Effective vs. marginal tax rates

Barry Dolowich for the Monterey Herald writes: Question: My wife is considering going back to work now that our children are grown up. I am afraid her earnings will put us in a higher tax bracket. If we enter into a higher tax bracket will we be working for nothing?

Answer: In view of the constant political debates regarding tax rates, the timing of your question could not have been better. Your question illustrates a confusion regarding the tax rate schedule that I frequently encounter among my clients. It almost always makes sense economically to make more money. Only if the tax rates were above 100 percent would it not make sense to earn more money.

Generally, tax preparers look at tax rates from two perspectives, the effective tax rate and the marginal tax rate. The effective tax rate is the total income tax paid divided by your taxable income. The marginal tax rate is the percentage of tax you will pay on the next dollar of income you will earn based upon your current level of taxable income.

The tax rate schedule is progressive. The percentage tax rates rise progressively higher with higher taxable income. However, by earning more, you do not necessarily lose the benefits of the lower tax rate percentage brackets.

For example: If you are in the 25 percent bracket and the next dollar you earn will put you in the 28 percent bracket, you will only pay an additional 3 cents (28 cents less 25 cents) on that dollar by entering the 28 percent bracket. Entering the 28 percent bracket does not mean that all your taxable income will be taxed at 28 percent.

Due to the complexity of the tax laws with many credits and deductions tied to various income levels for phase-outs, there may be certain (but rare) situations whereby earning more money may not be advantageous. If you have a complicated tax return that includes substantial investment income, Social Security benefits, passive activity losses, education credits, etc., you may want to discuss this issue with your tax preparer.

4 Employee Retirement Plans Worth Considering / Consider these alternatives if your employer doesn't offer a plan

Bisi Ibrahim for NerdWallet / InvestorPlace writes: If you don’t have a 401(k) where you work, saving for retirement can seem practically impossible. Workers who have an employer-sponsored 401(k) can kick-in $17,500 (for 2014) every year into the plan.  Plus, if they have a really generous employer, a company match can bring total annual 401(k) contributions up to a whopping $52,000!  Even more with catch-up contributions for 50+ workers.

That’s a pretty strong retirement savings plan. But if your boss doesn’t offer a 401(k), there are some attractive alternatives. If you are self-employed, or work for a small company, here are four employee retirement plans worth considering.

This is a simple solution that makes your IRA contributions easy and automatic. Rather than waiting until the end of the year — or tax time – to make your IRA contribution, your employer can set up an automatic payroll deduction. Just like a 401(k), that means you never see the money fall into your checking account, tempting you to spend it. It sweeps, clean and unseen, right into your IRA.

Your employer won’t have to file any paperwork with the IRS and you determine how much comes out of your check each payday. Of course, the annual maximum IRA contribution (all contribution limits listed in this article are for 2014) is $5,500 — unless you are 50 or over – then, you can pitch in a catch-up contribution of another $1,000.

SIMPLE IRA

Even better, is the SIMPLE IRA. Why is it better? Because you can save $12,000 a year, with catch-up contributions for workers 50+ adding another $2,500. And with this plan, your employer can make contributions, too – matching up to 3% of your deferrals or making 2% contributions of each eligible employee’s compensation, even if they don’t put in a dime. That really helps build a bigger nest egg.

Your boss will also like the fact that this retirement plan has minimal paperwork and there are no annual filing requirements for the employer. The financial provider will take care of that.

SIMPLE IRA 401(K)

This is a SIMPLE IRA plan with just a couple of twists: participants can take loans and hardship withdrawals from the plan, just like a 401(k) – but employers have to file an annual Form 5500.  Other than that, pretty much everything else remains the same: the employee deferral and employer match limits are unchanged.

SEP IRA

With a big-hearted employer, this plan can be a supercharged retirement wealth builder. But this is a “one-way” IRA. Only the employer contributes, and they don’t have to put in anything at all on your behalf from one year to the next.

Your employer may contribute up to 25% of your compensation or $52,000, whichever is less, to your SEP IRA. The company can max out the contribution one year, and then make no contribution the next.  There are no contribution mandates. The employer’s deposit to your SEP IRA is not a match to your contribution (because you, as an employee, can’t put money into the SEP) and it is totally discretionary. But every employee has to be treated the same — for example receiving a contribution based on the same percentage of pay — if the employer decides to make any contribution.

