Author Topic: Tax-Deferred and Taxable Accounts--Which and When?  (Read 10423 times)

VioletVixen

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Tax-Deferred and Taxable Accounts--Which and When?
« on: February 28, 2015, 12:05:01 AM »
I'm so confused about where to put my limited money for early retirement. 403b, Trad IRA, Roth IRA, HSA, Taxable accounts...how much do you need in each? I know that they each have their benefits and also their disadvantages, so I'm thinking there has to be a "perfect balance" somewhere. Right now I can only afford to max out two IRAs (mine and my husband's @ 11,000/yr together, one income) and the HSA ($5650 because my employer contributes $1,000). My employer also contributes 5% of my salary to a 401k regardless of whether I contribute to the 403b (it is not a match).

My biggest question is, when and WHY do you put money into a taxable account if you cannot even afford to max your tax-deferred accounts? I am curious about how this pertains to early retirement. My current thinking is to save about 1/3 of my nest egg in a Roth IRA in order to:

1. Get the 5 year clock ticking for future Roth conversion-ladder purposes.
2. Use the contributions as an emergency fund if needed (since I can access those without penalty, and money sitting in a bank account is actually depreciating).
3. Start racking up the amount needed for the 5 year gap between early retirement and having access to the Trad-->Roth conversion money.

The other 1/3 of my retirement savings is going into a Trad IRA, while the last 1/3 is going into an HSA.

With the above benefits of the Roth IRA, why would I consider a taxable account to keep me afloat for my first 5 years of retirement and/or an emergency fund?

To reiterate, I am currently putting 5500 in a Roth IRA (husband's), 5500 in a Trad IRA (mine) and 5650 in the combined family HSA via payroll deduction. I am not contributing anything at this time to the 403b. Am I missing something regarding the taxable accounts? What is their benefit? How do most people "bridge the gap" in early retirement?

ender

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #1 on: February 28, 2015, 06:08:17 AM »
To really answer this you need a lot more information.

Stuff like target retirement date, current account balances, etc. Income helps too.

But yes, generally people bridge the gap with some sort of taxable savings or rental income or plan for Roth IRA withdrawals.

What is your household income? It strikes me if you guys are saving $16k that you might be pretty low on taxable income (or at zero) and it may be beneficial to put all your IRA's into Roth IRAs.

Gin1984

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #2 on: February 28, 2015, 06:41:59 AM »
Put money in your 403b instead of the IRA, as long as the fees in the 403b are not too insane.  There are credits that are based on wage income, not AGI that you may qualify for if you use the 403b not IRA.  However the above poster was correct, we need more info. 

FIace

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #3 on: February 28, 2015, 07:28:24 AM »
How long is it going to be before you need to start withdrawals?  Here is what I would think about regarding the Roth IRA vs taxable account decision.  Lets assume that you want this account to be used as your emergency fund/early retirement bridge fund like you say.  So lets contribute that 5500 every year into a Roth IRA for 15 years (82500 worth of contributions).  Now you decide to retire, and assuming you didn't contribute money into a taxable account, is 82500 enough for you to build your Roth IRA pipeline?  Thats only 16500 per year.  Putting that 82500 into a taxable account instead of the Roth would give you access to all of the earnings on the money without penalty.  We really need more information about age, timeline for early retirement, income, etc.

VioletVixen

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #4 on: February 28, 2015, 02:44:51 PM »
I'm 27, would like to retire in 15-20 years. Husband is looking for work, but right now this is what we have:

CategoryMonthlyCommentsAnnual
Salary/Wages$4,326$51,912
Pretax Health Ins.$85$1,020
Pretax Vision/Dental Ins.$25$300
HSA/Pension$471$5,649
FICA base salary/wages$3,745$44,943
Traditional IRA$458Room to increase?$5,500
Employer Non-Match Contribution (5%)$216$2,596
Income subject to IRS tax$3,287$39,443
Federal Adj. Gross Inc.$3,287$39,443
Federal tax$832015 rates, stand. ded., 3 exempt.$997
State/City tax$170Guess, using 9.00% * Fed. AGI$2,042
Soc. Sec.$232Assumes 1 earner paying$2,787
Medicare$54$652
Total income taxes$540$6,480
Income before other expenses  $2,747$32,963
Monthly Expenses:
Mortgage$733$8,801
Property Tax$150$1,800
Mortgage Insurance$39$462
Hazard Insurance$33$397
Cable TV$140$1,680
Car Insurance (2 Cars)$55$660
Car Gas (2 Cars)$150$1,800
Electricity$35$420
Gas/Oil for heating$50$600
Groceries$200$2,400
Phone (cell)$17$204
Recycling/Trash$15$184
Water/Sewer$25$300
Non-mortgage total$909$10,907
Loans:
Shed Loan$387$4,639
Student Loan$146$1,746
Other tax-advantaged investments:
Roth IRA$458$5,500
Total Expense$2,633$31,593
Total to invest$114$1,370
Summary:
"Gross" income$4,326$51,912
Income taxes$540$6,480
After-tax income$3,786$45,432
IRA+401k/403b/TSP/457 (Savers' credit)$917$11,000
Living expenses$2,223$26,677
Non-mortgage loans$532$6,385
After-tax investable$114$1,370


