Wednesday, January 15, 2014

Roth vs Traditional Question for IRA & 401k / 403b

Posted on 8:27 AM by Unknown
Over at Mr. MoneyMustache.com we read the following discussion:
Pages: 1Author Topic: Roth vs Traditional Question for IRA & 401k/403b (Read 113 times)

fin123

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Roth vs Traditional Question for IRA & 401k/403b
« on: January 14, 2014, 08:50:23 am »
Hi all,


Simple question regarding Roth vs Traditional elections. My wife and I (24 & 26, respectively) combine to make ~135K, split basically even between us. We contribute 10-12% of our income to our 401k/403b and max out our IRAs each year. We both have the ability through work to elect a before or after-tax election for our 401k & 403b.


I have a good feeling that in retirement we'll be in a lower tax bracket than we are currently as we won't be making our current level of income. However, would it still be better to make Roth/Before tax elections for our 401k/403b & IRA accounts? If anything, tax rates will probably rise, and while in 35 years the Gov could theoretically tax Roth accounts, I don't see them able to pass that legislation. Or, should we hedge our bets and make Roth IRA contributions while going before-tax with one 401k and after-tax with the 403b? That way, we can have more control over our income streams down the line due to ability to pull from before & after tax account.


In summary - 135K income, mid-20s, how should we make elections for IRAs and work retirement accounts?


Thanks in advance for any assistance! Logged



NumberCruncher

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Re: Roth vs Traditional Question for IRA & 401k/403b
« Reply #1 on: January 14, 2014, 09:31:14 am »
My husband and I have had similar questions in the past and are currently in the 28% tax bracket. One simple solution is to use the Roth IRA pipeline, in which case using tax-advantaged (traditional) accounts makes a ton of sense: http://www.mrmoneymustache.com/forum/ask-a-mustachian/help-me-understand-the-roth-conversion-pipeline-idea-and-its-benefits/


Even if we were to just withdraw funds and pay the 10%, our spending levels would put us squarely in the 15% tax bracket (which hasn't changed a ton in recent history: http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2013-nominal-and-inflation-adjusted-brackets ), meaning we'd still come out ahead with traditional accounts. Since we have very few other deductions (renting non-parents), it saves us quite a bit. We'd even do traditional IRAs if we could get the deduction. Since we can't, we do Roth.


I don't see them changing the rules much on the lower tax brackets, but even if I did...it's a lot of speculation.

Logged



the fixer

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Re: Roth vs Traditional Question for IRA & 401k/403b
« Reply #2 on: January 14, 2014, 10:16:02 am »
I agree that you could speculate either way. I think raising the income tax rates on lower income earners is roughly as likely as putting a small tax on Roth withdrawals. Politicians and think tanks could put out all kinds of studies saying that despite the Roth IRA being intended for low-income taxpayers, the wealthiest receive most of the benefits. So having some in both accounts seems like a good idea.


I would put any money that would get taxed at 28% or more into tax-deferred accounts, then the rest could be split. The other variable worth considering is state income taxes if you think those will go down or up for you in retirement (including the case where you plan on moving to a different state). Logged
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FrugalSpendthrift

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Re: Roth vs Traditional Question for IRA & 401k/403b
« Reply #3 on: January 14, 2014, 01:05:27 pm »
I've been wrestling with this as well, but my crystal ball won't project that far. I'm in my mid 30's, currently in the 25% tax bracket, but if business goes well, I could potentially be in a higher tax bracket in a couple years. I've been using a Roth 401k for a number of years, and haven't really tracked it well until recently. I just noticed that 56% of my portfolio across all of me and my wife's accounts is Roth money. That shocked me into switching back to pre-tax contributions, but I can't decide if it was the right move. If I was in a higher tax bracket, I would feel more strongly that the pre-tax investment was the way to go, but being in the middle, I'm not so sure. Logged



frugally

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Re: Roth vs Traditional Question for IRA & 401k/403b
« Reply #4 on: January 14, 2014, 01:51:59 pm »



Cheddar Stacker

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Re: Roth vs Traditional Question for IRA & 401k/403b
« Reply #5 on: January 14, 2014, 02:43:47 pm »
I use these posts as my guideline. If you don't spend much money, and your tax rate is above 10%, traditional gives you a better tax benefit than Roth using these strategies.





aj_yooper

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Re: Roth vs Traditional Question for IRA & 401k/403b
« Reply #6 on: Today at 06:13:08 am »
If you have an employer-basee HSA available, I would be using that too; they are the sweet spot for tax advantaged. For me, generally, if you see yourselves retiring in the 10-15% bracket, tax advantaged is the way to go, assuming you are clearly above the 15% marginal rate already. If you have more money left over to invest, taxable accounts, properly constructed, are also very beneficial. The sites mentioned above are very good. Logged
"Live lightly. Don’t go into debt. It’s easier to live on less than to make more." Anonymous



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