Deferred compensation

[azucena]

I've had a few years now where I've been able to put a material amount of money in savings. I need to start understanding deferred compensation to see if it makes sense as a next move.

My salary is $200,000 with a gross bonus of $20,000 to $50,000 in the last few years.

- good resources to read?
- considerations?
- I have the option to set aside separate portions of salary vs bonus.
- how do I determine when to set payout(s)?

[azucena]

Demographics
Azucena/DH age 44
DD15 and DD11
Midwest

Income 2023
Azucena 207,269
Azucena bonus 56,056
DH 40,000
Total Income 303,325

Assets 12/29/2023
Savings 202,780
House Value 450,000
pension 131,007
401k 712,607
Azucena Roth 6,272
DH profit sharing 11,628
DH 403b 21,631
DH rollover IRA 24,644
DH Roth IRA 16,171
Stock options 31,019
Azucena HRA 41,812
DH HRA 20,906
Asset Total 1,670,475

Debts
Mortgage 199,389

Net Worth 1,471,086

[resolution]

I am not knowledgeable enough about deferred comp to offer any advice. I looked up the investopedia writeup on it and it seems like it is very specific to the individual offer your employer is making.  I think this may be a situation where it is worth paying a fee only financial planner to review the specific offer and provide some advice.

[azucena]

That's a good question. I feel like I'm not putting my money to its best use by continuing to shovel it into savings.

Items that come to mind -
- reducing taxes
- increasing retirement savings with the goal of age 60
- funding $30k/yr college tuition for each DD

Any maybe deferred comp is the wrong avenue for those goals so open to suggestions.

[azucena]

I'm maxing my 401k, have increased DH from 120/month to 600/month.

Last year I started putting in $10k into after tax savings directly from my paychecks and having it autoconvert right away to Roth. Max for that increased to $11k this yr so increased to that.

Not eligible for much Roth IRA and don't understand backdoor.

We put $5k/yr into 529 and then pull it back out again to pay for private school 5th grade tuition. Could Max this out for state tax benefit of a few more hundred. Don't really want to aggressively invest 529 given college is close. Happy with bond and cd returns to safely grow tuition money outside of 529.

General question is what's next for wealth building?

[minnesotapaintlady]

Jan 10, 2024 18:44:39 GMT -5 azucena said:

Not eligible for much Roth IRA and don't understand backdoor.

Backdoor Roth is really easy if you don't already have Traditional IRA money (because you can't just convert the new money that is post-tax with no earnings that you just put in). 

Otherwise, it's just Open Traditional IRA, make your maximum contribution, immediately convert it to Roth...well...you might have to wait a day or two until it posts to your account. Done.  Vanguard even has a "Convert to Roth" easy button under the Traditional IRA account view.

[myrrh]

If you feel deferred comp is too confusing or restrictive (which other than a governmental 457 I would be concerned about) you as a couple could divert more money to your DH's 401k and give him the spending money to make up for what he loses out of his paycheck.

[bookkeeper]

DH deferred some of his salary for about 5 years before he retired at age 55.  In his case, the money was in an investment account with his name on it and it was released to him upon retirement.

Originally, we planned to use this money (about $125,000) to fund health insurance premiums for 10 years.  What actually happened, is that we used the deferred compensation account to live on for about the first year and a half.

By participating in deferred compensation, we lowered our taxable income for those 5 years and had cash available at retirement.  DH worked in the public sector and his salary was public information.  Deferred compensation meant that his published salary was a lower figure.

Each program is very different.  I would study up on all the rules and ownership features of the DC plan before making a decision to do it.

[haapai]

Increasing your husband's 403(b) or 401(k) contributions to something closer to the max ($23K in 2024 for individuals under 50) seems like the easiest tax-reducing strategy that you are missing.  You may not be able to max it but you can get a lot closer to the max than you are doing. 

401(k) plans frequently have limits on the percentage of gross income that can be contributed.  70% of gross pay is a very common restriction.  You have to make sure there is enough to pay whatever health-care related stuff your husband is carrying, or forced to carry, and social security and medicare taxes, but it is not necessary to have anything withheld for state and federal taxes from your husband's check.  (You can adjust your own withholding to make up for what he is not having withheld.)