SEP IRAs are a favorite for the self-employed – it allows them to contribute to their own plan as an employer/employee and enjoy a higher savings rate than other retirement plans offer, though special contribution limits apply to the self-employed. Paperwork is minimal, and there are no annual reports typically filed by the employer.

The flexibility of these alternative retirement plans can fit into the compensation strategies of many small companies – or self-employed entrepreneurs.

Features of the New QuickBooks ProAdvisor Mobile App

Stacy Kildal for the Sleeter Group writes:   One of my favorite mobile apps is the Intuit Online Payroll (IOP) app. I can literally do payroll from anywhere I have access to the Internet, via Wi-Fi or cell service. However, this article isn’t for me to gush about the IOP app. It’s to tell you about the new QuickBooks ProAdvisor Mobile App for iPhone, which I just downloaded. For the most part, while it’s not life changing, I still love it for one simple reason. I’ll get to that reason, but first, let me give you some background, and then we’ll walk through a first-use experience together, shall we?

I used to love talking on the phone. With my sisters, my friends, even clients. Now? Not so much.

If you had told me a few years ago that I would end up being the type of person who doesn’t like to talk on the phone, I would have laughed and laughed and laughed at you. These days, I barely use my phone as a phone. I can almost run my entire business from it, and on occasion, I’ve had to do exactly that, albeit on a very short-term basis.
I mostly use text, email, and instant messaging to talk to everyone. I’ll still spend time on the phone when some sort of written communication just won’t work, but it’s pretty rare.

QuickBooks ProAdvisor Mobile App Availability

Just a note: I asked Intuit if the QuickBooks ProAdvisor Mobile App would be available for both traditional QuickBooks ProAdvisors as well as new Cloud ProAdvisors and was told the following:

“The current app is designed for traditional PAP [ProAdvisor Program] users as target audience, but as seen in the screenshots below, when a CPAP [Cloud ProAdvisor Program] user tries to log into it with their CPAP user ID and [password], they will be able to log in, but the experience will be a bit non-optimized; i.e., as seen in the pic below, their Membership tab will be empty, etc. What is that they can use from this app? They can use the Online Chat feature, but again the CPAP users will have a non-optimized experience. Yes, they can call the 888 number, but I believe that is a dedicated number for our traditional PAP users, and the CPAP support number is different, in which case the support agent will be transferring or guiding the CPAP user to another number to call.”

-SNIP- - The article continues, Please visit  visit the Sleeter Group / Click Here to continue reading.  

Why You Don’t Need a Tax Strategy

Alex McAdams for Nerd Wallet writes:   Our tax system is built on the notion of rewards and punishments. Do a good thing: get a treat. Misbehave: prepare to pay a price. In an effort to steer Americans toward what the government thinks is best we do—buy a house, seek regular medical care, invest and donate to charity—Uncle Sam offers a treat in the form of tax deductions. But many Americans, indeed fully two-thirds of us, don’t need a complicated tax strategy. Here’s why.

Standard deduction

For most people, taking what’s known as the standard deduction is the best way to save money on your taxes. The good news? It doesn’t involve saving any receipts or doing complicated calculations. You claim it just by checking a box.

The standard deduction is the amount of income the government excludes from taxation by default, and it is a fairly generous amount. For tax year 2014 (for filing by April 2015) the standard deduction rises to $6,200 for singles as well as married persons filing separate returns, and to $12,400 for married couples filing jointly.

The more you make, the likelier it is you’ll itemize your deductions. The non-profit Tax Foundation found that while only about half of taxpayers earning between $50,000 and $75,000 itemize, almost all taxpayers earning more than $200,000 do.

But don’t let the statistics fool you. While it is true that higher-income tax filers are more likely to itemize their deductions, nearly two-thirds (65.8%) of itemizers in 2010 had adjusted gross incomes of less than $100,000.

More confused than ever? Don’t worry, we’ll help get you on the right track. First, ask yourself this key question:

Do you own a home?