I have better funds in the IRA, which is why I am favoring the IRA over the 403b. Would the credits be worth the less appealing fund choices? Currently, my savings are:

Fidelity 401a (Employer contributes 5%, not a match): $3,115.17

79.95%    SPTN 500 INDEX ADV
           $2,490.72          Stock Investments   Large Cap
                .05% ER

20.05%   SPTN EXT MKT IDX ADV
           $624.45      Stock Investments   Mid-Cap
                .07% ER

Fidelity 403b (I have contributed to it in the past, but I am not actively contributing now): $6,433.91 <--95% of this is in Roth 403b, 5% Traditional 403b

72.26%   SPTN TOT MKT IDX ADV
           $4,648.99       Stock Investments    Large Cap
                .05% ER

27.74%   SPTN LT TR IDX ADV
           $1,784.92   Bond Investments  Income
                .1% ER

Traditional IRA (My IRA): $4,104.91

VASGX    Vanguard LifeStrategy Growth Fund Investor Shares
           0.17% ER    

Husband's IRA (Have not decided where to put his savings, Roth or Traditional?): $3,000

*Will probably choose Vanguard LifeStrategy Moderate Growth Fund (VSMGX) or the Conservative Growth Fund (VSCGX) for Emergency Fund
               0.15 or 0.16% ER

If I were to put money into a taxable account vs. a Roth IRA for the emergency fund/early retirement bridge, how much of a difference would that make in available money? Wouldn't I lose a good chunk to taxes when investing in a taxable fund?

Frankies Girl

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #5 on: February 28, 2015, 03:31:05 PM »
When you say you have better funds in the IRA, I'm think you might be mistaken or under the impression that Vanguard is the only way to go, because you do have the largest portion in your 403b in Spartan total stock market index (FSTVX) - which is a great fund that is the Fido equivalent of Vanguard's total stock market fund (VTSAX).

That would be my first and only choice for funding the 403b, and the fact that you have that available is super.

There is nothing wrong with preferring Vanguard, but you've got your 403b with Fido, and they are offering you a fund in there that is just as good as Vanguard's version, so I would definitely take advantage of that pre-tax bucket and fill it up.

KCM5

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #6 on: February 28, 2015, 03:50:06 PM »
It looks like you have access to a 457?  If so, that's where you should put your bridge money to get you through to the Roth pipeline. Its actually deferred comp, not a retirement account so you can access it as soon as you're no longer working for that company. If its governmental it is protected. If you work for a private company there are other issues. But in general a 457 is a great pre tax retirement savings vehicle for early retirees.

kpd905

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #7 on: February 28, 2015, 03:57:14 PM »

1. Get the 5 year clock ticking for future Roth conversion-ladder purposes.


What do you mean by this?

VioletVixen

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #8 on: February 28, 2015, 08:11:45 PM »
When you say you have better funds in the IRA, I'm think you might be mistaken or under the impression that Vanguard is the only way to go, because you do have the largest portion in your 403b in Spartan total stock market index (FSTVX) - which is a great fund that is the Fido equivalent of Vanguard's total stock market fund (VTSAX).

That would be my first and only choice for funding the 403b, and the fact that you have that available is super.

There is nothing wrong with preferring Vanguard, but you've got your 403b with Fido, and they are offering you a fund in there that is just as good as Vanguard's version, so I would definitely take advantage of that pre-tax bucket and fill it up.

