Very confused about choosing between traditional & roth 401k

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Topic Author
ofthewoods
Posts: 38
Joined: Mon Dec 28, 2020 11:48 am

Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

Hello all,

I swear the more I read the more confused I am. I'm currently allocating to both roth and traditional 401k through my employer's plan. My wife only has the option for traditional. We are maxing our 401ks and roth IRAs. Right now in total we have ~$56,000 in traditional 401k and ~$36,000 in roth 401k between us both. Our gross income is $132,000 and we take the standard deduction on our tax return.

We are in NY, 22% fed tax bracket and 6.09% state bracket. Realistically I think we'll realistically advance one more tax bracket in our current careers but really don't know what our bracket will be in retirement and I'm having a hard time working through it in the Traditional vs. Roth Boglehead Wiki. It's likely we'll move to a different state with a lower state tax rate within the next 12 - 18 months.

I'm not sure what other info would be helpful but will be happy to provide anything additional.

My question is whether we'd be better off contributing more toward traditional, roth, or splitting my 401k between roth and traditional.
simas
Posts: 927
Joined: Wed Apr 04, 2007 5:50 pm

Re: Very confused about choosing between traditional & roth 401k

Post by simas »

ofthewoods wrote: Fri Jan 01, 2021 2:24 pm Hello all,

I swear the more I read the more confused I am. I'm currently allocating to both roth and traditional 401k through my employer's plan. My wife only has the option for traditional. We are maxing our 401ks and roth IRAs. Right now in total we have ~$56,000 in traditional 401k and ~$36,000 in roth 401k between us both. Our gross income is $132,000 and we take the standard deduction on our tax return.

We are in NY, 22% fed tax bracket and 6.09% state bracket. Realistically I think we'll realistically advance one more tax bracket in our current careers but really don't know what our bracket will be in retirement and I'm having a hard time working through it in the Traditional vs. Roth Boglehead Wiki. It's likely we'll move to a different state with a lower state tax rate within the next 12 - 18 months.

I'm not sure what other info would be helpful but will be happy to provide anything additional.

My question is whether we'd be better off contributing more toward traditional, roth, or splitting my 401k between roth and traditional.
How i would have approached it
- What is your AGI?
- are your IRA contributions 'deductible'? See this https://www.irs.gov/retirement-plans/pl ... an-at-work

I would have put everything into traditional 401ks for both of you during the year. This is guaranteed 30% tax saving for you.
After the year ended and when running numbers, I would then decide what IRAs you are contributing - you can put just enough into Traditional to have further savings , put it into Roth (if numbers do not offer you deductibility) , or split it.


Remember that traditional 401k and deductible IRAs are tax savings now. You can always move some of that money to Roth later (and pay income taxes) if situation presents itself (your income is lower one of the years, one or both of you are off work, if tax brackets go down, etc) by converting some or more of your balances to Roth accounts. The reverse is not true, by putting money into Roth now and paying taxes now, you do not get to move it to traditional later and claim AGI reduction for years that already passed. You snooze -> you lose, once it is passed the tax benefit is gone.
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geerhardusvos
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Re: Very confused about choosing between traditional & roth 401k

Post by geerhardusvos »

ofthewoods wrote: Fri Jan 01, 2021 2:24 pm Hello all,

I swear the more I read the more confused I am. I'm currently allocating to both roth and traditional 401k through my employer's plan. My wife only has the option for traditional. We are maxing our 401ks and roth IRAs. Right now in total we have ~$56,000 in traditional 401k and ~$36,000 in roth 401k between us both. Our gross income is $132,000 and we take the standard deduction on our tax return.

We are in NY, 22% fed tax bracket and 6.09% state bracket. Realistically I think we'll realistically advance one more tax bracket in our current careers but really don't know what our bracket will be in retirement and I'm having a hard time working through it in the Traditional vs. Roth Boglehead Wiki. It's likely we'll move to a different state with a lower state tax rate within the next 12 - 18 months.

I'm not sure what other info would be helpful but will be happy to provide anything additional.

My question is whether we'd be better off contributing more toward traditional, roth, or splitting my 401k between roth and traditional.
Especially if you will have a couple low income or no income years between your retirement and Social Security starting, I highly recommend putting all 401(k) money in pre-tax. I also max out my Roth IRA for some Roth money because I don’t make enough to be in eligible. All my 401(k) money is and will be pretax until I convert to Roth when I am retired early.

In general, don’t overthink it. You can’t have too much pretax money. Not at your/our income levels at least.
VTSAX and chill
Topic Author
ofthewoods
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Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

simas wrote: Fri Jan 01, 2021 2:54 pm
ofthewoods wrote: Fri Jan 01, 2021 2:24 pm Hello all,

I swear the more I read the more confused I am. I'm currently allocating to both roth and traditional 401k through my employer's plan. My wife only has the option for traditional. We are maxing our 401ks and roth IRAs. Right now in total we have ~$56,000 in traditional 401k and ~$36,000 in roth 401k between us both. Our gross income is $132,000 and we take the standard deduction on our tax return.

We are in NY, 22% fed tax bracket and 6.09% state bracket. Realistically I think we'll realistically advance one more tax bracket in our current careers but really don't know what our bracket will be in retirement and I'm having a hard time working through it in the Traditional vs. Roth Boglehead Wiki. It's likely we'll move to a different state with a lower state tax rate within the next 12 - 18 months.

I'm not sure what other info would be helpful but will be happy to provide anything additional.

My question is whether we'd be better off contributing more toward traditional, roth, or splitting my 401k between roth and traditional.
How i would have approached it
- What is your AGI?
- are your IRA contributions 'deductible'? See this https://www.irs.gov/retirement-plans/pl ... an-at-work
Our AGI for 2020 is approximately $90,000 and should be similar in 2020 if no changes are made to my traditional/roth 401k split. According to the above table our IRA contributions are not deductible.
KlangFool
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Re: Very confused about choosing between traditional & roth 401k

Post by KlangFool »

OP,

It is very simple.


A) Do not contribute to Roth 401K.

B) Max up your Trad 401K and put the tax savings into your Roth IRA.

<<what our bracket will be in retirement >>

You only have 56K in the Trad 401K. In retirement, you withdraw 4% of that. It is less than 2K per year. How much taxes do you pay for 2K of income? 0%. The standard deduction is 24K


Why do you choose to pay 28+% of taxes now by contributing to Roth 401K when you can pay 0% later?


Until your Trad 401K account reaches 1 million, you do not have to think about Roth 401K yet.

You should read this URL too. 401K and IRA are tax-advantaged accounts. They are not retirement accounts. You can get the money out tax-free and penalty-free before 59 1/2 years old.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool
simas
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Re: Very confused about choosing between traditional & roth 401k

Post by simas »

ofthewoods wrote: Fri Jan 01, 2021 3:05 pm
simas wrote: Fri Jan 01, 2021 2:54 pm
ofthewoods wrote: Fri Jan 01, 2021 2:24 pm Hello all,

I swear the more I read the more confused I am. I'm currently allocating to both roth and traditional 401k through my employer's plan. My wife only has the option for traditional. We are maxing our 401ks and roth IRAs. Right now in total we have ~$56,000 in traditional 401k and ~$36,000 in roth 401k between us both. Our gross income is $132,000 and we take the standard deduction on our tax return.

We are in NY, 22% fed tax bracket and 6.09% state bracket. Realistically I think we'll realistically advance one more tax bracket in our current careers but really don't know what our bracket will be in retirement and I'm having a hard time working through it in the Traditional vs. Roth Boglehead Wiki. It's likely we'll move to a different state with a lower state tax rate within the next 12 - 18 months.

I'm not sure what other info would be helpful but will be happy to provide anything additional.

My question is whether we'd be better off contributing more toward traditional, roth, or splitting my 401k between roth and traditional.
How i would have approached it
- What is your AGI?
- are your IRA contributions 'deductible'? See this https://www.irs.gov/retirement-plans/pl ... an-at-work
Our AGI for 2020 is approximately $90,000 and should be similar in 2020 if no changes are made to my traditional/roth 401k split. According to the above table our IRA contributions are not deductible.
not sure how you determined that - are you filing MFJ or something else? MFJ limit for deductibility is 104k. This means (if you budget allows it), you can further reduce your AGI from $90,000 to $78,000 (90,000 - IRA limit of 6000 x2 for each one of you). This is additional reduction in your taxes for both Fed and State.

