Managing Martial Age Gap

[doublethinkmoney]

I'm hoping you all can offer up some advice for how we are stashing away money in our "retirement" funds.

My spouse and I have a 18 year age gap.
Our combined AGI is 160-180k.
He has been recently investing into a Roth 457b (instead of the tax sheltered 457)and I have been maxing out my 401K and putting additional funds into a ROTH IRA.

Looks like due to him switching over to a Roth 457 we will owe 2k in taxes this year. Is this the right move or should we tax shelter his retirement account as well? I'm a believer that we will win out in the long run by taking the tax hit now. We also just had a child this year (2016) plus a mortgage we have had for several years.

I'm working on increasing cash flow to save 11k per year in Roth IRA's for both of us, until then - who's Roth IRA should we contribute to first? Is there a benefit either way due to our age gap? How should we factor this into our investing strategy?

Thanks!

[MustacheAndaHalf]

Roth IRAs are the most flexible of the various retirement plan types, since you can take contributions out any time.  The growth, however, needs to remain in the plan until 59.5 yrs old.  Outside retirement plans, stock index funds can be very tax efficient - you only pay tax on the dividends.

How soon until one of you retires?
How will your ~170k income be impacted at that point?

[MDM]

Our combined AGI is 160-180k.

Looks like due to him switching over to a Roth 457 we will owe 2k in taxes this year. Is this the right move or should we tax shelter his retirement account as well?

The knee-jerk response for that income is "use traditional, not Roth."

That is based on this Rule of Thumb: use traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between.

See http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/ if you want even more details on that topic. 

See also http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845 and other posts in that thread about exceptions to the rule.   

[Zaga]

We have a bit of an age gap too, 12 years, and our income has been between $110K-$130K recently.  As much as is possible we are putting money into traditional to save on taxes now, with the realization that we will almost certainly be retiring close to when DH turns 59.5 and is able to pull from any IRA's in his name without penalty.  Plus there's the likelihood that he will retire first and I will work for several years to cover the gap until he's 59.5.

So you'll have to look at your circumstances.  I used to feel like you do and would put a bunch in Roth's and the rest in traditional, but I've changed to putting as much as I can in traditional for the guaranteed tax savings now.  Remember that when you're taking this money out you will be filling up the 0%, 10%, and 15% tax brackets first (or whatever they are at that time of course), while you're saving at the 25%+ bracket.

[MDM]

Remember that when you're taking this money out you will be filling up the 0%, 10%, and 15% tax brackets first....

Unless those brackets have already been spoken for by previous traditional contributions, pension, SS, etc.

Although unusual, it is possible to have "too much" in traditional accounts. 

In addition to the marginal tax rate link above, see https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081 for a long back-and-forth, and https://www.bogleheads.org/forum/viewtopic.php?f=1&t=185255&p=2824221#p2815980 for a picture (worth however many words...).

I agree that for most, traditional is likely better, and the distinction between marginal and average withdrawal rates becomes important only for some.

[Zaga]

Lol, if I run into that "problem" then I will know I have saved enough!  Considering our ages and lack of pension I don't think we will run across that issue.  However others might, good call.

[MDM]

Lol, if I run into that "problem" then I will know I have saved enough!

Indeed, not the worst problem to have. ;)

Considering our ages and lack of pension I don't think we will run across that issue.

Pension or lack thereof definitely makes a difference.  As a participant in this forum, you likely save more than average.  If you are also "afflicted" with jobs you like and continue to work past the point you "have" to, who knows?  Again, we should all have such "problems". :)

[doublethinkmoney]

Remember that when you're taking this money out you will be filling up the 0%, 10%, and 15% tax brackets first....

Unless those brackets have already been spoken for by previous traditional contributions, pension, SS, etc.

Although unusual, it is possible to have "too much" in traditional accounts. 

In addition to the marginal tax rate link above, see https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081 for a long back-and-forth, and https://www.bogleheads.org/forum/viewtopic.php?f=1&t=185255&p=2824221#p2815980 for a picture (worth however many words...).