Well, fidelity doesn't have a great bond fund (with low ER) and I'm trying to keep my allocation at 80 stock, 20 bonds. Is FSTVX truly the equivalent of VTSAX? How does the payroll deduction benefit me more than the IRA if they are both tax advantaged?

VioletVixen

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #9 on: February 28, 2015, 08:14:03 PM »
It looks like you have access to a 457?  If so, that's where you should put your bridge money to get you through to the Roth pipeline. Its actually deferred comp, not a retire
ent account so you can access it as soon as you're no longer working for that company. If its governmental it is protected. If you work for a private company there are other issues. But in general a 457 is a great pre tax retirement savings vehicle for early retirees.

I don't have access to a 457, that was just part of the spreadsheet and I didn't delete it.

VioletVixen

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #10 on: February 28, 2015, 08:15:54 PM »

1. Get the 5 year clock ticking for future Roth conversion-ladder purposes.


What do you mean by this?

Don't you have to have a Roth account open for 5 years before you can withdraw contributions?

merula

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #11 on: February 28, 2015, 08:29:42 PM »

1. Get the 5 year clock ticking for future Roth conversion-ladder purposes.


What do you mean by this?

Don't you have to have a Roth account open for 5 years before you can withdraw contributions?

It's not the age of the account that matters, it's the age of the contribution specifically. If I deposit $1 into a Roth IRA today, I can only withdraw $1 in 5 years no matter what other deposits are or aren't made. Unless you're at a lower income now than you expect to be in retirement, or it's time to start a Roth ladder, I don't see how opening a Roth account makes a difference.

MDM

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #12 on: February 28, 2015, 08:36:59 PM »
Is FSTVX truly the equivalent of VTSAX?
Close enough.  See http://www.bogleheads.org/forum/viewtopic.php?f=1&t=107935

Quote
How does the payroll deduction benefit me more than the IRA if they are both tax advantaged?
No difference between 403b and tIRA.  Both affect your AGI, and both are ignored for FICA purposes.

Don't you have to have a Roth account open for 5 years before you can withdraw contributions?
Too many "con" words: you can withdraw Roth contributions at any time, but there is a 5 year waiting time on traditional-to-Roth conversions.

DavidAnnArbor

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #13 on: February 28, 2015, 10:51:31 PM »
I would consider lowering the cable bill, and maybe just getting an internet connection and then buying netflix, as a way to still have entertainment, but then lower your bill per month. I'm thinking you could save at least $500 a year this way.

teen persuasion

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #14 on: March 01, 2015, 10:03:36 AM »
Is FSTVX truly the equivalent of VTSAX?
Close enough.  See http://www.bogleheads.org/forum/viewtopic.php?f=1&t=107935

Quote
How does the payroll deduction benefit me more than the IRA if they are both tax advantaged?
No difference between 403b and tIRA.  Both affect your AGI, and both are ignored for FICA purposes.

Don't you have to have a Roth account open for 5 years before you can withdraw contributions?
Too many "con" words: you can withdraw Roth contributions at any time, but there is a 5 year waiting time on traditional-to-Roth conversions.
For certain credits, such as EITC, payroll deductions are better than IRA deductions.  The credit amount is first figured on line 7 wages, and then again on AGI, and you get the smaller credit resulting.  If you are in the phaseout range, every additional $ lowers your credit, so lowering your wages generally trumps AGI. 

aschmidt2930

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #15 on: March 01, 2015, 10:47:05 AM »
It's not the age of the account that matters, it's the age of the contribution specifically. If I deposit $1 into a Roth IRA today, I can only withdraw $1 in 5 years no matter what other deposits are or aren't made. Unless you're at a lower income now than you expect to be in retirement, or it's time to start a Roth ladder, I don't see how opening a Roth account makes a difference.

Not to nitpick, but this isn't quite true.  If you contribute a dollar to a Roth IRA today, you can withdraw it tomorrow, or next year.  This applies to contributions only, not gains. 

The five year threshold comes into play when you roll funds over into a Roth IRA.  The easiest way to think about it is that rollovers aren't treated as contributions until they've sat in the account for five years.

MDM

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #16 on: March 01, 2015, 10:51:27 AM »
For certain credits, such as EITC, payroll deductions are better than IRA deductions.  The credit amount is first figured on line 7 wages, and then again on AGI, and you get the smaller credit resulting.  If you are in the phaseout range, every additional $ lowers your credit, so lowering your wages generally trumps AGI.
Absolutely correct - thanks for adding.

