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Eyeing the Future

Jonathan Clements

I DON’T TRACK MY finances that closely and I don’t make big financial moves very often. Partly, it’s because I’m so busy with other things. But partly, it’s because I’ve come to see the virtue in benign neglect.

Still, this is shaping up to be a surprisingly busy year. I’ve taken a handful of financial steps—with three key goals in mind:

No. 1: Prepaying retirement. Like many others as they approach retirement, I have the urge to get key expenses out of the way before my earned income disappears. I’m not sure this impulse is entirely rational. Even once we retire, big expenses will keep cropping up, so there’s a limit to how much we can prepay the future.

Yet prepaying costs is undoubtedly part of my motivation in remodeling my house now rather than later. That said, there’s another, more rational reason to get the project done soon: Elaine and I will have more years to enjoy the renovation before we’re potentially forced out of our home by old age, and any cost overruns will be easier to handle while I still have some earned income.

Similarly, in an effort to get costs out of the way, I’ve been writing some big checks to my grandson’s 529 college savings plan. I promised to build the account up to $50,000, and I got there last month. I’ve also said I’ll do the same for any other grandchildren who happen to turn up.

A digression: Based on his parents’ income, my grandson almost certainly won’t qualify for needs-based aid under the current financial-aid system, so funding the 529 seems like a sensible move. On the other hand, when I ponder the student loan mess and the outcry over rising college costs, I sense we could see wholesale changes in the way colleges are priced and financial aid is disbursed. What will that mean for money stashed in 529s? I wish I knew.

No. 2: Prepaying taxes. While I continue to save a modest amount each year, these days I’m mostly moving around the money I’ve already accumulated. What’s behind these moves? A key goal: Reduce my future tax bills, especially once I’m in my 70s and required minimum distributions (RMDs) will force me to pull significant sums each year from my traditional IRA. Those RMDs, coupled with Social Security benefits, are likely to put me in a lofty tax bracket.

To trim future tax bills, I’ve been stashing money this year in three accounts that offer tax-free growth. First, I’m hoping to fully fund my solo Roth 401(k) in 2023, which would mean moving $30,000 into the account as my “employee contribution.”

Second, I’ve been converting a portion of my traditional IRA to a Roth. I converted $80,000 last year and another $50,000 on 2023’s first trading day. I’ll likely convert another chunk later this year, when I have a better handle on my 2023 taxable income. There’s a good chance that chunk will be a large one—because my income this year looks like it’ll be modest, thanks in part to the collapse in digital advertising. HumbleDollar has never made a lot of money, but lately it’s been barely breaking even, with this year’s revenue from advertising running 25% below 2022’s level.

With my Roth conversions, my goal is to get my income close to the top of the 24% tax bracket. That seems like an especially smart strategy for the next three years—for two reasons. First, without Congressional action, today’s tax law will sunset at year-end 2025 and we’ll revert to 2017’s more punishing tax brackets. Second, in 2026, I’ll turn age 63—which means thereafter high taxable income, including income resulting from Roth conversions, could trigger premium surcharges once I turn age 65 and become eligible for Medicare.

What’s the third tax-free account I’m targeting? That would be my health savings account (HSA), which I’m eligible to fund this year because I have a high-deductible health insurance policy. Even though I’ll likely incur some medical expenses later in 2023, my plan is to pay those costs out of pocket while leaving my HSA to grow, so it’ll be available to help with my retirement’s medical expenses.

No. 3: Paying it forward. In stashing money in my solo Roth 401(k) and undertaking Roth conversions, I’m not just trying to limit my future tax bills. I’m also aiming to build up these accounts with an eye to bequeathing them to my two kids.

While a Roth isn’t the great inheritance it once was—thanks to the death of the stretch IRA—it’ll provide my children with a pool of income-tax-free money and potentially 10 years of tax-free growth after my death. Because I have no plans to spend the money during my lifetime, it’s 100% invested in stocks, in the guise of Vanguard Total World Stock Index Fund.

Recently, within my Roth IRA, I swapped from the mutual fund version (symbol: VTWAX) to the exchange-traded version (VT), thus lowering my annual expenses by 0.03 percentage point. While exchange-traded index funds typically have lower ongoing expenses than their mutual fund counterparts, I’ve resisted owning ETFs to date because you lose a little to trading costs every time you buy and sell. But I’m pretty certain I won’t be doing any selling in my Roth, so trading costs aren’t a concern.

By contrast, in my traditional IRA, which I plan to draw down during retirement—and, indeed, will be required to do so—I’ve avoided ETFs and instead stuck with regular index mutual funds. Could I save a few dollars by converting my traditional IRA to ETFs, even after factoring in some occasional buying and selling? Perhaps. But it doesn’t seem worth fussing with. No doubt true penny-pinchers would disagree.

In bequeathing my Roth accounts to my children, I’m hoping to set an example for them—that we, as a family, should strive to pay it forward to the next generation. I’m unlikely to bequeath so much that my kids never need to work again and, in any case, I don’t think that’s desirable. On the other hand, I do think it’s desirable to bequeath a sense of financial security—the knowledge that, if my children have a rougher financial journey than me, they’ll still be okay come retirement. That sense of financial security, I believe, is worth far more than the raw dollars involved—and I hope my kids will pay it forward to their kids.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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