Investing for Retirement

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Smith Corks One
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Re: Investing for Retirement

Post by Smith Corks One »

Michael wrote:Your questions are out of my depth, but I'll take a shot at it. Converting a pre tax pension to a roth is going to incur a hefty tax hit. My gut says an IRA with the lowest distros as possible would be the most wealth building option assuming they don't buy terrible securities.

That said, I'm really not sure. Give me another 30 years. This is a great question for the bogleheads.org message board because they have so many retirees on there. I wouldn't be shocked if you search the forums you'd find threads on this very topic. Just keep in mind tax laws change so old threads might not be correct. Obviously, a professional tax lawyer is another great option, but that might be pricey.
Awesome, thanks for the reply. You're right, there were some relevant threads on bogleheads, so I've been reading up. Does seem like a traditional IRA with the lowest distributions might be the way to go. And I wonder, is there a way to re-invest those distributions in something like mutual funds or ETFs, or would those be taxed again? Which makes me wonder - if I'm contributing after-tax income to an IRA (the $5500 max, or whatever), am I taxed again on the whole sum when I take a distribution? Double-taxed wouldn't be very awesome.

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Re: Investing for Retirement

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Smith Corks One wrote:And I wonder, is there a way to re-invest those distributions in something like mutual funds or ETFs, or would those be taxed again?
Yes, you can put the distributions into any kind of mutual fund or ETF or bitcoin or whatever. The interest income and capital gains would be taxed when realized.
Which makes me wonder - if I'm contributing after-tax income to an IRA (the $5500 max, or whatever), am I taxed again on the whole sum when I take a distribution? Double-taxed wouldn't be very awesome.
If you contribute $5500 in after-tax income to your IRA, then you would have a basis for your IRA of $5500. Distributions from the $5500 basis are not taxed, but anything taken out of the IRA beyond the $5500 (i.e. from income on your basis) would be taxed as income. The allocation between "basis" and "income on your basis" makes this a bit more complicated, but the principle at work here is only gains are taxed, and they are only taxed when you make distributions from the IRA. You should look into either (a) tax-deductible contribution to an IRA, if your income level allows it, (b) a direct contribution to a Roth IRA, if your income level allows it, or (c) a backdoor conversion to a Roth IRA. Roth IRAs are nice, since generally income from a Roth IRA is tax-free. Bogleheads will have more on (c), if you google "backdoor Roth." Option (a) is common enough to show up in TurboTax and the like, but if you do (a), then your basis for your IRA is zero, and any distribution is taxed.

In general IRAs are tax deferral vehicles, where Roth IRAs are somewhat more than that IMHO.

I'm not a tax advisor, no fiduciary relationship, yadda yadda yadda.

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IMADreamer
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Re: Investing for Retirement

Post by IMADreamer »

As a testament to the power of interest over time my Mom retired on Wednesday and we've been working on getting everything set up for her. She never made more than about $15 a hour at any point in her life and she assumed she wouldn't have much in retirement other than social security. In fact she'd planned on getting a part time job to make ends meet. My Mom is weirdly insecure about herself even though she's pretty smart so she always has me or my Dad listen in on financial decisions. So after 40 years of working and just putting away whatever percentage she was putting away each check she goes "oh I won't have much at all." Welp turns out she has about 1.3 million put away. lol She didn't believe it and kept asking the guy if it was a mistake. He just laughed. She about crapped when I told her her safe withdraw rate was about 50k a year to which she said "that's more than I make working!"

So anyway, even if you don't make much, if you can manage to put away a little each check and invest it, it really does add up.

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Smith Corks One
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Re: Investing for Retirement