VioletVixen

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #17 on: March 01, 2015, 01:29:20 PM »
It's not the age of the account that matters, it's the age of the contribution specifically. If I deposit $1 into a Roth IRA today, I can only withdraw $1 in 5 years no matter what other deposits are or aren't made. Unless you're at a lower income now than you expect to be in retirement, or it's time to start a Roth ladder, I don't see how opening a Roth account makes a difference.

Not to nitpick, but this isn't quite true.  If you contribute a dollar to a Roth IRA today, you can withdraw it tomorrow, or next year.  This applies to contributions only, not gains. 

The five year threshold comes into play when you roll funds over into a Roth IRA.  The easiest way to think about it is that rollovers aren't treated as contributions until they've sat in the account for five years.

Thanks, that helps!

VioletVixen

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #18 on: March 01, 2015, 01:33:31 PM »
For certain credits, such as EITC, payroll deductions are better than IRA deductions.  The credit amount is first figured on line 7 wages, and then again on AGI, and you get the smaller credit resulting.  If you are in the phaseout range, every additional $ lowers your credit, so lowering your wages generally trumps AGI.
Absolutely correct - thanks for adding.

So it only matters if I'm in the phase out range?

I'm still not sure if I should get a taxable account or use the Roth for Efund and bridge...Is there a calculator that can help me figure this out? What would you all do in my situation with my income? HSA max for sure for FICA benefit, right? What next?

VioletVixen

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #19 on: March 01, 2015, 02:30:54 PM »
How long is it going to be before you need to start withdrawals?  Here is what I would think about regarding the Roth IRA vs taxable account decision.  Lets assume that you want this account to be used as your emergency fund/early retirement bridge fund like you say.  So lets contribute that 5500 every year into a Roth IRA for 15 years (82500 worth of contributions).  Now you decide to retire, and assuming you didn't contribute money into a taxable account, is 82500 enough for you to build your Roth IRA pipeline?  Thats only 16500 per year.  Putting that 82500 into a taxable account instead of the Roth would give you access to all of the earnings on the money without penalty.  We really need more information about age, timeline for early retirement, income, etc.

Thanks for the example. I found a Roth vs. Taxable calculator and with what you've said here, it clearly makes sense to go with a Taxable over a Roth if I want to use the money as a bridge and E-fund, assuming I have immediate access to all of the money in the Taxable account and I don't lose any due to taxes on the earnings/dividends? How do Taxable accounts work? With the calculator I used, is it "what you see is what you get" or do I need to assume I will lose a chunk of it to taxes?


teen persuasion

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #20 on: March 01, 2015, 08:45:36 PM »
For certain credits, such as EITC, payroll deductions are better than IRA deductions.  The credit amount is first figured on line 7 wages, and then again on AGI, and you get the smaller credit resulting.  If you are in the phaseout range, every additional $ lowers your credit, so lowering your wages generally trumps AGI.
Absolutely correct - thanks for adding.

So it only matters if I'm in the phase out range?

I'm still not sure if I should get a taxable account or use the Roth for Efund and bridge...Is there a calculator that can help me figure this out? What would you all do in my situation with my income? HSA max for sure for FICA benefit, right? What next?

The EITC is based on a percentage of your earned income, up to a point.  Then it plateaus for a while, then begins phasing out.  If your income were very low, more income would increase your credit, until you reach the plateau.  The best way to know the effect is to look at the EITC chart in the 1040 tax booklet for your w2 wages, and your AGI; you get the smaller result.

Example: MFJ with one child. W2 wages $40k, tIRA $5500 gives EITC $626
MFJ with one child.  401k contributions $5500, W2 wages now $34500 gives EITC $1506.
Same amount in wages, same amount saved in tax deferred accounts, same taxable income in the end, different EITC.

The effect is compounded for me, since my state matches EITC at 30%.
« Last Edit: March 01, 2015, 08:50:22 PM by teen persuasion »

MDM

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #21 on: March 01, 2015, 11:28:00 PM »
The EITC is based on a percentage of your earned income, up to a point.  Then it plateaus for a while, then begins phasing out.  If your income were very low, more income would increase your credit, until you reach the plateau.  The best way to know the effect is to look at the EITC chart in the 1040 tax booklet for your w2 wages, and your AGI; you get the smaller result.

