Author Topic: To Much Saved Pre-Tax?  (Read 3168 times)

Xlar

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To Much Saved Pre-Tax?
« on: September 30, 2017, 04:27:47 PM »
So I've been thinking about this lately and I'm wondering if I'm saving too much pre-tax! Obviously I don't want to pay more taxes now but I don't want to end up with too much money locked away where I cannot touch it when I need it.

On to the numbers: (well, percentages. I figure that's more use any way)

Currently I have:
Pre-Tax67%
Roth13%
After-Tax20%

Based on my current savings rates and the fact that I am now taking better advantage of pre-tax accounts I estimate that at my retierment number I will have:

Pre-Tax78%
Roth13%
After-Tax9%

My question is: Do I have too much pre-tax? If I withdraw on the 4% rule I have ~2 years after-tax and ~3 years Roth. This seems like it is enough that I can make the 401k -> Roth ladder work since you have to wait 5 years to touch that money.

Does this logic make sense? Or should I decrease my pre-tax savings? Obviously if the law around tax advantaged retirement accounts changes and I cannot withdraw from them before age 59.5 then I'm screwed, hahaha.

MDM

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Re: To Much Saved Pre-Tax?
« Reply #1 on: September 30, 2017, 05:03:41 PM »
Where are you, relative to the chart below ("col. S" is the one with percentages)?

DavidAnnArbor

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Re: To Much Saved Pre-Tax?
« Reply #2 on: September 30, 2017, 05:20:26 PM »
Great table MDM

Joel

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Re: To Much Saved Pre-Tax?
« Reply #3 on: September 30, 2017, 05:55:31 PM »
Where are you, relative to the chart below ("col. S" is the one with percentages)?


That's a great table and something that so many people do not understand!

secondcor521

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Re: To Much Saved Pre-Tax?
« Reply #4 on: September 30, 2017, 06:16:59 PM »
@OP, I think you're right in the sweet spot, or close to it.  I'd continue to monitor your after-tax and Roth contribution amounts to make sure you have about 5 years there, then keep plowing anything extra into pre-tax to continue to get the deductions.

One thing to remember is that only the contribution portion of your Roth can be counted towards your pipeline funds, not any earnings.  You probably have some earnings in that 13% Roth that you'll have to not count towards your 5 year pipeline (although those funds can count towards your FIRE stash for purposes of the 4% rule).

Finally, because of the exact rules for the Roth pipeline, you can actually make do with a little over 4 years in your pipeline most of the time depending on the exact timing of your conversions and withdrawals.  For example, you can have four years of spending in your pipeline, convert 1 year of expenses on December 31, 2017, and then withdraw that 1 year of expenses on January 1, 2022 and fulfill the IRS requirements for the 5 year rule.  I wouldn't recommend cutting it quite that close for several reasons, but technically you can.

Xlar

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Re: To Much Saved Pre-Tax?
« Reply #5 on: September 30, 2017, 08:45:29 PM »
Where are you, relative to the chart below ("col. S" is the one with percentages)?



Huh, was not expecting a graph that I don't fully understand!

We are married filling jointly and would fall in the 28% bracket if we didn't put so much away pre-tax. We're planning to retire on 30k at the 4% rule, we'll see how exact we end up being when we get there. It's a few years out still so we'll see what happens. Let me know what this means relative to your chart!



@OP, I think you're right in the sweet spot, or close to it.  I'd continue to monitor your after-tax and Roth contribution amounts to make sure you have about 5 years there, then keep plowing anything extra into pre-tax to continue to get the deductions.

One thing to remember is that only the contribution portion of your Roth can be counted towards your pipeline funds, not any earnings.  You probably have some earnings in that 13% Roth that you'll have to not count towards your 5 year pipeline (although those funds can count towards your FIRE stash for purposes of the 4% rule).

Finally, because of the exact rules for the Roth pipeline, you can actually make do with a little over 4 years in your pipeline most of the time depending on the exact timing of your conversions and withdrawals.  For example, you can have four years of spending in your pipeline, convert 1 year of expenses on December 31, 2017, and then withdraw that 1 year of expenses on January 1, 2022 and fulfill the IRS requirements for the 5 year rule.  I wouldn't recommend cutting it quite that close for several reasons, but technically you can.

That makes a lot of sense, I'll have to keep an eye on how much of the Roth are earnings and how much are contributions. Also, if I get raises faster than the IRS increases the 401k limits then I'll end up with more after-tax saved. Thank you!

MDM

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Re: To Much Saved Pre-Tax?
« Reply #6 on: September 30, 2017, 09:33:07 PM »
Huh, was not expecting a graph that I don't fully understand!

We are married filling jointly and would fall in the 28% bracket if we didn't put so much away pre-tax. We're planning to retire on 30k at the 4% rule, we'll see how exact we end up being when we get there. It's a few years out still so we'll see what happens. Let me know what this means relative to your chart!
See the case study spreadsheet, cells Q12:U19 for the MFJ version.

The final column shows the traditional account balance, assuming 4% withdrawal rate, standard deduction, no other income, credits, etc., that is needed to reach the various tax brackets.