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greenback44 wrote:
Smith Corks One wrote:And I wonder, is there a way to re-invest those distributions in something like mutual funds or ETFs, or would those be taxed again?
Yes, you can put the distributions into any kind of mutual fund or ETF or bitcoin or whatever. The interest income and capital gains would be taxed when realized.
Which makes me wonder - if I'm contributing after-tax income to an IRA (the $5500 max, or whatever), am I taxed again on the whole sum when I take a distribution? Double-taxed wouldn't be very awesome.
If you contribute $5500 in after-tax income to your IRA, then you would have a basis for your IRA of $5500. Distributions from the $5500 basis are not taxed, but anything taken out of the IRA beyond the $5500 (i.e. from income on your basis) would be taxed as income. The allocation between "basis" and "income on your basis" makes this a bit more complicated, but the principle at work here is only gains are taxed, and they are only taxed when you make distributions from the IRA. You should look into either (a) tax-deductible contribution to an IRA, if your income level allows it, (b) a direct contribution to a Roth IRA, if your income level allows it, or (c) a backdoor conversion to a Roth IRA. Roth IRAs are nice, since generally income from a Roth IRA is tax-free. Bogleheads will have more on (c), if you google "backdoor Roth." Option (a) is common enough to show up in TurboTax and the like, but if you do (a), then your basis for your IRA is zero, and any distribution is taxed.

In general IRAs are tax deferral vehicles, where Roth IRAs are somewhat more than that IMHO.

I'm not a tax advisor, no fiduciary relationship, yadda yadda yadda.
More excellent advice. Thanks for taking the time!

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Re: Investing for Retirement

Post by Michael »

New 2020 401k limits:
For 2020, the annual contribution limit for elective deferrals to a 401(k), 403(b), 457, or Thrift Savings Plan is rising by $500 to $19,500. And keep in mind that this is the limit for elective deferrals, meaning the money that you as an employee choose to contribute to the plan. It does not include any nonelective employee contributions, any contributions (matching or otherwise) that your employer makes on your behalf, or any allocations of forfeitures.

If you are 50 or older, you also qualify to make elective catch-up contributions. For 2020, this is rising to $6,500 from the previous limit of $6,000. And to be clear, this is in addition to the general elective contribution limit, so for plan participants age 50 or older, the 401(k) elective deferral limit is $26,000 in 2020.
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Popeye_Card
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Re: Investing for Retirement

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I just realized recently that I have probably not optimized my personal contribution in order to maximize my employer's contribution. The past couple of years, I've hit the limit around mid-November, and I reacted "sweet - extra money in my paycheck for the holidays." Not realizing that it also meant my employer wasn't matching for those last few paychecks, correct?

Theoretical example: Let's say an individual makes $240k per year, their employer matches up to 6%, and the contribution limit is $18,000.

Scenario 1: Employee sets his contribution at 10%. That's $2000 per month, so they hit their $18k limit after 9 months. During that time, the employer matched $10,800. So a total contribution into the 401k of $28,800.

Scenario 2: Employee sets his contribution to 8%. That's $1600 per month, limiting out after 11.25 months. During that time, the employer matched $13,500. So a total contribution into the 401k of $31,500.

Is that correct? The above would be a more extreme example, but I think I've left at least some money on the table by not optimizing.

Would a secondary way of optimizing (including market gains) to be to make a large contribution early in the year, then basically match the employer contribution the rest of the year? i.e. for the example above, making an extra $3,600 contribution in January, then matching the company 6% the rest of the year.

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Re: Investing for Retirement

Post by Michael »

That's how 401k matching works at my company. I have an annual 401k check-in on my calendar in Sept to figure if my 401k contribution % is correct in order to last my until my last paycheck.

First world problem, but after my promotion and raise this year I forgot to adjust my 401k contribution % down, so in Dec I'll be missing out on some company match.

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Popeye_Card
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Re: Investing for Retirement

Post by Popeye_Card »

That’s a good idea, to set a reminder. We get a sizable but variable bonus that hits each April, along with our annual raises. So it is a bit difficult to set the optimal percentage until I know what those are.

Yes, first world / 5%’er problems.

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Jocephus
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Re: Investing for Retirement

Post by Jocephus »

those numbers are way over me

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Re: Investing for Retirement

Post by Michael »

Popeye_Card wrote:That’s a good idea, to set a reminder. We get a sizable but variable bonus that hits each April, along with our annual raises. So it is a bit difficult to set the optimal percentage until I know what those are.

Yes, first world / 5%’er problems.
Yep, I get my bonus in Apr as well, so I have the same setup. Just learn from my mistake and set your reminder AFTER mid-year promotions. I set another reminder in Nov as well. That's when I noticed my issue. I was able to save some of the match, but not all of it.

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