Get your numbers into whatever tax filling program you use (taxact, h&r block, etc) and see what happens if you record X or Y in IRA contributions. you will have program recalculate the results and see the changes in taxes. IRA contributions could be made until you filed taxes for the previously year (typically 4/15 or longer if you ask for extension)
Last edited by simas on Fri Jan 01, 2021 3:12 pm, edited 1 time in total.
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GerryL
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Re: Very confused about choosing between traditional & roth 401k

Post by GerryL »

Just a reminder for the future: When figuring how much you have set aside for retirement, never forget that in a traditional IRA or 401k, not all of that money belongs to you. The IRS will get a portion. So that $56k in your 401k is really about $42k for your future living expenses.

Now in retirement, I appreciate having the flexibility of 3 kinds of accounts to draw from (tax-deferred, tax-free and taxable). I wish I'd had a Roth option when I was younger, so it would have had more time to grow.
Independent George
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Re: Very confused about choosing between traditional & roth 401k

Post by Independent George »

I would go Traditional on the 401k, and Roth on the IRA. In fact, that's what I'm currently doing with the same tax brackets. With enough assets in each class, you actually have a lot of power to game your tax rate in retirement.

As a general rule of thumb, I think Roth is clearly better if you're in the 10% & 12% brackets, and Traditional is clearly better if you're in the 32% bracket or higher. At the current 22% and 24% brackets, it's about preferences, and I personally want a mix of both.
Topic Author
ofthewoods
Posts: 38
Joined: Mon Dec 28, 2020 11:48 am

Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

simas wrote: Fri Jan 01, 2021 3:10 pm
ofthewoods wrote: Fri Jan 01, 2021 3:05 pm
simas wrote: Fri Jan 01, 2021 2:54 pm
ofthewoods wrote: Fri Jan 01, 2021 2:24 pm Hello all,

I swear the more I read the more confused I am. I'm currently allocating to both roth and traditional 401k through my employer's plan. My wife only has the option for traditional. We are maxing our 401ks and roth IRAs. Right now in total we have ~$56,000 in traditional 401k and ~$36,000 in roth 401k between us both. Our gross income is $132,000 and we take the standard deduction on our tax return.

We are in NY, 22% fed tax bracket and 6.09% state bracket. Realistically I think we'll realistically advance one more tax bracket in our current careers but really don't know what our bracket will be in retirement and I'm having a hard time working through it in the Traditional vs. Roth Boglehead Wiki. It's likely we'll move to a different state with a lower state tax rate within the next 12 - 18 months.

I'm not sure what other info would be helpful but will be happy to provide anything additional.

My question is whether we'd be better off contributing more toward traditional, roth, or splitting my 401k between roth and traditional.
How i would have approached it
- What is your AGI?
- are your IRA contributions 'deductible'? See this https://www.irs.gov/retirement-plans/pl ... an-at-work
Our AGI for 2020 is approximately $90,000 and should be similar in 2020 if no changes are made to my traditional/roth 401k split. According to the above table our IRA contributions are not deductible.
not sure how you determined that - are you filing MFJ or something else? MFJ limit for deductibility is 104k. This means (if you budget allows it), you can further reduce your AGI from $90,000 to $78,000 (90,000 - IRA limit of 6000 x2 for each one of you). This is additional reduction in your taxes for both Fed and State.

Get your numbers into whatever tax filling program you use (taxact, h&r block, etc) and see what happens if you record X or Y in IRA contributions. you will have program recalculate the results and see the changes in taxes. IRA contributions could be made until you filed taxes for the previously year (typically 4/15 or longer if you ask for extension)
AGI is MFJ but I did make a mistake calculating MAGI for Roth IRA purposes. I recalculated using Worksheet 2-1 here https://www.irs.gov/publications/p590a# ... 1000230955 and came up with ~$103,725. That's an estimate using the best numbers I have on hand so we may be just above the cutoff. I actually didn't know Roth IRA contributions were deductible at all, though. I thought Roth contributions were strictly non-deductible. I'm going to have to check our tax return from last year and see if we need to amend it.

I'll also note that we still have 30 - 35 years until retirement if that matters.
Last edited by ofthewoods on Fri Jan 01, 2021 3:36 pm, edited 1 time in total.
Topic Author
ofthewoods
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Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

KlangFool wrote: Fri Jan 01, 2021 3:10 pm OP,

It is very simple.


A) Do not contribute to Roth 401K.

B) Max up your Trad 401K and put the tax savings into your Roth IRA.

<<what our bracket will be in retirement >>

You only have 56K in the Trad 401K. In retirement, you withdraw 4% of that. It is less than 2K per year. How much taxes do you pay for 2K of income? 0%. The standard deduction is 24K


Why do you choose to pay 28+% of taxes now by contributing to Roth 401K when you can pay 0% later?


Until your Trad 401K account reaches 1 million, you do not have to think about Roth 401K yet.

You should read this URL too. 401K and IRA are tax-advantaged accounts. They are not retirement accounts. You can get the money out tax-free and penalty-free before 59 1/2 years old.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool
Klangfool, thanks for your comments. I've seen many of your other responses in other threads related to this subject as well. I'll give that link a read.
simas
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Re: Very confused about choosing between traditional & roth 401k

Post by simas »

GerryL wrote: Fri Jan 01, 2021 3:11 pm Just a reminder for the future: When figuring how much you have set aside for retirement, never forget that in a traditional IRA or 401k, not all of that money belongs to you. The IRS will get a portion. So that $56k in your 401k is really about $42k for your future living expenses.

Now in retirement, I appreciate having the flexibility of 3 kinds of accounts to draw from (tax-deferred, tax-free and taxable). I wish I'd had a Roth option when I was younger, so it would have had more time to grow.
another thing to remember here are words of caution when gambling with the state (assuming you know the tax rates OR laws in the future) Congress can and does change the rules at whim based on political winds. Social security was not supposed to be taxed either until it become so. There is absolutely nothing blocking Congress from include Roth IRA withdrawals in the future in various calculations including MAGI, AGI, AMT, etc. Nothing at all. Roth IRAs are not part of Constitutional Amendment (and even those do change) and Congress will have many tools to ensure it is de-facto taxed if it wants to (which given it is always starved for revenue, it will someday in my opinion will try to do). Similarly Congress may decide to move some of the tax load to VAT and then Roth is even worse bet..

If you are giving up real tax credit now based on assumptions that rules will never change decade plus in the future, I am not sure it is a good bet..

I put money into Roth too, I just not sure I would be overloading it as Congress does not have a great track record with its promises (see Social Security )
simas
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Re: Very confused about choosing between traditional & roth 401k

Post by simas »

ofthewoods wrote: Fri Jan 01, 2021 3:34 pm
simas wrote: Fri Jan 01, 2021 3:10 pm
ofthewoods wrote: Fri Jan 01, 2021 3:05 pm
simas wrote: Fri Jan 01, 2021 2:54 pm
ofthewoods wrote: Fri Jan 01, 2021 2:24 pm Hello all,

I swear the more I read the more confused I am. I'm currently allocating to both roth and traditional 401k through my employer's plan. My wife only has the option for traditional. We are maxing our 401ks and roth IRAs. Right now in total we have ~$56,000 in traditional 401k and ~$36,000 in roth 401k between us both. Our gross income is $132,000 and we take the standard deduction on our tax return.

We are in NY, 22% fed tax bracket and 6.09% state bracket. Realistically I think we'll realistically advance one more tax bracket in our current careers but really don't know what our bracket will be in retirement and I'm having a hard time working through it in the Traditional vs. Roth Boglehead Wiki. It's likely we'll move to a different state with a lower state tax rate within the next 12 - 18 months.

I'm not sure what other info would be helpful but will be happy to provide anything additional.

My question is whether we'd be better off contributing more toward traditional, roth, or splitting my 401k between roth and traditional.
How i would have approached it
- What is your AGI?
- are your IRA contributions 'deductible'? See this https://www.irs.gov/retirement-plans/pl ... an-at-work
Our AGI for 2020 is approximately $90,000 and should be similar in 2020 if no changes are made to my traditional/roth 401k split. According to the above table our IRA contributions are not deductible.
not sure how you determined that - are you filing MFJ or something else? MFJ limit for deductibility is 104k. This means (if you budget allows it), you can further reduce your AGI from $90,000 to $78,000 (90,000 - IRA limit of 6000 x2 for each one of you). This is additional reduction in your taxes for both Fed and State.

