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Hello,

I am putting about 14k a year into my 403b TIAA CREF. Which is a combination of my contribution and my employers. This account now totals about 132,000. When calculated out at 10% interest for 24 years when I turn 60 the sum should be 1,110,000. I also am contributing to my ROTH and have about 24k there form an IRA conversion. My concern is that I will end up in a higher tax bracket at 60 than I am in now, our AGI is about 85k. My husbond is also maxing out his contribution to his 401k and ROTH but has started more receintly. I'm considering paying more on our morgage and investing more in individual stocks.

Thanks, Jody
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Author: teton99 Date: 12/14/00 3:01 PM Number: 26611
I am putting about 14k a year into my 403b TIAA CREF. Which is a combination of my contribution and my employers. This account now totals about 132,000. When calculated out at 10% interest for 24 years when I turn 60 the sum should be 1,110,000. I also am contributing to my ROTH and have about 24k there form an IRA conversion. My concern is that I will end up in a higher tax bracket at 60 than I am in now, our AGI is about 85k. My husbond is also maxing out his contribution to his 401k and ROTH but has started more receintly. I'm considering paying more on our morgage and investing more in individual stocks.

I am closer to retirement than you are, but I have a similar problem. I plan to begin fairly large distributions immediately after retirement to avoid huge MRDs (Minimum Required Distributions) when I turn 70.5.

I have also stumbled across what seems to be a really good fund for investing outside of your sheltered accounts. It is the Vanguard Tax Managed S&P500 Index Fund, VTGIX. It has an expense ratio of 0.19% and taxes are minimal due to only 0.21% in yearly distributions each year. Total returns appear to match the S&P 500, which has historically been about 12%. Then, when you are retired, you can sell shares and only pay long term capital gains taxes. In addition, if there is any left when you die, the heirs get the step-up in cost basis.

I believe that if you use this fund, you may eventually end up with more money in your pocket than you will get from unmatched contributions to a 401(k) that are taxed at your marginal rate (which could be quite high) when you are retired.

(Note: I am not affiliated with Vanguard other than being a customer.)

Russ


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I am assuming that you are in a 28% or higher tax bracket now. I can reassure you that in retirement the concept that you'll be in a lower tax bracket is not accurate. Once you start taking distributions from your tax-deferred accounts, it will be difficult to stay in a low tax bracket. But, I would rather have that problem then be stuck in the 15% bracket with no chance of getting out of it. You are fortunate that you have time on your side to accumulate wealth for your retirement. It sounds as if both you and your husband are taking full advanage of your tax-deferred moneys. Be sure that you fund both of your Roth's each year. It is a great estate planning tool for your children and grandchildren. If you want to invest in post-tax dollars, of course Roth IRAs are the best, next best are growth stocks that pay no dividends, like Berkshire Hathaway. You pay no any taxes until you sell. Annunities are an insurance product, and are very expensive. Avoid if at all possible. Buying growth stocks are better for you than annunities for post-tax dollars. I am a leader of a Retirement Planning Study Group and we discuss topics like this all the time. I am a retired science teacher and spend alot of time reading and studying these topics.
Feel free to contact me at gstipps@iquest.net

glenn
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I am assuming that you are in a 28% or higher tax bracket now. I can reassure you that in retirement the concept that you'll be in a lower tax bracket is not accurate.

This will vary from person to person. My own rule of thumb is that if I work to the point where I am in a higher tax bracket when I retire, then I worked too long. :)

And if I am in the same tax bracket, then pre-tax contributions still come out ahead IMO, assuming I invest the money the same way in my 403b (or 401k or traditional IRA) as I would in a Roth. (I have better options with a Roth than my 403b, so I do both). The reason pre-tax comes out better is that tax savings on the 403b contributions are at your marginal rate (i.e. 28%), while the taxes you pay in the future will be at your average tax rate (probably around 20%). So in the 403b you end up paying about 20% taxes, while the income you're putting in your Roth is taxed at 28%. Other things being equal--which they often aren't--the pre-tax comes out better.
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The reason pre-tax comes out better is that tax savings on the 403b contributions are at your marginal rate (i.e. 28%), while the taxes you pay in the future will be at your average tax rate (probably around 20%).

This, too, has to be considered on an individual basis. In my case, it looks like my Oregon PERS distributions will be enough to keep me in the 28% federal tax bracket, so the choice becomes paying taxes at my marginal tax rate now (Roth IRA) or paying at my marginal tax rate when I retire (403(b)).
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