Retirement Planning

#1

Looking at ways to minimize our tax burden post retirement.

We currently have the following in place for retirement:, and plan on him retiring in 4 years, and me being work optional in 4 to 6 years.

Me:

  • 401k - $664,800 and contribute $1252 biweekly
  • Pension - $139,000

Him:

  • 403b - $137, 300 and contribute $1000 biweekly
  • Pension - $594,500

We also now have additional $2300 a month in discretionary (post tax) dollars, and are considering the following options:

Option 1: put in a HYA to draw from for a few years once he retires

Rationale- by drawing from this account we will fall into a lower tax bracket before drawing from tax deferred accounts.

Option 2: place in a brokerage account in a mix of dividend paying REITs, and Index funds, and just pay taxes on the amount we draw out.

Note: we exceed the salary cap for a Roth. Our health insurance is with his employer and they do not offer an HSA. We have LTC insurance. We keep our expenses low.

#2

Since you’re so close to retirement — some experts recommend having around 2-3 years’ worth of expenses in a regular savings/checking/money market account (account that you can access the cash easily). So personally, I would go with option 2 first, but then would plan appropriately to save enough in option 1 before retirement. In addition to the tax reasoning that you had, the other reason for option 1 is because if the stock market crashes unexpected when you and your spouse no longer work, you will not be forced to sell assets when it is not advantageous for you. This is basically an emergency fund, and the emergency fund in retirement is for a longer period of time than when you’re working (which is 3-12 months).

OR third option is start contributing to a Roth account or backdoor Roth. This will surely help reduce tax obligations post retirement. Still recommending to save enough for emergency fund though.

One thing to caution, in case you aren’t already aware for the pension money — if all things equal (age, service, annuity, etc), the pension lump sum would decrease if interest rates increase. (I assume the pension numbers you have is an estimate of the lump sum pay out for a Defined Benefit plan.) So if my assumption is true, you may want to ask the plan administrator which basis they use for the interest rate and keep track of that as it most likely changes every year. We’re in a low interest environment today. For example, a common actuarial basis that pension plans use for lump sum calculations is the PPA or 417(e) segment rates and mortality.

#3

Thanks Mindi.

Roth is not an option as we exceed the salary cap. But we are considering going the back door route once he retires.

We are thinking to spend down from the beefed up EF (post his retirement). The thought is to start moving incremental amounts during the lower tax years.

Does that make sense?

#4

@Kim_Hunter_Borst you can still do a Roth with high income.
Deposit 6k into a traditional IRA and before investing it, convert it to Roth.
Since you did not invest it, there are no gains so you do not pay taxes.
This is Backdoor Roth for high income earners.

#5

Thanks so much. I was aware of this process, but was under the impression that I would need to do this in a year where I don’t expect my tax burden to be high. Is that not the case?

#6

As well, can both my husband and I contribute to said Roth. Ir would we need separate accounts?

#7

You can contribute even when your income is high for the year. The only downside I know people talk about is your money is already taxed at a higher tax bracket. I know some people who decide not to use this account because they are already at a high tax bracket.

For your second question both you and your husband can open Roth IRAs. They should be separate because they use your SSN as the identifying information. @Kim_Hunter_Borst I hope this helps.

You can ask people who are more educated too and research. Some brokerage will give you information on this or your 401k provider. Your 401k provider usually provides lots of information. I found this recently too especially if your account is being managed.