1) I asked about the SS income because I wanted to say with just the SS where would that place you in terms of tax brackets. $6,500 in today's dollars between the two of you, so let's say the 0% tax bracket (the standard deduction) is spoken for.
2) Current balance in the 401(k) is $380k, and you are in early 30's. I suppose it is reasonable to estimate that you have a 30 year ramp before retirement. Assume a modest 6% return rate on your investments, the balance doubles every 12 years (Rule of 72), so $380k will double twice and another $380k added in the 6 years left. That's $1.9 million.
A 4% withdrawal rate (the "Safe Withdrawal Rate" from Trinity Study) means you get $80k income from your investments. Which places you smack in the middle of the 12% tax bracket. And you will have at least another $15k room in the 12% tax bracket; or probably even $25k since SS is only 85% taxable.
So it's almost a certainty that, if you do not add another penny to your Traditional investments, your eventual marginal tax bracket will be 12% (or 15% since the 12% bracket sunsets in 2026) based on forced RMD. Hence all the more reason to defer at 22% now and withdraw at 15%, enjoying a 7% tax-rate arbitrage.
3) By turning the new investments exclusively to bonds, you will further suppress that 6% assumed return in 2); so you will have even more room in the 15% tax bracket than just $25k annually.
4) So you have about $38k in those other 401(k) plan (10% allocation to intermediate/total bond). Does your older 401(k) plan allow trading / shifting assets from one mutual fund to another? As you add $23k to the bond fund in your current 401k (current year max), shift $23k from intermediate term to equities in the other 401(k). You will be able to turn the entire other 401(k) purely into equities within just 2 years. Uncle Sam will throw in $5k ( = 22% * $23k) per year as incentive for you to do so
5) You can take this even further, if your old 401(k) plan allows Roth conversion within the plan -- even after 2 years. Contribute the maximum $23k to the current plan, grab the $5k tax incentive. Ask the old plan to convert $23k from equities to Roth, and will incur the same $5k bill. It's identical to what you will have faced in terms of current tax year liability, if you simply had NOT contributed to the 401(k) plan which was your plan earlier ...
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The only fly in the ointment here is that if that other 401k plan insists on withholding tax liability from the conversion. FORTUNATELY my employer plan allows this, although I suspect it may be a feature of my state law (New Jersey) which allows the tax payer to elect to NOT withhold taxes on Roth conversions.
You could also do a variation of this theme, if your old 401(k) plan at least allows partial withdrawals and won't force the issue as "all or none". Then transfer $23k from old plan to a Traditional IRA, add back any tax withholdings the old plan custodian may withhold, and convert to Roth IRA.
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5) Take that cheapest bond fund in your current 401(k) plan, and look up its SEC yield, if there is a ticker available. If there is no ticker, Google that name removing any "institutional" or "trust" from the name -- you should be able to land on an investor class equivalent of the same fund.
If that SEC yield is anything greater than 3.5%, I would say it is still worth it to invest only in bonds in this plan.
First of all, I really appreciate how much time and energy you have put into your responses -- there's some great ideas in here I will definitely implement. Thank you!
2) $380k was our mortgage balance, not 401k balance. Our sum-total of retirement savings is actually around that number though, about $350k. $245k of that is in Roth IRAs, $80k in old workplace traditional 401k with great, low-expense index funds, and $25k invested in our HSA. I actually haven't yet contributed anything to my current workplace 401k, and am due to start getting employer contributions this year. Unfortunately this changes all of the calculations you made, but I totally understand your point nonetheless.
4) My old 401k allows me to make any trades I want. Is your point here that, by putting the bond allocation in my current 401k (with higher expenses) and equities in my old 401k (low expenses), that over time the old 401k will grow more and have less removed as expenses? And the current, higher expense 401k will grow less due to being in bonds and therefore the higher expense ratio removes less total money? If that's your point, that makes sense to me. I like this idea.
5) This is brilliant -- how did you even think of this?! I don't think my old plan allows Roth conversion, but it would be just the same to just roll it over from the old 401k directly into my Roth IRA, which I can definitely do (I've not a partial rollover before). In a lower income year, I rolled over a decent amount of traditional 401k money into my Roth IRA and was able to pay the tax myself, not having it withheld from the 401k funds.
Statistics: Posted by Rheuminator — Fri Mar 08, 2024 7:17 pm — Replies 14 — Views 699