Get your numbers into whatever tax filling program you use (taxact, h&r block, etc) and see what happens if you record X or Y in IRA contributions. you will have program recalculate the results and see the changes in taxes. IRA contributions could be made until you filed taxes for the previously year (typically 4/15 or longer if you ask for extension)
AGI is MFJ but I did make a mistake calculating MAGI for Roth IRA purposes. I recalculated using Worksheet 2-1 here https://www.irs.gov/publications/p590a# ... 1000230955 and came up with ~$103,725. That's an estimate using the best numbers I have on hand so we may be just above the cutoff. I actually didn't know Roth IRA contributions were deductible at all, though. I thought Roth contributions were strictly non-deductible. I'm going to have to check our tax return from last year and see if we need to amend it.

I'll also note that we still have 30 - 35 years until retirement if that matters.
Roth is never 'deductible' (from income), only traditional IRA contributions may or may not be deductible based on AGI. and remember that contributions themselves change the AGI. In short, play around with numbers using tax software, you will easily see what makes sense for IRA breakdown
aristotelian
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Re: Very confused about choosing between traditional & roth 401k

Post by aristotelian »

One more vote for traditional. Try to project out your portfolio in retirement and fill out a tax return. Very unlikely you will be in the 22% bracket when you do not have income from a job. Remember that in retirement your tax bracket is determined by your taxable income, not your spending.
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patrick013
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Re: Very confused about choosing between traditional & roth 401k

Post by patrick013 »

ofthewoods wrote: Fri Jan 01, 2021 2:24 pm My question is whether we'd be better off contributing more toward traditional, roth, or splitting my 401k between roth and traditional.
A few words about it below -

viewtopic.php?p=5700288#p5700288
age in bonds, buy-and-hold, 10 year business cycle
Topic Author
ofthewoods
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Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

simas wrote: Fri Jan 01, 2021 3:40 pm Roth is never 'deductible' (from income), only traditional IRA contributions may or may not be deductible based on AGI. and remember that contributions themselves change the AGI. In short, play around with numbers using tax software, you will easily see what makes sense for IRA breakdown
My fault. I misunderstood what you meant by deductible above.
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JoMoney
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Re: Very confused about choosing between traditional & roth 401k

Post by JoMoney »

I am a big fan of traditional, and taking the tax break now.
This is the way I framed it in another post recently:
If your retirement savings and tax bracket of future withdrawals is uncertain though, I would think it wise to look at the consequences:

If you save too much in a taxable retirement plan, the "consequence" is you're in a higher tax bracket in withdrawal/retirement then when you were working. While those in that situation are certain to grumble about their high tax rate and could'a would'a should'a optimized better, having more money then you need available to you is not a bad situation.

If you save in a Roth retirement plan, but it turns out your available withdrawal/income puts you at the same or lower tax bracket then when you were working, it means less after-tax spendable money is available to you then if you had saved in a traditional pre-tax account, which could impact the quality of life you have in retirement.
If you're in a high income tax state, and think you might move to a no/low income tax state when you start withdrawing, even more reason to prefer traditional.

That said, in my own personal situation I have started to account for how much I have saved in traditional accounts, and how many more years I might live. Doing the very simple math of dividing my (taxable balance)/(remaining years estimate) the amount would completely fill up through the 12% tax bracket and put me firmly in the 22% if I withdrew that sum every year, and the money didn't grow much but keeping with inflation.
With some modest growth estimates it might be time I start considering roth contributions/conversion... but because I'm currently in the 24% bracket and paying another 9% to California, I'm still reluctant to do that. I've promised myself I will not complain, and consider it "winning the game" if I have so much money in retirement that it puts most of my income into the same tax bracket or higher as while I was working.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
LeslieSmiley
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Re: Very confused about choosing between traditional & roth 401k

Post by LeslieSmiley »

KlangFool wrote: Fri Jan 01, 2021 3:10 pm OP,

It is very simple.


A) Do not contribute to Roth 401K.

B) Max up your Trad 401K and put the tax savings into your Roth IRA.

<<what our bracket will be in retirement >>

You only have 56K in the Trad 401K. In retirement, you withdraw 4% of that. It is less than 2K per year. How much taxes do you pay for 2K of income? 0%. The standard deduction is 24K


Why do you choose to pay 28+% of taxes now by contributing to Roth 401K when you can pay 0% later?


Until your Trad 401K account reaches 1 million, you do not have to think about Roth 401K yet.

You should read this URL too. 401K and IRA are tax-advantaged accounts. They are not retirement accounts. You can get the money out tax-free and penalty-free before 59 1/2 years old.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool

Excellent point!

I think many people either forget or do not take into the account of standard deduction which could render the withdrawal tax free from the tIRA.

I have a sizeable amount in my tax deferred and I plan to do Roth conversion as soon as I begin my early retirement when my tax rate would drop, but not until I need to take RMD as my tax rate would rise at that point due to the RMD from a high balance tax deferred accounts.
MathWizard
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Re: Very confused about choosing between traditional & roth 401k

Post by MathWizard »

I contribute to traditional to get me to the 12% bracket, then Roth after that.

I don't see me getting into the 10% bracket, and the 12% bracket will become 15% in a few years, so paying 12% now seems the better deal.
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JoMoney
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Re: Very confused about choosing between traditional & roth 401k

Post by JoMoney »

MathWizard wrote: Fri Jan 01, 2021 4:08 pm... the 12% bracket will become 15% in a few years...
As the law currently is written, but that could change. It will have to be addressed by congress, one way or another. Even if just left to lapse and reset on it's own, there will be uproar. I can't imagine any politician taking the side of raising taxes on the lowest income earners, it should make for some "interesting" politics to see how they frame/explain doing that, should that be a proposal.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
MathWizard
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Re: Very confused about choosing between traditional & roth 401k

Post by MathWizard »

JoMoney wrote: Fri Jan 01, 2021 4:22 pm
MathWizard wrote: Fri Jan 01, 2021 4:08 pm... the 12% bracket will become 15% in a few years...
As the law currently is written, but that could change. It will have to be addressed by congress, one way or another. Even if just left to lapse and reset on it's own, there will be uproar. I can't imagine any politician taking the side of raising taxes on the lowest income earners, it should make for some "interesting" politics to see how they frame/explain doing that, should that be a proposal.
Forum rules do not allow discussion of potential legislation.

I make comments only on tax law as it currently exists.

I think that forum policy is very sensible, since it stops many disagreements.
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ofthewoods
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Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

LeslieSmiley wrote: Fri Jan 01, 2021 4:01 pm Excellent point!

I think many people either forget or do not take into the account of standard deduction which could render the withdrawal tax free from the tIRA.

I have a sizeable amount in my tax deferred and I plan to do Roth conversion as soon as I begin my early retirement when my tax rate would drop, but not until I need to take RMD as my tax rate would rise at that point due to the RMD from a high balance tax deferred accounts.
I'm still really early into retirement planning other than having a 401k and IRA set up and haven't even begun to start thinking about RMD. Hoping to get the foundations set up and learn as time allows.
retiredjg
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Re: Very confused about choosing between traditional & roth 401k

Post by retiredjg »

ofthewoods wrote: Fri Jan 01, 2021 2:24 pm Our gross income is $132,000 and we take the standard deduction on our tax return.

We are in NY, 22% fed tax bracket and 6.09% state bracket.....

Our AGI for 2020 is approximately $90,000 and should be similar in 2020 if no changes are made to my traditional/roth 401k split.
This is not adding up so let's go back over your numbers.

How do you get your AGI down to $90,000?

And after deducting the standard deduction from your AGI, why do you think you are in the 22% tax bracket? I think you are probably in the 12% bracket which is likely to be the lowest rate you will ever pay.

My suggestion would be to contribute enough to traditional 401k to get into the 12% bracket and put everything else in Roth. Getting money into Rothness at 12% is a good thing. Deferring taxes at 12% is questionable if you could be putting it into Roth.
bling
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Re: Very confused about choosing between traditional & roth 401k

Post by bling »

while traditional 401k before roth 401k is ideal for most people, it changes slightly if you're able to contribute the maximum every year.

assumptions: start at age 30, $500 increments every 5 years, 33% boost after 50, stop at 65, RMDs at 70, 6% ROR.

