Should we spend down Taxable to max. Tax-deferred accounts?

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Topic Author
L82GAME
Posts: 616
Joined: Sat Dec 07, 2019 8:29 am

Should we spend down Taxable to max. Tax-deferred accounts?

Post by L82GAME »

Em. Funds/Cash
-4 mos. among 1% credit union checking account, and CDs with Discover Bank ranging from 1.8% to 2.75%

Debt
-Only debt is a mortgage with ~47% equity, 11 years into 30 year mortgage @ 2.875. Plan to payoff prior to retirement.

Tax Filing Status
-Married Filing Jointly, one dependent

Marginal Tax Rate (current)
-12% Federal, 6% State

Sate of Residence
-VT

Ages
-Self 49
-Spouse 56
-Child 14

Desired AA
-Blend of 65 Eq. & 35 Bonds/Cash
-~20% of equites are international
-Total retirement portfolio is mid-six figures inclusive of cash (excludes 529).

Current Retirement Assets
Taxable
-25% of portfolio
--Of this amount:
---80% Vanguard Total Stock Market Index Fund Admiral (VTSAX) (.04%)
---20% cash and CDs (see above)

My 457
-16% of portfolio
--100% Vanguard Institutional 500 Index (VINIX) (.035%)
-No employer match, management fee of .03%

My Pension [informational only, and not included in total retirement portfolio data herein]
-Current cash value of high-five figures;
-12 years of creditable service
-At 57 yo., I will have 20 years of creditable service providing ~40% of avg. of three highest years of salary at 65 yo., as well as Medicare wraparound health ins. 80% subsidized by state employer.

My Trad. IRA at Vanguard
-16% of portfolio
--58% Vanguard Total Int'l Stock Index Fund Admiral (VTIAX) (.11%)
--42% Vanguard Total Bond Market Index Fund Admiral (VBTLX) (.05%)

My Roth at Vanguard
-9% of portfolio
--38% Vanguard Total Int'l Stock Index Fund Admiral (VTIAX) (.11%)
--62% Vanguard Total Stock Market Index Fund Admiral (VTSAX) (.04%)

Spouse's 403b
-0% of portfolio (will begin making contributions in CY 2022)
--Plan for 80% Vanguard Institutional 500 Index (VINIX) (.035%)
--Plan for 20% Vanguard Small Cap Value Index I (VISVX) (.19%)
--(100% employer match up to 3% of employee contributions, and 3% of salary employer contribution)
--The plan administrator charges .11%

Spouse's Trad. IRA at Vanguard
-24% of portfolio
--100% Vanguard Total Bond Market Index Fund Admiral (VBTLX) (.05%)

Spouse's Roth IRA at Vanguard
-10% of portfolio
--100% Vanguard Total Stock Market Index Fund Admiral (VTSAX) (.04%)

Contributions
New Annual Contributions
Current
-$19,500 my 457 (no employer match)
-$7,000 to my pension (I'm providing this as contextual info.)

Proposed Contributions eff. 1/1/2022
-$27,000 my 457 (no employer match)
-$7,000 to my pension (I'm providing this as contextual info.)
-$26,500 to spouse's 403b (inclusive of 100% employer match up to 3% of employee contributions, and 3% of salary employer contribution)
-Will make $14,000 total Roth IRA contributions probably as transfers from Taxable Brokerage (we will be in 0% capital gains federal tax bracket)

Available Funds
I am not interested in moving away from Vanguard's low-cost broad-based index funds comprising a three fund portfolio.

Questions
1. Should we spend down Taxable/Cash to max. out my wife’s 403b? We may qualify for Saver’s Tax Credit.

2. I welcome any other observations.

Thank you for your consideration.
"Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand…” - Thoreau
Dottie57
Posts: 12379
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Location: Earth Northern Hemisphere

Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by Dottie57 »

I think you probably won’t be in 0% capital gains since your income plus capital gains determines CG bracket.

I used Intuit Taxcaster to input 100k W2 income for MFJ and came to Amt A.
Then added 10k capital gains and came up with Amt B. Amt B > Amt A. So there is some tax on Capital Gains.


Run your numbers through tax software to see impact.
retire2022
Posts: 3286
Joined: Tue Oct 02, 2018 6:10 pm
Location: NYC

Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by retire2022 »

L82GAME wrote: Fri Nov 26, 2021 1:35 pm Em. Funds/Cash
-4 mos. among 1% credit union checking account, and CDs with Discover Bank ranging from 1.8% to 2.75%


Current Retirement Assets
Taxable
-25% of portfolio
--Of this amount:
---80% Vanguard Total Stock Market Index Fund Admiral (VTSAX) (.04%)
---20% cash and CDs (see above)



Proposed Contributions eff. 1/1/2022
-$27,000 my 457 (no employer match)
-$7,000 to my pension (I'm providing this as contextual info.)
-$26,500 to spouse's 403b (inclusive of 100% employer match up to 3% of employee contributions, and 3% of salary employer contribution)
-Will make $14,000 total Roth IRA contributions probably as transfers from Taxable Brokerage (we will be in 0% capital gains federal tax bracket)

Available Funds
I am not interested in moving away from Vanguard's low-cost broad-based index funds comprising a three fund portfolio.

