457 or Roth withdrawal?
- Fierce Escape
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457 or Roth withdrawal?
I need to withdraw about $20k to make a purchase. I'm retired and will be in the 12% tax bracket MFJ. Is there any financial advantage to withdraw from a 457 account or my Roth?
Re: 457 or Roth withdrawal?
If your tax-deferred accounts are large, taking from the 457 is a good idea as long as that does not move you out of the 12% bracket. You will pay taxes on it of course and that might increase the amount you need to take out.
If you are near the top of the 12% bracket and don't want to move into the next bracket, taking some money from each account might accomplish what you want.
If you are near the top of the 12% bracket and don't want to move into the next bracket, taking some money from each account might accomplish what you want.
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Re: 457 or Roth withdrawal?
I echo @retiredjg's suggestions. The current 12% tax bracket is set to snap back to 15% starting in 2026. So either doing withdrawals from 457 to meet current need, or making Roth conversions, up to the top of the 12% tax bracket would save you an additional 3% in taxes in the future. I do not believe that we will ever see the 12% bracket again in our lifetimes.
The tax bracket jump from 12% to 22% is rather steep (almost double), hence I would strive to keep my income below the ceiling of 12% tax bracket, including Roth conversions or withdrawals.
The money that is in Roth already, I am inclined to let it ride indefinitely and grow tax free. For either future expenses when additional taxable withdrawals would cross over into the 22% tax bracket domain, or for heirs.
The tax bracket jump from 12% to 22% is rather steep (almost double), hence I would strive to keep my income below the ceiling of 12% tax bracket, including Roth conversions or withdrawals.
The money that is in Roth already, I am inclined to let it ride indefinitely and grow tax free. For either future expenses when additional taxable withdrawals would cross over into the 22% tax bracket domain, or for heirs.
- Fierce Escape
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- Joined: Wed Apr 21, 2021 3:20 pm
- Location: Illinois
Re: 457 or Roth withdrawal?
Ok thanks, that clears some things up. My Roth amount is small compared to tax deferred, so I'll pull from the 457.
I think roughly the 12% bracket ends at 81k and standard deduction is 26k, so MFJ that would put us at $107k, which even with the $20k withdrawal, I should be able to stay in the lower bracket.
I just didn't want to borrow money for this purchase. I may not have to withdraw any, it'll be close. Appreciate the help
I think roughly the 12% bracket ends at 81k and standard deduction is 26k, so MFJ that would put us at $107k, which even with the $20k withdrawal, I should be able to stay in the lower bracket.
I just didn't want to borrow money for this purchase. I may not have to withdraw any, it'll be close. Appreciate the help
Re: 457 or Roth withdrawal?
Correct, the 12% bracket ends at $107k approximately for Married Filing Jointly. If you would stay below this threshold, I would really suggest converting to Roth up to that threshold. Again, my belief is that we will never see the 12% bracket again in our lifetimes after 2026.Fierce Escape wrote: ↑Thu May 06, 2021 10:44 am Ok thanks, that clears some things up. My Roth amount is small compared to tax deferred, so I'll pull from the 457.
I think roughly the 12% bracket ends at 81k and standard deduction is 26k, so MFJ that would put us at $107k, which even with the $20k withdrawal, I should be able to stay in the lower bracket.
I just didn't want to borrow money for this purchase. I may not have to withdraw any, it'll be close. Appreciate the help
- willthrill81
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Re: 457 or Roth withdrawal?
+1retiredjg wrote: ↑Thu May 06, 2021 7:34 am If your tax-deferred accounts are large, taking from the 457 is a good idea as long as that does not move you out of the 12% bracket. You will pay taxes on it of course and that might increase the amount you need to take out.
If you are near the top of the 12% bracket and don't want to move into the next bracket, taking some money from each account might accomplish what you want.
If a 457 withdrawal can be made in the 12% bracket, it preserves Roth assets in the 12% bracket, which is pretty much a no-brainer for nearly everyone.
The Sensible Steward
Re: 457 or Roth withdrawal?
