Author Topic: Help with investing tax deferred/tax advantage  (Read 2096 times)

mobyrocket

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Help with investing tax deferred/tax advantage
« on: July 01, 2014, 08:35:10 AM »
MMM community,

I wasn't sure whether to put this in Ask a Mustachian or Investor Alley, but finally settled on Investor Alley.  So here goes.

I have an unused option for saving for retirement.  I'm not sure the best way to leverage it.  I work for a state university.  The pay is not quite at market but the retirement options are awesome especially if one is frugal minded.  There is a 2 for one match up to 4.5% of my salary.  We also have access to a 457 (b) too.  That means I can save up to 38k a year in tax deferred accounts.  My question is this.  I currently can't save 38k a year but can save more than 17,500.  So how do I approach the split?  I plan to retire earlier than 59.5 so the 457 (b) is a great option.  I'm about 10 years away (hopefully sooner) from leaving the need-to-work-for-a-living world.  I'm 42 now.

Current state monthly savings
1) 458.33 to Roth
2) 1459 to 403 (b)

While I haven't gone full mustache yet, I have increased my savings rate to the full value of each of my raises for the past three years.  So no lifestyle inflation, and actively working on lifestyle deflation.

Here is what I think I should do
1) Stop contributing to my Roth
2) Contribute to the 403 (b) to get the match from my employer
3) Throw the rest into the 457 (b)

Then as my savings rate increases
1) Contribute to 403 (b) to get the match
2) Max out the 457 (b) at 17,500
3) Contribute as much as possible until I am able to max out on the 403 (b) at 17,500
4) Then and only then contribute to a Roth
5) Then and only then put money in any kind of post tax investment.

What do you all think?  There is no HSA available through my employer.

My investing manifesto
Low cost index funds
60% broad market index - total market index fund, total international index fund
30% bonds including mortgage at 3.5%
10% REIT

Re-balance yearly.

Please let me know what other info you need.   Thank you in advance - wise mustache community!

brewer12345

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Re: Help with investing tax deferred/tax advantage
« Reply #1 on: July 01, 2014, 09:13:11 AM »
Just to be clear, I would put enough into the 403B to capture the full match.  After that, contribute to the 457B.  If you still have money left, max out the 403B then fill up a Roth and a taxable account.

BlueLesPaul

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Re: Help with investing tax deferred/tax advantage
« Reply #2 on: July 01, 2014, 10:09:13 AM »
I think a lot depends on what your current marginal tax rate is and whether you can the luxury of rolling over your 403(b) and 457 into a traditional IRA and then converting it to a Roth and creating a conversion ladder to avoid or minimize income tax.  Also, what are your other assets? (taxable accounts and current balances in your retirement account) and the amount you want to have when you retire?

mobyrocket

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Re: Help with investing tax deferred/tax advantage
« Reply #3 on: July 02, 2014, 11:48:31 AM »
I think a lot depends on what your current marginal tax rate is and whether you can the luxury of rolling over your 403(b) and 457 into a traditional IRA and then converting it to a Roth and creating a conversion ladder to avoid or minimize income tax.  Also, what are your other assets? (taxable accounts and current balances in your retirement account) and the amount you want to have when you retire?

BlueLesPaul, The way I'm approaching this is if I gin up the 457 (b), then I won't need to rollover anything except creating a Roth Pipeline once I retire.  Since the 457(b) is deferred compensation, I can withdrawal without penalty as soon as I separate from my job.  We will use this to withdrawal only living expenses to keep income tax low since this is taxed as regular old income.  Then at 59.5 we can tap our 401(k)s as needed.  We haven't yet determined if we need to rollover anything. My work retirement plan is with Fidelity all invested in Vanguard funds, my partner's current 401k is with Vanguard as is her rollover.

As for other assets using percent of net worth (two of us in the household now with a little one on the way in November):
9%in Roth IRA
70% in pretax retirement plans -  all 401k, 401a, and 403b with nothing in the 457(b)
15% in Home Equity
6% in taxable including cash

Only debt is mortgage at 3.5% on a 15 year loan with a balance of 151k

Current marginal tax rate is 25%