However, municipal bonds whose interest is exempt from state and federal income tax do have lower interest rates than taxable bonds.
We are retired (well my husband is - I have a very low income part time job). Our financial planning is moving from retirement planning to estate planning. Having so much money in 401 K and IRA accounts is an issue for us. We donāt want to get taxed highly when we do the required distributions, but worse we donāt want to saddle our daughter (only heir) with a huge tax burden should she inherit our IRA/401K money.
1 Like
If she inherits that money and has to pay income taxes on it, then it is still better for her than if there is no money, right? (The income taxes should be significantly less than the value of the accounts.)
5 Likes
Different discussions but for high income people, muni yields typically trump taxable yields when factoring in tax free status. If youāre in a tax income state and buy munis from that state or US territory, your tax equivalent returns are even greater.
As an example, today you can get 4% paper, highly rated and insured, at 95-ish. So a return greater than 4%. Higher rated but uninsured fir high 80s to low 90s.
The I bonds - taxable - all the rage of the last few years - are 4.3%. CDs also taxable - look to be a tad over 5% today with shorter duration which may or may not be good.
Munis are the investment of the wealthy. Whether it be that slime Madoff or ray kroc back in the day and the super wealthy today.
But thatās a different thread to start.
This was the question I posed back on the thread this one spun from.
At what marginal Fed + state tax rate does Roth 401K no longer make sense? I do not know if my thinking is sound, but suggested to my son he should opt for the Roth 401K at 24% Fed & 5% state, especially assuming we see the 24% reset to 28% at the end of '25. The next bracket at 32/33% should have him pivot to 401K.
It is a difficult question of balancing our investment withdrawals over the course of the rest of our lives. What funds do we use and when do we use them - our IRA/401K vs non-retirement investments?
Yes, it will be nice to leave money to my heir, but will it be better to leave her money that has already been taxed or not?
1 Like
Most experts say the youth should have a Roth because they assume sue to the high national debt rates have to be higher later. I donāt buy that.
A lot depends on how they are invested.
I am conservative. Hence the munis. Most experts advise the young to be in equities for greater gains.
The experts make sense but I believe between my pensions and munis, Iāll have enough. But at 70.5 Iāll have to draw down Iras and 401ks so maybe my income will be in a high bracket ?
Most today donāt have pensions but a few of my sonās, including one he accepted have defined contribution in addition to 401k match.
I donāt know the answer to your question but I personally donāt believe rates will trend high long term. If/when they do and the economy stalls, the next person will reduce.
Basically one needs to be Nostradamus to answer this.
But the experts uniformally say to go Roth as had other posters Iāve read on here.
Itās really a question of not current rates but rates when your son retires.
The Roth doesnāt give you that deferral today but itāll pay off in 40 years.
My son will revisit in 6 mos. He did 10%. His company match is 5% at 100% but he wanted to put more away.
But he knows income this year will be light as itās half a year so he didnāt feel like heās losing much doing a Roth. I could see him next year contributing to both.
Iām personally not sure thereās a right answer because I donāt know how someone will find their income when they retire.
2 Likes
May be worth hiring a fee planner for an hour. Or I bet on line youāll find articles.
Actually, you have until after 73 to start withdrawing, or possibly later, depending on your current age. Secure 2.0 changes.
From a Fidelity page:
āThe age at which owners of retirement accounts must start taking RMDs will increase to 73, starting January 1, 2023. The current age to begin taking RMDs is 72, so individuals will have an additional year to delay taking a mandatory withdrawal of deferred savings from their retirement accounts. Two important things to think about: If you turned 72 in 2022 or earlier, you will need to continue taking RMDs as scheduled. If youāre turning 72 in 2023 and have already scheduled your withdrawal, you may want to consider updating your withdrawal plan. Good to know: SECURE 2.0 also pushes the age at which RMDs must start to 75 starting in 2033.ā
I donāt know how to quote my own prior comments (Fail!) so here is what I wrote in the Enough to Retire thread a few days ago.
"When discussing this with my son, I just assumed $22K contribution/year for 40 years and compounding growth rates ranging from 4% to 7%. The 401K contribution limit will most likely increase during this 40 year period , but assuming it remains constant, the account balance at 65 could range from more than $2 million to more $4.6 million. RMD could be nearly $200K at age 75.
I am guessing that the RMD table will change as the required RMD age ticks up through 2033.
I also assumed no employer match, just to keep things simple.