On the other hand, forcing your spouse to reduce his paycheck to almost nothing is serious ick territory.  I would not accept it unless I received an allowance every payday and was permitted to put that money into a non-joint account.  I would also demand that my spouse give me something like what two "normal" paychecks would be to put into an account that I control.  This would be to account for the delay between requesting a change in 401(k) or 403(b) contributions and that change showing up in my net pay.  It's serious business to ask someone to give up their paycheck.  

[aricia]

I think your next step for wealth building is after tax investments in a regular brokerage account. Second to last step on Archie's list.  Although you can draw from retirement accounts at age 59 1/2 so I would not particularly use this money for retirement at ages 60-65.  But this is flexible money you can use for whatever you need and would fall under "wealth building."
It looks like your $10-11k after tax savings from your paycheck is still in a retirement account, correct?
I don't know much about deferred compensation but it seems like it makes the most sense if you are deferring until retirement, when your income is lower, otherwise you're not really getting a benefit.  I don't think deferred comp is helpful for a college tuition goal.  Also, (possibly depending on your plan) this money can be at risk if your company does poorly.  I like how bookkeeper's family only used if for 5 years before retirement, I'd feel safer betting on a company for only 5 years.

DH 401k - I think you mentioned he had high fees.  Depending on how high the fees are, may or may not make sense to max it out?  Also, if he's likely to change jobs, he'll be able to roll the money out at that point and invest it with lower fees.

Backdoor Roth - Exactly what MPL said!  Easy if you have no traditional IRA!  If your asset list is accurate, I would recommend doing this for you.  Since DH has the rollover IRA, it's less clear cut if it makes sense to do one for him and will likely cause taxes to be due.  (It probably doesn't make sense to do one for him, but there are always unique situations.)   www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/

529/college - investigate if there are equally conservative investment options to the cd/bonds that you are happy with IN your 529 account to max out your state benefit.  Do you have a target tuition amount in mind? Do you want it to all be saved up ahead of time or are you planning on paying out of income as you go?  You can use the regular after tax account for college or retirement or ?? anything!  Sure, you might not want to PLAN on using it for college due to the short timeline, but you COULD if you needed to or if the market was up and you wanted to.
We are lucky to have a public in-state university that's around $25,000 a year with tuition and housing and has a great program in the field that our older child (HS freshman) is likely to go into.  This is extremely affordable for us. We save just enough into the 529 to max out the state benefit and currently have $85,000 between the two kids. At the public school, the 529 should cover half and we could pay the other half from income easily.  If we wanted to sink more into education at an expensive school, we could still pay for it out of income, but we would not be able to save nearly as much.  Our savings in the 529s would not go far at all. To do that for two kids would probably delay retirement for a couple years and might be DH's call since he's the one currently working AND the one who went to an expensive private university. This is kind of a cross that bridge when we come to it situation for us since we're still not sure where they'll want to go or be accepted but we have options (aka income) to cover the possibilities. If circumstances change and we couldn't afford an expensive university, I would have no problem sending them to the less expensive school.

[azucena]

My after-tax $10k/year investment is set to autoconvert to Roth 401k daily. This was a new option in 2023. Max went up to $11k this year so I'll do that again.

Good note to read up on my particular def comp. Will do so. I know it might not pay out if company goes bankrupt, but we just weathered the pandemic and all those life insurance claims (our main line of business making up at least 90%), so I feel okay stashing some money.

Haapai - you make some good points. Our lopsided salaries are already contentious, so that's part of why I haven't increased his contribution. $300/check means he nets right at $1000/check. He gets $300/month put into his spending account to play with. We are common potters otherwise.

I'd also held back on his 401k bc he doesn't have as many invt options and his fees are higher. The fees are nothing compared to our tax level though, so time to stop over thinking that part.

Increasing your husband's 403(b) or 401(k) contributions to something closer to the max ($23K in 2024 for individuals under 50) seems like the easiest tax-reducing strategy that you are missing. You may not be able to max it but you can get a lot closer to the max than you are doing. His company doesn't give any match.

Good point on watching % of income limit.

I feel good about the $300 amount and may increase it to $400 next year. In just a handful of years, we'll hit 50 and catch-up limit so that would become part of the game plan.