More accurately, are you paying a mortgage? If so, and if you’re paying a heap of interest each month and property taxes to boot, you might find some benefit from itemizing deductions. Homeownership is the common denominator for beginning to consider whether filing your taxes goes from quick and easy to down and dirty.

But it is not the only benchmark to consider. If you really want to know if you should itemize or just take the standard deduction, you’ll have to do the math on both and compare the results. The Government Accountability Office looked at the 1998 tax returns of Americans and found that half a million people overpaid their taxes by claiming the standard deduction, when they could have itemized and paid less tax.

Itemized deductions

Here’s where the proverbial shoebox of receipts comes into play. If you decide to itemize, you will need to keep track of expenses related to:

• Mortgage interest
• Uninsured medical and dental expenses
• Charitable gifts
• Real estate taxes
• Educational expenses
• Casualty, disaster and theft losses
• Unreimbursed employee business expenses

According to the Congressional Research Service, the mortgage interest deduction made up the largest share of deduction claims among itemizers with an adjusted gross income between $20,000 and $250,000.

Now, these expenses don’t just come right off the top. Many of them require meeting or exceeding certain minimum amounts of your adjusted gross income. For example, you could have a boxful of receipts, spend hours tallying them up and find that your expenses just don’t add up enough to count. There’s that punishment-and-reward thing again.

Tax reform

The winds of tax reform blow steadily during election years, then slow to a whisper when there are no votes to count. One of the topics you’ll hear when the gusts gather is whether itemized tax deductions should be reduced or eliminated altogether. For now, , itemizing is an option to consider when looking to reduce your tax burden. And, of course, you’re not locked in forever. You can itemize this year and not the next.

If you have a mortgage, it’s a pretty simple matter to add up the interest and taxes you pay to see if they exceed the standard deduction. If they do, or at least come close, it may be time to drag out a shoebox and start saving those receipts.

If not, your best tax strategy may be no strategy at all.

U.K. Perspective: Time to reboot the accounting profession ( "All the indications are that end user businesses will continue to prefer the newer applications but it remains open whether the vendors will be able to maintain previous growth rates")

Den Howlett for Diginomica writes: Phil Wainewright’s series on the technical distinctions between different cloud ‘types’ is prescient in the context of some work I’ve been doing around the professional accounting market. To recap Phil’s central position:

Right from the beginning of my 15-year involvement with SaaS I have always said, this is more than a deployment choice; more than a relocation exercise. Once applications are in the cloud, they are able to connect more easily and that opens up opportunities and capabilities that were never possible when confined within the enterprise.

It also allows for the creation of all-new applications that were never conceivable in the client-server era. That is why so many of the new wave of applications in fields such as marketing automation, talent management and collaborative working are almost exclusively developed and delivered cloud-native.

For my part, I have been following the evolution of cloud/SaaS accounting solutions for some eight years. In that time, the panoply of emergent vendors have cleaned up all the organic growth I would have expected to see from the UK’s incumbent. My current estimate is that the whole end user accounting solution market now accounts for some 100,000 businesses with ample room for growth in the coming years.

On the professional front almost nothing has changed. I say almost because both IRIS and Sage, which between them claim some 30,000 UK professional practitioner customers have made efforts to move solutions into a cloudy environment. In that sense, they conform to Phil’s contention that:

…the applications themselves have largely become Web-enabled so that they can be accessed via a browser rather than through a Windows terminal session.

This is the modern deployment model for what I once called SoSaaS — Same old Software, as a Service. It delivers the economies of scale of utility cloud infrastructure and the convenience of cloud-based applications, without any need to re-engineer the existing software.

He goes on to say:

…Client-server SaaS still exists because it often remains the best fit for many traditional applications. In these circumstances, the lack of adaptation to the cloud environment is seen as an advantage, because the way the application behaves and is managed doesn’t change that much.

I fully understand that position but struggle to buy into it as it applies to the professional accounting market.

The incumbents and many of their customers will argue that the fundamental compliance work required of a professional accountant has not changed and therefore there is no pressing need to forklift into a new method of computing. They will reinforce that argument by noting that the technical principles underpinning the operation of professional compliance have not changed either.

