additional 6.5K catch-up contribution for 403B plan

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Topic Author
woodside
Posts: 161
Joined: Tue Apr 23, 2013 8:13 pm

additional 6.5K catch-up contribution for 403B plan

Post by woodside »

Hi,

Both my wife and I are 49 years old. We have already maximized the 403B plan and also back-door Roth. Should we put the additional 6.5K/each catch-up contribution for the next year when both of us are 50 next year?

We are living in the very high-cost living coast regions.
Age for both: 49
two kids: 16 and 10
403B: 1.2 Million, contribute 67K each year (20.5K/each person + employer)
Roth IRA: 400K, contribute 12K via backdoor each year, will contribute 14K next year.
Taxable: 450K, contribute 20K each year
529: 200K, contribute 15K each year
Mortgage: 600K at 3% from 2021
Tax bracket: 24% married filing jointly.
Overall asset allocation: 80/20 as of now, will gradually move to 70/30 in ten years (age 60).

No Roth 403b plan or mega backdoor Roth are at work. No pension from work. Wife plan to apply for social security at age 62 and Husband at age 70

Wife thinks about retiring at 60, Husband wants to hold on to the job until 65. We will plan to do Roth conversions (using the money from the taxable) starting from Age 60 and also after age 70 to keep the 403B around 1-2 Million to keep the tax brackets at 24% for now and also for the future.

For the next year when we reach age 50, we can keep the plan as it is. Or we can take advantage of the additional 6.5K/each catch-up contribution (13K in total)?

My initial analysis seems to indicate whether or not taking the additional 6.5K/each catch-up contribution doe not make much difference as it is a very small % of the overall 403B portfolio. Contributing additional 6.5K/each may reduce a little bit of tax depending on the tax rate of the later Roth conversion. Keeping the plan as it is will give more flexibility in the taxable account.

Any suggestions on this issue will be greatly appreciated. Thanks in advance.
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rob
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Re: additional 6.5K catch-up contribution for 403B plan

Post by rob »

I believe your allowed to add that in the year you turn 50... so might be this year depending on birthdays. IMO I would.
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Topic Author
woodside
Posts: 161
Joined: Tue Apr 23, 2013 8:13 pm

Re: additional 6.5K catch-up contribution for 403B plan

Post by woodside »

rob wrote: Sun Aug 14, 2022 8:13 pm I believe your allowed to add that in the year you turn 50... so might be this year depending on birthdays. IMO I would.
Thanks for your suggestion. My birthday has already passed. I will just need to wait four months to start the additional contribution if it is the plan.
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: additional 6.5K catch-up contribution for 403B plan

Post by lakpr »

woodside wrote: Sun Aug 14, 2022 8:25 pm
rob wrote: Sun Aug 14, 2022 8:13 pm I believe your allowed to add that in the year you turn 50... so might be this year depending on birthdays. IMO I would.
Thanks for your suggestion. My birthday has already passed. I will just need to wait four months to start the additional contribution if it is the plan.
You are allowed to contribute the maximum $27,000 to the plan, from January of the year you turn 50. So when you say "my birthday has already passed", was that your 49th birthday or 50th birthday? If it is the latter, you have 4 additional months to max out $27,000. If not, of course wait 4 more months for the next year.
Topic Author
woodside
Posts: 161
Joined: Tue Apr 23, 2013 8:13 pm

Re: additional 6.5K catch-up contribution for 403B plan

Post by woodside »

lakpr wrote: Mon Aug 15, 2022 7:05 am You are allowed to contribute the maximum $27,000 to the plan, from January of the year you turn 50. So when you say "my birthday has already passed", was that your 49th birthday or 50th birthday? If it is the latter, you have 4 additional months to max out $27,000. If not, of course wait 4 more months for the next year.
It's my 49th birthday that just passed.

I'd like to hear inputs/suggestions on the pros and cons of contributing to the maximum (27,000) or staying as is (20,500) for next year. During the time my kid is in college (in two years for my first kid), I will probably need to reduce the contributions of the 403B and also taxable account to cash flow part of the college expense (depending on the actual cost of the college and also the performance on the 529)
lakpr
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Re: additional 6.5K catch-up contribution for 403B plan

Post by lakpr »

woodside wrote: Mon Aug 15, 2022 8:13 am
lakpr wrote: Mon Aug 15, 2022 7:05 am You are allowed to contribute the maximum $27,000 to the plan, from January of the year you turn 50. So when you say "my birthday has already passed", was that your 49th birthday or 50th birthday? If it is the latter, you have 4 additional months to max out $27,000. If not, of course wait 4 more months for the next year.
It's my 49th birthday that just passed.

