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Posted by on June 29, 2008, 6:51 am
All,
I've been lurking for quite some time since my last posts, but not
have reason to pose a question. I just received my benefits
information from my employer yesterday and I noted that starting in
2009 they will have a Roth 403b. I have been fully funding my and my
wife's Roth IRAs for years and putting 11% of my gross income into my
403b. I am 41 1/2 years old and my employer still (surprisingly)
provides a defined benefit pension plan. What are the pros and cons
of switching to the Roth 403b?
On another note, I saw on Bankrate.com the other day a suggestion to
get into WIP ETF to help hedge against international inflation. I
keep about 12 moths of expenses in my new car/emergency fund and don't
really understand what role WIP might possibly play in that portfolio
(where I have about 25% money market, 25% laddered CDs (about a 2 year
ladder), 25% large cap stocks, 12% floating rate bank loans, 12% short
bond fund, and 10% 'risky' stocks).
Thanks,
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Posted by joetaxpayer on June 29, 2008, 11:10 am
mjgrinnell@gmail.com wrote:
> All,
>
> I've been lurking for quite some time since my last posts, but not
> have reason to pose a question. I just received my benefits
> information from my employer yesterday and I noted that starting in
> 2009 they will have a Roth 403b. I have been fully funding my and my
> wife's Roth IRAs for years and putting 11% of my gross income into my
> 403b. I am 41 1/2 years old and my employer still (surprisingly)
> provides a defined benefit pension plan. What are the pros and cons
> of switching to the Roth 403b?
I've gone on a bit about how Roth accounts and Roth conversions are
beneficial to a select few people, or limited circumstances.
For you, it may be ideal. The simple reason it doesn't benefit most
working people is that it takes quite a bit of savings, pretax to put
you back in the same or higher tax bracket as when you were working. But
I do offer that those who have a great defined benefit plan are among
those who may be candidates for Roth accounts.
I suggest looking at http://www.fairmark.com/refrence/index.htm and
understanding the tax bracket you are now in. That's a fact, your
current tax rate. The rest is forecasting, your employer (will you stay
there? will they continue to offer the plan?) your income and savings
level, and future tax rates. As your pension gets closer to replacing
final income by a larger percent, the numbers favor Roth. Do you see
why? If the pension replaced your income 100%, any additional income is
taxed at the same or higher rate.
Of course, this doesn't address your wife's income, 401(k), or other
savings. If you post some numbers, many will be happy to offer more advice.
Joe
www.blog.joetaxpayer.com
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Posted by on June 30, 2008, 5:03 am
> Of course, this doesn't address your wife's income, 401(k), or other
> savings. If you post some numbers, many will be happy to offer more advice.
Hi Joe,
With my 403b contributions, mortgage deduction, etc., I have been in
the 15% bracket. My wife has not been working so the 401k on her part
has not been an issue. I would expect she would go back to work part-
time in a couple of years once my second child is in first grade. I
don't imagine she will be making a ton at that point either. I have
about 30K in my 403b at present and as noted have been putting 11% of
my pre-tax income into it yearly as well as fully funding both my and
my wife's Roth IRAs. Also putting about 5K yearly into two 529
plans. Not sure what other numbers you might need.
Thanks,
--------------------------------------
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Posted by joetaxpayer on June 30, 2008, 7:37 pm
mjgrinnell@gmail.com wrote:
> Hi Joe,
>
> With my 403b contributions, mortgage deduction, etc., I have been in
> the 15% bracket. My wife has not been working so the 401k on her part
> has not been an issue. I would expect she would go back to work part-
> time in a couple of years once my second child is in first grade. I
> don't imagine she will be making a ton at that point either. I have
> about 30K in my 403b at present and as noted have been putting 11% of
> my pre-tax income into it yearly as well as fully funding both my and
> my wife's Roth IRAs. Also putting about 5K yearly into two 529
> plans. Not sure what other numbers you might need.
I think you are on the right track with Roth. This is not a black and
white issue, there is a huge gray area. What I try to help people avoid
is this scenario; Couple in 28% bracket is so fixated on Roth that upon
retiring doesn't have enough pretax saving to come close to 'filling'
the 15% bracket. i.e. a huge missed opportunity, and wasted taxes.
Remember one thing - there is a zero percent bracket. Right now, it's
$17,900 for you and your wife. When you project your pension income, it
may be more than this, so you'll start in the 10% bracket. For those
with no pension, that $17,900 of income would require $447K of (pretax)
savings to generate, assuming a 4% withdrawal rate.
If the missus goes back to work and bops you into the 25% bracket, I'd
suggest tracking your income closely and using regular IRAs to shelter
any money that would be taxed at 25%.
For someone retiring today, my goal would be to keep them in the 15%
bracket. If you can manage the numbers to that while working and then
again at retirement, you'll have done well tax-wise.
(Those who disagree with me will point out that I cannot really know
what the tax structure will be in 2 years let alone 20, and they are
right. I take no offense to that. I offer my opinion given the current
laws and your ability to predict your own income and retirement needs.)
Joe
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Posted by HW \"Skip\" Weldon on June 30, 2008, 9:37 am
On Sun, 29 Jun 2008 05:51:21 -0500, mjgrinnell@gmail.com wrote:
>What are the pros and cons of switching to the Roth 403b?
>
There are several pros to the Roth 403b, each depending on what kind
of changes to the tax code we see between now and when you withdraw
the money.
But an immediate negative will be increased taxes now. What were
traditional 403b contributions will now be taxable income to you. And
I believe the same is true of the employer match. Bottom line: More
taxes, without more income to pay those taxes. This may or may not be
a problem for you, but it is important to be aware of it.
-HW "Skip" Weldon
Columbia, SC
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
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