Another retirement investment question

[Rhcuam]

I am enrolled in the kpers 457 plan for a while now and it has Provided a nice return. All the contributions are drawn before tax. While setting up some investment accounts for my children (thank you guys for your input on those) there was a very brief mention of possibly setting up a Roth account or something along those lines where the contributions would be drawn after tax.

I contribute $500 a month to my 457 plan. I was planning to increase it and I just got to thinking if maybe I would be better off splitting some of that money into an after-tax or Roth IRA type account.

So essentially 300 in to the 457 plan and then 300 into a new Roth account. Is this a terrible idea or wouldn’t make a bit of difference?

 

[TOGIE]

i always start these conversations with "i don't know anything"

and i actually don't

but i set up my 457 contributions to be split between pre and post tax, i don't remember what my split is off the top of my head. but as far as i know, it's prudent to do some degree of both.

 

[HONEYBADGER]

I am enrolled in the kpers 457 plan for a while now and it has Provided a nice return. All the contributions are drawn before tax. While setting up some investment accounts for my children (thank you guys for your input on those) there was a very brief mention of possibly setting up a Roth account or something along those lines where the contributions would be drawn after tax.

I contribute $500 a month to my 457 plan. I was planning to increase it and I just got to thinking if maybe I would be better off splitting some of that money into an after-tax or Roth IRA type account.

So essentially 300 in to the 457 plan and then 300 into a new Roth account. Is this a terrible idea or wouldn’t make a bit of difference?

Not sure if the rules are the same for your employer but if you can contribute the max to your 457 which is nearly 20k a year now, it defers you paying taxes on that amount of money which is nice.

 

[npaden]

There are lots of caveats if you are hitting limits on what you are putting into your retirement accounts, but aside from that, essentially with a Roth you are just betting that your tax rate now is lower than your tax rate will be when you retire.

A Roth also gives you more flexibility on when you withdraw the funds at retirement. It never hurts to have some Roth money as you can tweak your taxable vs. nontaxable withdrawals at retirement to minimize your tax liability, but if you are at peak earnings now and paying a high tax rate and you aren't maximizing your other options a Roth might not be the best option.

 

[TOGIE]

double checked, looks like i'm doing 2/3 pre tax and 1/3 post tax.

no rhyme or reason there. just did it the way i did it.

 

[Rhcuam]

@TOGIE thanks for that info I’ll see if that’s an option in Kansas.

@npaden I read your post about five times now and I think I understand what you’re saying. I am not maxing out what I’m contributing into my 457 plan. I live in BFE Western Kansas so even peak earnings for me do not put me in a Super high tax bracket.
As far as my tax rate right now compared to what it will be in 10 to 12 years I don’t even have the The slightest idea on that.

Just when I think I have a very basic understanding of investing and savings I talk to somebody and I realize I am a caveman still.

 

[TOGIE]

As far as my tax rate right now compared to what it will be in 10 to 12 years I don’t even have the The slightest idea on that.

very GENERAL rule when saving for retirement - tax rates aren't going anywhere but up over time.

hence why it's nice to be able to put some post tax money away, invest it, and not be taxed on it when you draw it out during retirement. as your taxes now are likely to be less than they will be in however many years till you retire.

 

[SAJ-99]

very GENERAL rule when saving for retirement - tax rates aren't going anywhere but up over time.

hence why it's nice to be able to put some post tax money away, invest it, and not be taxed on it when you draw it out during retirement. as your taxes now are likely to be less than they will be in however many years till you retire.

Sorry, TOGIE, but that is a horrible rule and has been wrong for decades. Tax rates have fallen, especially for the wealthy.

I agree it is a question of tax arbitrage over time. The questions the OP has to ask, is 1) will the US ever move away from a graduated tax rate, and 2) how much income will I draw on an annual basis. I think the answer to one is 'No'. The answer to the second depends on the individual. But your tax bracket matters more than individual tax rates.

 

[TOGIE]

Sorry, TOGIE, but that is a horrible rule and has been wrong for decades. Tax rates have fallen, especially for the wealthy.

I agree it is a question of tax arbitrage over time. The questions the OP has to ask, is 1) will the US ever move away from a graduated tax rate, and 2) how much income will I draw on an annual basis. I think the answer to one is 'No'. The answer to the second depends on the individual. But your tax bracket matters more than individual tax rates.

i guess tax bracket is really what i was going for.

my angle was, you make more money later than you do now... generally. and therefore get taxed more.

i guess now i'm confused, wouldn't your tax bracket depend on how much you draw?

either way, my young naive point is it's just best to hedge. do some ratio of both. i do majority pre tax.

