a Roth 403(b) is mostly just that it has a higher limit, so if you find the optimal strategy is to put more than $6000 in Roth then you can. Workplace retirement plans are also covered by federal liability exemptions if you get sued, while IRAs vary by state.

As you play around with @MDM's (excellent) spreadsheet also play around with the =FV() formula to make you own future value calculations. As I mentioned, I think 5% is a decent real return assumption to use in your projections.

A Fella from Stella

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Re: Do I 403b? Roth?
« Reply #7 on: July 16, 2019, 07:57:27 AM »
If you have spare cash to start a Roth, definitely get something in there, even if only $50 per month. Everything you put in after 5 years you can take out with no penalty, so it could be good for paying tuition.

If you never take it out, it's great to have a lump sum you can just withdraw when you are older.

EvenSteven

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Re: Do I 403b? Roth?
« Reply #8 on: July 16, 2019, 08:08:20 AM »
If you have spare cash to start a Roth, definitely get something in there, even if only $50 per month. Everything you put in after 5 years you can take out with no penalty, so it could be good for paying tuition.

If you never take it out, it's great to have a lump sum you can just withdraw when you are older.

terran

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Re: Do I 403b? Roth?
« Reply #9 on: July 16, 2019, 08:26:14 AM »
If you have spare cash to start a Roth, definitely get something in there, even if only $50 per month. Everything you put in after 5 years you can take out with no penalty, so it could be good for paying tuition.

If you never take it out, it's great to have a lump sum you can just withdraw when you are older.

Right, contributions can be removed at at time. To that point, if you can't afford to max your 403(b) and IRA, but have an emergency fund, you might take a look at: https://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund

getting a Roth open as soon as possible isn't a bad idea though, as there is a 5 year rule that requires the IRA to be open at least 5 years before gains are removed even if you're over 59.5 when you make the withdrawal. Establishing a Roth IRA now so you don't have to think about that would be good.

MDM

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Re: Do I 403b? Roth?
« Reply #10 on: July 16, 2019, 09:57:20 AM »
I will have to play around with the case study spreadsheet, that appears a bit overwhelming.
You might find the Case Study Spreadsheet club (like a book club...only with a spreadsheet...) thread of interest.

dandarc

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Re: Do I 403b? Roth?
« Reply #11 on: July 16, 2019, 11:30:33 AM »
Out of curiosity, do you also have a 457B available at work? Would depend on the employer - public school districts and universities often offer both, and if so that's another $19K of traditional retirement space.

Sometimes called "deferred compensation" if you're not sure. If you're lucky to be in that situation, that could get you well into range for EITC, big saver's credit.

Might also be irrelevant - big constraint would be "can I get by on what's left" if we're talking about possibly maxing out to the tune of $46K (403B, 457B, IRA).

If you're willing to get your spending low enough, and you either work for the right employer or are self-employed, you often have a ton of tax-advantaged space at your disposal.

A Fella from Stella

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Re: Do I 403b? Roth?
« Reply #12 on: July 16, 2019, 12:50:05 PM »
If you have spare cash to start a Roth, definitely get something in there, even if only $50 per month. Everything you put in after 5 years you can take out with no penalty, so it could be good for paying tuition.

If you never take it out, it's great to have a lump sum you can just withdraw when you are older.

Right, contributions can be removed at at time. To that point, if you can't afford to max your 403(b) and IRA, but have an emergency fund, you might take a look at: https://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund

getting a Roth open as soon as possible isn't a bad idea though, as there is a 5 year rule that requires the IRA to be open at least 5 years before gains are removed even if you're over 59.5 when you make the withdrawal. Establishing a Roth IRA now so you don't have to think about that would be good.

Yep. My kids will all have Roths with their first job. I'm only telling them right now that the money is for when they are 60, but if they are in trouble at 30 (or just want to buy a home), it will be awesome if they have $40k to tap into.

luminajd

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Re: Do I 403b? Roth?
« Reply #13 on: July 16, 2019, 04:23:59 PM »
I only have a 403B and 403B Roth through work, Im in healthcare.
I already have a Vanguard Roth I have like $1,000 in, any advantage to using the Roth through work versus vanguard?
I really appreciate your guys' help!