Code: Select all

age	contribution	catchup	value
30	19500		$19,500.00
31	19500		$40,170.00
32	19500		$62,080.20
33	19500		$85,305.01
34	19500		$109,923.31
35	20000		$136,518.71
36	20000		$164,709.83
37	20000		$194,592.42
38	20000		$226,267.97
39	20000		$259,844.05
40	20500		$295,934.69
41	20500		$334,190.77
42	20500		$374,742.22
43	20500		$417,726.75
44	20500		$463,290.36
45	21000		$512,087.78
46	21000		$563,813.04
47	21000		$618,641.83
48	21000		$676,760.34
49	21000		$738,365.96
50	21500	7095	$811,262.91
51	21500	7095	$888,533.69
52	21500	7095	$970,440.71
53	21500	7095	$1,057,262.15
54	21500	7095	$1,149,292.88
55	22000	7260	$1,247,510.46
56	22000	7260	$1,351,621.08
57	22000	7260	$1,461,978.35
58	22000	7260	$1,578,957.05
59	22000	7260	$1,702,954.47
60	22500	7425	$1,835,056.74
61	22500	7425	$1,975,085.14
62	22500	7425	$2,123,515.25
63	22500	7425	$2,280,851.17
64	22500	7425	$2,447,627.24
65	23000	7590	$2,625,074.87
66			$2,782,579.37
67			$2,949,534.13
68			$3,126,506.18
69			$3,314,096.55
70			$3,512,942.34
your RMD at 70 will be $128k, putting you into the 22-24% bracket. and this is excluding any company matches you may receive... if you earn enough to max out, it seems at some point to avoid having too much in your tax deferred space it makes sense to put it into a roth 401k instead.

while the 22-24% is likely lower than the 24-35% you're paying right now (since you would need a high income to afford maxing out), some may want to downsize during retirement and aim for that magical 0% tax rate.
Topic Author
ofthewoods
Posts: 38
Joined: Mon Dec 28, 2020 11:48 am

Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

retiredjg wrote: Fri Jan 01, 2021 4:33 pm
ofthewoods wrote: Fri Jan 01, 2021 2:24 pm Our gross income is $132,000 and we take the standard deduction on our tax return.

We are in NY, 22% fed tax bracket and 6.09% state bracket.....

Our AGI for 2020 is approximately $90,000 and should be similar in 2020 if no changes are made to my traditional/roth 401k split.
This is not adding up so let's go back over your numbers.

How do you get your AGI down to $90,000?

And after deducting the standard deduction from your AGI, why do you think you are in the 22% tax bracket? I think you are probably in the 12% bracket which is likely to be the lowest rate you will ever pay.

My suggestion would be to contribute enough to traditional 401k to get into the 12% bracket and put everything else in Roth. Getting money into Rothness at 12% is a good thing. Deferring taxes at 12% is questionable if you could be putting it into Roth.
Okay, calculating it again I'm not sure where I got $90k either. The income will be approximate (don't have access to old paystubs at the moment and switched companies during the second quarter of the year) but will be close.

For 2020: Gross Income = $132,200, contributed a total of $28,275 to traditional 401k (between both of us), and standard deduction of $24,400 for MFJ. That comes out to $79,525. So, we are either just under the 22% bracket or at the top of the 12% bracket it seems based on what we contributed last year.

So your suggestion (and others) would be, using a gross income of $132,200 and the $24,400 standard deduction, contribute ~$28,000 to traditional IRA to reach the 12% tax bracket and contribute the remaining $11,000 to roth. Am I understanding that correctly?
Last edited by ofthewoods on Fri Jan 01, 2021 5:19 pm, edited 1 time in total.
KlangFool
Posts: 19654
Joined: Sat Oct 11, 2008 12:35 pm

Re: Very confused about choosing between traditional & roth 401k

Post by KlangFool »

ofthewoods wrote: Fri Jan 01, 2021 4:48 pm
retiredjg wrote: Fri Jan 01, 2021 4:33 pm
ofthewoods wrote: Fri Jan 01, 2021 2:24 pm Our gross income is $132,000 and we take the standard deduction on our tax return.

We are in NY, 22% fed tax bracket and 6.09% state bracket.....

Our AGI for 2020 is approximately $90,000 and should be similar in 2020 if no changes are made to my traditional/roth 401k split.
This is not adding up so let's go back over your numbers.

How do you get your AGI down to $90,000?

And after deducting the standard deduction from your AGI, why do you think you are in the 22% tax bracket? I think you are probably in the 12% bracket which is likely to be the lowest rate you will ever pay.

My suggestion would be to contribute enough to traditional 401k to get into the 12% bracket and put everything else in Roth. Getting money into Rothness at 12% is a good thing. Deferring taxes at 12% is questionable if you could be putting it into Roth.
Okay, calculating it again I'm not sure where I got $90k either. The income will be approximate (don't have access to old paystubs at the moment and switched companies during the second quarter of the year) but will be close.

For 2020: Gross Income = $132,200, contributed a total of $28,275 to traditional 401k (between both of us), and standard deduction of $24,400 for MFJ. That comes out to $79,525. So, we are either just under the 22% bracket or at the top of the 12% bracket it seems based on what we contributed last year.

So your suggestion (and others) would be, using a gross income of $132,200 and the $24,400 standard deduction, contribute ~$28,000 to roth IRA to reach the 12% tax bracket and contribute the remaining $11,000 to traditional. Am I understanding that correctly?
OP,

1) Why paying 12% is a good deal when your tax-deferred account balance is so low that you would be paying 0%?


2) It is very simple.


Max up your Trad 401K. Put the tax savings into Roth IRAs. Do not think about Roth 401K until your tax-deferred account is at 1 million.


3) Only 10% or less of the US household has a net worth of 1 million or more.


KlangFool
retiredjg
Posts: 43181
Joined: Thu Jan 10, 2008 12:56 pm

Re: Very confused about choosing between traditional & roth 401k

Post by retiredjg »

ofthewoods wrote: Fri Jan 01, 2021 4:48 pm Okay, calculating it again I'm not sure where I got $90k either. The income will be approximate (don't have access to old paystubs at the moment and switched companies during the second quarter of the year) but will be close.

For 2020: Gross Income = $132,200, contributed a total of $28,275 to traditional 401k (between both of us), and standard deduction of $24,400 for MFJ. That comes out to $79,525. So, we are either just under the 22% bracket or at the top of the 12% bracket it seems based on what we contributed last year.
The standard deduction is $24,800. If you paid for employee sponsored health insurance, or HSA or FSA you would take that off as well unless they were taken off before the "gross of $132,200"

The top of the 12% bracket for MFJ for 2020 is $80,250. You are under that. Putting more into traditional than what you are currently doing would be deferring income that would be taxed at 12%. Better to put such money into Rothness.
So your suggestion (and others) would be, using a gross income of $132,200 and the $24,400 standard deduction, contribute ~$28,000 to roth IRA traditional 401k to reach the 12% tax bracket and contribute the remaining $11,000 to traditional roth 401k or Roth IRA. Am I understanding that correctly?
YOu have it backwards. Contribute enough to bring that gross income of $132,200 down to below $81,050 taxable income (top of 12% bracket for 2021 income) and put the rest into Roth.
Topic Author
ofthewoods
Posts: 38
Joined: Mon Dec 28, 2020 11:48 am

Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

retiredjg wrote: Fri Jan 01, 2021 5:11 pm YOu have it backwards. Contribute enough to bring that gross income of $132,200 down to below $81,050 taxable income (top of 12% bracket for 2021 income) and put the rest into Roth.
Yes, I mistyped. Thank you for the correction.
Flyer24
Moderator
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Re: Very confused about choosing between traditional & roth 401k

Post by Flyer24 »

Topic moved to Personal Investments.
Topic Author
ofthewoods
Posts: 38
Joined: Mon Dec 28, 2020 11:48 am

Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

KlangFool wrote: Fri Jan 01, 2021 5:06 pm OP,

1) Why paying 12% is a good deal when your tax-deferred account balance is so low that you would be paying 0%?


2) It is very simple.


Max up your Trad 401K. Put the tax savings into Roth IRAs. Do not think about Roth 401K until your tax-deferred account is at 1 million.


3) Only 10% or less of the US household has a net worth of 1 million or more.


KlangFool
Klangfool, I'm not fully understanding what you mean. Yes, right now the balance is low but we still have 30 years to contribute. At that point the tax rate won't be 0%. If tax rates remain as they are currently, I expect at retirement we would be in the 12% (maybe 22%) bracket.
KlangFool
Posts: 19654
Joined: Sat Oct 11, 2008 12:35 pm

Re: Very confused about choosing between traditional & roth 401k

Post by KlangFool »

ofthewoods wrote: Fri Jan 01, 2021 5:19 pm
KlangFool wrote: Fri Jan 01, 2021 5:06 pm OP,

1) Why paying 12% is a good deal when your tax-deferred account balance is so low that you would be paying 0%?


2) It is very simple.


Max up your Trad 401K. Put the tax savings into Roth IRAs. Do not think about Roth 401K until your tax-deferred account is at 1 million.