The 700k in my 401k breaks out as follows:
- 44% pre-tax
- 24% safe harbor match (not taxed yet)
- 7% nonelective company paid (not taxed yet)
- 13% Roth (I was putting some paycheck here until I broke thru tax levels; now my after tax will shift here)
- 3% company match (not taxed yet)
- 7% other (too lazy to log back into system to see what this is)
so I really want to add taxable investments to even things up.

[azucena]

Missouri 529 info
    
State tax deduction for Missouri residents (up to $8,000 per person, or $16,000 if you're married filing jointly) Tax-free withdrawals when used for qualified expenses. $18,000 ($36,000 if married filing jointly) annual gift tax exclusion for qualified contributions.

Looks like MO income tax rate tops out at about 5%, so I'm currently saving 5% times 5000 = 250 and could save up to $800/yr.

Of the $200k saved, I'm thinking of it like $100k emergency fund and $100k towards DD15 tuition which we'd like to fund at $30k/yr. So if we stay on track, hers is funded after saving up this year.

[azucena]

Jan 10, 2024 22:49:25 GMT -5 minnesotapaintlady said:

Jan 10, 2024 18:44:39 GMT -5 azucena said:

Not eligible for much Roth IRA and don't understand backdoor.

Backdoor Roth is really easy if you don't already have Traditional IRA money (because you can't just convert the new money that is post-tax with no earnings that you just put in). 

Otherwise, it's just Open Traditional IRA, make your maximum contribution, immediately convert it to Roth...well...you might have to wait a day or two until it posts to your account. Done.  Vanguard even has a "Convert to Roth" easy button under the Traditional IRA account view.

This is where I always get lost and give up and say figure it out next year, so bear with me on my questions.

My Roth IRA is at Vanguard and made up of two years of Roth IRA deposits of about $1k and $2k a few years ago before we hit the income limit. I only own it and my 401k for retirement.

Are you saying that I want to go to Vanguard or Fidelity and open a new trad IRA? 

I'm not sure what you mean by make my max contribution. Is that $6500 for 2023 that can be deposited by 4/15? And then convert it to Roth and not owe taxes?

Saving this link for myself for later www.whitecoatinvestor.com/how-to-do-a-backdoor-roth-ira-at-fidelity/

[aricia]

Looks like you’re in a good place with your college savings. Our 529 benefit is much different. 20% back on first $7500.
If you’re truly joint finances, it shouldn’t matter if his paycheck is $0. Is it just a mental issue with seeing that? My entire paycheck used to go in savings that we didn’t touch, and DH’s went in checking and it was pretty much all spent. I didn’t feel like I didn’t get to spend anything and he didn’t feel like I spent all his money. We do have complete trust in each other’s spending habits though and no “fun money” or allowances are required.

[azucena]

Jan 11, 2024 14:45:14 GMT -5 aricia said:

Looks like you’re in a good place with your college savings. Our 529 benefit is much different. 20% back on first $7500.
If you’re truly joint finances, it shouldn’t matter if his paycheck is $0. Is it just a mental issue with seeing that? My entire paycheck used to go in savings that we didn’t touch, and DH’s went in checking and it was pretty much all spent. I didn’t feel like I didn’t get to spend anything and he didn’t feel like I spent all his money. We do have complete trust in each other’s spending habits though and no “fun money” or allowances are required.

It shouldn't matter, but it would be a huge hit to his male ego. So likely not worth that hassle to put in more than I've outlined at least for now.

Every year when my bonus hits in March, it's like a catch-22 because the higher it is, the more it dwarfs his entire salary.

[minnesotapaintlady]

Jan 11, 2024 14:38:52 GMT -5 azucena said:

Jan 10, 2024 22:49:25 GMT -5 minnesotapaintlady said:

Backdoor Roth is really easy if you don't already have Traditional IRA money (because you can't just convert the new money that is post-tax with no earnings that you just put in). 

Otherwise, it's just Open Traditional IRA, make your maximum contribution, immediately convert it to Roth...well...you might have to wait a day or two until it posts to your account. Done.  Vanguard even has a "Convert to Roth" easy button under the Traditional IRA account view.

This is where I always get lost and give up and say figure it out next year, so bear with me on my questions.

My Roth IRA is at Vanguard and made up of two years of Roth IRA deposits of about $1k and $2k a few years ago before we hit the income limit. I only own it and my 401k for retirement.