Some users will argue that the suite approach of IRIS and CCH in particular are powerful reasons to stick with what they have. As conservative actors in this market, they will also argue that something relatively new introduces risk.

I see these arguments as little more than a reinforcement of the status quo in a market where the supply side (the end user market) has already spoken and where operational efficiency is trumped by client need. I’ve seen too many examples of new practitioners who are building transformational business models to believe that the legacy methods can survive in the long term.

So why haven’t the new breed of providers steamrollered the incumbents? Here are some reasons:

• So far, the new players are only providing limited solutions that address the basics. If they are to become large scale players then they need to follow the Salesforce.com route, building or buying additional functionality.
• Following on from the above, the new players have yet to figure out how to translate the value add that buyers see and from which practitioners benefit into a revenue stream.
• The market is fragmented. While the UK is dominated by Xero, FreeAgent and KashFlow, there are plenty of others picking up bits and pieces of the available market. Then there are the US variants that can play globally. That leaves the incumbents with plenty of wiggle room. Despite the mindshare earned by the cloud leaders, they are still very small in comparison to the incumbent both in terms of revenue and scale.
• While it is possible to assemble services that can match the needs of the professional, many of those same services need to benefit the end user client as well. A good example is file sharing. But with so many choices, what direction should a new player take – partner or build?
• Assembled services are not as attractive to the professional market as a suite approach where practice requirements extend well beyond accounts production. The large players have a massive lead in this regard with investments going back many years.
• None of the new vendors have cracked the analytics nut. I have long held the view that the cloud/SaaS vendor which gets the value of analytics will capture significant market share. The accounting players will argue this is something that’s very hard to do because of privacy concerns. Once again, I believe this to be a spurious argument because we already have the precedent in the public domain in the shape of filed accounts. HMRC has no qualms in looking for patterns in numbers submitted. Practitioners already have the wherewithal to undertake some analysis but it is always limited by the relatively small size data sets.
• Despite the cloud/SaaS leaders being well funded, they cannot match incumbent resources. You can argue that having stripped the incumbents of growth and successfully drawn attention to themselves that resource doesn’t matter. Not true. Being smart with meager resources is one thing. Outspending is another.

If I am painting what seems to be a pessimistic view then I’d caution. All but the last issue can and will be overcome. Last Friday, FreeAgent for example announced that their sole traders customers can file for self assessment from directly inside their solution. In the legacy world, this is usually handled by a separate application.

All the indications are that end user businesses will continue to prefer the newer applications but it remains open whether the vendors will be able to maintain previous growth rates.

In the meantime, I remain confident that the profession will be rebooted…it’s just a question of time.

FinancialForce.com Adds Tax Automation and Project Management Capabilities With Winter '14 Release

FinancialForce.com today announced the Winter '14 release of FinancialForce Accounting and FinancialForce PSA. With improved project management capabilities and tools that will help simplify financial management on the Salesforce Platform, FinancialForce.com furthers its commitment to help companies grow the top and bottom line.

FinancialForce Accounting

The Winter '14 release of FinancialForce Accounting streamlines and provides additional automation of a number of financial processes and activities including year-end, accounts receivable ageing, bank reconciliation, accounts payable processing and currency revaluation. Additionally, the application will now integrate with Avalara, the leading provider of sales tax and compliance automation services in the cloud. This integration will enable customers to better manage complex sales and use taxes on the Salesforce Platform and will give them the option to use Avalara to track and submit tax forms and payments.

Pascal Van Dooren, EVP of sales and marketing at Avalara, said, "Manually managing sales tax is difficult, expensive and time consuming -- and businesses can face stiff penalties if they don't get it right. Avalara's software as a service offering makes sales tax compliance simple and automatic for thousands of customers every day, and we look forward to doing the same for FinancialForce.com customers. In today's electronic world, it just doesn't make sense to manually manage sales tax."

FinancialForce PSA

FinancialForce PSAWinter '14 delivers a more comprehensive resource management and project management experience for customers. Key product updates include:

·      Updated timecard interface offers a single point of entry in the cloud for resource management, project management and billing on assignments.