3) Only 10% or less of the US household has a net worth of 1 million or more.


KlangFool
Klangfool, I'm not fully understanding what you mean. Yes, right now the balance is low but we still have 30 years to contribute. At that point the tax rate won't be 0%. If tax rates remain as they are currently, I expect at retirement we would be in the 12% (maybe 22%) bracket.
ofthewoods,

<<Yes, right now the balance is low but we still have 30 years to contribute. >>

Only if you can be fully-employed and contribute fully continuously for 30 years. Are you that lucky?


<< At that point the tax rate won't be 0%. >>


The standard deduction and tax brackets are adjusted upward by inflation every year.


<<If tax rates remain as they are currently, I expect at retirement we would be in the 12% (maybe 22%) bracket.>>


Even if the tax rates remain the same, the tax brackets are adjusted upward by inflation every year. You may not have enough at 12%.


It is very simple.

Take your deferred account balance and divide it by 25 every year. Look at the current standard deduction and tax brackets. Then, decide whether Roth 401K is right for you.

At this moment, with 24K standard deduction, you need at least 25 X 24K = 600K to clear the 0%. You are nowhere close yet.


KlangFool
k3vb0t
Posts: 470
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Re: Very confused about choosing between traditional & roth 401k

Post by k3vb0t »

ofthewoods wrote: Fri Jan 01, 2021 5:19 pm
KlangFool wrote: Fri Jan 01, 2021 5:06 pm OP,

1) Why paying 12% is a good deal when your tax-deferred account balance is so low that you would be paying 0%?


2) It is very simple.


Max up your Trad 401K. Put the tax savings into Roth IRAs. Do not think about Roth 401K until your tax-deferred account is at 1 million.


3) Only 10% or less of the US household has a net worth of 1 million or more.


KlangFool
Klangfool, I'm not fully understanding what you mean. Yes, right now the balance is low but we still have 30 years to contribute. At that point the tax rate won't be 0%. If tax rates remain as they are currently, I expect at retirement we would be in the 12% (maybe 22%) bracket.
Current standard deduction is $24,800. If you withdraw 4% from your tax-deferred accounts to “fill up” that deduction each year that would be a tax-deferred portfolio of $620,000. So, that portion of your portfolio would have a 0% tax rate. Then, another $39,475 $78,950 to fill up the 10% and 12% brackets. At 4% withdrawals, that’s another $986,875 $1,973,750 in tax-deferred portfolio to pull from. (Edited with strikethroughs as the original numbers were for single filers, my mistake.)

If my math is right that’s $1,606,875 $2,593,750 (in today’s dollars) in tax-deferred portfolio you could have before you run into the 22% bracket. And even more with 3% withdrawals. (Someone else feel free to correct me on this.)

Not knowing your industry, likelihood of having two incomes for next 30 years, willingness (and ability) to work 30 more years, desired income in retirement, and where you might retire, etc... all of those would factor into your decision making. You can get a guaranteed tax break now of 28% (22+6, or 12%+6%=18% if your MAGI is actually lower). And you might “win the game” early and be able to use a variety of tools to still pull from your Traditional accounts without paying penalties before reaching 59.5. Etc.

Also, let’s say your wife takes 1, 2, 5 years off if you decide to have children. You could do Roth conversions on your tIRAs as well during those lower income years.
simas
Posts: 927
Joined: Wed Apr 04, 2007 5:50 pm

Re: Very confused about choosing between traditional & roth 401k

Post by simas »

ofthewoods wrote: Fri Jan 01, 2021 4:48 pm
retiredjg wrote: Fri Jan 01, 2021 4:33 pm
ofthewoods wrote: Fri Jan 01, 2021 2:24 pm Our gross income is $132,000 and we take the standard deduction on our tax return.

We are in NY, 22% fed tax bracket and 6.09% state bracket.....

Our AGI for 2020 is approximately $90,000 and should be similar in 2020 if no changes are made to my traditional/roth 401k split.
This is not adding up so let's go back over your numbers.

How do you get your AGI down to $90,000?

And after deducting the standard deduction from your AGI, why do you think you are in the 22% tax bracket? I think you are probably in the 12% bracket which is likely to be the lowest rate you will ever pay.

My suggestion would be to contribute enough to traditional 401k to get into the 12% bracket and put everything else in Roth. Getting money into Rothness at 12% is a good thing. Deferring taxes at 12% is questionable if you could be putting it into Roth.
Okay, calculating it again I'm not sure where I got $90k either. The income will be approximate (don't have access to old paystubs at the moment and switched companies during the second quarter of the year) but will be close.

For 2020: Gross Income = $132,200, contributed a total of $28,275 to traditional 401k (between both of us), and standard deduction of $24,400 for MFJ. That comes out to $79,525. So, we are either just under the 22% bracket or at the top of the 12% bracket it seems based on what we contributed last year.

So your suggestion (and others) would be, using a gross income of $132,200 and the $24,400 standard deduction, contribute ~$28,000 to traditional IRA to reach the 12% tax bracket and contribute the remaining $11,000 to roth. Am I understanding that correctly?
I would go all pre-tax if I were in your shoes. Forget Roth contributions altogether, IRA, 401k, etc. You can always convert as much as you want later (tomorrow, next year, etc) on your timing and your terms. Who knows , you may decide to retire early, tap 401k prior to retirement age through periodic payments (so without penalty), etc. Get your tax benefit now. You may have years there income is lower, you may be unemployed, etc. there would be time to convert to Roth if you want it to. Now, if you are 65 with 5 million in traditional IRA balance and nothing in Roth, that message may be different, but that is not your situation - forget Roth contributions and dont look back.

what really helps you is not having high expenses and having that flexibility.

As for gross to net calculation - it is very easy for two working people in a couple to get down to those numbers, - 39k in 401ks (19.5x2), minus up to 7k in HSA , minus up to 5k in FSA (for things like dependent care), minus cost of insurance ,etc. Even before insurance 401ks + FSA+ HSA could be 51k difference and massive tax saving.
Topic Author
ofthewoods
Posts: 38
Joined: Mon Dec 28, 2020 11:48 am

Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

simas wrote: Fri Jan 01, 2021 6:19 pm
ofthewoods wrote: Fri Jan 01, 2021 4:48 pm
retiredjg wrote: Fri Jan 01, 2021 4:33 pm
ofthewoods wrote: Fri Jan 01, 2021 2:24 pm Our gross income is $132,000 and we take the standard deduction on our tax return.

We are in NY, 22% fed tax bracket and 6.09% state bracket.....

Our AGI for 2020 is approximately $90,000 and should be similar in 2020 if no changes are made to my traditional/roth 401k split.
This is not adding up so let's go back over your numbers.

How do you get your AGI down to $90,000?

And after deducting the standard deduction from your AGI, why do you think you are in the 22% tax bracket? I think you are probably in the 12% bracket which is likely to be the lowest rate you will ever pay.

My suggestion would be to contribute enough to traditional 401k to get into the 12% bracket and put everything else in Roth. Getting money into Rothness at 12% is a good thing. Deferring taxes at 12% is questionable if you could be putting it into Roth.
Okay, calculating it again I'm not sure where I got $90k either. The income will be approximate (don't have access to old paystubs at the moment and switched companies during the second quarter of the year) but will be close.

For 2020: Gross Income = $132,200, contributed a total of $28,275 to traditional 401k (between both of us), and standard deduction of $24,400 for MFJ. That comes out to $79,525. So, we are either just under the 22% bracket or at the top of the 12% bracket it seems based on what we contributed last year.

So your suggestion (and others) would be, using a gross income of $132,200 and the $24,400 standard deduction, contribute ~$28,000 to traditional IRA to reach the 12% tax bracket and contribute the remaining $11,000 to roth. Am I understanding that correctly?
I would go all pre-tax if I were in your shoes. Forget Roth contributions altogether, IRA, 401k, etc. You can always convert as much as you want later (tomorrow, next year, etc) on your timing and your terms. Who knows , you may decide to retire early, tap 401k prior to retirement age through periodic payments (so without penalty), etc. Get your tax benefit now. You may have years there income is lower, you may be unemployed, etc. there would be time to convert to Roth if you want it to. Now, if you are 65 with 5 million in traditional IRA balance and nothing in Roth, that message may be different, but that is not your situation - forget Roth contributions and dont look back.

what really helps you is not having high expenses and having that flexibility.

