2 years later, windfall invested, now what?

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Topic Author
teacher2163
Posts: 255
Joined: Wed Jan 15, 2020 7:21 am

2 years later, windfall invested, now what?

Post by teacher2163 »

I joined this site a little over two years ago. I originally posted on how to handle a significant windfall. Looking back at my early posts I was such a newbie. My original plan was to live off of the windfall and invest the money into a 403B and a government 457, which I have done. I also did Roth IRA's the past 3 tax years for both my wife and me. The 457 added a Roth option this year, so I started using that at the beginning of this year. The advice I got was to keep a taxable account in addition to funding Roth's, and my traditional 403B. I was hoping to get some guidance in how to handle the upcoming year, as my windfall is to the point where I will not be supplementing my living expenses from it. I will still have money to invest but would like some guidance on how to do that. Here is our financial picture currently.


Emergency funds: I have an emergency fund of at least 6 months

Debt: I have no debt, including car payment and mortgage

Other important considerations: My brother and I own a farm, rental homes, and a small business, which brings in about $30,000 each per year. My wife and I make about $80,000 each year as teachers. Total income $190,000

Pension and Social Security: When we retire at age 60, we will receive about 80% of our salaries through our pension plan. Social Security will be about $200 monthly at the age of 67. This is reduced because of our pension.

Tax Filing Status: Married filing jointly

Tax Rate: Federal: 22%, state 4.4% (this will be similar in retirement)

State of Residence: Ohio (low cost of living)

Age: 49 as is my wife

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 20% of stocks

Contributions current:

His: 403B ($19,500)
Her: 403B ($19,500)
His: 457 ($19,500)
Her:457 ($19,500)

Total: $78,000

Investment summary:

To summarize our financial position we have $400,000 in a brokerage account. We also have $100,000 in Roth IRA and 457 Roth. We have about $350,000 in our 403B and 457 Traditional. Our asset mix is about 60% VTI (Vanguard U.S total stock market), 20% VXUS (Vanguard total international stock market), and 20% in in BND (Vanguard total bond market). I have a few other minor stocks and funds. All of the bonds are held in the 403B traditional account. This is a little risky for our age, but I also have the pension and rental income for stability.

Moving forward, I think that we can afford to invest somewhere between $60,000 and $70,000 per year. My though was to do a roth IRA for my wife and myself ($14,000 total as we will be 50), and to max out the Roth 457 ($53,000 total) for a combined investment of $67,000.

Questions:
1. Does it make the most sense to max out Roth contributions? My thoughts are that my retirement income will most likely be as much as it is now, especially when RMDs start happening (especially when one of us passes)
2. Should I continue to invest in the traditional 403B and pull money from my brokerage account, or is it better to leave the brokerage account alone?
3. Any other input would be greatly appreciated
niagara_guy
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Re: 2 years later, windfall invested, now what?

Post by niagara_guy »

I see putting after tax money into a Roth as an no risk event (assuming you can fund your other retirement options as well). You can withdraw your contribution (but not the earnings) at any time and will not pay taxes on the withdrawal later assuming you meet the Roth withdrawal rules.

I think funding 403b/457 decision is more complicated. If you are going to be in a lower tax bracket when you withdraw from these then I think it makes sense to keep contributing. Would you post the funds available and all the costs (including aum fees) for your 403b/457? Some of the investment houses for 403b's will fee you to death, i hope you are serviced by a low cost provider.

If you have to chose between a Roth or contributions to a 403b/457 then I think it's harder to get a good answer. I converted some ira money to a Roth before I retired and looking back it wasn't the best decision (but it looked reasonable at the time) because I am in a low tax bracket now. I do like having money in all 3 (Roth, t-ira and individual account) since it gives me flexibility.
pizzy
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Joined: Tue Jun 02, 2020 6:59 pm

Re: 2 years later, windfall invested, now what?

