Defined Contributions

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Topic Author
value8888
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Joined: Sun Jan 23, 2022 3:33 pm

Defined Contributions

Post by value8888 »

2 kids preschool aged. 100% Equities. Debt free. Late starters so once we meet our number we will rebalance into more conservative portfolios.

We have access to:

403b we will max out for first time 2022 to age 65 with top ups.

457b we will contribute 10k and are starting in 2022 build up to max to age 65 with top ups.

Pension ~8% pay.

HSA we contribute to.

We have our Roth’s established and will contribute max.

Brokerage account: 100% Equities; 50% VTI 50% VXUS.

I am curious between a brokerage account that we already have or if we should start contributing to our works DC (defined contributions) after tax contributions?

We will work to max our both 403b and 457b since we will have to stay at our state job to gain our pensions.

529’s we front loaded and now contribute a few hundred dollars a month. 100% VTI.
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retiredjg
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Re: Defined Contributions

Post by retiredjg »

Welcome to the forum. :happy

If there will be two pensions, it may not be a good idea to max out both a tax-deferred 403b and a tax-deferred 457b. With two pensions, it is unlikely you will need to spend any or much money from your tax-deferred accounts and they may simply become a tax bomb in your late years.

Do you have Roth 403b or Roth 457available?

...or if we should start contributing to our works DC (defined contributions) after tax contributions?
Do you mean Roth? There is also something known as an after-tax contribution that is not Roth.
Topic Author
value8888
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Joined: Sun Jan 23, 2022 3:33 pm

Re: Defined Contributions

Post by value8888 »

No, its not a Roth we already have one of those.

When I googled it looks to be a 401a AFTER tax contributions. So my question is should we use our after tax money to use the 401a after tax or a brokerage account.

I think the biggest difference is gains are not taxed like they would be in a brokerage account.
Affable at 50
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Re: Defined Contributions

Post by Affable at 50 »

value8888 wrote: Sun Jan 23, 2022 11:16 pm No, its not a Roth we already have one of those.

When I googled it looks to be a 401a AFTER tax contributions. So my question is should we use our after tax money to use the 401a after tax or a brokerage account.

I think the biggest difference is gains are not taxed like they would be in a brokerage account.
Making after tax contributions is not the step that creates the advantage of having the funds in a 401a. The advantage comes from being able to convert the after tax account to a Roth 401k or, for plans that allow in service withdrawals, rolling the funds to a Roth IRA. Either of these methods allow an investor to significantly increase the value of their tax advantaged Roth accounts.

If the funds stay in an after tax account, the gains are taxed as ordinary income, which makes this worse than a taxable brokerage, where realized gains are typically taxed at a preferential capital gain tax rate.
Topic Author
value8888
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Joined: Sun Jan 23, 2022 3:33 pm

Re: Defined Contributions

Post by value8888 »

Boom. Thank you. That is exactly the answer I was looking for, the account does allow for Roth roll overs so that is how we will utilize this account. If and when our salary's become too much to contribute to a Roth.
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Morgan22
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Re: Defined Contributions

Post by Morgan22 »

I would max out the 457b before the 403b since you can pull funds from the 457b without penalty before "retirement" age. That way, if you retire earlier than 59 1/2 you would have funds to pull from until you can tap into other retirement accounts. (Since you are saving so much now this may be a possibility for you.)

Of course there are ways to tap into other retirement accounts without penalty. But you can learn more about that if you are interested. :beer
Topic Author
value8888
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Re: Defined Contributions

Post by value8888 »

That is great info. I appreciate it.

My conundrum at this stage in my life is wondering what we are going to do with this money when we retire. Our pensions are going to cover our fixed expenses.
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retiredjg
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Re: Defined Contributions

Post by retiredjg »

value8888 wrote: Mon Jan 24, 2022 2:18 am That is great info. I appreciate it.

My conundrum at this stage in my life is wondering what we are going to do with this money when we retire. Our pensions are going to cover our fixed expenses.
In that case, it would be good to save something in tax-deferred accounts but perhaps not a great deal. What you don't want to do is put enough into your tax-deferred accounts that your RMDs are very large...pushing you into a higher tax bracket than now.

Obviously, what is "too much" in tax-deferred accounts varies for each situation. When you start saving, how much you save, how many years you save, when you retire, and how much you spend from the tax-deferred accounts in retirement all come into play. Also the number of years you are able to do Roth conversions of the tax-deferred accounts to Roth IRA at relatively low rates. And, of course, we have no idea what tax rates will be when you retire.

