How to split 403b Roth and traditional

[jack10525]

Hello All,

I am 54 years old and plan on retiring in 13 years. I currently work for a hospital that offers a 403b with Roth and traditional options. I am only able to invest 20k a year. I’ve only been investing in the Roth side for about 5-6 years and maybe 30% of the 20k. Should I keep it at this amount or change it? I have no pension so what I invest is what I have. I also don’t have money to invest outside of work unless I decrease the 20k in tne 403b.

[FiveK]

See Prioritizing investments - Bogleheads and Traditional versus Roth - Bogleheads (at least through section 4.1).

After reading those, are things clearer or muddier?

[jack10525]

It's not clearer or muddier. I've heard of Ramsey's baby steps and loosely follow that advice. I am pretty stable financially. My home mortgage is pretty low and will be paid off in about 6-7 years. I have a about 7k in an auto loan that will be paid off in 2 years. I have 12k in an emergency fund. I am investing as much as I can and still pay the regular bills. Currently I am splitting my traditional and roth 403b 60/40. I'm wondering if I should increase the traditional 403b to get a better tax advantage.

[FiveK]

OK, that addresses the first link about what comes first, etc.

The second link discusses how one can make an educated guess at the Roth vs. traditional answer. It comes down to
a) knowing the marginal tax rate you will save by making a traditional contribution now,
b) estimating the marginal tax rate you will pay when making a traditional withdrawal later, and
c) comparing those two rates.

Have you done that, and if so what do you see?

[Admiral]

What is your current marginal federal tax bracket, and what is the value of your tax deferred savings?

The only (or let's say primary) reason to choose Roth over Traditional is, as FiveK alluded to, whether you will pay more in tax when retirement funds are withdrawn than you are paying now. If marginal rates are the same, it's a wash.

So, in order to have a best guess, you need to a) compare marginal rate now and expected rate later and b) have some guess as to what your tax deferred balance will be upon RMDs, because that will impact your marginal rate in retirement, and can't be controlled except by reducing the account balance (through spending it down, or conversion.)

You can convert to Roth later. You can't capture the tax deferral later.

Just want to make sure you understand all the concepts and are contributing to Roth with this in mind.

[celia]

Currently I am splitting my traditional and roth 403b 60/40. I'm wondering if I should increase the traditional 403b to get a better tax advantage.

It’s not just a comparison of tax rates between now and later, but also the balance of each account when you retire that matters as well as how each tax category is invested.

As an extreme example, at RMD time, someone could have $6M in tax-deferred and $4M in Roth. That supersaver would not only have large RMDs but also have 85% of their SS be taxed and be subject to IRMAA surcharges on their Medicare benefits. They could be converting like crazy from the day they retired but the tax-deferred balance could grow faster than what they withdraw each year. If OP scales down to what his/her best estimate of assets will be then, similar repercussions could still apply.

OP should also be looking at what their Asset Allocation is. With over 10 years before retirement, there is room to take more risk compared to when he is is within 5 years of retirement. After deciding on a desired AA, OP should follow Tax-efficient Fund Placement principles. This says that stock funds should be in Roths to maximize future tax-free growth. Bond funds should be in Tax-deferred accounts since there is no tax preference on interest, like there is on Long Term Capital Gains and Qualified Dividends. This will also slow down the growth of RMDs. International Stock funds and remaining stock funds should be in Taxable accounts. When the International stock pays foreign taxes in Taxable, the taxpayer may be eligible for the Foreign Tax Credit on their taxes.

If the OP will need to do Roth conversions in early retirement, it is best if the taxes are paid from Taxable. If the taxpayer pays from tax-deferred instead, they will be paying taxes on the amount they withdraw for those taxes.