Considering changing from 100% Roth to either 50/50 or 100% traditional. Age 25.

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CRJPylote
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Considering changing from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by CRJPylote »

I know this is a documented and FAQ discussion, and I have read the Wiki, just wanted to get some personal advice. I am single for tax purposes.

I have been 100% roth since I started investing at 18. It was always relatively easy to pick roth as I was making relatively little money. Last year, I started a new job in the spring, and although it is variable, I plan to make roughly 50-60K a year. I made 46K Gross last year due to not being fully employed the entire year, and our pay goes up based on years of employment via a pay table, so it's relatively easy to plan. Assuming I stay at this company, in 2023 I should be up to about 80K.

I spend relatively little money and was able to fill up my roth IRA fully for 2021. 2022 is already half full. I am debating switching the remaining $3000 to traditional contributions, and also potentially switching to a traditional 401K scheme in addition to that.

As for as long term earning potential, ideally, in my current career, 250K-400K gross salary, within the next 7 years or so. If I stay where I am at and make no career moves, 130K.

I think the best move would be to switch my remaining contributions to traditional now, and then evaluate next year if I want to go 100% traditional.What do you guys think?
aristotelian
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Re: Considering ghanging from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by aristotelian »

You would determine it by your tax bracket, not an arbitrary ratio. A good rule of thumb is any income in the 22% bracket or higher is more advantageous to save pretax. For single filer, that would mean any income over $53k in traditional.
Goldwater85
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Re: Considering ghanging from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by Goldwater85 »

I’d keep it simple and stick with 100% Roth space. Your tax bracket is still pretty low particularly in light of what you project for career earnings.
wetgear
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Re: Considering ghanging from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by wetgear »

Stay 100% Roth, if that’s your pay trajectory you likely won’t be in this low a tax bracket for the rest of your life. Traditional IRA balances can mess with your ability to back door Roth in the future too. Do you have a 401k plan at work in addition to your Roth IRA?
Topic Author
CRJPylote
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Re: Considering ghanging from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by CRJPylote »

wetgear wrote: Wed Jan 26, 2022 1:59 pm Stay 100% Roth, if that’s your pay trajectory you likely won’t be in this low a tax bracket for the rest of your life. Traditional IRA balances can mess with your ability to back door Roth in the future too. Do you have a 401k plan at work in addition to your Roth IRA?
I do, we have traditional and roth options. I have been using the roth 401k, and we do have a small match of 4%. My understanding is the match is pre tax regardless.
The Woodbutcher
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Re: Considering ghanging from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by The Woodbutcher »

These two recent articles by The Finance Buff may provide relevant information for you:

https://thefinancebuff.com/the-forgotte ... e-ira.html

https://thefinancebuff.com/case-against-roth-401k.html
KlangFool
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Re: Considering ghanging from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by KlangFool »

OP,

You should check out Saver's Credit before you decide.

https://www.bogleheads.org/wiki/Saver%27s_credit

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Topic Author
CRJPylote
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Re: Considering ghanging from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by CRJPylote »

KlangFool wrote: Wed Jan 26, 2022 2:37 pm OP,

You should check out Saver's Credit before you decide.

https://www.bogleheads.org/wiki/Saver%27s_credit

KlangFool
Interesting, I am likely, not gonna be able to lower my AGI enough to qualify for 2021, but I'll have to look at a 1040X for 2020, I think I definitely qualified then.
Navillus1968
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Re: Considering ghanging from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by Navillus1968 »

CRJPylote wrote: Wed Jan 26, 2022 1:53 pm I know this is a documented and FAQ discussion, and I have read the Wiki, just wanted to get some personal advice. I am single for tax purposes.

I have been 100% roth since I started investing at 18. It was always relatively easy to pick roth as I was making relatively little money. Last year, I started a new job in the spring, and although it is variable, I plan to make roughly 50-60K a year. I made 46K Gross last year due to not being fully employed the entire year, and our pay goes up based on years of employment via a pay table, so it's relatively easy to plan. Assuming I stay at this company, in 2023 I should be up to about 80K.
You don't mention state income tax bracket. If you file Single & make $60-80K in 2022, you'll be in the heart of the 22% Fed bracket. Add in US average 5-6% state income tax & your marginal tax rate is 27-28%.
At that marginal rate, Traditional 401k/IRA starts to look attractive. If you live in FL/TX/NV/etc. & have zero state income tax, Roth at 22% isn't terrible, all things considered.
Your future tax rate in your working years isn't the critical number, it's your future marginal tax rate when you withdraw the money in retirement vs today's marginal tax rate.

Do you expect to draw a defined benefit pension in retirement?
Assuming your income climbs to the lofty heights you predict, eventually you will max out your 401k/IRA & will have to invest in a taxable brokerage account. Over time, dividends & capital gains can grow into a significant taxable income stream in retirement.