Post by pizzy »

Why are you voluntarily paying 26.4% taxes to fund a 457 roth instead of doing traditional?
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
Topic Author
teacher2163
Posts: 255
Joined: Wed Jan 15, 2020 7:21 am

Re: 2 years later, windfall invested, now what?

Post by teacher2163 »

As for the 403B and 457 choices they both offer low cost Vanguard funds (.02 to .08). I can create a 60/20/20 total u.s stock market, total international stock market, and total u.s. bond market from either account. To answer another question, I would consider paying 26.4% taxes now because I think that my tax bracket will be as high or higher in retirement. Our pensions will be 80% of our salaries, plus some from Social Security. With RMD of the 403B account at age 72 I think taxes could get costly, especially if I put another 60 or 70 thousand each year for the next 11 years. Of course, I may be missing something too
zie
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Re: 2 years later, windfall invested, now what?

Post by zie »

pizzy wrote: Fri Dec 03, 2021 10:59 am Why are you voluntarily paying 26.4% taxes to fund a 457 roth instead of doing traditional?
because the OP will have a taxable pension that will keep them in the high tax bracket. So there is little to no arbitrage for converting from traditional to ROTH later on with a lower tax bracket.

If what I said is untrue(I'm unfamiliar with OH state tax law), then perhaps there is an opportunity, but generally pensions are taxable income, both federally and at the state level, which means all ROTH is usually the best way to go.
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
pizzy
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Re: 2 years later, windfall invested, now what?

Post by pizzy »

zie wrote: Fri Dec 03, 2021 11:19 am
pizzy wrote: Fri Dec 03, 2021 10:59 am Why are you voluntarily paying 26.4% taxes to fund a 457 roth instead of doing traditional?
because the OP will have a taxable pension that will keep them in the high tax bracket. So there is little to no arbitrage for converting from traditional to ROTH later on with a lower tax bracket.

If what I said is untrue(I'm unfamiliar with OH state tax law), then perhaps there is an opportunity, but generally pensions are taxable income, both federally and at the state level, which means all ROTH is usually the best way to go.
I totally disagree with the idea of voluntarily paying more tax today that you are required.
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
Topic Author
teacher2163
Posts: 255
Joined: Wed Jan 15, 2020 7:21 am

Re: 2 years later, windfall invested, now what?

Post by teacher2163 »

My understanding of Roth or traditional comes down to math. I guess I don't see the disadvantage to doing a Roth now as opposed to most likely paying more later. My big question is if it is still better to keep the brokerage or try to get that into my traditional 403B at Vanguard.
pizzy
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Re: 2 years later, windfall invested, now what?

Post by pizzy »

teacher2163 wrote: Fri Dec 03, 2021 11:29 am My understanding of Roth or traditional comes down to math. I guess I don't see the disadvantage to doing a Roth now as opposed to most likely paying more later. My big question is if it is still better to keep the brokerage or try to get that into my traditional 403B at Vanguard.
The disadvantage is guaranteeing you have 26.4% less money to start with.
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
Topic Author
teacher2163
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Re: 2 years later, windfall invested, now what?

Post by teacher2163 »

When weighing in on the advice on these forums, I think it is good to have different view points, however, I am not sure that if you are 100% against Roth investments in any situation, you are giving me any help.
zie
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Re: 2 years later, windfall invested, now what?

Post by zie »

pizzy wrote: Fri Dec 03, 2021 11:27 am
zie wrote: Fri Dec 03, 2021 11:19 am
pizzy wrote: Fri Dec 03, 2021 10:59 am Why are you voluntarily paying 26.4% taxes to fund a 457 roth instead of doing traditional?
because the OP will have a taxable pension that will keep them in the high tax bracket. So there is little to no arbitrage for converting from traditional to ROTH later on with a lower tax bracket.

If what I said is untrue(I'm unfamiliar with OH state tax law), then perhaps there is an opportunity, but generally pensions are taxable income, both federally and at the state level, which means all ROTH is usually the best way to go.
I totally disagree with the idea of voluntarily paying more tax today that you are required.
Let's step back, see where we disagree, as I'm having a hard time understanding your perspective.