Are you saying that I want to go to Vanguard or Fidelity and open a new trad IRA? 

I'm not sure what you mean by make my max contribution. Is that $6500 for 2023 that can be deposited by 4/15? And then convert it to Roth and not owe taxes?

Saving this link for myself for later www.whitecoatinvestor.com/how-to-do-a-backdoor-roth-ira-at-fidelity/

Yes.  Easiest would be Vanguard since you already have your Roth there, but it doesn't really matter. If you convert immediately, you owe no taxes because the Traditional IRA was funded with after tax money and you don't qualify to deduct it on your taxes and there would have been no growth (if it was sitting for a few days in a money market account before you convert it you might owe some pennies )

Open a Traditional IRA and fund it for 2023 before 4/15.  (Max is $6500).  You can also do your 2024 IRA contribution of $7000 at that time if you want (although it will make you do two transactions to do that).

Hit this handy dandy "Convert to Roth" button.

It will ask you if you want to convert your entire account or just part of it and if you want to open a new Roth or put it in your existing one with them if there is one.  It will also ask if you want to have taxes withheld, but since this was a non-taxable transaction you can skip any withholding.

That's it. 

2025, you fill your traditional again and convert right away again.  You don't have to do it all at once, you can do as many transactions to max it out during the year as you want, but you're going to want to make sure you convert it all ASAP and not let it get any growth that would be taxed.

[haapai]

It will probably be impossible for him to contribute the max when he turns 50.  There will be inflation adjustments, but that would be 75% of gross if we were using current numbers.  His employer's plan probably caps contributions at at seventy percent of gross and those numbers just don't work, even before social security, medicare, short-term disability and union dues get considered. 

There's a lot of algebra involved in calculating how to set contributions.  The only nugget that I can give you is that you is withholding for federal, state, and local taxes can be done in other ways -- either through adjusting your own withholding or making quarterly tax payments.  (I'd vote for adjusting your withholding.  It's easy if his income is steady and tricky if it is not.) 

[azucena]

Whew, I think I finally follow it and it's def not that hard. Just needed to make the time to ask the right questions and follow up questions.

Now, talk me through is there any way for DH to open backdoor Roth? His retirement accounts are as follows:

DH 403b 21,631 capital group

DH rollover IRA 24,644 vanguard

DH Roth IRA 16,171 vanguard


We max'd his Roth a couple of years before we hit income limits since I own so much of our retirement and was trying to even it out even just a little bit.

Since he doesn't have a Fidelity account, can I open a new trad IRA there and follow these same steps?


DD15 will have some earned income this year if she gets a summer job. We plan to fund a Roth for her as I think it will be a fun way to teach compounding and retirement savings.

[azucena]

Jan 11, 2024 15:16:19 GMT -5 ArchietheDragon said:

Jan 11, 2024 15:08:50 GMT -5 azucena said:

Whew, I think I finally follow it and it's def not that hard. Just needed to make the time to ask the right questions and follow up questions.

Now, talk me through is there any way for DH to open backdoor Roth? His retirement accounts are as follows:

DH 403b 21,631 capital group

DH rollover IRA 24,644 vanguard

DH Roth IRA 16,171 vanguard


We max'd his Roth a couple of years before we hit income limits since I own so much of our retirement and was trying to even it out even just a little bit.

Since he doesn't have a Fidelity account, can I open a new trad IRA there and follow these same steps?


DD15 will have some earned income this year if she gets a summer job. We plan to fund a Roth for her as I think it will be a fun way to teach compounding and retirement savings.

His Roll over IRA is going to make it a little more complicated for him because they don't let you convert your IRA to a ROTH IRA if you have other taxdeferred (ie, Rollover)IRAs.   IMHO, I think you should bite the bullet and convert his entire $24,644 to a ROTH when you do his backdoor Roth.   It will cost you some tax money this year because that is a taxable event, but it will make future backdoor roths easier and it is a good future tax planning move.  

Have I provided enough info for you to roughly guess at the taxes due on that?

So I can't just open another IRA account for him?