Example: MFJ with one child. W2 wages $40k, tIRA $5500 gives EITC $626
MFJ with one child.  401k contributions $5500, W2 wages now $34500 gives EITC $1506.
Same amount in wages, same amount saved in tax deferred accounts, same taxable income in the end, different EITC.

The effect is compounded for me, since my state matches EITC at 30%.
EITC calculations have been added to the reader case study spreadsheet.

They don't reproduce the above numbers exactly, but the spreadsheet is set to calculate 2015 numbers and I'm guessing the ones above are for 2014...?

teen persuasion

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #22 on: March 02, 2015, 07:30:29 AM »
The EITC is based on a percentage of your earned income, up to a point.  Then it plateaus for a while, then begins phasing out.  If your income were very low, more income would increase your credit, until you reach the plateau.  The best way to know the effect is to look at the EITC chart in the 1040 tax booklet for your w2 wages, and your AGI; you get the smaller result.

Example: MFJ with one child. W2 wages $40k, tIRA $5500 gives EITC $626
MFJ with one child.  401k contributions $5500, W2 wages now $34500 gives EITC $1506.
Same amount in wages, same amount saved in tax deferred accounts, same taxable income in the end, different EITC.

The effect is compounded for me, since my state matches EITC at 30%.
EITC calculations have been added to the reader case study spreadsheet.

They don't reproduce the above numbers exactly, but the spreadsheet is set to calculate 2015 numbers and I'm guessing the ones above are for 2014...?
I just looked up the amounts in my 2014 1040 EITC chart.  Double checking, I see that I'm off on the second one.  It should be $1505.  I really just meant it as a Q & D example.

I like to play around with different scenarios to see how things work.  Poking around behind the scenes and testing edge conditions gives me new insights into how things work, and weird gotchas to avoid or exploit.

VioletVixen

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #23 on: March 02, 2015, 01:21:52 PM »
The EITC is based on a percentage of your earned income, up to a point.  Then it plateaus for a while, then begins phasing out.  If your income were very low, more income would increase your credit, until you reach the plateau.  The best way to know the effect is to look at the EITC chart in the 1040 tax booklet for your w2 wages, and your AGI; you get the smaller result.

Example: MFJ with one child. W2 wages $40k, tIRA $5500 gives EITC $626
MFJ with one child.  401k contributions $5500, W2 wages now $34500 gives EITC $1506.
Same amount in wages, same amount saved in tax deferred accounts, same taxable income in the end, different EITC.

The effect is compounded for me, since my state matches EITC at 30%.

Thanks for the example. But you must have a child to qualify for this credit, correct? I do not have children.

Also, contributing my limited funds to a taxable account vs. a Roth will eliminate part of my Saver's credit, won't it? What are the tax implications of putting that $5500 in a taxable account over a Roth?

teen persuasion

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #24 on: March 02, 2015, 01:54:00 PM »
There is a category of EITC for 0 children, but the income limits are pretty low.  I was guessing based on your comment of 3 exemptions.

I believe the retirement savers credit is available if you contribute to 401k/403b Accounts OR IRAs; not sure about pension plan contributions.  Your credit maxes out with only $2k of contributions for you, and another $2k for your spouse.  You could divvy things up if there is a benefit.  But you are correct, taxable contributions don't count for that credit.

MDM

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #25 on: March 02, 2015, 02:20:34 PM »
Also, contributing my limited funds to a taxable account vs. a Roth will eliminate part of my Saver's credit, won't it? What are the tax implications of putting that $5500 in a taxable account over a Roth?
See http://www.irs.gov/pub/irs-pdf/f8880.pdf for confirmation: Yes, Roth and Traditional contributions do count, but regular investment accounts do not.

The Saver's Credit has some interesting "cliffs", where $1 difference in income can mean hundreds of dollars difference in credit.  That can make it better to contribute to a Traditional plan instead of a Roth, even for someone in a low tax bracket.  It's a good "what if?" thing to evaluate if you are near one of those cliffs.

Of course there's also the EIC trade-off to consider, as teen persuasion noted.  Juggling all the trade-offs is why I like spreadsheets....

ac

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #26 on: March 02, 2015, 02:35:34 PM »
Disclaimer:  I have not read the enormous amount of stuff above.

I recommend focusing on increasing net worth regardless of when you could pull money out without penalty. 