 

[npaden]

@npaden I read your post about five times now and I think I understand what you’re saying. I am not maxing out what I’m contributing into my 457 plan. I live in BFE Western Kansas so even peak earnings for me do not put me in a Super high tax bracket.
As far as my tax rate right now compared to what it will be in 10 to 12 years I don’t even have the The slightest idea on that.

Just when I think I have a very basic understanding of investing and savings I talk to somebody and I realize I am a caveman still.

Sorry I wasn't clear, but I think you did get the concept I was trying to get across.

Essentially you are gambling a bit with a Roth that your tax rate will be lower now when you are willingly paying tax on the amount you are contributing so it can earn tax free and be withdrawn tax free in the future. If you do the math if your tax rate is the same now as it is when you retire and tax the money out it ends up essentially the same either way (Roth vs before tax contribution).

Where you can get a little tricky with having some Roth balances available to withdraw would be if you were getting close to going from the 24% bracket to the 32% bracket when you were withdrawing money at retirement you could pull out traditional pre-tax retirement money to get you up to the 24% bracket end and then pull the rest out as Roth so that keeps you at 24% tax.

That's all fine and dandy but if you were in the 35% tax bracket when you funded the Roth and paid tax when you withdrew it at 24% then you really are still behind on the tax game.

That all gets thrown out the window if you are maximizing your pre-tax contributions and contribute additional amounts into a Roth, then you are still avoiding paying tax on the earnings of those investments so even if you are in the 35% bracket you are ahead by not having to pay tax on the earnings at least.

I'm sure a good financial planner could describe it all a lot better than me, but if you aren't maxed out on your pre-tax contributions essentially you are just gambling on the fact that you are going to be in a higher tax bracket at retirement than you are now.

A Roth is a great investment opportunity for people in lower tax brackets starting out and for people who are already maxing out their pre-tax options. IMO they really aren't that great for a middle of the road dude. They also aren't super great for "saver" type people that aren't going to be pulling out big chunks of retirement. Even if you are only in the 22% tax bracket now, if you are frugal and end up pulling out small amounts of your retirement assets and you are in a 12% tax bracket you really would have been better off investing that money pre-tax instead of in a Roth.

Way too long of an explanation. LOL.

 

[homers]

Depends on your situation, but I'd go Roth the longer you are from retirement. Lots of advantages to a Roth vs a traditional. Don't need to take Required Minimum Distribution from a Roth, ALL of your investment returns (which is usually far greater than your contributions) are taken out tax free. (not just your contributions). Far more flexibility with Roth. My kids are maxing out their Roths (one has IRA, the other 401K) and will be sitting on a huge pile of $$$, all tax free if they need it, when they retire.

 

[Rhcuam]

I will be able to retire at 50 , I plan on working past that, somewhere between 52-55 is when I would like to get out. Currently 42.

Thanks for the input!

 

[Frenchy]

@TOGIE thanks for that info I’ll see if that’s an option in Kansas.

@npaden I read your post about five times now and I think I understand what you’re saying. I am not maxing out what I’m contributing into my 457 plan. I live in BFE Western Kansas so even peak earnings for me do not put me in a Super high tax bracket.
As far as my tax rate right now compared to what it will be in 10 to 12 years I don’t even have the The slightest idea on that.

Just when I think I have a very basic understanding of investing and savings I talk to somebody and I realize I am a caveman still.

I'll boil it down for you. It doesn't matter...pre-tax, post tax, etc.....all of that is just a guess at what life will be like when you retire. What really matters in determining what life will be like when you retire......is choosing to save that $600 in the first place!

 

[TN2shot07]

Frenchy is right, we all love to nerd out about tax impacts on future earnings, returns, and the different investment vehicles to get you there. Too many people don’t even bother with the saving part and arrive at retirement with ssi and that’s it.

If your job offers a match, even with subpar options start there because it’s 100% return on those dollars. Then figure out the % you’re comfortable saving for retirement and plow it in to whatever suits your fancy. My next step personally is a Roth because I want the tax free growth but just save something.

 

[npaden]

If you guys want to do an interesting calculation, take $1,000 and invest it in your 401k. Take the same $1,000 and pay tax on it at your current rate (lets say 22%) so you put the net of that ($780) into your Roth investment.

Pick whatever investment return you want and whatever timeline of how long it is invested that you want.