I'd like to hear inputs/suggestions on the pros and cons of contributing to the maximum (27,000) or staying as is (20,500) for next year. During the time my kid is in college (in two years for my first kid), I will probably need to reduce the contributions of the 403B and also taxable account to cash flow part of the college expense (depending on the actual cost of the college and also the performance on the 529)
My understanding is that FAFSA looks at only income that's net of the retirement plan contributions, so obviously making the full $27,000 contributions for the next year would improve the chances of aid for your kid. Since you said your kid is going to college in two years, and FAFSA looks at tax returns from two-years past ... the income for the next 4 years starting THIS year are crucial. Once your kid gets into the second semester of his/her junior year, the parent's income does not matter.

If your kid is going to attend a private school, then they do CSA and not FAFSA; that form adds back the retirement plan contributions to the income, expecting you to cut down on the retirement plan contributions and contribute to college expenses instead. In which case, whichever action you take now (contribute to retirement plan or not) does not matter.

In any case, since you are in the 24% tax bracket, it is unlikely that your kid will get any meaningful financial aid.

{ I am in the same boat, my kids are going to be juniors in high school this year, in 24% bracket, and expecting zero financial aid regardless; but I am choosing to max out the full $27k as pre-tax. My wife is also older than 50, she's also maxing out her pre-tax 403(b) }
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greg24
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Re: additional 6.5K catch-up contribution for 403B plan

Post by greg24 »

What are your state income taxes? Paying 24% federal plus possible state could be a high amount.

I'm in a similar boat, and we're in 24% federal with 8.5% state. It was a no-brainer for me to elect to do the extra contribution and avoid 32.5% taxation.
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CyclingDuo
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Re: additional 6.5K catch-up contribution for 403B plan

Post by CyclingDuo »

woodside wrote: Mon Aug 15, 2022 8:13 amI'd like to hear inputs/suggestions on the pros and cons of contributing to the maximum (27,000) or staying as is (20,500) for next year. During the time my kid is in college (in two years for my first kid), I will probably need to reduce the contributions of the 403B and also taxable account to cash flow part of the college expense (depending on the actual cost of the college and also the performance on the 529)
Therein may lie your answer. Jack it up for the next 2 years via the catch ups, then back off to cash flow the college. :beer

I wouldn't worry so much about what you said in your original post...

My initial analysis seems to indicate whether or not taking the additional 6.5K/each catch-up contribution doe not make much difference as it is a very small % of the overall 403B portfolio.

Obviously, as portfolio size increases contributions can start to seem like a small drop in an already pretty full bucket if we all only view it in terms of a percentage of the overall portfolio. Our strategy has been to ignore that view and keep on saving a certain amount in all of our accounts from income that we bring in while our human capital is still a productive thing.

That being said, we've been able to use the pre-tax with catch ups to keep our current taxes low, as well as mitigate taxes on LTCG/Qualified Dividends in the taxable account.

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel | "Pick a bushel, save a peck!" - Grandpa
Topic Author
woodside
Posts: 161
Joined: Tue Apr 23, 2013 8:13 pm

Re: additional 6.5K catch-up contribution for 403B plan

Post by woodside »

lakpr wrote: Mon Aug 15, 2022 8:23 am
In any case, since you are in the 24% tax bracket, it is unlikely that your kid will get any meaningful financial aid.

{ I am in the same boat, my kids are going to be juniors in high school this year, in 24% bracket, and expecting zero financial aid regardless; but I am choosing to max out the full $27k as pre-tax. My wife is also older than 50, she's also maxing out her pre-tax 403(b) }
I agree with you that financial aid is zero with the 24% tax bracket and the amount of asset (taxable account, 529, and also real estate equity). I tried the net price calculators to gauge this aspect for different colleges of interest and I came to this conclusion.


greg24 wrote: Mon Aug 15, 2022 8:31 am What are your state income taxes? Paying 24% federal plus possible state could be a high amount.

I'm in a similar boat, and we're in 24% federal with 8.5% state. It was a no-brainer for me to elect to do the extra contribution and avoid 32.5% taxation.
The state+city tax is brutal, about 10-11%.

CyclingDuo wrote: Mon Aug 15, 2022 8:35 am Therein may lie your answer. Jack it up for the next 2 years via the catch ups, then back off to cash flow the college. :beer

CyclingDuo
This is probably the best plan all things considered.
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