Not having any idea what will be optimal, I would suggest putting no more than half your savings into tax-deferred accounts. Put the other half into Roth 403b, Roth 457, Roth IRA, and a taxable account. And if you do you use an after-tax account, convert it to Roth.

As you get closer to retirement, it may become obvious that half and half is not the right number going forward. At that point, you can change to what seems better.
dbr
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Re: Defined Contributions

Post by dbr »

value8888 wrote: Mon Jan 24, 2022 2:18 am That is great info. I appreciate it.

My conundrum at this stage in my life is wondering what we are going to do with this money when we retire. Our pensions are going to cover our fixed expenses.
I would answer that in two pieces.

First, fixed expenses are not all your expenses. You should think what your retirement income is going to look like in total. You will need to plan for reserves and for contingencies and you should not assume your pensions are going to materialize as you think. For one thing pensions are contingent on actually staying employed for that pension. If you have already got the work in, then you can count up the income, pending the pension fund failing.

Second, if you are wealthy enough compared to the lifestyle you live, there are plenty of situations all over the world where people are in dire need of help. Donations are welcome.
Topic Author
value8888
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Joined: Sun Jan 23, 2022 3:33 pm

Re: Defined Contributions

Post by value8888 »

How about allocations?

The fund options:

US Equities Index EXP: 0.005%

US Small Cap Index EXP: 0.01%

US Real Estate EXP: 0.01%

International Equities Index: 0.01%

Emerging Markets: EXP 0.01

There are the funds we are interested in investing in. I don't think current allocation matters because with this exercise we are switching everything.

403b current balance = 85k
457b Zero balance.

Our idea is to put 100% US Equities index in the 403b maxing out every year and dispersing an allotment between the other funds in the 457b eventually building up to maxing both contributions.

or split up the 403 and 457 between us and international.

Thanks
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retiredjg
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Re: Defined Contributions

Post by retiredjg »

Value8888, you have good choices in your work plans.

I suggest that you should have some allocation to bonds, even if you feel like you are playing catch up.
aristotelian
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Re: Defined Contributions

Post by aristotelian »

value8888 wrote: Mon Jan 24, 2022 2:18 am That is great info. I appreciate it.

My conundrum at this stage in my life is wondering what we are going to do with this money when we retire. Our pensions are going to cover our fixed expenses.
You could consider retiring earlier using the 457 funds with no penalty.
Topic Author
value8888
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Joined: Sun Jan 23, 2022 3:33 pm

Re: Defined Contributions

Post by value8888 »

I would allocate to bonds but, my choices are limited to intermediate TIPS and shorter duration bonds.

So I looked in the target date fund allocations for bonds and the long duration bonds are in a fund I can not contribute to directly.

I crunched some number last night and it's looking like

403b 100% US equites index. Max contribution.

457b 25% international equites 25% emerging markets 25% US Small Cap 25% Real Estate. Will build up to max from zero balance.
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retiredjg
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Re: Defined Contributions

Post by retiredjg »

value8888 wrote: Sat Jan 29, 2022 12:25 pm I would allocate to bonds but, my choices are limited to intermediate TIPS and shorter duration bonds.

So I looked in the target date fund allocations for bonds and the long duration bonds are in a fund I can not contribute to directly.
It sounds like you would only consider a long term bond. I suggest you look for an intermediate term bond fund and/or a stable value fund, preferably in the tax-deferred accounts you have available.

I crunched some number last night and it's looking like

403b 100% US equites index. Max contribution.

457b 25% international equites 25% emerging markets 25% US Small Cap 25% Real Estate. Will build up to max from zero balance.
Are you looking for comments on this? I hope you don't get any because there is not enough information to comment.

Your portfolio should be considered as a whole, not by accounts. We know you have other accounts but don't know what is in all of them and we don't know the relative size of the accounts. We also know nothing about your age, the size of your retirement savings, or even your tax brackets. So any comment on what investments you should have would be made without adequate information.

I'm not sure you want help with this, but if you do, you should post all the information needed in the format we use to help people with their portfolio questions. You can find it in the link at the bottom of this message. It is some work but people tend to learn a lot about their own financial situations by doing it. The closer you follow the format, the easier it is to help.
Topic Author
value8888
Posts: 7
Joined: Sun Jan 23, 2022 3:33 pm

Re: Defined Contributions

Post by value8888 »

Got it. Thanks for all the info. I hope I can get all this together.
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