·      Time against task feature allows customers to track time on project tasks. As task time is entered, it will automatically roll into the timecard assignments for billing while still allowing users the ability to manage project tasks separately for project management purposes.

·      New Gantt chart functionality provides customers with a visual representation of projects, tasks and resources that will allow them to see the flow of a project and the relationship of tasks over time.

·      Mobile expense capabilities give customers the power to add and edit expenses in the mobile application, even if their phone has no connectivity, such as on an airplane.

"2013 was a big year for FinancialForce.com in terms of growing our product offerings, customer base and company presence. What remains unchanged is our focus on customer feedback and making each point solution most useful, reliable and cutting edge, whether as a standalone or combined as part of an ERP suite," said Jeremy Roche, president and CEO of FinancialForce.com. "We are dedicated to rethinking possibilities for the back office cloud. This Winter '14 release is another step towards our vision for a seamless, collaborative back office that positively impacts our customers' top and bottom line. There is much more on the horizon this year!"

The Winter '14 versions of FinancialForce Accounting and FinancialForce PSA are immediately available to FinancialForce.com customers as part of their subscription fee. To learn more visit www.financialforce.com.

ACA (Affordable Care Act) Tax 101: How It Impacts Your 2014 Tax Return (Click To View)

Bill Cobb, president and CEO at H&R Block, explains the impact of the Affordable Care Act on your 2014 tax filing on Bloomberg Television’s “Bloomberg Surveillance.”

Intuit TurboTax Introduces New, Data-Driven Personalization for Returning Customers

Intuit TurboTax®, the nation’s No.-1 rated, best selling online tax preparation service, today unveils a totally redesigned online experience for its millions of returning customers. Loyal TurboTax users will now get a more personalized experience that adapts itself to a customer’s unique tax situation based on their previous tax return data. A new, intuitive user interface provides the guidance, support and answers they need every step of the way, so customers can be confident that their taxes are done right.

“Innovating for our most loyal TurboTax customers, we’ve delivered a new, highly personalized experience for returning TurboTax users based on all the previous tax return information we have for them,” said Sasan Goodarzi, general manager of Intuit’s Consumer Tax Group. “We know you and your taxes so we can eliminate dozens of unnecessary questions and still help every customer file a return that’s complete, accurate and results in their biggest possible refund.”

TurboTax 2013 for returning customers features:

• Personalized experience: Using data from the prior year’s return, TurboTax 2013 makes tax preparation faster and easier than ever. TurboTax automatically transfers returning customer’s personal information and prior year tax return data, including W-2 wage and salary information from their employer, and then adapts itself based on that information to slash screens and questions that are not relevant to their specific tax situation. With everything TurboTax knows about returning customers, they are often already about a third of the way done with their tax return before they even start entering this year’s information. Taxpayers simply review their personal and employer information and answer some relevant questions and they are done.
• New refund explanations: TurboTax now highlights changes to a customer’s tax refund, providing personalized, easy-to-understand explanations to help them see exactly why their refund increased or decreased. And to help make sure that customers don’t leave a single dollar on the table, TurboTax automatically double checks taxpayers’ returns as they go, searching for every tax deduction and credit to which they are entitled.
• Quick, easy access to answers: Because every question is important, TurboTax provides direct access to answers and experts from every screen so a customer never feels alone. TurboTax AnswerXchange® delivers answers that are specific to customers’ individual tax situation from a community of TurboTax experts and people who’ve been there before. The power of the community means tax questions have already been asked and answered. In addition, credentialed tax experts, all certified public accountants and enrolled agents, and product experts are available by phone for free to all TurboTax Online and mobile customers.
• Customized home base: New for 2013, MyTurboTax offers a simple, unified home base for all of a customer’s important tax tasks and information. MyTurboTax summarizes last year’s tax return for customers and provides a timeline of their entire TurboTax history. It also serves as a place for customers to access previous tax returns and, once they file, check the status of their tax refund and access their own personal ‘Affordable Care Guide’.
  
  This guide helps customers understand how the Affordable Care Act affects them, calculating their estimated subsidy and out-of-pocket cost of purchasing health insurance. If customers choose not to get health insurance, the guide calculates their estimated penalty, giving them a quick and easy way to make the best decision for them and their family.

