Help me understand pre-tax 403(b) ROI calculations

[jsternitzky]

I earn $110,000 gross and if contribute $18,000 pretax (at my current tax rate of 28%) and withdraw it when I am retired (estimate 15% tax rate), can I make the assumption that I just instantly earned an extra 12% on my money on top of my growth %?

--or--

A quick figure using some online calculators I figured out that contributing $18,000 will reduce my take home pay by $12,000/yr. when I withdraw that same $18,000 at a 15% tax rate, I will actually get $15,300. Which is a 27% growth over the $12,000.

Am I overcomplicating this?

[forummm]

You're overcomplicating it. The general idea you have is right--that by using a 403b, you are increasing your returns when you pay a lower rate to withdraw them. I wouldn't call that a growth rate--it's an avoided expense.

[jsternitzky]

FORUMMM,

What is your personal order of investing in the non-retired world? Here is my order, would you agree?

1: Max out mine and wife's ROTH IRA
2: MAX out 403(b) $18,000/yr pre-tax retirement account at work (only options are Variable Annuities...which I am not happy about..)
3: Pay off the house as fast as I can
3b: Once house is paid for, just start piling up money in my personal brokerage account

(anyone can chime in if they have an opinion)

[forummm]

Only variable annuities? Ugh. Sometimes the accounts with variable annuities have one option for some kind of mutual fund holdings. Have you called your benefits manager and the 403b servicer to double-check?

Is your tax bracket now higher than what you think it will be in retirement? If so, you might want to use traditional IRAs instead of Roth.

What's your interest rate on the mortgage?

Is there any way for either of you to earn your money through self employment?

[jsternitzky]

The benefits manager said they hope to be adding other options this fall. Let's see if that happens.

The thought is that in retirement everything will be paid off and so I can live on very little (<$30000/yr)7

Am I still limited to $5500/yr if I open a traditional IRA?

Home loan is at 3.6% (VA LOAN)

Self employment? No.

My plan is to only work another 15 years and then retire.

I will need some non-retirement fund since I will only be 50 yrs old.

[forummm]

At <$30k, your tax rate should be lower than what you're paying now, so you would probably better off with traditional IRA contributions. You are still limited to $5500/yr per person.

You can access your retirement accounts before 59.5 with either the Roth IRA Pipeline or Substantially Equal Periodic Payments. There are a hundred threads on that around here.

[jsternitzky]

I have seen a bunch on pulling money out before 59.5.

Why do people not use regular brokerage account investing more. Aren't returns from investments capped at 15% no matter what income bracket you are in? Except you are unlimited to how much you can contribute which makes it more appealing than a traditional IRA.

[forummm]

I have seen a bunch on pulling money out before 59.5.

Why do people not use regular brokerage account investing more. Aren't returns from investments capped at 15% no matter what income bracket you are in? Except you are unlimited to how much you can contribute which makes it more appealing than a traditional IRA.

No, I think the rates are 23% for some people for long term gains. And why pay even 15% when you can pay nothing? And the dividends are taxed during your working years, so you can't pay nothing on those either.

[MDM]

Why do people not use regular brokerage account investing more.

Because they prefer not to pay taxes
  - on the original investment, and/or
  - on any annual taxable returns, and/or
  - on the capital gains when withdrawn

If there are poor options in a 401k, sometimes a case can be made to invest in a taxable account instead.  E.g., see http://forum.mrmoneymustache.com/investor-alley/early-retirement-max-out-401(k)-or-stick-with-outside-brokerage-accounts/.