Options for delaying income subject to tax

Submitted by M Kent on Wed, 2017-03-22 19:13

I’m not financially well-versed, so forgive me if I use incorrect terminology or generally don’t know what I’m talking about.

I’m 55, still working, contributing to a Roth 403b and a Traditional IRA. Also have a Roth IRA. No 401k available, but I have a pension plan through a state teacher’s retirement fund.

Husband is 69 (last December). Has a much smaller Roth and Traditional IRA.

My income is good and rising slowly but steadily. I’m trying to find ways to lessen our tax liability. It’s why I’m contributing again to the Traditional IRA (I had stopped, in favor of all-Roth contributions) and it’s why I started with the 403b.

But I think I need to get more “pre-tax” contributions into a retirement fund.

I’m contributing the max I can ($6500/yr) to the Traditional now. I can contribute more to the 403b, but it doesn’t help cut down my taxes.

I’d love to have an independent Health Savings account available to me for tax-sheltered contributions, but no such luck because we cannot afford the output from a High Deductible medical plan. Because of his age, our healthcare costs are rising.

Any ideas? I read about rollover IRAs, but that has to be an EMPLOYER funded IRA that gets rolled over? Is there anything I could do with a Roth conversion (his) that would help?

thanks



Submitted by Alan - IRA critic on Wed, 2017-03-22 20:45

  • Roth contributions and conversions of all kinds increase your current taxes, but will decrease them later in retirement since distributions will be tax free and there are no RMDs. Conversely, pre tax contributions reduce your taxes now and will increase RMDs later on. That means you generally would decide what types of contributions to make today based on whether your current marginal tax rate is higher or lower than what you expect it to be when you are both retired and taking RMDs, any pensions and SS benefits. For many seniors, the best time to convert to a Roth IRA is after early retirement and before RMDs or SS kicks in because taxes will be lower then than later.
  • Are you sure that your TIRA contributions can be deducted?
  • If pre tax contributions are more beneficial, most employer plans allow you to change your contributions from Roth to pre tax. But some plans limit those changes to one or two per year or perhaps only on certain dates. Changing from Roth to pre tax 403b contributions is the one simple thing you can probably do very soon that will reduce your taxes this year. But for long range planning purposes, the comparison of tax rates should be considered even though you would be guessing as to your rate in retirement.
  • Unless your 403b high expenses or poor investment options, you would ordinarily not roll it over to an IRA until you retire or separate from service. And you cannot roll over your contributions if you are still working and under 59.5.

Submitted by Steve Hagedorn on Wed, 2017-03-22 23:18

  • At 69, is you husband taking SS and or receiving Medicare? Do you as a teacher contribute to SS (13 states don’t).
  • Some school systems have opted to go with HSA style Insurance plans so be sure your system doesm’t offer such a plan. If they do, get some information first, crunch your numbers and then make an informed decision.
  • I wouldn’t be surprise that you opted for a Roth 403(b) at some point in time. Public schools and their unions have been pushing 403(b) plans for a very long time, while Roth 403(b) plans are relatively new. Again ask your plan sponsor (maybe your HR department) if 403(b)(7) options are available. These are not annuity products, but instead low cost, low fee mutual fund options that Vanguard, Fidelity or other low fee investment companies offer. As an uninformed teacher you are being taken advantage of by the insurance company and more than likely the very union you pay dues to. It wasn’t that long ago that the NY State’s attorney went after both parties (the NY Teacher’s Union and ING, an insurer over collusion and kick backs). The teachers were the losers.Here’s the article: http://www.nytimes.com/2006/05/09/nyregion/spitzer-studying-ings-tie-to-teachers-union.html
  • Remember you already have an annuiity, your teacher pension. In fact, at retirement you may be able to transfer part of your individual 403(b) to the state for what is referred to as an “extra annuity”. Your state teacher retirment website is also a very good resource to find additional information with regard to retirement and healthcare options.
  • A great resource for owners of 403(b) plans is linked here: http://403bwise.com/
  • Finally, since there is a significant age difference between you and your spouse (14 years) consider this age difference along with all of your other considerations. Retirement planning, when married, needs to be looked at through the lens of two retirees and age is just one of many dynamics that may steer your retirement plans as a couple. Good Luck!

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