• More money in your pocket: In addition to helping customers get their biggest possible refund, with the Refund Bonus program TurboTax puts more money in customers’ pockets. Exclusively with TurboTax, customers can choose to use part of their federal tax refund to purchase an Amazon.com Gift Card and TurboTax will add an extra 5 percent to 10 percent to the amount of the e-gift card.

Pricing and Availability

TurboTax Online, desktop, and mobile products are now available and are up to date with the latest tax and health care laws. Taxpayers can e-file now and TurboTax will securely hold and then submit their tax returns to the Internal Revenue Service when the agency begins accepting them on January 31.

TurboTax Online pricing starts at free for simple federal tax returns. TurboTax Online federal and state products include e-filing at no additional cost and are available at http://www.TurboTax.com.

TurboTax 2013 desktop products start at $29.99 and include preparation and federal e-filing for up to five federal returns. State e-filing is additional. Desktop products are available at retail stores and direct from TurboTax.

401K vs IRA

Over at Bogelheads we read the following discussion: 

401K vs IRA

by Jetkid03 » Mon Jan 13, 2014 6:50 pm

Hello everyone,

I am a 23 year old who has been working for a bit over a year, with ~$60K base salary and ~$10K bonus. My company contributes 6% of my salary to the 401K regardless of what I put in there.

That being said, my friends always tell me to max out my Roth IRA as soon as I reach the 6% contribution. However, that doesn't apply to me since my company pays me 6% regardless of what I put into the 401K. So my first question is, which account (401K or Roth IRA) should I max out first?

Secondly, I am taxed at the 25% federal bracket as of today. I live a pretty conservative life (in terms of spending), and I don't plan on "making it rain" every day after I retire. Thus, I feel like I should max out my traditional 401K before doing anything with the Roths. Does that sound about right?

Thirdly, do I even need the Roth IRA account at all? Since my pay is pretty low right now, I can barely meet the $17,500 minimum for the 401K. Having a maxed out $5,500 Roth IRA AND a half maxed 401K seems like a lot of hassle. Would it make more sense to just re-route the contributions from the IRA to the 401K (all traditional)?

To recap my questions (the order of the questions can arguably be better...):
1. Should I max out 401K or Roth IRA first?
2. Should I touch Roth accounts if I don't plan on making huge distributions after retirement? Or should I just keep it all pre-tax (traditional) for the time being?
3. Should I not have a Roth IRA at all until I am able to max out my 401K?


Thank you ALL!

Post edit thoughts:
1. I plan on buying a house in 3-5 years. From what I know, Roth IRA lets you withdraw up to $10K in EARNINGS for first time house buyers, whereas Traditional IRA allows you to withdraw up to $10K in PRINCIPLE. Would this mean Traditional IRA is a better option than Traditional 401K? Should i be contributing to both Roth and Traditional IRAs instead of 401K?

2. (solved) I heard someone say "As long as those 0% and 10% tax brackets exist, the 401/403/etc should come first. Just 'prime the pump' with some super minor Roth contributions if you need to age your account to that magic 5+ year marker. Put $100 in and forget." - What do they mean "prime the pump" and what is the "5+ year market" benefit? - Answer: 5 years after making your first investment in Roth IRA, you can withdraw up to $10,000 for home buying.

Last edited by Jetkid03 on Mon Jan 13, 2014 7:21 pm, edited 4 times in total.

Jetkid03

: 401K vs IRA

by Ice-9 » Mon Jan 13, 2014 6:56 pm

If you like the fund selection in your 401k (for a Boglehead, that would mean reasonably priced index funds representing the asset classes in which you'd like to invest), then go ahead and invest there as much as you can first.

If you're unhappy with the fund selection in your 401k, you can solve the problem by investing in your IRA first, where, for example, if you chose Vanguard as your custodian, you have all of Vanguard to pick from.