Stuff all your investable money into tax deferred accounts starting with ones that are tax advantaged for money going in, during growth, and on withdrawals (HSA).  Max those out.  Then move to tax advantaged going in and during growth (traditional ira, 401k, etc).  Then on during growth and withdrawals (roth).  Then move to taxable accounts. 

You can move money around later like using the roth pipeline.  But you can't recover lost net worth increasing opportunities. 

MDM

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #27 on: March 02, 2015, 08:13:30 PM »
The Saver's Credit has some interesting "cliffs", where $1 difference in income can mean hundreds of dollars difference in credit.  That can make it better to contribute to a Traditional plan instead of a Roth, even for someone in a low tax bracket.  It's a good "what if?" thing to evaluate if you are near one of those cliffs.

Here's an example of a couple with gross income of $47,000.  Nominally, that puts them comfortably inside the 15% marginal tax bracket and many would say "use Roth, not Traditional".  But due to the Saver's Credit, using Traditional means they pay $2,638 less.  Thus it costs $13,638 to contribute $11,000 to the Roth, for an effective tax rate of 2638/13638 = 19.3%, making a better case to "use Traditional, not Roth."

If, however, gross income = $47,001 then the tax savings are only $1,898 for an effective tax rate of 14.7%.  Need to evaluate case by case.

Contributing $11,000 to a Roth account:
Filing Status21=S, 2=MFJ
# of earners2
AGI$47,000
Std. Deduct.$12,600
Act. Deduct.$12,600
# Exempt.2
Exemption$8,000
Taxable$26,400
Tax$3,038
Savers' credit$400
Tax after n-d credit$2,638
# Children <170
Child Tax Cred.$0
EIC$0
Net Tax$2,638


Contributing $11,000 to a Traditional account:
Filing Status21=S, 2=MFJ
# of earners2
AGI$36,000
Std. Deduct.$12,600
Act. Deduct.$12,600
# Exempt.2
Exemption$8,000
Taxable$15,400
Tax$1,540
Savers' credit$2,000
Tax after n-d credit$0
# Children <170
Child Tax Cred.$0
EIC$0
Net Tax$0

VioletVixen

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #28 on: March 04, 2015, 09:56:58 PM »
Disclaimer:  I have not read the enormous amount of stuff above.

I recommend focusing on increasing net worth regardless of when you could pull money out without penalty. 

Stuff all your investable money into tax deferred accounts starting with ones that are tax advantaged for money going in, during growth, and on withdrawals (HSA).  Max those out.  Then move to tax advantaged going in and during growth (traditional ira, 401k, etc).  Then on during growth and withdrawals (roth).  Then move to taxable accounts. 

You can move money around later like using the roth pipeline.  But you can't recover lost net worth increasing opportunities.

So, even though I would be penalized for dipping into a Trad IRA early for that 5-year gap before the Roth Pipeline is available, I should keep putting money into the Trad IRAs ONLY and none in the taxable? I am thinking a taxable account is like a bank account that makes 7% interest...am I wrong? My plan for now is to max my HSA, then max my Trad IRA and put about $400/mo in a taxable account. This means I don't put anything in my husband's IRA or my 403b. Is this a bad strategy? Don't I need a large sum to live off while waiting for my Roth Ladder?
« Last Edit: March 04, 2015, 09:59:01 PM by violetvixen »

VioletVixen

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #29 on: March 04, 2015, 09:58:16 PM »
The Saver's Credit has some interesting "cliffs", where $1 difference in income can mean hundreds of dollars difference in credit.  That can make it better to contribute to a Traditional plan instead of a Roth, even for someone in a low tax bracket.  It's a good "what if?" thing to evaluate if you are near one of those cliffs.

Here's an example of a couple with gross income of $47,000.  Nominally, that puts them comfortably inside the 15% marginal tax bracket and many would say "use Roth, not Traditional".  But due to the Saver's Credit, using Traditional means they pay $2,638 less.  Thus it costs $13,638 to contribute $11,000 to the Roth, for an effective tax rate of 2638/13638 = 19.3%, making a better case to "use Traditional, not Roth."

If, however, gross income = $47,001 then the tax savings are only $1,898 for an effective tax rate of 14.7%.  Need to evaluate case by case.