As for gross to net calculation - it is very easy for two working people in a couple to get down to those numbers, - 39k in 401ks (19.5x2), minus up to 7k in HSA , minus up to 5k in FSA (for things like dependent care), minus cost of insurance ,etc. Even before insurance 401ks + FSA+ HSA could be 51k difference and massive tax saving.
K3vBot & Klangfool, it's starting to click.

Simas, would it be worth converting the roth IRAs we already have to traditional? I like the idea of maintaining Roth IRAs for tax diversification and because $39k out of the $51k yearly contribution would be going toward the traditional 401k, but not sure if I'm missing something.
simas
Posts: 927
Joined: Wed Apr 04, 2007 5:50 pm

Re: Very confused about choosing between traditional & roth 401k

Post by simas »

ofthewoods wrote: Fri Jan 01, 2021 7:11 pm
simas wrote: Fri Jan 01, 2021 6:19 pm
ofthewoods wrote: Fri Jan 01, 2021 4:48 pm
retiredjg wrote: Fri Jan 01, 2021 4:33 pm
ofthewoods wrote: Fri Jan 01, 2021 2:24 pm Our gross income is $132,000 and we take the standard deduction on our tax return.

We are in NY, 22% fed tax bracket and 6.09% state bracket.....

Our AGI for 2020 is approximately $90,000 and should be similar in 2020 if no changes are made to my traditional/roth 401k split.
This is not adding up so let's go back over your numbers.

How do you get your AGI down to $90,000?

And after deducting the standard deduction from your AGI, why do you think you are in the 22% tax bracket? I think you are probably in the 12% bracket which is likely to be the lowest rate you will ever pay.

My suggestion would be to contribute enough to traditional 401k to get into the 12% bracket and put everything else in Roth. Getting money into Rothness at 12% is a good thing. Deferring taxes at 12% is questionable if you could be putting it into Roth.
Okay, calculating it again I'm not sure where I got $90k either. The income will be approximate (don't have access to old paystubs at the moment and switched companies during the second quarter of the year) but will be close.

For 2020: Gross Income = $132,200, contributed a total of $28,275 to traditional 401k (between both of us), and standard deduction of $24,400 for MFJ. That comes out to $79,525. So, we are either just under the 22% bracket or at the top of the 12% bracket it seems based on what we contributed last year.

So your suggestion (and others) would be, using a gross income of $132,200 and the $24,400 standard deduction, contribute ~$28,000 to traditional IRA to reach the 12% tax bracket and contribute the remaining $11,000 to roth. Am I understanding that correctly?
I would go all pre-tax if I were in your shoes. Forget Roth contributions altogether, IRA, 401k, etc. You can always convert as much as you want later (tomorrow, next year, etc) on your timing and your terms. Who knows , you may decide to retire early, tap 401k prior to retirement age through periodic payments (so without penalty), etc. Get your tax benefit now. You may have years there income is lower, you may be unemployed, etc. there would be time to convert to Roth if you want it to. Now, if you are 65 with 5 million in traditional IRA balance and nothing in Roth, that message may be different, but that is not your situation - forget Roth contributions and dont look back.

what really helps you is not having high expenses and having that flexibility.

As for gross to net calculation - it is very easy for two working people in a couple to get down to those numbers, - 39k in 401ks (19.5x2), minus up to 7k in HSA , minus up to 5k in FSA (for things like dependent care), minus cost of insurance ,etc. Even before insurance 401ks + FSA+ HSA could be 51k difference and massive tax saving.
K3vBot & Klangfool, it's starting to click.

Simas, would it be worth converting the roth IRAs we already have to traditional? I like the idea of maintaining Roth IRAs for tax diversification and because $39k out of the $51k yearly contribution would be going toward the traditional 401k, but not sure if I'm missing something.
You can not convert Roth IRA to traditional , it is one way . If you just performed rollover , I think there is a way to 'change your mind', but otherwise what you already have in Roth , you have in Roth. Overall, you had a number of responses here, all good
- maintain high savings rate (this is the key that affords you flexibility down the line)
- dont overthink it. _ANY_ retirement plan and IRA contributions are better than one. Dont let analysis paralysis prevent you from acting. the worst enemy of good plan is dream of perfect plan.
- you know my opinion (Roth is dead to you for now, take your tax credit today, deal with conversions later on if desired) :) , feel free to follow or ignore.
Topic Author
ofthewoods
Posts: 38
Joined: Mon Dec 28, 2020 11:48 am

Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

simas wrote: Fri Jan 01, 2021 7:55 pm
ofthewoods wrote: Fri Jan 01, 2021 7:11 pm
simas wrote: Fri Jan 01, 2021 6:19 pm
ofthewoods wrote: Fri Jan 01, 2021 4:48 pm
retiredjg wrote: Fri Jan 01, 2021 4:33 pm
This is not adding up so let's go back over your numbers.

How do you get your AGI down to $90,000?

And after deducting the standard deduction from your AGI, why do you think you are in the 22% tax bracket? I think you are probably in the 12% bracket which is likely to be the lowest rate you will ever pay.

My suggestion would be to contribute enough to traditional 401k to get into the 12% bracket and put everything else in Roth. Getting money into Rothness at 12% is a good thing. Deferring taxes at 12% is questionable if you could be putting it into Roth.
Okay, calculating it again I'm not sure where I got $90k either. The income will be approximate (don't have access to old paystubs at the moment and switched companies during the second quarter of the year) but will be close.

For 2020: Gross Income = $132,200, contributed a total of $28,275 to traditional 401k (between both of us), and standard deduction of $24,400 for MFJ. That comes out to $79,525. So, we are either just under the 22% bracket or at the top of the 12% bracket it seems based on what we contributed last year.

So your suggestion (and others) would be, using a gross income of $132,200 and the $24,400 standard deduction, contribute ~$28,000 to traditional IRA to reach the 12% tax bracket and contribute the remaining $11,000 to roth. Am I understanding that correctly?
I would go all pre-tax if I were in your shoes. Forget Roth contributions altogether, IRA, 401k, etc. You can always convert as much as you want later (tomorrow, next year, etc) on your timing and your terms. Who knows , you may decide to retire early, tap 401k prior to retirement age through periodic payments (so without penalty), etc. Get your tax benefit now. You may have years there income is lower, you may be unemployed, etc. there would be time to convert to Roth if you want it to. Now, if you are 65 with 5 million in traditional IRA balance and nothing in Roth, that message may be different, but that is not your situation - forget Roth contributions and dont look back.

what really helps you is not having high expenses and having that flexibility.

As for gross to net calculation - it is very easy for two working people in a couple to get down to those numbers, - 39k in 401ks (19.5x2), minus up to 7k in HSA , minus up to 5k in FSA (for things like dependent care), minus cost of insurance ,etc. Even before insurance 401ks + FSA+ HSA could be 51k difference and massive tax saving.
K3vBot & Klangfool, it's starting to click.

Simas, would it be worth converting the roth IRAs we already have to traditional? I like the idea of maintaining Roth IRAs for tax diversification and because $39k out of the $51k yearly contribution would be going toward the traditional 401k, but not sure if I'm missing something.
You can not convert Roth IRA to traditional , it is one way . If you just performed rollover , I think there is a way to 'change your mind', but otherwise what you already have in Roth , you have in Roth. Overall, you had a number of responses here, all good
- maintain high savings rate (this is the key that affords you flexibility down the line)
- dont overthink it. _ANY_ retirement plan and IRA contributions are better than one. Dont let analysis paralysis prevent you from acting. the worst enemy of good plan is dream of perfect plan.
- you know my opinion (Roth is dead to you for now, take your tax credit today, deal with conversions later on if desired) :) , feel free to follow or ignore.
Yeah, the section on analysis paralysis in the Boglehead’s Guide resonated with me a ton. I appreciate your input. Based on the input here I’ll likely adjust for 100% traditional contributions into the 401k and keep chugging away into our IRAs.
User avatar
FiveK
Posts: 10975
Joined: Sun Mar 16, 2014 2:43 pm

Re: Very confused about choosing between traditional & roth 401k

Post by FiveK »

ofthewoods wrote: Fri Jan 01, 2021 2:24 pm I swear the more I read the more confused I am.
Join the crowd. The "correct" answer is unknowable except in hindsight.

One can made a reasoned choice, and one might as well do so, but how that will come out depends on assumptions that may or may not hold true.

You may get advice telling you one or the other is "obviously" correct, but that is based on assumptions made by the people giving the advice, which again may or may not hold true.
I'm having a hard time working through it in the Traditional vs. Roth Boglehead Wiki. It's likely we'll move to a different state with a lower state tax rate within the next 12 - 18 months.
In that case, it's appropriate to include state (and local, if applicable) tax effects.

