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After going on and on about front-loading over the last year, I have decided not to front-load my retirement account in 2020. You see, I had planned on it. I even put a request into my HR department in early December to set aside about 90% of my salary for retirement starting in January 2020. But then I canceled the request.
There is really no telling what my Human Resources department thinks of me. They probably thought I was planning on resigning from my position back in early 2019. I was maxing out my 403(b) account to the point where my paychecks were coming in at $12.00. I was in the midst of yet another Epic EMR (electronic medical record) implementation, so perhaps they figured, “yeah, he’s finally lost it”. Now a year later, I am putting in erratic requests to dramatically increase my retirement contribution amounts to 90% of my pay only to cancel it last minute with no explanation.
But after thinking long and hard about it (about 10 minutes to be exact), I decided not to front-load my retirement account in 2020. After canceling the request, I set my contribution back down to 3% of my salary to ensure I capture the employer match.
So has Max lost his edge? Not necessarily.
Personal finance is just a hobby for me. I actually like this stuff. So, considering other options for where to place my hard-earned money is fun for me.
2020 Retirement Account Contribution Limits
The IRS increased the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan from $19,000 to $19,500.
If the Max Out of Pocket crew still lands in the 22% tax bucket in 2020, maxing out this account would defer another $4,290 in taxes. I could then invest that money into the total stock market index where it would sit until I reach the traditional retirement age. My current vehicle for that is Vanguard Institutional Index Fund (VIIIX). This fund seeks to track the performance of the S&P 500 and has a rock bottom expense ratio of 0.02%.
$19,500 X 22% = $4,290 Federal Income Taxes Deferred
It seems like a pretty solid deal, but Max needs some additional time to think through this. While I figure things out, front-loading is out of the question.
I have been maxing out our 403(b) plans since 2013. Even before that, I had a pretty aggressive contribution percentage. Between that, my employer match, and a raging bull market, our retirement accounts have become pretty sizable. In fact, we have well over a half-million set aside for retirement already.
As good as that feels, having so much money in tax-deferred accounts has thrown our overall portfolio off balance a bit. I even mentioned it briefly over at Costa Rice Fire earlier this year. Several other bloggers had additional comments on things they wished they learned about FIRE early on. Thanks again, Caroline, for putting that together!
I initially had plans to retire extremely early and use a Roth Conversion Ladder to slowly release assets out of those accounts at a 0% tax rate. I will get into the details of that process in another post. But then, halfway through 2019 I really started enjoying work again. So now a Roth Conversion Ladder is likely out of the question, or at the very least, won’t happen for several years. Maybe I will hang it up at 40, but I might work until I am 100. There is really no telling at this point. If I do retire out of healthcare, I guarantee I will be making money somehow. After all, I have a $500,000 Standard Deduction portfolio on my side and it is hard to justify not filling that bucket up.
So now, I am considering building up our taxable brokerage account a bit more to help me create a larger pool of liquid assets. That way, if I decide to start a real business or take a sabbatical I will have plenty of money at easy access. I don’t like climbing ladders to get access to my money.
What If I Change My Mind?
Am I really willing to pay around $4,290 in federal income taxes now for the luxury of liquidity later? I’m not sure. Would that $19,500 better serve me locked away in a retirement account? Maybe. Or would I rather have access to about $15,000 now to buy real estate or start a meaningful business? I just don’t know the answer to that question.
I may change my mind later this year and decide to max out my employer-sponsored retirement account. I just need more time to think through this. If I were to front-load again, I wouldn’t be able to reverse that decision and those assets would be locked in tax-deferred accounts.
Is Max Trying To Time The Stock Market?
Unfortunately, I am not a superhero. We can’t time the market. I know that and hopefully, by now, you know that. But that doesn’t negate the fact the S&P is coming off a 30%+ gain in 2019. Is that sustainable? I don’t know. For all I know, we are heading into round two of the roaring ’20s.
But then again, we just bombed Iran. There is a looming presidential election. Australia is burning. Perhaps holding off some contributions will come in handy and I can pivot on this decision and “back-load” into lower stock valuations if things go bust later in 2020. That said, if it happens it would be luck. Time will certainly tell.
Roth 403(b) Retirement Account Option
My employer centralized our retirement account administrator last year. This opened up a new option Max has never had access to.
The Roth 403(b).
Contributions are made to these accounts on a post-tax basis but they offer tax-free growth. I will be doing some additional research on these accounts. My understanding is they behave a lot like the regular Roth IRA including access to the original contributions after 5 years. A decent chunk of my medical office building portfolio is in a Roth IRA because they throw off so many dividends. Those dividends are tax-free in that type of account.
I went ahead and set my 3% salary deferral to go into a Roth 403(b). This will force me to do the research. Perhaps this will be a good middle ground for the Max Out of Pocket crew.
Front-loading worked well for me in 2019. With the S&P up 30%, I ended up with about $1,000 more in my account compared to the gains I would have seen if I hadn’t front-loaded. I will dig into those numbers soon.
But after maxing out my tax-deferred retirement account for 7 years, Max is considering changing things up in 2020. I am starting out the year by only putting 3% of my salary into my employer’s retirement account. For the first time, those contributions will hit a Roth 403(b) account. I will be doing some additional research on my fancy new Roth 403(b) account in the coming months.
In the meantime, I am going to cash-flow my W2 income into my brokerage account. Who knows, maybe I will accelerate my medical office building portfolio a bit. I just need to be careful keeping too many of those things in a taxable account since they throw off so many dividends. I don’t want to have an embarrassing tax situation on my hands.
Personal finance, what a weird hobby for someone to have.
Where do you keep your retirement assets?