Contributing $11,000 to a Roth account:
Filing Status21=S, 2=MFJ
# of earners2
AGI$47,000
Std. Deduct.$12,600
Act. Deduct.$12,600
# Exempt.2
Exemption$8,000
Taxable$26,400
Tax$3,038
Savers' credit$400
Tax after n-d credit$2,638
# Children <170
Child Tax Cred.$0
EIC$0
Net Tax$2,638


Contributing $11,000 to a Traditional account:
Filing Status21=S, 2=MFJ
# of earners2
AGI$36,000
Std. Deduct.$12,600
Act. Deduct.$12,600
# Exempt.2
Exemption$8,000
Taxable$15,400
Tax$1,540
Savers' credit$2,000
Tax after n-d credit$0
# Children <170
Child Tax Cred.$0
EIC$0
Net Tax$0

Thanks for the example. So you think Traditional is always the best way to go, even if you're already in a low tax bracket?

MDM

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #30 on: March 04, 2015, 10:23:38 PM »
Thanks for the example. So you think Traditional is always the best way to go, even if you're already in a low tax bracket?
Never say always. ;)

It's truly a case of "it depends on..." a variety of things, and one needs to look at one's own situation.

The main intent of that example was to highlight the fact that there are complexities in the tax code that can alter the "usual" advice.  Similarly, complexities in people's personal situations can affect the "best" answer: e.g., the presence/absence of a pension is a big contributor to the effective tax rate of IRA withdrawals and thus impacts the Trad/Roth analysis.

The good thing in all this is that the choice between a Traditional or Roth IRA is secondary (or tertiary or ...) to more important things, such as Reduce Your Spending and Invest In Some Tax-Advantaged Account.  Take your best guess, implement that strategy, then get on with life.  You'll only know for sure what was best after you don your hindsight glasses....

zurich78

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #31 on: March 05, 2015, 08:30:53 AM »
Disclaimer:  I have not read the enormous amount of stuff above.

I recommend focusing on increasing net worth regardless of when you could pull money out without penalty. 

Stuff all your investable money into tax deferred accounts starting with ones that are tax advantaged for money going in, during growth, and on withdrawals (HSA).  Max those out.  Then move to tax advantaged going in and during growth (traditional ira, 401k, etc).  Then on during growth and withdrawals (roth).  Then move to taxable accounts. 

You can move money around later like using the roth pipeline.  But you can't recover lost net worth increasing opportunities.

So, even though I would be penalized for dipping into a Trad IRA early for that 5-year gap before the Roth Pipeline is available, I should keep putting money into the Trad IRAs ONLY and none in the taxable? I am thinking a taxable account is like a bank account that makes 7% interest...am I wrong? My plan for now is to max my HSA, then max my Trad IRA and put about $400/mo in a taxable account. This means I don't put anything in my husband's IRA or my 403b. Is this a bad strategy? Don't I need a large sum to live off while waiting for my Roth Ladder?

I don't know if you have an emergency fund, but if you do, then I personally wouldn't be as concerned about having to withdraw money from any of my investment accounts.  That's what e-funds are for.

My concern about looking at my taxable as a bank account is, if I need to dip in to it, what happens if I need to when the market is down?   I'd hate to have to sell assets at a loss and then replenish it when the market has bounced back.  I look at my taxable as an account I will not need to touch, because I have sufficient liquid savings in times of need.

VioletVixen

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #32 on: March 05, 2015, 09:00:00 PM »
Thanks for the example. So you think Traditional is always the best way to go, even if you're already in a low tax bracket?
Never say always. ;)

It's truly a case of "it depends on..." a variety of things, and one needs to look at one's own situation.

The main intent of that example was to highlight the fact that there are complexities in the tax code that can alter the "usual" advice.  Similarly, complexities in people's personal situations can affect the "best" answer: e.g., the presence/absence of a pension is a big contributor to the effective tax rate of IRA withdrawals and thus impacts the Trad/Roth analysis.

The good thing in all this is that the choice between a Traditional or Roth IRA is secondary (or tertiary or ...) to more important things, such as Reduce Your Spending and Invest In Some Tax-Advantaged Account.  Take your best guess, implement that strategy, then get on with life.  You'll only know for sure what was best after you don your hindsight glasses....

Okay, so how can I reduce my mortgage payment? I did not pay anything down on my house. Are there ways to lower a mortgage/PMI payment?

What about my personal loan at 6.5%? Would it be wise to take out a home equity line of credit with a lower interest rate in order to pay it off faster (make the same payments each month)?

VioletVixen

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #33 on: March 05, 2015, 09:01:45 PM »
Disclaimer:  I have not read the enormous amount of stuff above.