For 2021, using AGI = $132,200 (all ordinary income - no long term capital gains or qualified dividends), $26,050 in traditional contributions will save 28.09%. Further traditional contributions, up to your combined $51K limit, will save 18.09%

The vast majority would suggest using traditional for the 28.09% savings. What to do with the 18.09% amount is less clear, with good arguments for both traditional and Roth, again depending on what assumptions are used.
TheDDC
Posts: 1250
Joined: Mon Jan 08, 2018 11:11 am

Re: Very confused about choosing between traditional & roth 401k

Post by TheDDC »

I have a pension which will replace 87.5% of my salary upon retirement. I am in the 22% bracket and a flat 3.07% state income tax. I can retire in 18 years. I am eligible for SS, and SS income will be taxed at 22% bracket. If I add in RMDs or conversions from a traditional IRA/403b, this pushes my income to the upper end of the 22% (which will most likely be 24% or more, but I won’t go down the wormhole...) bracket. I may also have to pay IRMAAs which is money down the toilet.

Therefore everything else I save goes to Roth. It makes sense for me when a pension is factored in when one calculates the value of said pension. For me it’s pretty simple: avoid paying unnecessarily.

-TheDDC
Rules to wealth building: 75-80% VTSAX piled high and deep, 20-25% VTIAX, 0% given away to banks, minimize amount given to medical-industrial complex
Topic Author
ofthewoods
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Joined: Mon Dec 28, 2020 11:48 am

Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

TheDDC wrote: Fri Jan 01, 2021 10:42 pm I have a pension which will replace 87.5% of my salary upon retirement. I am in the 22% bracket and a flat 3.07% state income tax. I can retire in 18 years. I am eligible for SS, and SS income will be taxed at 22% bracket. If I add in RMDs or conversions from a traditional IRA/403b, this pushes my income to the upper end of the 22% (which will most likely be 24% or more, but I won’t go down the wormhole...) bracket. I may also have to pay IRMAAs which is money down the toilet.

Therefore everything else I save goes to Roth. It makes sense for me when a pension is factored in when one calculates the value of said pension. For me it’s pretty simple: avoid paying unnecessarily.

-TheDDC
That's basically what I was trying to get a handle of with this post - what will best maximize what I put into tax advantaged accounts now and in the future. On a side note, I'd kill for a pension like that.
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Re: Very confused about choosing between traditional & roth 401k

Post by willthrill81 »

Getting a guaranteed tax break of 22% federal and 6.09% state when the OP's tax-deferred balances are still so low seems to be a slam dunk for traditional contributions only for a while. If/when the OP has around $1 million in tax-deferred or has some unusually low income years, the issue can be revisited to determine if switching to Roth contributions makes sense then.

In the absence of a pension or significant other non-portfolio retirement income, you generally need to be a very aggressive saver for a long time for Roth contributions to come out ahead of tax-deferred.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Very confused about choosing between traditional & roth 401k

Post by MedicatedMoney »

KlangFool wrote: Fri Jan 01, 2021 5:06 pmMax up your Trad 401K. Put the tax savings into Roth IRAs. Do not think about Roth 401K until your tax-deferred account is at 1 million.

3) Only 10% or less of the US household has a net worth of 1 million or more.

KlangFool
Klang and/or others:
Can you explain further the thoughts on Roth 401(k) for those that have tax-deferred account at/above 1 million?
Don't want to thread hijack but we find ourselves in this situation.
Debating if we want to start putting some money into the Roth 401(k) option in additional to the backdoor Roths
-Medicated
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Re: Very confused about choosing between traditional & roth 401k

Post by TheDDC »

ofthewoods wrote: Fri Jan 01, 2021 10:50 pm
TheDDC wrote: Fri Jan 01, 2021 10:42 pm I have a pension which will replace 87.5% of my salary upon retirement. I am in the 22% bracket and a flat 3.07% state income tax. I can retire in 18 years. I am eligible for SS, and SS income will be taxed at 22% bracket. If I add in RMDs or conversions from a traditional IRA/403b, this pushes my income to the upper end of the 22% (which will most likely be 24% or more, but I won’t go down the wormhole...) bracket. I may also have to pay IRMAAs which is money down the toilet.

Therefore everything else I save goes to Roth. It makes sense for me when a pension is factored in when one calculates the value of said pension. For me it’s pretty simple: avoid paying unnecessarily.

-TheDDC
That's basically what I was trying to get a handle of with this post - what will best maximize what I put into tax advantaged accounts now and in the future. On a side note, I'd kill for a pension like that.
I am married to a happy stay at home mom so I am really earning for two... :sharebeer

As willthrill81 made mention, some of this has to do with basic math: how much you expect to accumulate (added on to what your present value is)? If you plan on maxing out all possible tax advantage space (assuming two incomes, which is not the case for me) then you will have quite a bit saved that you will pay a tax bill on. I don't see your age posted anywhere, but your earning potential is great. I would consider a Roth. Also keep in mind choosing "poorly" is really not. In the end you will have saved more than 80% of households save for retirement. You may have to pay tax that you should have paid earlier (or not), or you may have lost pennies on the dollar in lost growth in your investment accounts due to paying a tax you didn't need to pay early. I don't consider either one of those losing.

-TheDDC
Rules to wealth building: 75-80% VTSAX piled high and deep, 20-25% VTIAX, 0% given away to banks, minimize amount given to medical-industrial complex
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Re: Very confused about choosing between traditional & roth 401k

Post by FiveK »

MedicatedMoney wrote: Fri Jan 01, 2021 11:32 pm Can you explain further the thoughts on Roth 401(k) for those that have tax-deferred account at/above 1 million?
Don't want to thread hijack but we find ourselves in this situation.
Debating if we want to start putting some money into the Roth 401(k) option in additional to the backdoor Roths
Depends on other things, particularly your expected time until retirement. E.g., the answers for a 30 year old expecting to work through age 70 might differ from those for a 64 year old expecting to retire next year.

For you (and OP, and others) the main thing is to have some estimate of the marginal tax rate you'll pay when withdrawing from traditional accounts. Without that number you might as well flip a coin.

See the Estimating future marginal tax rate section of the T vs. R wiki, perhaps aided by rows 198-210 in the 'Misc. calcs' tab of the personal finance toolbox. If one can use Excel even a little, the 'Calculations' tab of that tool usually provides a very quick and accurate (assuming current tax law) picture of marginal rates for whatever dollar range of withdrawals/contributions desired.
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Re: Very confused about choosing between traditional & roth 401k

Post by willthrill81 »

MedicatedMoney wrote: Fri Jan 01, 2021 11:32 pm
KlangFool wrote: Fri Jan 01, 2021 5:06 pmMax up your Trad 401K. Put the tax savings into Roth IRAs. Do not think about Roth 401K until your tax-deferred account is at 1 million.

3) Only 10% or less of the US household has a net worth of 1 million or more.

KlangFool
Klang and/or others:
Can you explain further the thoughts on Roth 401(k) for those that have tax-deferred account at/above 1 million?
You didn't ask me, but I'm of the same view as KF here. Assuming 4% withdrawals, $1 million in tax-deferred will only produce $40k in retirement income. You need about $2.5 million in tax-deferred to reach the top of the 12% bracket (apart from SS income, which reduces the needed portfolio size to reach that threshold). So it makes sense to me to not worry much at all about Roth contributions until you have at least $1 million unless you have a very good reason to think that your income will grow substantially down the road (e.g. an attending physician should be 100% Roth), you're in an unusually low income year for whatever reason, or you will have significant non-portfolio income (e.g. pension, real estate income).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

willthrill81 wrote: Fri Jan 01, 2021 11:45 pm
MedicatedMoney wrote: Fri Jan 01, 2021 11:32 pm
KlangFool wrote: Fri Jan 01, 2021 5:06 pmMax up your Trad 401K. Put the tax savings into Roth IRAs. Do not think about Roth 401K until your tax-deferred account is at 1 million.

3) Only 10% or less of the US household has a net worth of 1 million or more.

