HI Richard. Sounds like you don't necessarily need these unexpected taxable payouts to fund your living expenses between 55 and 65, so I would also consider putting the proceeds into Exchange Traded Funds (ETFs). They are more tax-efficient than equity mutual funds. Retiring at 55 means you have a long retirement ahead of you and you will want to stay ahead of inflation, so equities may be more appropriate than a muni bond fund. If you do need some income from this bucket of money, focus your research on dividend paying ETFs.
Hi travel man. Where are we headed next? Gettysburg for me. Yes, assuming the business income ceases at retirement, you could omit those tax payments from retirement expenditures. Same goes for your wife, if her income cease at retirement, her tax payment become less interesting for your retirement expenditures. You may want to include a tax "expense" for whatever retirement income sources you'll be using to pay your various other expenses. I hope retirement is well traveled!
Trying again! Hi Cecil - Unless your mortgage is at a higher rate than normal, you probably want to sock away what you can for retirement, including maxing out your Roth IRA. Once you stop working you won't be able to make Roth IRA contributions AND you will need to live off what you've saved. Your mortgage interest is tax-deductible, so chances are you could make more over time in the equity markets than what you would save by making extra mortgage payments.
Setu: Good question. This answer may be dependent upon your current marginal rate and what you expect your own marginal rate in the future will be. Not only that but you would ideally want to know what or how Congress may change the tax code. The benefit to the 401k is that you get the current year deferral (good thing) and you may be able to withdraw at a lower future tax bracket (also good). However, the 401k is subject to Required Minimum withdrawals. The Roth IRA is not subject to the RMD rules which may people like. I like the approach of having a mix of pre-taxed dollars and post-tax dollars during retirement and would thus recommend a mix.
HI Chris - It depends on your current tax bracket. If you think you are going to be in a lower tax bracket in retirement and you are paying a lot in taxes now, you might want to take advantage of the pre-tax deductions of a regular 401k. If you think your taxes might be the same or higher by the time you retire, using the tax-free Roth 401k will make more sense. Of course, ideally over time it's good to have both, so splitting your contribution will start to build flexibility in withdrawal strategies in retirement.
That is a great question, Chris. I like to see tax diversification when it comes to this decision. In other words, a little of both tends to be helpful. I'd lean toward the ROTH, given your age, though your tax circumstance should impact the ultimate decision. It's not much fun to make a ROTH contribution into a higher marginal tax rate. An accountant can provide clarity on this point. Whatever you do, pick up any employer match! Best to you..
Here's a question from Tom:
I would like to set up a Roth IRA but struggling with what mutual funds to go with through say like Vanguard or Fidelity or TIAA etc. I am 50 and can contribute the max per year at this time. Any suggestions and also I have a 457 from a previous employer that I could roll over. It has about 16K in it. Am I able to roll that whole amount over and still contribute the maximum amount in one year? Thanks
@Chris -- Great answers. I've seen situations where people have ONLY deferred accounts from which to draw in retirement and every dollar is taxable. They have no flexibility in pulling funds from various accounts (pre-tax, post-tax)
Hi Clifton. You're correct that the Roth TSP or traditional TSP depends on your tax bracket now vs. your tax bracket later. To figure your tax bracket now, look at your 2013 tax return line 43 of your 1040. Taxable income on line 43 is used to figure your tax bracket. For 2014, if your taxable income is equal or less than $36,900 single or $73,800 married, you are in the 15% tax bracket. If your taxable income is below $89,350 single or $148,850 married, you are in the 25% tax bracket. My rule of thumb is if you are in the 15% tax bracket, use the Roth TSP. If you are higher than the 25% tax bracket, use the traditional TSP. If you are in the 25% tax bracket, you can do either. Given your age, I like the idea of making Roth contributions now since your income will likely go up during your career. As your income increases and you can use more tax deductions, switch back to the traditional contributions.
Hi Richard! Lea Anne answered your question below. Here's what she had to say:
HI Richard. Sounds like you don't necessarily need these unexpected taxable payouts to fund your living expenses between 55 and 65, so I would also consider putting the proceeds into Exchange Traded Funds (ETFs). They are more tax-efficient than equity mutual funds. Retiring at 55 means you have a long retirement ahead of you and you will want to stay ahead of inflation, so equities may be more appropriate than a muni bond fund. If you do need some income from this bucket of money, focus your research on dividend paying ETFs.
Tom: You can typically set up a Rorth IRA directly with the custodian. I would recommend using one with a wide range of mutual funds at low cost. Vanguard will be an excellent choice and is well known in the market place for their low cost and range of choices. I recommend index funds to capture market expsosure inexpensively.