Ice-9

: 401K vs IRA

by Kitkat76 » Mon Jan 13, 2014 7:09 pm

Congrats on getting started at an early age. Since your Company contributes 6% to your 401k without regard to what you contribute, a traditional IRA would be preferable to contributions to your 401k simply because you have more investment options. Of course ideally it would be best to fully contribute to your 401k as it would reduce your taxable income. Then fully contribute to either a traditional or roth ira. I would prefer a roth since you are in a relatively low tax bracket now while your future tax rate is an unknown.

Kitkat76

: 401K vs IRA

by JW Nearly Retired » Mon Jan 13, 2014 7:23 pm

Jetkid03 wrote:To recap my questions (the order of the questions can arguably be better...):
1. Should I max out 401K or Roth IRA first?
2. Should I touch Roth accounts if I don't plan on making huge distributions after retirement? Or should I just keep it all pre-tax (traditional) for the time being?
3. Should I not have a Roth IRA at all until I am able to max out my 401K?

Depends on what your wild guess of your tax bracket in retirement might be compared to your tax bracket now. If you end up with a "huge" 401k the required distributions (RMD/MRD) are "huge" by law. You are getting a great early start on saving so you might accumulate more than you think. Many folks hedge their estimates and try to have some of both pre-tax and Roth accounts.

Also depends on the selections and expenses available in your 401k. Can you post the funds that are available (including ERs)?
JW

Retired Summer 2013

JW Nearly Retired

: 401K vs IRA

by Jetkid03 » Mon Jan 13, 2014 7:26 pm

JW Nearly Retired wrote:

Jetkid03 wrote:To recap my questions (the order of the questions can arguably be better...):
1. Should I max out 401K or Roth IRA first?
2. Should I touch Roth accounts if I don't plan on making huge distributions after retirement? Or should I just keep it all pre-tax (traditional) for the time being?
3. Should I not have a Roth IRA at all until I am able to max out my 401K?

Depends on what your wild guess of your tax bracket in retirement might be compared to your tax bracket now. If you end up with a "huge" 401k the required distributions (RMD/MRD) are "huge" by law. You are getting a great early start on saving so you might accumulate more than you think. Many folks hedge their estimates and try to have some of both pre-tax and Roth accounts.

Also depends on the selections and expenses available in your 401k. Can you post the funds that are available (including ERs)?
JW

Here are my available funds in my 401K:

And thanks to the help from other Bogleheads in this forums, here is my allocation plan:

Jetkid03

: 401K vs IRA

by curmudgeon » Mon Jan 13, 2014 10:51 pm

Having diversity in retirement fund forms is helpful, as it gives you choices in retirement that you might not otherwise have. Some of your existing choices might be taken from you in the future with tax law changes as well, though that's hard to predict. Even if the law stays the same, you may find that salary increases bump you into the zone where you can no longer directly contribute to Roth (and things like the "backdoor" may go away).

There's no good predictions this far ahead, but if I were in your shoes, I'd hedge my bets by splitting between Roth and 401K. I'd probably lean more towards Roth since you are early in your career.

curmudgeon

: 401K vs IRA

by MichaelM24 » Mon Jan 13, 2014 11:04 pm

Your 401k is wonderful and you have a relatively low income right now.

I wouldn't contribute to the Roth until you have maxed out the 401k.

If you get your marginal tax rate down to 15%, and still have money to contribute go with the Roth IRA.

MichaelM24

: 401K vs IRA

by JW Nearly Retired » Tue Jan 14, 2014 12:01 am

MichaelM24 wrote:Your 401k is wonderful and you have a relatively low income right now.

I wouldn't contribute to the Roth until you have maxed out the 401k.

If you get your marginal tax rate down to 15%, and still have money to contribute go with the Roth IRA.

+1
Agree.
JW

Retired Summer 2013

JW Nearly Retired

Re: 401K vs IRA

by Jetkid03 » Tue Jan 14, 2014 1:06 am

MichaelM24 wrote:Your 401k is wonderful and you have a relatively low income right now.

I wouldn't contribute to the Roth until you have maxed out the 401k.

If you get your marginal tax rate down to 15%, and still have money to contribute go with the Roth IRA.

How would I be able to get my marginal tax rate down to 15%? Even if I max out my 401K at $17,500, wouldn't that leave me with over $40K gross income?

Jetkid03

Posts: 7

Joined: 10 Jan 2014