OMG Taxes....

[RetireSomeday]

We are finally done aggressively paying student loans, and are now feeling RICH. I am struggling with fully understanding the tax implications of changing our savings plan around a bit now that we are done with student loans. Our goal is not extreme FIRE, but we’d like to retire by at least 55 if not earlier (current age 30). Current fed tax bracket in the new 2018 brackets is 22%. We expect to be spending in the 12% bracket in retirement (if nothing changes to brackets etc.).

Initial Planned Hierarchy of Savings:
1) 401k – contribute to get employer match [My work matches 2-1 (I put in 5%, they put in 10%), spouse’s work barely matches (put in 3%, they put in 1.5%)]
2) HSA – contribute max
3) Max 457b governmental – since this money can be withdrawn at any age, this seemed like a good next step. My question – do I contribute Roth (wouldn’t be tax free till 59 ½), or pre-tax?
4) Any extra to 401ks (pre-tax, though I can do Roth if I choose to for my employer) – not able to max both 401k's yet, but should be able to max 1
5) Not here yet, but if we hit it someday, any extra would go to low fee index funds

We recently met with a financial advisor who recommended:
1) 401k to get match
2) HSA max
3) 457b max BUT to do it all Roth! I didn’t realize when we met with him that it wouldn’t be tax free until 59.5
4) Extra to index funds, not max 401k? Didn’t understand this either from a tax perspective (however, this would provide money from age 55-59.5 when we could not withdraw the ROTH 457b tax free yet)

Given the conflicting advice on Roth vs. pre-tax, and hierarchy of account types versus what we had planned, I just want to get more opinions. I feel like since we fall somewhere between super early retirement and normal age retirement that it’s a little more fuzzy. Then I read GCC 'never pay taxes again' and started to doubt both plans above! I tried to model it out, since we have a long time horizon the money would grow so much that it seemed to favor ROTH, but I'm not confident in my modeling. Help!!

[Seppia]

I would generally try to delay death and taxes as much as I can

[ajcoleman22]

I would always defer the taxes. Once you retire you get to choose the taxes you pay for the most part. Take the guaranteed benefit now.

[suomalainen]

We recently met with a financial advisor who recommended:
1) 401k to get match
2) HSA max
3) 457b max BUT to do it all Roth! I didn’t realize when we met with him that it wouldn’t be tax free until 59.5
4) Extra to index funds, not max 401k? Didn’t understand this either from a tax perspective (however, this would provide money from age 55-59.5 when we could not withdraw the ROTH 457b tax free yet)

The problem I find with financial advisors is that they typically assume that you want to be in the same tax bracket (or higher!) in retirement. In my view, if you do it that way, you did it wrong. But anyway, it's that attitude that typically leads to the "do it all Roth" recommendation.

I don't particularly understand where the 457b comes into play if you and your wife also have 401k plans, but in any event, my $.02 is that you should always take the tax benefit now rather than later (i.e., I'm assuming I'm in a higher bracket now than I will be later) unless there are other considerations. For example, you may want to balance your pre-tax and post-tax accounts if you want/need that money before 59.5. It is possible that this consideration is what lead to the reco in #3 above, but if you're unclear about the reasoning, ask the FA.

[ThisDinosaur]

Fish put this nice chart together for me. It shows how much one should put in retirement accounts if you have several years of FI before age 59.5y.

viewtopic.php?t=9015

And I second suomalainen that if you have a large savings rate, you tax rate should be lower in retirement than now. Delay taxes as long as possible.

[RetireSomeday]

Thanks all, very helpful! In case it helps for more clarity, the advantage to the 457b is you can withdraw at any time after retiring (or leaving the company) with no extra penalty, so that's why I prioritized over 401k (the best part is that you can max both out!). The only caveat to that is that if you make the contributions Roth you'll be taxed on them if you take out before 59.5 (double tax, yikes!). Yet another reason to make those contributions pre-tax as you've all recommended. It sounds like the best route would be to max out all pre-tax savings ($18,500 457b (not doing roth), $18,500 to my 401k, any extra to husband's 401k beyond his minimum to get match). Where does the HSA fall in the priority list?

Thanks everyone for the guidance! I certainly am a beginner when it comes to taxes...

[cmonkey]

Given health care expense levels and where they are headed, HSA should be a top priority as well. All contributions are top-line income reducing so you don't pay tax on them. The account grows tax-free. It also doubles as an IRA once you turn 65, you can withdraw for non-health expenses and not pay a penalty, just normal taxes.