Fierce Escape, as a new retiree, you will soon get this figured out.
Having both tax-deferred assets and Roth assets gives you some flexibility. For example, let's say it is December 15 and you unexpectedly need a new heat pump . You've already earned and spent most of the 12% bracket which was your goal for the year.
But look...you have this nice little Roth IRA you can tap if you have to - without going into a higher bracket. Or you may decide you will go a little way into the higher bracket because it is not going to matter much anyway. Or you might put this expense on a credit card and work it into your next year's budget.
The point is...You have choices.
If part of your income is from qualified dividends or long term capital gains, be sure you understand how that works at the transition from just under the 12% bracket into the 22% bracket. Some of that money will be taxed at what people call a "shadow rate" of 27%. It is worth learning about, especially if you are considering Roth conversions.
Having both tax-deferred assets and Roth assets gives you some flexibility. For example, let's say it is December 15 and you unexpectedly need a new heat pump . You've already earned and spent most of the 12% bracket which was your goal for the year.
But look...you have this nice little Roth IRA you can tap if you have to - without going into a higher bracket. Or you may decide you will go a little way into the higher bracket because it is not going to matter much anyway. Or you might put this expense on a credit card and work it into your next year's budget.
The point is...You have choices.
If part of your income is from qualified dividends or long term capital gains, be sure you understand how that works at the transition from just under the 12% bracket into the 22% bracket. Some of that money will be taxed at what people call a "shadow rate" of 27%. It is worth learning about, especially if you are considering Roth conversions.
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- Fierce Escape
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- Joined: Wed Apr 21, 2021 3:20 pm
- Location: Illinois
Re: 457 or Roth withdrawal?
Good. Wow, yes I think you right about the end of 12%.lakpr wrote: ↑Thu May 06, 2021 11:07 amCorrect, the 12% bracket ends at $107k approximately for Married Filing Jointly. If you would stay below this threshold, I would really suggest converting to Roth up to that threshold. Again, my belief is that we will never see the 12% bracket again in our lifetimes after 2026.Fierce Escape wrote: ↑Thu May 06, 2021 10:44 am Ok thanks, that clears some things up. My Roth amount is small compared to tax deferred, so I'll pull from the 457.
I think roughly the 12% bracket ends at 81k and standard deduction is 26k, so MFJ that would put us at $107k, which even with the $20k withdrawal, I should be able to stay in the lower bracket.
I just didn't want to borrow money for this purchase. I may not have to withdraw any, it'll be close. Appreciate the help
First I did try to research this, so I have a rollover IRA that I can't touch without penalty till 59.5, which will be 2026 year you stated the bracket increase to 15%.
I'd prefer to do the conversions there and save the 457 for "if needed" dollars before 59.5. So I can convert up to $14k Roth each year to save the 3%, up to the current $107k break (this account is only in my name of that affects the conversion dollars)?
Income will go up some in the next 3 to 8 years with an additional, though not large, pension and SS if we'd take them at 62. It'll push the 12% income limit eventually.
- willthrill81
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Re: 457 or Roth withdrawal?
You can do Roth conversions without paying the 10% penalty before 59.5. The conversion is just treated as taxable income.Fierce Escape wrote: ↑Thu May 06, 2021 1:14 pmGood. Wow, yes I think you right about the end of 12%.lakpr wrote: ↑Thu May 06, 2021 11:07 amCorrect, the 12% bracket ends at $107k approximately for Married Filing Jointly. If you would stay below this threshold, I would really suggest converting to Roth up to that threshold. Again, my belief is that we will never see the 12% bracket again in our lifetimes after 2026.Fierce Escape wrote: ↑Thu May 06, 2021 10:44 am Ok thanks, that clears some things up. My Roth amount is small compared to tax deferred, so I'll pull from the 457.
I think roughly the 12% bracket ends at 81k and standard deduction is 26k, so MFJ that would put us at $107k, which even with the $20k withdrawal, I should be able to stay in the lower bracket.