I recommend focusing on increasing net worth regardless of when you could pull money out without penalty. 

Stuff all your investable money into tax deferred accounts starting with ones that are tax advantaged for money going in, during growth, and on withdrawals (HSA).  Max those out.  Then move to tax advantaged going in and during growth (traditional ira, 401k, etc).  Then on during growth and withdrawals (roth).  Then move to taxable accounts. 

You can move money around later like using the roth pipeline.  But you can't recover lost net worth increasing opportunities.

So, even though I would be penalized for dipping into a Trad IRA early for that 5-year gap before the Roth Pipeline is available, I should keep putting money into the Trad IRAs ONLY and none in the taxable? I am thinking a taxable account is like a bank account that makes 7% interest...am I wrong? My plan for now is to max my HSA, then max my Trad IRA and put about $400/mo in a taxable account. This means I don't put anything in my husband's IRA or my 403b. Is this a bad strategy? Don't I need a large sum to live off while waiting for my Roth Ladder?

I don't know if you have an emergency fund, but if you do, then I personally wouldn't be as concerned about having to withdraw money from any of my investment accounts.  That's what e-funds are for.

My concern about looking at my taxable as a bank account is, if I need to dip in to it, what happens if I need to when the market is down?   I'd hate to have to sell assets at a loss and then replenish it when the market has bounced back.  I look at my taxable as an account I will not need to touch, because I have sufficient liquid savings in times of need.

No emergency fund yet. That was one reason I wanted to start contributing to a taxable account. :/

MDM

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #34 on: March 05, 2015, 09:24:11 PM »
Okay, so how can I reduce my mortgage payment? I did not pay anything down on my house. Are there ways to lower a mortgage/PMI payment?
"Refinance" would be the usual route.  For your current mortgage, what are
- original principal?
- interest rate?
- length?
- amount of PMI/mo?
- current principal and time (or number of payments) remaining on the loan?
- current estimated house value?

Quote
What about my personal loan at 6.5%? Would it be wise to take out a home equity line of credit with a lower interest rate in order to pay it off faster (make the same payments each month)?
In general, lower interest is better.  Same questions (other than PMI and house value) for this loan as for the mortgage.  You might run into conflicts between this idea and the mortgage refinance, depending on how the lender(s) view the equity for each loan. 
« Last Edit: March 07, 2015, 09:16:49 PM by MDM »

VioletVixen

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #35 on: March 07, 2015, 06:21:36 PM »
Current Mortgage:

- original principal?  $158,367
- interest rate? 3.75%
- length? 30 Years
- amount of PMI/mo? $39 (do I need to add the hazard insurance, too? That's $33/mo)
- current principal and time (or number of payments) remaining on the loan? $150,600, about 27.5 years left
- current estimated house value? Per Zillow, $170,000, but that may not include the 30x40 insulated garage I had built last year...


Personal Loan:

- original principal? $16,300
- interest rate? 6.5%
- length? 4 Years
- current principal and time (or number of payments) remaining on the loan? $11,058, about 28.6 months left

I don't even have enough equity in my mortgage to do a HELOC for the personal loan, do I?



MDM

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Re: Tax-Deferred and Taxable Accounts--Which and When?
« Reply #36 on: March 07, 2015, 09:29:45 PM »
Current Mortgage:

- original principal?  $158,367
- interest rate? 3.75%
- length? 30 Years
- amount of PMI/mo? $39 (do I need to add the hazard insurance, too? That's $33/mo)
- current principal and time (or number of payments) remaining on the loan? $150,600, about 27.5 years left
- current estimated house value? Per Zillow, $170,000, but that may not include the 30x40 insulated garage I had built last year...
3.75% isn't bad.  Even adding PMI makes it similar to a 4.2% no-PMI loan so you are in the gray area between "obviously do" and "obviously don't" pay extra.
And no, don't include the home insurance, nor the property tax.  Those remain after the mortgage is paid.

Quote
Personal Loan:
- original principal? $16,300
- interest rate? 6.5%
- length? 4 Years
- current principal and time (or number of payments) remaining on the loan? $11,058, about 28.6 months left

I don't even have enough equity in my mortgage to do a HELOC for the personal loan, do I?
This one seems ripe for prepaying, even at the cost of not investing anything in a Roth.  You get a guaranteed 6.5% return from your payments here.  You might do better with the Roth, but this is a "bird in the hand."