At the end of the period when you take it out, if you are in the same tax bracket as you were when you put the money in you end up with the same exact amount after taxes.

Example - $1,000 put into the traditional 401k pretax would grow to $2,593.74 at 10% in 10 years. Take it out at 22% tax and you end up with $570.62 in tax and a net amount of $2,023.12.

Put $1,000 less the $220 of tax into an after tax vehicle and let that grow at 10% for 10 years, you have..... Wait for it..... $2,023.12 to pull out tax free.

That's why I keep saying that it is all about the tax rate when you are talking about Roth vs Pre-tax options unless you are discussing other items like you have hit your limit on your pre-tax or you are trying to work around tax brackets by having different options on required minimum distributions and things like that.

All things being equal if you are in the same tax bracket now as you are going to be when you are retired you do have more flexibility with a Roth.

If you are in a higher tax bracket now than you will be when you retire and you are not already maxing out your pre-tax options you are probably making a mistake putting money in a Roth.

 

[TOGIE]

If you guys want to do an interesting calculation, take $1,000 and invest it in your 401k. Take the same $1,000 and pay tax on it at your current rate (lets say 22%) so you put the net of that ($780) into your Roth investment.

Pick whatever investment return you want and whatever timeline of how long it is invested that you want.

At the end of the period when you take it out, if you are in the same tax bracket as you were when you put the money in you end up with the same exact amount after taxes with way.

Example - $1,000 put into the traditional 401k pretax would grow to $2,593.74 at 10% in 10 years. Take it out at 22% tax and you end up with $570.62 in tax and a net amount of $2,023.12.

Put $1,000 less the $220 of tax into an after tax vehicle and let that grow at 10% for 10 years, you have..... Wait for it..... $2,023.12 to pull out tax free.

That's why I keep saying that it is all about the tax rate when you are talking about Roth vs Pre-tax options unless you are discussing other items like you have hit your limit on your pre-tax or you are trying to work around tax brackets by having different options on required minimum distributions and things like that.

All things being equal if you are in the same tax bracket now as you are going to be when you are retired you do have more flexibility with a Roth.

If you are in a higher tax bracket now than you will be when you retire and you are not already maxing out your pre-tax options you are probably making a mistake putting money in a Roth.

sounds like tomayto/tomahto then

and given those unknowns about future tax brackets, not a bad idea to hedge a little?

 

[Werty]

Look into Self Directed Roth, could be another avenue.

 

[npaden]

sounds like tomayto/tomahto then

and given those unknowns about future tax brackets, not a bad idea to hedge a little?

Agreed, unless you are in the higher tax brackets and aren't already maxing out your pre-tax options.

 

[SAJ-99]

i guess now i'm confused, wouldn't your tax bracket depend on how much you draw?

Yes. I would think that most people would draw less in income after retirement than they make before retirement. Assumption is house might be paid off, kids are gone, etc. A lot of travel might increase the need to draw more. A lot of this ties in to the other thread about purchasing a second home. Your income level, pre medicare eligibility, also affects what you pay for health insurance on the exchange.

 

[Blackcats06]

If you guys want to do an interesting calculation, take $1,000 and invest it in your 401k. Take the same $1,000 and pay tax on it at your current rate (lets say 22%) so you put the net of that ($780) into your Roth investment.

Pick whatever investment return you want and whatever timeline of how long it is invested that you want.

At the end of the period when you take it out, if you are in the same tax bracket as you were when you put the money in you end up with the same exact amount after taxes.

Example - $1,000 put into the traditional 401k pretax would grow to $2,593.74 at 10% in 10 years. Take it out at 22% tax and you end up with $570.62 in tax and a net amount of $2,023.12.

Put $1,000 less the $220 of tax into an after tax vehicle and let that grow at 10% for 10 years, you have..... Wait for it..... $2,023.12 to pull out tax free.

That's why I keep saying that it is all about the tax rate when you are talking about Roth vs Pre-tax options unless you are discussing other items like you have hit your limit on your pre-tax or you are trying to work around tax brackets by having different options on required minimum distributions and things like that.

All things being equal if you are in the same tax bracket now as you are going to be when you are retired you do have more flexibility with a Roth.

If you are in a higher tax bracket now than you will be when you retire and you are not already maxing out your pre-tax options you are probably making a mistake putting money in a Roth.

Your math is correct but I would rather give the government $220 over $570

Maybe a dumb way to look at it but that’s what I think.