Questions
1. Should we spend down Taxable/Cash to max. out my wife’s 403b? We may qualify for Saver’s Tax Credit.

2. I welcome any other observations.

Thank you for your consideration.

L82GAME

I agree with Dottie57 that you should double check capital gains, here is Glen Reeves free 1040 which uses Excel file, you can use Google Sheets to open them

https://sites.google.com/view/incometaxspreadsheet/home

Generally, I would advise selling any equities in taxable until you need it, that said when your family would apply for financial aide, (when your child is a senior in HS) the taxable assets could be used against you, ie that is they expect one to spend down family resources to pay for student loans or tuition.

How long had you held the VTSAX in taxable?

I am in favor of rebalancing with new cash, and suggest if use cash in taxable or some of your biweekly salary to fund new positions if you are able to.

Once you fund your spouse's 403b, then refill your cash position in taxable for the year.
Topic Author
L82GAME
Posts: 616
Joined: Sat Dec 07, 2019 8:29 am

Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by L82GAME »

Thank you Dottie57 and Retire2022:

Using the following “back of the envelope” calculator, I estimate ~$48k in taxable income assuming max. tax deferred ret. contributions, FSA contributions, Pension contributions, and health ins. premiums:

http://www.moneychimp.com/features/tax_calculator.htm

Almost all gains in Taxable are LTCG.
"Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand…” - Thoreau
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retiredjg
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Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by retiredjg »

I suggest that you do not spend down taxable to max out your tax deferred accounts. Not in the 12% bracket.

Deferring at 12% is not much of a deal, especially since you are likely to pay more than 12% in retirement to take that money out and spend it.

What I suggest you do is put enough in tax-deferred accounts to get into the 12% bracket and then put all the rest of your savings into Roth accounts. Getting money into Roth at 12% is a very good deal.

A possible exception might be in order to get the saver's credit or even the earned income credit, but that would depend on how much the credits are. In order to figure this out, you need to look at your exact income numbers and probably do some comparison tax returns.
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by KlangFool »

retiredjg wrote: Fri Nov 26, 2021 4:54 pm I suggest that you do not spend down taxable to max out your tax deferred accounts. Not in the 12% bracket.

Deferring at 12% is not much of a deal, especially since you are likely to pay more than 12% in retirement to take that money out and spend it.

What I suggest you do is put enough in tax-deferred accounts to get into the 12% bracket and then put all the rest of your savings into Roth accounts. Getting money into Roth at 12% is a very good deal.

A possible exception might be in order to get the saver's credit or even the earned income credit, but that would depend on how much the credits are. In order to figure this out, you need to look at your exact income numbers and probably do some comparison tax returns.
retiredjg ,

+1,000.

KlangFool
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Topic Author
L82GAME
Posts: 616
Joined: Sat Dec 07, 2019 8:29 am

Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by L82GAME »

Thank you Retiredjg and Klangfool. Understood and appreciate your logic.
"Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand…” - Thoreau
terran
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Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by terran »

Yeah, with that pension I'm not sure I'd go nuts with the tax deferred investing. I'd definitely sell taxable to get it into Roth though, so max out your Roth IRAs every year and if you wife's 403(b) and/or your 457(b) have Roth options consider that. Definitely contribute enough to the 403(b) to get the full match. If you have any traditional IRAs or old employer plans you consider contributing to traditional 403(b)/457(b) and convert traditional IRA to Roth for a $0 net tax effect while getting more into Roth even if they 403(b)/457(b) don't have that option.
Topic Author
L82GAME
Posts: 616
Joined: Sat Dec 07, 2019 8:29 am

Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by L82GAME »

Thank you, terran. I need to run a few comparative tax projections per retiredjg’s comment.
"Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand…” - Thoreau
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retiredjg
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Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by retiredjg »

I looked at this again today. Some things that come to mind.

You will need (or at least it will be nice) to defer enough income to get total taxable income under $83,350 (2022 number) in order to get the 0% rate on LTCG.

Tax rates are scheduled to go back up in 2026 when your 12% bracket will become 15%. We don't know what is going to happen, but with your pension it seems very unlikely to me you will be in a tax bracket that is lower than 15% (or same neighborhood) in retirement. It makes no sense to defer taxes at 12% and then pay 15% later on. That is exactly backwards.

It does make a lot of sense to move money from taxable to Roth IRA, especially if you can do that with no capital gains and while staying in the 12% bracket.