There really isn't an optimum ratio of traditional/Roth/taxable.  E.g., if you pay 25% now you should contribute to traditional until expected withdrawals from your expected traditional balance at retirement puts you into the 25% bracket, then switch to using Roth.  Whether that happens at the end of your working career so you have 100% traditional and 0% Roth, or much earlier (or you can use a mega backdoor Roth) so you have something like 30% traditional and 70% Roth, doesn't matter.
« Last Edit: September 30, 2017, 09:35:12 PM by MDM »

Xlar

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Re: To Much Saved Pre-Tax?
« Reply #7 on: October 01, 2017, 02:19:24 PM »
Huh, was not expecting a graph that I don't fully understand!

We are married filling jointly and would fall in the 28% bracket if we didn't put so much away pre-tax. We're planning to retire on 30k at the 4% rule, we'll see how exact we end up being when we get there. It's a few years out still so we'll see what happens. Let me know what this means relative to your chart!
See the case study spreadsheet, cells Q12:U19 for the MFJ version.

The final column shows the traditional account balance, assuming 4% withdrawal rate, standard deduction, no other income, credits, etc., that is needed to reach the various tax brackets.

There really isn't an optimum ratio of traditional/Roth/taxable.  E.g., if you pay 25% now you should contribute to traditional until expected withdrawals from your expected traditional balance at retirement puts you into the 25% bracket, then switch to using Roth.  Whether that happens at the end of your working career so you have 100% traditional and 0% Roth, or much earlier (or you can use a mega backdoor Roth) so you have something like 30% traditional and 70% Roth, doesn't matter.

I see, that makes sense. I definitely should be contributing pre-tax from a taxes perspective. I pay way more percentage wise in taxes now than I will in retirement.

MDM

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Re: To Much Saved Pre-Tax?
« Reply #8 on: October 01, 2017, 02:31:19 PM »
I see, that makes sense. I definitely should be contributing pre-tax from a taxes perspective. I pay way more percentage wise in taxes now than I will in retirement.
If you are like most people, that is correct.

In case you have some combination of a pension, high expected SS benefits that will start immediately upon retirement, an already large traditional balance, or other retirement income source, remember to compare your marginal rate now vs. your marginal rate in retirement.  The "effective" or "overall" tax rate is irrelevant.

ender

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Re: To Much Saved Pre-Tax?
« Reply #9 on: October 01, 2017, 07:44:07 PM »
One thing I've thought about is that if I end up with too much saved pre-tax, it means one of two situations has happened:

  • I "won" by ending up with way too much money (or, lost, by working too long.. perspective I guess)
  • I didn't have a plan to retire early and didn't account for transition years before using the pretax money

Even the second there though is mitigable (worst case currently is you just eat the 10% penalty as a tax, which for us would still be better than putting money into Roth and paying a much higher than 10% marginal rate).

People see the 10% "penalty" and forget it's effectively no different than paying 10% tax. Paying 30% marginal rate for a Roth 401k/IRA vs the 10%+marginal rate for pretax is silly.

albireo13

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Re: To Much Saved Pre-Tax?
« Reply #10 on: October 06, 2017, 09:38:02 AM »
Where are you, relative to the chart below ("col. S" is the one with percentages)?


Can youexplain this table? 
Not sure how to read it.

Thx.

seattlecyclone

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Re: To Much Saved Pre-Tax?
« Reply #11 on: October 06, 2017, 10:10:51 AM »
Remember that the biggest factor in Roth vs. traditional is whether you expect to have a higher tax bracket when you retire.

The chart is comparing your existing tax bracket to the amount of money you would need to save in a traditional retirement account in order to have a higher tax bracket on retirement (assuming you take 4% of your original balance out every year).

MDM

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Re: To Much Saved Pre-Tax?
« Reply #12 on: October 06, 2017, 11:13:11 AM »
Where are you, relative to the chart below ("col. S" is the one with percentages)?

Can youexplain this table? 
Not sure how to read it.
Thx.
See the case study spreadsheet, cells Q1:U28 for the full version.

The first column has the minimum taxable income needed to reach the tax bracket shown in the third column.  The fourth column adds the standard deduction and personal exemption(s) to the taxable income to get Adjusted Gross Income.  The last column is 25 times the fourth (in other words, the AGI/4%).  Does that make sense?

Undecided

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Re: To Much Saved Pre-Tax?
« Reply #13 on: October 06, 2017, 12:05:36 PM »
Where are you, relative to the chart below ("col. S" is the one with percentages)?

Can youexplain this table? 
Not sure how to read it.
Thx.
See the case study spreadsheet, cells Q1:U28 for the full version.

The first column has the minimum taxable income needed to reach the tax bracket shown in the third column.  The fourth column adds the standard deduction and personal exemption(s) to the taxable income to get Adjusted Gross Income.  The last column is 25 times the fourth (in other words, the AGI/4%).  Does that make sense?

Why not also include t401(k) assets?

MDM

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Re: To Much Saved Pre-Tax?
« Reply #14 on: October 06, 2017, 12:08:05 PM »
Why not also include t401(k) assets?
tIRA is just shorthand for tIRA+t401k+t403b+t457b, etc.