[minnesotapaintlady]

Jan 11, 2024 15:19:13 GMT -5 azucena said:

Jan 11, 2024 15:16:19 GMT -5 ArchietheDragon said:

His Roll over IRA is going to make it a little more complicated for him because they don't let you convert your IRA to a ROTH IRA if you have other taxdeferred (ie, Rollover)IRAs.   IMHO, I think you should bite the bullet and convert his entire $24,644 to a ROTH when you do his backdoor Roth.   It will cost you some tax money this year because that is a taxable event, but it will make future backdoor roths easier and it is a good future tax planning move.  

Have I provided enough info for you to roughly guess at the taxes due on that?

So I can't just open another IRA account for him?

No. Either just convert his entire Rollover and pay the taxes or roll it into his 403b if you can but I think you said his employer plan was pretty bad. 

The taxes will be whatever your marginal rate is, so 24%?  Plus any state tax. 

eta: I confused you with someone else I was talking to on Facebook this morning with a 340K income.  Archie was right 22%. 

[azucena]

Thanks Archie and MPL - $5k will be a pretty hard sell with him. He'll get hung up on comparing it to the balance itself, his salary, etc. And future tax free compounding feels so abstract to him. Maybe I can get our CPA to sign off on this plan so I'm not the bad guy.

Plus his mom and his sister both called already this week to brag about their giant tax refunds, so us owing more taxes hits harder.

[minnesotapaintlady]

Jan 11, 2024 15:40:29 GMT -5 azucena said:

Thanks Archie and MPL - $5k will be a pretty hard sell with him. He'll get hung up on comparing it to the balance itself, his salary, etc. And future tax free compounding feels so abstract to him. Maybe I can get our CPA to sign off on this plan so I'm not the bad guy.

Plus his mom and his sister both called already this week to brag about their giant tax refunds, so us owing more taxes hits harder.

You wouldn't take it out of the balance...I mean you could, but I wouldn't.  It would be added to your income when you did your taxes, and he would still have 25K in his IRA only it would be Roth and not Traditional.

[azucena]

Jan 11, 2024 15:49:42 GMT -5 minnesotapaintlady said:

Jan 11, 2024 15:40:29 GMT -5 azucena said:

Thanks Archie and MPL - $5k will be a pretty hard sell with him. He'll get hung up on comparing it to the balance itself, his salary, etc. And future tax free compounding feels so abstract to him. Maybe I can get our CPA to sign off on this plan so I'm not the bad guy.

Plus his mom and his sister both called already this week to brag about their giant tax refunds, so us owing more taxes hits harder.

You wouldn't take it out of the balance...I mean you could, but I wouldn't.  It would be added to your income when you did your taxes, and he would still have 25K in his IRA only it would be Roth and not Traditional.

Yep, got it. But his math will be $5k compared to $25k balance and why do it.

We've been pretty close to breakeven on tax returns the last couple of years - sometimes getting back <1k and sometimes paying 1kish.

I follow the logic but need to decide how to present it.

Maybe I wait until there's an initial run of our tax returns to see what we already owe.

[minnesotapaintlady]

Jan 11, 2024 15:53:07 GMT -5 azucena said:

Jan 11, 2024 15:49:42 GMT -5 minnesotapaintlady said:

You wouldn't take it out of the balance...I mean you could, but I wouldn't.  It would be added to your income when you did your taxes, and he would still have 25K in his IRA only it would be Roth and not Traditional.

Yep, got it. But his math will be $5k compared to $25k balance and why do it.

We've been pretty close to breakeven on tax returns the last couple of years - sometimes getting back <1k and sometimes paying 1kish.

I follow the logic but need to decide how to present it.

Maybe I wait until there's an initial run of our tax returns to see what we already owe.

Use the Phil button.  Do you want to save 5K in taxes now or pay no taxes on 200K in 20 years? 

$25,000.00 lump sum @ 11%/ann. for 20 years: $201,557.79

Yeah, I know it's not that simple. Really the main reason to do it is to open up the backdoor Roth option going forward.  Either way you're doing great!  Especially with that perk of being able to put 11K in through work. 

[saveinla]

When you do your taxes (if you use turbo tax) they have a forum where this question is asked - so be careful on how you manage the backdoor IRA on your taxes.

It will show as a taxable event, but if you follow the rules, it will go through as zero.

HRB Software does not handle this well.