I just didn't want to borrow money for this purchase. I may not have to withdraw any, it'll be close. Appreciate the help
First I did try to research this, so I have a rollover IRA that I can't touch without penalty till 59.5, which will be 2026 year you stated the bracket increase to 15%.
I'd prefer to do the conversions there and save the 457 for "if needed" dollars before 59.5. So I can convert up to $14k Roth each year to save the 3%, up to the current $107k break (this account is only in my name of that affects the conversion dollars)?
Income will go up some in the next 3 to 8 years with an additional, though not large, pension and SS if we'd take them at 62. It'll push the 12% income limit eventually.
The Sensible Steward
Re: 457 or Roth withdrawal?
If you have a Rollover IRA and you convert some of that money to Roth, you will NOT be assessed any 10% penalty. The only constraint imposed upon Roth conversion is that the converted money cannot be withdrawn until January 1 of the 5th calendar year when you made the conversion. [ By that I mean, if you made the Roth conversion any time in 2021, the money will be available to you on Jan-1-2026. Even if you made the conversion on 12/31/2021 ].
Re: 457 or Roth withdrawal?
There is no limit of $14k. You can convert however much you want, staying under whatever limit you choose.Fierce Escape wrote: ↑Thu May 06, 2021 1:14 pm So I can convert up to $14k Roth each year to save the 3%, up to the current $107k break (this account is only in my name of that affects the conversion dollars)?
If you have a large tax-deferred account, you might delay both the pension and SS if you can and do Roth conversions on the large tax-deferred account now. This will reduce the likelihood that your RMDs will become a problem in the future.Income will go up some in the next 3 to 8 years with an additional, though not large, pension and SS if we'd take them at 62. It'll push the 12% income limit eventually.
I do not know if this even applies to you but thought I would mention it just in case.
Roth converted money becomes available without penalty when you reach age 59.5 or the 5 tax year clock mentioned above runs out. Whichever comes first.
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- Fierce Escape
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Re: 457 or Roth withdrawal?
All the replies are setting up a great planretiredjg wrote: ↑Thu May 06, 2021 2:54 pmThere is no limit of $14k. You can convert however much you want, staying under whatever limit you choose.Fierce Escape wrote: ↑Thu May 06, 2021 1:14 pm So I can convert up to $14k Roth each year to save the 3%, up to the current $107k break (this account is only in my name of that affects the conversion dollars)?
If you have a large tax-deferred account, you might delay both the pension and SS if you can and do Roth conversions on the large tax-deferred account now. This will reduce the likelihood that your RMDs will become a problem in the future.Income will go up some in the next 3 to 8 years with an additional, though not large, pension and SS if we'd take them at 62. It'll push the 12% income limit eventually.
I do not know if this even applies to you but thought I would mention it just in case.
Roth converted money becomes available without penalty when you reach age 59.5 or the 5 tax year clock mentioned above runs out. Whichever comes first.
Retiredjg, yes definitely applies, had not thought of that. Just looked at taxes for next year, I'm right at the 12% break, next year may have $8k under it to convert to Roth.
It seems if we are living and can travel well with half our income, we should convert up to and probably over the $107k, and delay the second pension and SS..
My tax rate bracket range changed last year when I got married. So if it's lower percent based on tax range now than when I invested in tax deferred when I filed single, it'd be beneficial to convert some extra now even at the 22%?
My effective/average tax rate when single was up to 22%, last year as MFJ was 15%, next year 12%.
Re: 457 or Roth withdrawal?
Fierce Escape, I looked at your earlier posts. Apparently you and your wife are newly retired, mid 50's, with a low cost of living. There is at least 1 pension, maybe two. And SS coming, maybe two. Apparently neither pension nor SS has started yet.
You have both a 457 and a Roth IRA. Don't know what your wife has. I believe you mentioned having enough income that the 457 may not ever be needed much.
Right now, you are in the 12% bracket with little to no headroom for Roth conversions. The question is whether you should do Roth conversions into the 22% bracket. Chances are you should, but there is not enough information.