Again, so many assumptions. I am not firm in my belief of fully funding the Roth 401Kājust laying out the inputs I considered and looking for discussion and/or someone to poke holes in my theorizing!
He is 24 with many years of work ahead of him. At the moment, he does not have any use for the money, but would he be better off using the tax savings of 401K contributions and investing in a brokerage account and paying a 15% LTCG rate? He has no interest in actively managing investments so I donāt think he would be able to take advantage of capital gains.
I welcome any feedback anyone has."
1 Like
As with so much of thisā¦a function of unknown factors. Your tax rate at your withdrawal ages vs your daughterās tax rate during the ten years she will have to take the money out of the inherited IRA. Bigger unknown: How long will each of you live? Once the first spouse dies, the RMDs remain the same for the remaining spouse but now taxed at single rate instead of MFJ.
I donāt have an answer to any of this!
2 Likes
When we got married, DH was still a college student. I was working in the public schools. It was a miracle we could pay our day to day billsā¦never mind save for a down payment on a house. But we managed to scrounge enough to buy our first home less than a year after DH got his bachelors. But with thatā¦we had a mortgage payment to make that was at the upper limit of what we could afford. We made it work! Our interest rate in that mortgage was 12%ā¦no kidding.
Anywayā¦about two years later, we felt we both had sufficient income to contribute to our tax deferred retirement accountsā¦and we contributed the maximum. On the advice of two financial planners, we did the maximum contributionsā¦and did not start college savings for our kids. Our incomes were such that we were able to pay for college out of current earnings. If needed, we could have reduced our retirement contributionsā¦but we didnāt have to do that.
Soā¦I guess we saved for the house first, and then did the retirement savings. Yes, this meant that we deferred savings for retirement for a few years. Except I did contribute to my defined pension plan each pay period. All the time. My DHs company at the time didnāt have a 401K match. But he still contributed when the time came.
We are retiredā¦and we are in good shape, we think (and so does our financial planner).
I think this is a different strokes for different folks thing. Some folks feel saving for a down payment should come first, and some donāt. We wanted to be home owners asapā¦.and we donāt regret our decision.
6 Likes
Yep, this thread shows just how complicated this can all be. You canāt predict anything.
2 Likes
There isnāt a simple rule such as at a tax rate of >x% choose traditional and at tax rate of <x% choose Roth because the calculation depends on other factors. The relative tax rate between when you are retired is particularly important, rather than just the tax rate in an absolute sense. Also relevant is the number of years to retirement and expected return on investments. Some example calculations are below:
40 Years from Retirement at 8% Return
Current Tax Rate = 25%, Choose traditional, if retirement tax rate is <= 15%
5 Years from Retirement at 6% Return
Current Tax Rate = 25%, Choose traditional, if retirement tax rate is < 25%
Is 22k a year contribution realistic?
At a certain income, you can only do 8%. If youāre a top 20% of company wage earner, this rule limits you.
I had this one year when I was young and at my current company. Today I canāt even put close to that because if this rule. Well maybe if you count match I guess I do.
You can contribute >$22k per year to 401k regardless of your income level. That >$22k will obviously be a different percentage for different income levels.
2 Likes
I forgot about that aspect. Not an issue at his current employer, but impossible to know where he will be in the future.
Difficult to imagine retirement tax rate being that low if earnings are high throughout working years, but I freely admit that I have no guarantee they will remain this high. Also, possibly MFJ rates during retirement vs single rates today.
I think he will pivot to 401K once he trips the next bracket, but in the meantime, I hope I have not provided faulty advice.
The new FHA government-insured mortgage rules favor higher downpayments relative to high FICO scores. There were complaints in the press that high FICO scores were being punished, but for downpayments of 30% and maybe 25%, rates were actually lowered.
Iāll have to look. Iām capped at 8% because of that rule I posted. Perhaps you can via a Roth but I donāt believe my company offers a Roth yet.
I put most my excess income into munis.I dabble in sticks too. Maybe a 90%10% ratio on non retirement income.
Iām not sure I follow. The link mentions a possible limit on the 401k employer matching for high income persons, but not on the $22,500 base.
Edit ā I think you may be referring to special provisions to avoid the 401k plan failing the non-discrimination test. That could limit maximum contribution below $22.5k. Thatās not a given for highly compensated persons. It depends on the specific company and how not highly compensated persons contribute to 401k at that company.
3 Likes