You are totally right, in the general sense, a traditional pre-tax account is usually the best situation because of the tax-arbitrage available in early retirement, where they can convert to post-tax during the low-tax years. The OP will likely not have that arbitrage opportunity.

The OP, is likely going to stay in the same tax bracket for the rest of their life, because of the pension and SS. So nothing they do will prevent them from paying the taxes. The only way I can see them getting out of paying taxes is:

* Drastic tax law changes (unlikely - and against forum rules to talk about)
* Giving up US citizenship and immigrating to a lower tax country (the OP has made no claims this is on their todo list)
* Die before the taxes come due.

The 2nd one is the only one in their control, though I doubt most people would think it's a great plan.

From my perspective, one should try and optimize their overall lifetime tax payments. The OP could maybe run some tax returns given their situation to ensure that a ROTH really is beneficial in their particular tax situation, but based on the information given so far, a ROTH today makes sense, to avoid future excess taxes later when pulling from the retirement accounts.
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
pizzy
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Joined: Tue Jun 02, 2020 6:59 pm

Re: 2 years later, windfall invested, now what?

Post by pizzy »

zie wrote: Fri Dec 03, 2021 1:46 pm
pizzy wrote: Fri Dec 03, 2021 11:27 am
zie wrote: Fri Dec 03, 2021 11:19 am
pizzy wrote: Fri Dec 03, 2021 10:59 am Why are you voluntarily paying 26.4% taxes to fund a 457 roth instead of doing traditional?
because the OP will have a taxable pension that will keep them in the high tax bracket. So there is little to no arbitrage for converting from traditional to ROTH later on with a lower tax bracket.

If what I said is untrue(I'm unfamiliar with OH state tax law), then perhaps there is an opportunity, but generally pensions are taxable income, both federally and at the state level, which means all ROTH is usually the best way to go.
I totally disagree with the idea of voluntarily paying more tax today that you are required.
Let's step back, see where we disagree, as I'm having a hard time understanding your perspective.

You are totally right, in the general sense, a traditional pre-tax account is usually the best situation because of the tax-arbitrage available in early retirement, where they can convert to post-tax during the low-tax years. The OP will likely not have that arbitrage opportunity.

The OP, is likely going to stay in the same tax bracket for the rest of their life, because of the pension and SS. So nothing they do will prevent them from paying the taxes. The only way I can see them getting out of paying taxes is:

* Drastic tax law changes (unlikely - and against forum rules to talk about)
* Giving up US citizenship and immigrating to a lower tax country (the OP has made no claims this is on their todo list)
* Die before the taxes come due.

The 2nd one is the only one in their control, though I doubt most people would think it's a great plan.

From my perspective, one should try and optimize their overall lifetime tax payments. The OP could maybe run some tax returns given their situation to ensure that a ROTH really is beneficial in their particular tax situation, but based on the information given so far, a ROTH today makes sense, to avoid future excess taxes later when pulling from the retirement accounts.
Funding a roth workplace retirement plan is giving money today to the government that you are guaranteed to never get back. People do this because there is a chance you may have to give the government more money much later down the road. It doesn't make any sense unless you are in the 0% tax bracket. Yes, the future is unknown and we shouldn't speculate, but OP states that he predicts he will be in a similar tax bracket in the future. If that is the assumption, why pay the taxes now?

OP states: "Moving forward, I think that we can afford to invest somewhere between $60,000 and $70,000 per year. My though was to do a roth IRA for my wife and myself ($14,000 total as we will be 50), and to max out the Roth 457 ($53,000 total) for a combined investment of $67,000."

Fund the traditional 457, invest the tax savings in your taxable brokerage or better yet into the 403 traditional and defer the taxes as long as possible.
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
zie
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Re: 2 years later, windfall invested, now what?