If your joint tax-deferred accounts are small, conversions may not even be needed. But let's say you have $1 million in tax-deferral now and no plans to spend much of it before you reach 72. That $1 million could grow to almost $3 million assuming a 6% rate of return. Then RMDs hit and your first RMD will be $108k. As you can see, that extra $108k in addition to the pensions and SS will push you into a much higher tax bracket than now. In a case like that, doing Roth conversions at 22% now makes good sense. It especially makes good sense between now and 2026 when tax rates go back up.
Another way it makes sense is realizing that one of you will likely die before the other and the survivor's rate will almost automatically go up a bracket just by filing as a single.
On the other side of the coin, if you want to keep your income low now in order to get ACA subsidies, conversions may not make sense. However, I sense that you may have health coverage from previous employment and so this may not be an issue for you.
It is not necessary or even desirable to eliminate your tax-deferred accounts entirely. But you may want to keep that balance trimmed down so that it does not grow into some unwieldy amount in your old age. Or you may just want to let it go and just pay whatever taxes later if that becomes necessary. Just depends on what you and your wife want.
There is information in the Wiki (link above) about Roth conversions. And numerous threads going all the time. It takes a little while to get a feel for it, but you have plenty of time to consider these decisions, even if you decide to start this year.
If you want to start a thread concerning whether you should do Roth conversions, consider using the format we use to help people with their portfolio questions (link at bottom of this message). For that question, we do not need to know what your actual investments are if you wish to leave that part out. However, the size and types of accounts is important.
One thing I did notice from an earlier post. You said you rolled much of your 457 into a Vanguard account. If you mean you rolled it into an IRA, you no longer have the ability to tap that money penalty free before age 59.5. I hope that is not an issue.
You have both a 457 and a Roth IRA. Don't know what your wife has. I believe you mentioned having enough income that the 457 may not ever be needed much.
Right now, you are in the 12% bracket with little to no headroom for Roth conversions. The question is whether you should do Roth conversions into the 22% bracket. Chances are you should, but there is not enough information.
If your joint tax-deferred accounts are small, conversions may not even be needed. But let's say you have $1 million in tax-deferral now and no plans to spend much of it before you reach 72. That $1 million could grow to almost $3 million assuming a 6% rate of return. Then RMDs hit and your first RMD will be $108k. As you can see, that extra $108k in addition to the pensions and SS will push you into a much higher tax bracket than now. In a case like that, doing Roth conversions at 22% now makes good sense. It especially makes good sense between now and 2026 when tax rates go back up.
Another way it makes sense is realizing that one of you will likely die before the other and the survivor's rate will almost automatically go up a bracket just by filing as a single.
On the other side of the coin, if you want to keep your income low now in order to get ACA subsidies, conversions may not make sense. However, I sense that you may have health coverage from previous employment and so this may not be an issue for you.
It is not necessary or even desirable to eliminate your tax-deferred accounts entirely. But you may want to keep that balance trimmed down so that it does not grow into some unwieldy amount in your old age. Or you may just want to let it go and just pay whatever taxes later if that becomes necessary. Just depends on what you and your wife want.
There is information in the Wiki (link above) about Roth conversions. And numerous threads going all the time. It takes a little while to get a feel for it, but you have plenty of time to consider these decisions, even if you decide to start this year.
If you want to start a thread concerning whether you should do Roth conversions, consider using the format we use to help people with their portfolio questions (link at bottom of this message). For that question, we do not need to know what your actual investments are if you wish to leave that part out. However, the size and types of accounts is important.
One thing I did notice from an earlier post. You said you rolled much of your 457 into a Vanguard account. If you mean you rolled it into an IRA, you no longer have the ability to tap that money penalty free before age 59.5. I hope that is not an issue.
Link to Asking Portfolio Questions
- Fierce Escape
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- Joined: Wed Apr 21, 2021 3:20 pm
- Location: Illinois
Re: 457 or Roth withdrawal?
Deleted last post, will start new thread according to financial help format. I've read the boglewiki and may try to use the spreadsheet calcs also, if the old laptop supports that software.