If in retirement you have a pension + dividend/capital gains + above average Social Security income, then add in RMDs from a large TIRA/401k = high tax bills on RMD income you might not need. Point in favor of Roth.

However, you can always convert Trad money to Roth early in retirement after your W-2 income stops & before claiming SSI. Move to FL & now there's zero state tax on conversions. Point in favor of Trad today if you are paying state income tax, especially in NY/NJ/CA/etc..

That's all down the road.
Today, I would look at my Fed + state combined marginal rate & go Traditional for both (assuming your MAGI allows TIRA deduction) if your combined marginal tax rate is closer to 30% & do Roth for both if your rate is only 22%. In between, I'd split the contributions, weighting Roth vs Trad according to where your rate falls- IOW, more Roth closer to 22%, More Trad closer to 30%.

It's far from an exact science, since, as Master Yoda wisely noted- “Difficult to see. Always in motion is the future.”
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Re: Considering changing from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by LadyGeek »

I removed several posts conjecturing on changes in taxation of Roth IRAs. Changes to taxes are changes to US law, a political process. Speculation about future legislation is prohibited by forum policy, see: Unacceptable Topics
Politics and Religion

In order to avoid the inevitable frictions that arise from these topics, political or religious posts and comments are prohibited. The only exceptions to this rule are:
  • Common religious expressions such as sending your prayers to an ailing member.
  • Usage of factual and non-derogatory political labels when necessary to the discussion at hand.
  • Discussions about enacted laws or regulations that affect the individual investor. Note that discussions of proposed legislation are prohibited.
  • Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.
This forum is focused on investing that is directly actionable to personal investors. We don't hold debates on conjecture.

The whole point of the policy is to (1) eliminate contentious disagreements that result from these discussions and (2) keep investors from making bad decisions. Proposed legislation changes many times between the time it's introduced and signed into law.

The best approach is to make your decision about current law. When the law changes, make your decision at that time.

(I also fixed a typo in the thread title "ghanging " to "changing".)
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123
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Re: Considering changing from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by 123 »

I have never heard the following complaint "I wish I had more money in traditional retirement accounts (IRA/401k) instead of this money in Roth accounts". Money in Roth accounts is yours, money in traditional retirement accounts still has to go through the tax cycle.
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FoolMeOnce
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Re: Considering changing from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by FoolMeOnce »

123 wrote: Wed Jan 26, 2022 4:03 pm I have never heard the following complaint "I wish I had more money in traditional retirement accounts (IRA/401k) instead of this money in Roth accounts". Money in Roth accounts is yours, money in traditional retirement accounts still has to go through the tax cycle.
And money on Roth had to go through the tax cycle up front. The comparison isn't money in Roth versus money in traditional. It's money in Roth versus money traditional + extra in taxable (or extra money in one's pocket - then decide what to do with it).

Anyway, OP, the point upthread about muddying the backdoor Roth in the future is worth considering. If your income really will be that high in seven years or so, you won't be eligible for direct Roth or deductible IRA contributions but could do the backdoor Roth. That benefit might outweigh paying a little extra in taxes in the coming years.
billfromct
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Re: Considering changing from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by billfromct »

Being 25 years old with 35-45 years before retirement, and 35-45 years for a Roth retirement account to compound tax free & can be taken out state & Federal tax free after age 59.5, why wouldn’t you want to put as much money into a Roth IRA as you can? This probably being your lowest earning years of your career.

I’ve responded to many “20 somethings” about putting as much in a Roth retirement account as you can when early in your career because as you get older & in a higher tax bracket, tax deductible retirement contributions will make the most sense.

Also if “you are covered by a retirement plan (401k, 403b, pension, etc) at work”, the ability to contribute to a tax deductible IRA starts to phase out when your modified adjusted gross income ( MAGI) hits $68k. This may not apply to you now, but probably will in the future.

You want to put as much in that Roth IRA as you can during your younger working years!

bill
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JoeRetire
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Re: Considering ghanging from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by JoeRetire »

aristotelian wrote: Wed Jan 26, 2022 1:56 pm You would determine it by your tax bracket, not an arbitrary ratio. A good rule of thumb is any income in the 22% bracket or higher is more advantageous to save pretax. For single filer, that would mean any income over $53k in traditional.
This. (Although I might stay in Roth until I reached the 24% bracket).

Basically the choice between Roth and Traditional boils down to a bet as to at which point in time (now or in retirement) you will be in a higher tax bracket.

It's nice to retire with funds in both buckets - that gives you plenty of flexibility.
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Re: Considering changing from 100% Roth to either 50/50 or 100% traditional. Age 25.

Post by sailaway »

The irony of the t vs Roth debate for IRAs is that if you are eligible for t, the Roth is probably what you need. A few exceptions would include things like that extra deduction being the difference between qualifying or not qualifying for saver credit or the best deal on ACA.
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