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Question about a pension plan and income during retirement
Posted on 1/8/21 at 11:37 am
Posted on 1/8/21 at 11:37 am
Say one were to have a pension plan that payed their entire salary after retirement as well as had money invested into a tax deferred acount.
When retirement time comes, and you pay your tax rate at the time of retirement:
Does the money from your pension count as “income” and basically the same (or more) than what you made at time time of placing the money in the traditional 401K rendering the “tax deferral” useless or is it still beneficial?
Is a personal roth 401K is a better choice?
When retirement time comes, and you pay your tax rate at the time of retirement:
Does the money from your pension count as “income” and basically the same (or more) than what you made at time time of placing the money in the traditional 401K rendering the “tax deferral” useless or is it still beneficial?
Is a personal roth 401K is a better choice?
This post was edited on 1/8/21 at 11:42 am
4
Posted on 1/8/21 at 2:50 pm to tigersint
I’m not a money expert, but I have both a pension and 2 different deferred Comp plans. I am retired and the money that I withdraw is taxed at my current tax rates. In fact, one of the deferred plans automatically withholds 20% of the amount withdrawn for federal taxes. I wish I had put some of the money during my working years in a Roth. Hope that helps.
Posted on 1/8/21 at 2:54 pm to tigersint
On a related note Louisiana doesn't tax public pensions.
Posted on 1/8/21 at 3:05 pm to tigersint
Yes. You’ll end up taxed on that money at a higher rate than you would have if you never deferred it
Posted on 1/8/21 at 5:20 pm to Dawgfanman
So if I want to invest it then its much smarter to just put it in either a Money Market taxable stock acount and the 6K per year into my roth rite?
This post was edited on 1/8/21 at 5:21 pm
Posted on 1/8/21 at 5:46 pm to tigersint
Broadly speaking there are three types of accounts you've referenced:
- Tax deferred retirement accounts (IRA, 401k, deferred comp, 457, 403b, HSA, etc.) These are all variations of the same concept. No income taxes up front, income taxes paid in retirement.
- Roth retirement accounts (Roth IRA, Roth 401k, Roth 457, etc). These are again variations of the same concept. You pay income taxes up front, but no income or capital gains taxes in retirement.
- Taxable investment account i.e. a brokerage account. You pay income tax on your money, invest it, then pay capital gains tax on the growth.
All of these account types can be invested in just about whatever you want - stocks, bonds, mutual funds, ETFs, real estate, money markets, whatever you want to buy with the money inside the account. The type of account only refers to the tax treatment and rules governing how and when you can access the money.
So that said..
The answer to this question depends on your goals.
If you want to maximize retirement income, you should probably max a Roth IRA followed by Roth retirement contributions if your employer offers it, followed by tax deferred retirement contributions. If you are getting a 100% pension, your retirment income is likely to be higher than your working years so Roth options are more tax efficient than tax deferred accounts.
- Tax deferred retirement accounts (IRA, 401k, deferred comp, 457, 403b, HSA, etc.) These are all variations of the same concept. No income taxes up front, income taxes paid in retirement.
- Roth retirement accounts (Roth IRA, Roth 401k, Roth 457, etc). These are again variations of the same concept. You pay income taxes up front, but no income or capital gains taxes in retirement.
- Taxable investment account i.e. a brokerage account. You pay income tax on your money, invest it, then pay capital gains tax on the growth.
All of these account types can be invested in just about whatever you want - stocks, bonds, mutual funds, ETFs, real estate, money markets, whatever you want to buy with the money inside the account. The type of account only refers to the tax treatment and rules governing how and when you can access the money.
So that said..
quote:
So if I want to invest it then its much smarter to just put it in either a Money Market taxable stock acount and the 6K per year into my roth rite?
The answer to this question depends on your goals.
If you want to maximize retirement income, you should probably max a Roth IRA followed by Roth retirement contributions if your employer offers it, followed by tax deferred retirement contributions. If you are getting a 100% pension, your retirment income is likely to be higher than your working years so Roth options are more tax efficient than tax deferred accounts.
This post was edited on 1/8/21 at 5:51 pm
Posted on 1/8/21 at 6:00 pm to Huey Lewis
Thanks.
That was pretty much my question.
I believe that I will not be offered a Roth at work but only a “traditional” tax deferred vehicle. I don’t believe they match any but I will get a pension that can be up to 100% plus pulling any money out will only increase my income in retirement.
So that means the smart choice is to focus on putting 6K/year into my personal Roth then contribute to the deferred plan at work
That was pretty much my question.
I believe that I will not be offered a Roth at work but only a “traditional” tax deferred vehicle. I don’t believe they match any but I will get a pension that can be up to 100% plus pulling any money out will only increase my income in retirement.
So that means the smart choice is to focus on putting 6K/year into my personal Roth then contribute to the deferred plan at work
Posted on 1/8/21 at 6:06 pm to tigersint
Also from my understanding,
In a traditional acount you:
Pay taxes on the gains
In a roth you:
Do not pay taxes on the gains
In a traditional acount you:
Pay taxes on the gains
In a roth you:
Do not pay taxes on the gains
Posted on 1/9/21 at 12:13 am to tigersint
That is correct. Also, if you are over 50, you can contribute $7,000 a year in your Roth. Just make sure you are under the income limits.
Posted on 1/9/21 at 2:46 am to tigersint
Yes you will pay taxes on the withdrawals from a tax deferred retirement accounts at your then current marginal tax rate.
It is always good to have both tax free, like a ROTH, as well as taxable money (IRA, 401k, 403b, etc) that can be used during retirement. Additionally, you should have after-tax investments which can be sold and withdrawn only owing the tax on gains at capital gains rate(this will probably rise in Biden tenure).
Tax brackets are fluid, depending on Congress' whims and the US economy. Tax rates will probably be raised, at least for the next two years, but typically cycle up and down.
If you have all three types of money you can supplement your retirement pension income most effectively by blending your account withdrawals to get he most after tax income based on that year's tax brackets. In other words, make decisions each year based on need, marginal tax brackets and rates, so that you take the maximum amount needed to satisfy spending needs while remaining in the lowest bracket. While tax rates are tiered, you still would do better if you plan carefully and avoid putting yourself into a higher bracket.
Knowing that brackets will probably come down, and rates go up in Biden-Harris times, 2020 was the time (if you were already retired) to take extra money out of taxable accounts (tax-deferred or after tax)and stockpile it to save tax payments in future years.
It is always good to have both tax free, like a ROTH, as well as taxable money (IRA, 401k, 403b, etc) that can be used during retirement. Additionally, you should have after-tax investments which can be sold and withdrawn only owing the tax on gains at capital gains rate(this will probably rise in Biden tenure).
Tax brackets are fluid, depending on Congress' whims and the US economy. Tax rates will probably be raised, at least for the next two years, but typically cycle up and down.
If you have all three types of money you can supplement your retirement pension income most effectively by blending your account withdrawals to get he most after tax income based on that year's tax brackets. In other words, make decisions each year based on need, marginal tax brackets and rates, so that you take the maximum amount needed to satisfy spending needs while remaining in the lowest bracket. While tax rates are tiered, you still would do better if you plan carefully and avoid putting yourself into a higher bracket.
Knowing that brackets will probably come down, and rates go up in Biden-Harris times, 2020 was the time (if you were already retired) to take extra money out of taxable accounts (tax-deferred or after tax)and stockpile it to save tax payments in future years.
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