The saver's credit and the earned income credit should be considered. I think even with taxable income at $48kish (which I understand is as low as you will get) the EIC is minimal to non-existent. I think the saver's credit, even with two of you, is going to be small. I'd be intereed in knowing what you find out about these.
ryman554
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Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by ryman554 »

retiredjg wrote: Sat Nov 27, 2021 12:18 pm I looked at this again today. Some things that come to mind.

You will need (or at least it will be nice) to defer enough income to get total taxable income under $83,350 (2022 number) in order to get the 0% rate on LTCG.
For the OP benefit, does the above number include the $14k (or whatever the OP is wanting to) convert into the roth from taxable? I think it's important to reiterate to the OP that the total taxable income needs to include any realized gains (not basis) from selling $$ in taxable accounts.

To illustrate, lets pretend the limit for 0% LTCG is $100k of taxable income. The OP has $90k of other income, and wants to sell $20k of stock.

If the $20k of stock includes $5k of gains, then the OP total taxable income is $95k, and pays $0 tax due to the sales of stock (0% LTCG)
If the $20k of stock includes $15k of gains, then the OP total taxable income is $105k, and pays 12% tax on $5k due to the sales of stock (0% LTCG on the first 10k, and 12% on the next 5k.)

So, it's kind of an iterative calculation.
Topic Author
L82GAME
Posts: 616
Joined: Sat Dec 07, 2019 8:29 am

Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by L82GAME »

retiredjg wrote: Sat Nov 27, 2021 12:18 pm Tax rates are scheduled to go back up in 2026 when your 12% bracket will become 15%. We don't know what is going to happen, but with your pension it seems very unlikely to me you will be in a tax bracket that is lower than 15% (or same neighborhood) in retirement. It makes no sense to defer taxes at 12% and then pay 15% later on. That is exactly backwards.

It does make a lot of sense to move money from taxable to Roth IRA, especially if you can do that with no capital gains and while staying in the 12% bracket.

The saver's credit and the earned income credit should be considered. I think even with taxable income at $48kish (which I understand is as low as you will get) the EIC is minimal to non-existent. I think the saver's credit, even with two of you, is going to be small. I'd be intereed in knowing what you find out about these.
Thank you, retiredjg. Per underlined and bold above, thank you and agreed. Being too aggressive in tax-deferred investments may be too clever by half.

Re: italics and underlined above, current law is all that we have to go on, and based on the expiration of current brackets in 2026, your point is very well taken. I will run more detailed numbers this weekend. I plan to give us enough margin via tax-deferred investments to clear the hurdle for moving $14k from Taxable to Roths to realize 0% LTCG tax.

Re: benefit of saver's credit; agreed that it would be minimal and therefore not likely worth the effort per underlined and bold point above. My back of the envelope calcs. show maybe eking out ~$600 in the savers credit, *but at the cost of avoiding 12% MTB now for 15% later (makes no sense). *EITC is non-existent; however, to the extent we may overshoot ~$83k for 0% LTCG, we could tweak deductions via deductible IRA contributions due to low MAGI, so feeling solid about Roth contributions from Taxable with 0% tax implications.

*Subsequently edited to provide additional info.
Last edited by L82GAME on Sat Nov 27, 2021 8:16 pm, edited 1 time in total.
"Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand…” - Thoreau
Topic Author
L82GAME
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Joined: Sat Dec 07, 2019 8:29 am

Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by L82GAME »

ryman554 wrote: Sat Nov 27, 2021 1:25 pm I think it's important to reiterate to the OP that the total taxable income needs to include any realized gains (not basis) from selling $$ in taxable accounts.
ryman554, thank you. Yes, I'm aware of the CG implications, but I appreciate your attention to this detail nonetheless and ensuring that I, too, am aware.
"Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand…” - Thoreau
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retiredjg
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Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by retiredjg »

L82GAME wrote: Sat Nov 27, 2021 4:21 pm ...however, to the extent we may overshoot ~$83k for 0% LTCG, we could tweak deductions via deductible IRA contributions due to low MAGI, so feeling solid about Roth contributions from Taxable with 0% tax implications.
I think you are saying you would use deductible contributions to IRA in order to get under the limit. That does not sound like a great idea to me since that would decrease what you could put in Roth IRA.

Paying no LTCG tax would be nice, but it is not necessary for this to be a good idea.
Topic Author
L82GAME
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Re: Should we spend down Taxable to max. Tax-deferred accounts?

Post by L82GAME »

retiredjg wrote: Sun Nov 28, 2021 7:21 am That does not sound like a great idea to me since that would decrease what you could put in Roth IRA.
Thank you, retiredjg Re: $14k total contributions for MFJ across all IRAs. :oops:

We'll do out best to hit the ~$83k landing strip, and it'll be what it'll be.
"Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand…” - Thoreau
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