Tom: With regard to the 457, if you are eligible to roll that over into your own IRA then great. This rollover does not count against your annual maximum contribution limits, so you can still make those contributions.
Thank you for your question, Clifton!
Here's a question we got from a reader:
I need to take my first RMD from my IRA this year. My husband started taking his several years ago. Can we add up our totals and then take a single RMD from one account?
Hi reader! Unfortunately, you cannot aggregate your IRA RMDs between you and your husband. If you, yourself, have 4 IRAs you can aggegrate the total RMDs amongst those four and take the withdrawal from one IRA.
Hi Tom. Since Roth IRAs grow tax free, I like to hold the more aggressive part of the portfolio in the Roth. Doing so should help the tax free part of your portfolio expand. To keep the account aggressive yet diversified, you could use an all-in-one fund from Fidelity (search for Fidelity Asset Manager), Vanguard (search for LifeStrategy), or build your own from Kiplinger's 25 favorites. To answer your second question, a rollover does not count toward your contribution, so you can still make your full contribution even if you roll your 457 funds. However, if you roll before tax dollars from a 457 to a Roth IRA you will owe income tax on the conversion. If you're planning on doing a rollover, you could roll to a traditional IRA instead to continue deferring the tax on the 457.
EKP: It sounds like your immediate retirement expenses are well in hand. Congratulations! If you intend to leave an inheritance to those you cherish, you may be able to consider investing those long-term dollars more aggressively. Equities come to mind first. Beyond that, you have considerable flexibility.
EKP: The extent of your flexibility may even include gifting. It's fun to see the dollars used, and it can be informative as to how remaining dollars may be used...
Thanks for the questions everyone, and keep them coming!
Mike and David, you are on deck!
Hi jhart. You can withdraw the converted ROTH next year. You'll owe tax and penalty on earnings between now and then. Each conversion has its own 5 year wait.
J Hart: RE: Roth IRA conversion. If there are taxes owed on the conversion, I recommend using outside funds to pay for the conversion. Also, you'll want to be careful about the conversion amount to stay within low tax brackets and if you are collecting social security you may be subjecting more of that benefit to taxation.
J Hart: The answer is No you cannot both collect on eachother.
I'm 38 y.o., single, healthy, no children. My portfolio is $400K, split 70% stocks, 25% bonds, 5% cash. Foreign makes up 25% of stocks and bonds each. My [lofty] goal in 12 years is to pay off my mortgage and work part-time to cover my living expenses. How should my portfolio allocation change as I get closer to my goal?
HI Richard. Sounds like you don't necessarily need these unexpected taxable payouts to fund your living expenses between 55 and 65, so I would also consider putting the proceeds into Exchange Traded Funds (ETFs). They are more tax-efficient than equity mutual funds. Retiring at 55 means you have a long retirement ahead of you and you will want to stay ahead of inflation, so equities may be more appropriate than a muni bond fund. If you do need some income from this bucket of money, focus your research on dividend paying ETFs.
Hi D. You still need to take required minimum distributions (RMD) starting at age 70 1/2 even if you take withdrawals before then. You can take more than the RMD, the RMD is simply the minimum you must take. Your RMD is calculated each year based on your age and the balance in your account on 12/31 of the prior year. Whoever holds your account(s) can do the calculation for you. Next, you can take the sum of your RMDs from one account, two accounts, or split it among all your accounts. You aren't required to take the exact RMD from each respective account. As for finding an advisor, check out Kiplinger's article, "6 Steps to Finding a Great Financial Advisor"
Hi travel man. Where are we headed next? Gettysburg for me. Yes, assuming the business income ceases at retirement, you could omit those tax payments from retirement expenditures. Same goes for your wife, if her income cease at retirement, her tax payment become less interesting for your retirement expenditures. You may want to include a tax "expense" for whatever retirement income sources you'll be using to pay your various other expenses. I hope retirement is well traveled!
Setu: Good question. This answer may be dependent upon your current marginal rate and what you expect your own marginal rate in the future will be. Not only that but you would ideally want to know what or how Congress may change the tax code. The benefit to the 401k is that you get the current year deferral (good thing) and you may be able to withdraw at a lower future tax bracket (also good). However, the 401k is subject to Required Minimum withdrawals. The Roth IRA is not subject to the RMD rules which may people like. I like the approach of having a mix of pre-taxed dollars and post-tax dollars during retirement and would thus recommend a mix.
Tom, I'd be remiss if I didn't point you to the Kip 25 -- our favorite no-load funds available to new investors.