KlangFool
Klang and/or others:
Can you explain further the thoughts on Roth 401(k) for those that have tax-deferred account at/above 1 million?
You didn't ask me, but I'm of the same view as KF here. Assuming 4% withdrawals, $1 million in tax-deferred will only produce $40k in retirement income. You need about $2.5 million in tax-deferred to reach the top of the 12% bracket (apart from SS income, which reduces the needed portfolio size to reach that threshold). So it makes sense to me to not worry much at all about Roth contributions until you have at least $1 million unless you have a very good reason to think that your income will grow substantially down the road (e.g. an attending physician should be 100% Roth), you're in an unusually low income year for whatever reason, or you will have significant non-portfolio income (e.g. pension, real estate income).
Thanks for this breakdown. I was wondering the significance of the $1 million figure also.
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ofthewoods
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Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

TheDDC wrote: Fri Jan 01, 2021 11:34 pm
ofthewoods wrote: Fri Jan 01, 2021 10:50 pm
TheDDC wrote: Fri Jan 01, 2021 10:42 pm I have a pension which will replace 87.5% of my salary upon retirement. I am in the 22% bracket and a flat 3.07% state income tax. I can retire in 18 years. I am eligible for SS, and SS income will be taxed at 22% bracket. If I add in RMDs or conversions from a traditional IRA/403b, this pushes my income to the upper end of the 22% (which will most likely be 24% or more, but I won’t go down the wormhole...) bracket. I may also have to pay IRMAAs which is money down the toilet.

Therefore everything else I save goes to Roth. It makes sense for me when a pension is factored in when one calculates the value of said pension. For me it’s pretty simple: avoid paying unnecessarily.

-TheDDC
That's basically what I was trying to get a handle of with this post - what will best maximize what I put into tax advantaged accounts now and in the future. On a side note, I'd kill for a pension like that.
I am married to a happy stay at home mom so I am really earning for two... :sharebeer

As willthrill81 made mention, some of this has to do with basic math: how much you expect to accumulate (added on to what your present value is)? If you plan on maxing out all possible tax advantage space (assuming two incomes, which is not the case for me) then you will have quite a bit saved that you will pay a tax bill on. I don't see your age posted anywhere, but your earning potential is great. I would consider a Roth. Also keep in mind choosing "poorly" is really not. In the end you will have saved more than 80% of households save for retirement. You may have to pay tax that you should have paid earlier (or not), or you may have lost pennies on the dollar in lost growth in your investment accounts due to paying a tax you didn't need to pay early. I don't consider either one of those losing.

-TheDDC
We are 30. 2020 was the first year we've maxed our 401ks and IRAs. Our plan is to continue doing so but we are also looking to move and buy a house in the near future which may impact our ability to max slightly. That would be a benefit of traditional 401k contributions - more cash in pocket to throw into our roth IRAs. Nonetheless, we're motivated. I may not be able to work until 60 or 65 due to a medical condition, so the more we can save early on the better and still have potential for significant salary increases.
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Re: Very confused about choosing between traditional & roth 401k

Post by TheDDC »

ofthewoods wrote: Fri Jan 01, 2021 11:50 pm We are 30. 2020 was the first year we've maxed our 401ks and IRAs. Our plan is to continue doing so but we are also looking to move and buy a house in the near future which may impact our ability to max slightly. That would be a benefit of traditional 401k contributions - more cash in pocket to throw into our roth IRAs. Nonetheless, we're motivated. I may not be able to work until 60 or 65 due to a medical condition, so the more we can save early on the better and still have potential for significant salary increases.
You're in good shape. If I were you, with the uncertainty about retirement age I might hedge my bets and max out a traditional 401k first and then fill up as much of my Roth IRA space as possible, after saving for the house. Roth IRAs also have the added benefit of allowing you to pull contributions out early (after five years) without penalty if you retire early. I am not sure if a Roth 401k has the same benefit (though I'm thinking it does). Beyond that, if medical cost concerns are an issue during retirement, erring on the side of more pre-tax investing from the traditional 401k would also give you another great benefit. Medical expenses are tax deductible above a certain floor (currently for 2020, those that exceed 7.5% of your AGI). I helped a family member out with this issue as she would have had a huge tax bite+IRMAA with all of her income from RMDs as a single filer with a pension. She had quite a few recurring medical expenses that ended up being simple "above the line" deductions with no limit! More info available here: https://www.irs.gov/taxtopics/tc502

I will reiterate my previous statement: You'll win either way. The most important thing is your savings rate -- consistent and steady.

-TheDDC
Last edited by TheDDC on Sat Jan 02, 2021 12:08 am, edited 1 time in total.
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ofthewoods
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Re: Very confused about choosing between traditional & roth 401k

Post by ofthewoods »

TheDDC wrote: Fri Jan 01, 2021 11:59 pm
ofthewoods wrote: Fri Jan 01, 2021 11:50 pm We are 30. 2020 was the first year we've maxed our 401ks and IRAs. Our plan is to continue doing so but we are also looking to move and buy a house in the near future which may impact our ability to max slightly. That would be a benefit of traditional 401k contributions - more cash in pocket to throw into our roth IRAs. Nonetheless, we're motivated. I may not be able to work until 60 or 65 due to a medical condition, so the more we can save early on the better and still have potential for significant salary increases.
You're in good shape. If I were you, with the uncertainty about retirement age I might hedge my bets and max out a traditional 401k first and then fill up as much of my Roth IRA space as possible, after saving for the house. Roth IRAs also have the added benefit of allowing you to pull contributions out early (after five years) without penalty if you retire early. I am not sure if a Roth 401k has the same benefit (though I'm thinking it does). Beyond that, if medical cost concerns are an issue during retirement, erring on the side of more pre-tax investing from the traditional 401k would also give you another great benefit. Medical expenses are tax deductible above a certain floor. I helped a family member out with this issue as she would have had a huge tax bite with all of her traditional IRA income as a single filer, and she also had quite a few medical expenses that were simple "above the line" deductions with no limit!

I will reiterate my previous statement: You'll win either way. The most important thing is your savings rate -- consistent and steady.

-TheDDC
Great points, thank you.
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Re: Very confused about choosing between traditional & roth 401k

Post by TheDDC »

ofthewoods wrote: Sat Jan 02, 2021 12:08 am Great points, thank you.
Happy to help. I also edited my above post to include a direct link to the IRS info on this, as well the minimum % of income that medical expenses must exceed in order to deduct.

-TheDDC
Rules to wealth building: 75-80% VTSAX piled high and deep, 20-25% VTIAX, 0% given away to banks, minimize amount given to medical-industrial complex
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Re: Very confused about choosing between traditional & roth 401k

Post by KlangFool »

MedicatedMoney wrote: Fri Jan 01, 2021 11:32 pm
KlangFool wrote: Fri Jan 01, 2021 5:06 pmMax up your Trad 401K. Put the tax savings into Roth IRAs. Do not think about Roth 401K until your tax-deferred account is at 1 million.

3) Only 10% or less of the US household has a net worth of 1 million or more.

KlangFool
Klang and/or others:
Can you explain further the thoughts on Roth 401(k) for those that have tax-deferred account at/above 1 million?
Don't want to thread hijack but we find ourselves in this situation.
Debating if we want to start putting some money into the Roth 401(k) option in additional to the backdoor Roths
For most people, until and unless the tax deferred account is 1 million or more, there is no possibility that they will be paying more taxes in retirement by going with Trad 401K.

KlangFool
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Re: Very confused about choosing between traditional & roth 401k

Post by TomatoTomahto »

KlangFool wrote: Sat Jan 02, 2021 7:48 am
MedicatedMoney wrote: Fri Jan 01, 2021 11:32 pm
KlangFool wrote: Fri Jan 01, 2021 5:06 pmMax up your Trad 401K. Put the tax savings into Roth IRAs. Do not think about Roth 401K until your tax-deferred account is at 1 million.

3) Only 10% or less of the US household has a net worth of 1 million or more.

KlangFool
Klang and/or others:
Can you explain further the thoughts on Roth 401(k) for those that have tax-deferred account at/above 1 million?
Don't want to thread hijack but we find ourselves in this situation.
Debating if we want to start putting some money into the Roth 401(k) option in additional to the backdoor Roths
For most people, until and unless the tax deferred account is 1 million or more, there is no possibility that they will be paying more taxes in retirement by going with Trad 401K.

KlangFool
By the time my wife’s deferred account was in 7 digits, we were in the highest tax brackets. We didn’t have Roths available in our early years, but it sure would have hurt less to fund a Roth at the lowest tax rates rather than the highest.

Her deferred account is now over $3M, even after switching ALL of her contributions to Roth, but between the market and the employer match going to traditional, it keeps growing. Heck, my deferred accounts, to which I haven’t contributed for almost 20 years and from which I have converted some, are at $720k.

My recommendation is that if your deferred accounts have the likelihood to grow to $1.5M, go Roth early when it’s not so expensive. Deferral is worth more when you’re deferring at high rates.
I get the FI part but not the RE part of FIRE.
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