Post by zie »

pizzy wrote: Fri Dec 03, 2021 3:02 pm People do this because there is a chance you may have to give the government more money much later down the road. It doesn't make any sense unless you are in the 0% tax bracket. Yes, the future is unknown and we shouldn't speculate, but OP states that he predicts he will be in a similar tax bracket in the future. If that is the assumption, why pay the taxes now?
We know the tax rate will go up in 2026, at the very least as Trump's TCJA stuff expires. Historically, we are in an amazingly low tax rate situation right now, at times our top tax brackets have hit 91% and was over 80% for like 2 decades.

The differences between pre and post tax are basically the same, it generally makes no difference if you pay now or later, unless you have an arbitrage opportunity.

We know we have an arbitrage opportunity between now and 2026 at the very least. The traditional arbitrage opportunity of no/low taxable income in the early years of retirement we know the OP will almost certainly not get.

The bonus of paying it now is you have certainty in what you are paying. If you delay, you are stuck with whatever the rate is tomorrow, that nobody has any control over.

So even in your scenario, it still makes sense to ROTH between now and 2026, assuming no other tax law changes. Since we have been on a historically unprecedented decline of tax rates and a similarly unprecedented increase in spending, the current gravy train is likely going to have to end at some point. Who knows if it will end in the OP's lifetime or not, I guess that's something the OP will have to make a decision on for themselves. Especially since future tax law(s) are off-topic for this forum.

I still have no idea why you think delaying taxes is always the preferred strategy. It's certainly a valid strategy, but it makes little to no sense for people that will likely stay in higher tax brackets their entire lives.
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
pizzy
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Re: 2 years later, windfall invested, now what?

Post by pizzy »

Because are assuming constant employment between now and retirement.

There are so many future variables and predictions.

The only sure bet is saving 26.4% on each dollar into traditional today.
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
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BL
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Re: 2 years later, windfall invested, now what?

Post by BL »

Have you considered purchasing I-Bonds each year? You can buy annually at treasuryDirect.gov (10k/person/yr) so you could buy 10k worth before the end of this year and then another 10k/person in January or later next year. We know the interest rate follows the CPI-U and is currently 7.2% rate for 6 months, but we don't know the next rate until mid-April or 1 May next year. Some get up to 5k in paper bonds from IRS tax refunds.

I like Roth IRAs, especially with a pension. Do you do a backdoor Roth (see Wiki) as well?
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retiredjg
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Re: 2 years later, windfall invested, now what?

Post by retiredjg »

teacher2163 wrote: Fri Dec 03, 2021 11:29 am My understanding of Roth or traditional comes down to math. I guess I don't see the disadvantage to doing a Roth now as opposed to most likely paying more later.
I don't see a disadvantage either. Current tax rates are quite favorable. When tax law changes, you may want to re-evaluate.

My big question is if it is still better to keep the brokerage or try to get that into my traditional 403B at Vanguard.
I would keep the brokerage account and not increase the tax-deferred account with it. You will need little to none of your tax-advantaged account in retirement. The $350k you have now is enough.

The answer would be different if you had brokerage money and actually needed to put money into tax-deferral.

I don't think you can make a seriously "wrong" decision about this. Saving money is the important part.
VaR
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Re: 2 years later, windfall invested, now what?

Post by VaR »

Remember to read the Bogleheads wiki article on Traditional versus Roth.

I'm also a bit iffy on increasing traditional contributions at the expense of converting capital gains into ordinary income, given that you may not have the usual situation of having a lower tax rate in retirement. Take a look at the breakeven rates in the table at: https://www.bogleheads.org/wiki/Traditi ... cal_values
Topic Author
teacher2163
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Re: 2 years later, windfall invested, now what?

Post by teacher2163 »

Thanks for the thoughtful responses. We have down Roth IRA's the past 3 years and will continue to do so. We did not have to do the backdoor Roth. I will research some more on the Roth vs. Traditional contributions to my retirement accounts. Honestly, I am finding it is not as clear a choice as I assumed
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