[saveinla]

Jan 11, 2024 15:25:58 GMT -5 ArchietheDragon said:

Jan 11, 2024 15:19:13 GMT -5 azucena said:

Have I provided enough info for you to roughly guess at the taxes due on that?

So I can't just open another IRA account for him?

It will be about 22%, or $5k.     You can open another IRA for him, but you won't be able to fully convert it to a ROTH.   you could do a partial and slowly do the conversion of his rollover over a few years, but you have the cash available.   I would rip the bandaid off and do it this year. 

If you can roll his Traditional IRA to his 401K , then you dont have to pay taxes now, but you have to check if that is allowed and if it is worth it to do that.

[azucena]

Jan 11, 2024 16:07:55 GMT -5 saveinla said:

When you do your taxes (if you use turbo tax) they have a forum where this question is asked - so be careful on how you manage the backdoor IRA on your taxes.

It will show as a taxable event, but if you follow the rules, it will go through as zero.

HRB Software does not handle this well.

Thanks for the heads up. DH's best friend is a CPA and does our taxes. As mathy as I am, I've never wanted to figure out tax rules.

[TheOtherMe]

Jan 11, 2024 15:40:29 GMT -5 azucena said:

Plus his mom and his sister both called already this week to brag about their giant tax refunds, so us owing more taxes hits harder.

If you know the reason why they receive large refunds, do you know why?  Is it because of refundable credits or over withholding.  

The over withholding is an interest free loan to the government.  I know some people like large refunds.  I used to think like that until I prepared tax returns at Block and saw what people did with the refunds.

Refundable credits?  Which ones are they?  Is it because they are lower income.  

I try to hit the +/- $100 mark.  Federal refund is closer to $300 but I'd rather it be that direction than that I owe $300.  

Since retirement income is no longer taxable in Iowa, I owe no Iowa taxes.  I have a refund coming of the withholding that was done last year before I knew this. 

[azucena]

Jan 11, 2024 16:48:08 GMT -5 TheOtherMe said:

Jan 11, 2024 15:40:29 GMT -5 azucena said:

Plus his mom and his sister both called already this week to brag about their giant tax refunds, so us owing more taxes hits harder.

If you know the reason why they receive large refunds, do you know why?  Is it because of refundable credits or over withholding.  

The over withholding is an interest free loan to the government.  I know some people like large refunds.  I used to think like that until I prepared tax returns at Block and saw what people did with the refunds.

Refundable credits?  Which ones are they?  Is it because they are lower income.  

I try to hit the +/- $100 mark.  Federal refund is closer to $300 but I'd rather it be that direction than that I owe $300.  

Since retirement income is no longer taxable in Iowa, I owe no Iowa taxes.  I have a refund coming of the withholding that was done last year before I knew this. 

Oh that's a whole can of worms, MIL is on social security disability because she's blind. There's some kind of extra tax refund or credit for blind people - I forget if it's federal or Illinois state. Her refund is a few thousand.

SIL doesn't work a full time job and works under the table here and there. She also gets paid by the state for MIL. She has two minor kids and reports income below poverty level. Not sure she actually makes much more than poverty level. Her refund is usually around $10k. She's one of those folks in the loophole of getting 'refunded' more than she pays in. It's a whole thing.

Both blow through the refund money like it's water and then are promptly behind on bills once again.

He was raised to expect big refunds and my high income more than kills that. Logically he knows that we are so much better off this way but numerically/emotionally it kinds screws with his head in March/April every year.

[lurkyloo]

I hesitate to suggest this since you’ve mentioned you’re not fond of the available investments in his 403b, but some plans allow you to roll IRAs into 401ks or 403bs.  Might be a possible workaround to enable backdoor Roths for him.  Personally I’d probably go ahead and convert the 24K and take the tax hit.  

You know you have until April 15-ish to also take advantage of 2023 IRA space, right?

We have additional tax withheld from our paychecks because otherwise we underpay enough* to owe penalties, and it’s easier than doing quarterly payments.  If you feel like humoring him on the refund sulk you could overpay your owed taxes slightly by this route and make Phil need eye bleach 

*Seriously, fsck mutual fund capital gains.


Edit:  I missed that saveinla had already suggested the IRA-to-403b rollover    I’d take a close look at the fund options first though, 0.76% is pretty high for expense ratio.