I agree that for most, traditional is likely better, and the distinction between marginal and average withdrawal rates becomes important only for some.

t "bin
I did forget that we both have pensions as well, most likely mine will be frozen in the next 5 years (with ten years in now) but he will retire with his fully which should be about 35k-40k per year. He's 49 now. I'm not sure how much mine will be but I'm just going to consider it "bonus" money.

[doublethinkmoney]

Roth IRAs are the most flexible of the various retirement plan types, since you can take contributions out any time.  The growth, however, needs to remain in the plan until 59.5 yrs old.  Outside retirement plans, stock index funds can be very tax efficient - you only pay tax on the dividends.

How soon until one of you retires?
How will your ~170k income be impacted at that point?

When we retire that income will be gone.
We want to retire at the same time, hopefully in the next 15 years or sooner, basically when he retires. I also want to factor in the fact that I will need to live off of my money longer. Women tend to live longer and I am the younger one so I like the idea of stashing a bunch of cash away fro me to grow for as long it can and use his pile first. Then we can maybe fill in any gaps with at least 2 rentals we plan to own by then or side work. Should be at least 3,500 per month.

[MDM]

I did forget that we both have pensions as well, most likely mine will be frozen in the next 5 years (with ten years in now) but he will retire with his fully which should be about 35k-40k per year. He's 49 now. I'm not sure how much mine will be but I'm just going to consider it "bonus" money.

We want to retire at the same time, hopefully in the next 15 years or sooner, basically when he retires. I also want to factor in the fact that I will need to live off of my money longer. ... Then we can maybe fill in any gaps with at least 2 rentals we plan to own by then or side work. Should be at least 3,500 per month.

OK, you are beyond the knee-jerk stage and it isn't immediately obvious whether traditional or Roth is better for you now.

You may want to explore tools such as www.i-orp.com to look at various time-dependent "what-if?"s.

If I had to bet, my bet would still be placed on traditional, but with the condition that you delay SS (and the pensions, if you have favorable terms for delaying) so you can convert your traditional funds to Roth while still paying 15% marginal rates.

If you have, say, $24K SS income on top of a $40K pension, the first ~$8,900 of tIRA->Roth conversions will be taxed at 27.75%, due to the $0.85 SS income that is taxed for every $1 conversion - even though you are in the 15% bracket (27.75% = 15% * 1.85).

You can look at graphs of marginal rates for various scenarios in the case study spreadsheet.

[PhysicianOnFIRE]

Is a Martial Age Gap at all related to Martial Law?

He will obviously have easier access to all the monies in his accounts at 59 1/2, so that's one consideration.  I agree that at your level of combined income, tax deferred is probably a better idea than a Roth 457(b).

[Zaga]

Is a Martial Age Gap at all related to Martial Law?

He will obviously have easier access to all the monies in his accounts at 59 1/2, so that's one consideration.  I agree that at your level of combined income, tax deferred is probably a better idea than a Roth 457(b).

I'm not sure of the complete answer to this question, but there is one small item that will likely come up.  If you're more than 10 years apart in age, then your RMD calculation once you reach 70.5 is a bit different.  I believe you can take out less because the joint life expectancy is longer than if you are closer to the same age.

[doublethinkmoney]

Is a Martial Age Gap at all related to Martial Law?

He will obviously have easier access to all the monies in his accounts at 59 1/2, so that's one consideration.  I agree that at your level of combined income, tax deferred is probably a better idea than a Roth 457(b).

LOL we both train in martial arts so I'm so used to typing that word!

[PhysicianOnFIRE]

Is a Martial Age Gap at all related to Martial Law?

He will obviously have easier access to all the monies in his accounts at 59 1/2, so that's one consideration.  I agree that at your level of combined income, tax deferred is probably a better idea than a Roth 457(b).

LOL we both train in martial arts so I'm so used to typing that word!

Oh, crap!  I'm messing with the wrong couple.  Forget I said anything! :)