Should I continue to do Roth 401k and Roth IRA?by fareastwarriors » Tue Mar 18, 2014 12:17 pm
Hi,
Should I continue to do Roth 401k and Roth IRA? Or it is advantageous for me to do traditional 401k and traditional IRA to get the tax deductions?
I have been contributing to a Roth IRA. The Roth IRA is about 40k right now.
For the 401k, I can contribute my "bonus" money to a Roth bucket. The rest of the contributions are regular pre-tax contribution. I have been doing this for the past 2 years. The 401k plan is worth about 56k (of which 17k is Roth).
2013 Tax Bracket
25% Federal
9.3% California
I think I will hit 28% federal bracket this year. My annual income is $62,500 and bonus.
I have been at my job (first one out of college) for about 2 and half years. Additionally, I have no plans to move out of California anytime soon.
I itemized in 2013 because of state taxes and charitable contributions.
What other info do you guys need?
Thanks.
Last edited by fareastwarriors on Tue Mar 18, 2014 1:22 pm, edited 1 time in total.
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Re: Should I continue to do Roth 401k and Roth IRA?
by mnvalue » Tue Mar 18, 2014 12:24 pm
I would definitely do enough Traditional 401k to keep from hitting the 28% bracket, and probably even 100% Traditional. I assume you're earning enough that you can't make deductible IRA contributions because you're over the limit for people who are covered by a plan at work. So the IRA will have to continue to be Roth.
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Re: Should I continue to do Roth 401k and Roth IRA?
by Bob's not my name » Tue Mar 18, 2014 12:45 pm
fareastwarriors wrote:For the 401k, I can contribute my "bonus" money to a Roth bucket. The rest of the contributions are regular pre-taxed contribution.
Roth and "pre-taxed" are the same thing, since Roth contributions are taxed. Traditional and "pre-tax" are the same thing, since traditional contributions are not taxed.
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Re: Should I continue to do Roth 401k and Roth IRA?
by fareastwarriors » Tue Mar 18, 2014 1:23 pm
Bob's not my name wrote:
fareastwarriors wrote:For the 401k, I can contribute my "bonus" money to a Roth bucket. The rest of the contributions are regular pre-taxed contribution.
Roth and "pre-taxed" are the same thing, since Roth contributions are taxed. Traditional and "pre-tax" are the same thing, since traditional contributions are not taxed.
I thought my contribution to the Roth portion of the 401k is after-tax. Am I confusing myself somewhere?
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Re: Should I continue to do Roth 401k and Roth IRA?
by fareastwarriors » Tue Mar 18, 2014 1:27 pm
mnvalue wrote:I would definitely do enough Traditional 401k to keep from hitting the 28% bracket, and probably even 100% Traditional. I assume you're earning enough that you can't make deductible IRA contributions because you're over the limit for people who are covered by a plan at work. So the IRA will have to continue to be Roth.
My income is not that high. My income was $62,500 last year plus a bonus of about 15k.
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Re: Should I continue to do Roth 401k and Roth IRA?
by rkhusky » Tue Mar 18, 2014 1:34 pm
Do you expect a sizable pension? Do you expect your salary to significantly increase from what you are getting now, i.e. bump you up to higher bracket? Do you expect to retire in a state with low income taxes?
Last edited by rkhusky on Tue Mar 18, 2014 1:36 pm, edited 1 time in total.
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Re: Should I continue to do Roth 401k and Roth IRA?
by an_asker » Tue Mar 18, 2014 1:36 pm
fareastwarriors wrote:
Bob's not my name wrote:
fareastwarriors wrote:For the 401k, I can contribute my "bonus" money to a Roth bucket. The rest of the contributions are regular pre-taxed contribution.
Roth and "pre-taxed" are the same thing, since Roth contributions are taxed. Traditional and "pre-tax" are the same thing, since traditional contributions are not taxed.
I thought my contribution to the Roth portion of the 401k is after-tax. Am I confusing myself somewhere?
Hopefully, it is not Bob who's not not confused and not both of us!!
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Re: Should I continue to do Roth 401k and Roth IRA?
by Bob's not my name » Tue Mar 18, 2014 2:05 pm
after tax = pre-taxed
after = post
before = pre
taxed = past participle of tax = post-tax
I pre-wrote this post before posting it. Then I previewed it post writing it and pre posting it.
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Re: Should I continue to do Roth 401k and Roth IRA?
by an_asker » Tue Mar 18, 2014 2:09 pm
Bob's not my name wrote:after tax = pre-taxed
after = post
before = pre
taxed = past participle of tax = post-tax
I pre-wrote this post before posting it. Then I previewed it post writing it and pre posting it.
Bob's not my name wrote:Roth and "pre-taxed" are the same thing, since Roth contributions are taxed.
Using quote #1 above, would that not make Roth = post taxed?
[edited to add]OK, now I get it - you are referring to Roth 401k not Roth IRA!! D'uh! 
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Re: Should I continue to do Roth 401k and Roth IRA?
by ryuns » Tue Mar 18, 2014 3:28 pm
I'm in a similar situation, in the same tax brackets in California. I still do a traditional 401k/403b for all my contributions at work. This represents about 75% of my retirement savings. I also contribute annually to a Roth for the remaining 25%. I do expect a pension but completely unknown amount. I have no idea if I'll retire in California. All these unknowns are why I do the Roth for part, but not all, of it.
Pro Roth: Tax diversity will provide more options in retirement and it can act as a hassle-free emergency fund if I ever need it. If you're constrained by the amount of space available for tax advantaged plan, since Roth money is already taxed, the same $5500 has effectively more buying power at retirement than $5500 in traditional IRA money. (I'm not actually constrained because work offers a 401k and a 403b which is weird and awesome.)
Anti-Roth: There's a chance I'll move to a state with lower tax when I retire (though I do love me some California). I don't expect to have a lavish lifestyle in retirement, which will probably mean a lower overall tax burden, so I may be, for instance, giving up tax savings now in the 35% range, when I'd only have to pay, say, 25% later.
An inconvenience is only an adventure wrongly considered; an adventure is an inconvenience rightly considered. -- GK Chesterton
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Re: Should I continue to do Roth 401k and Roth IRA?
by rkhusky » Tue Mar 18, 2014 5:04 pm
Fully funding traditional 401K and a Roth IRA seems like a reasonable balance, unless you know that pension + SS alone will push you into the same marginal tax rate that you have now, then more careful analysis could be done. If you retire early and delay taking pension and SS, you can use up some of the traditional tax-deferred contributions to live on and to convert to a Roth, paying 0%, 10% and 15% (Federal) on some of that.
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Re: Should I continue to do Roth 401k and Roth IRA?
by ensign_lee » Tue Mar 18, 2014 6:29 pm
With the ~10% of CALI taxes thrown in there, I think it's a slam dunk decision to go traditional for the 401k. Heck, you can really even make the argument that you should do a traditional IRA as well.
I do a traditional 401k in the 25% tax bracket here in Texas with a Roth IRA, with 0% state income tax.
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Re: Should I continue to do Roth 401k and Roth IRA?
by DonCamillo » Tue Mar 18, 2014 9:11 pm
I am in NJ. There are no deductions for contributions to retirement accounts, whether Roth or tax deferred. Earnings on tax deferred accounts, but not the original investment, are taxed by the state when withdrawn with a possible pension exclusion (see below). No part of qualified withdrawals from Roth are taxed.
I had originally expected to retire young, then found a second (actually fifth) career I enjoyed (college teaching) and the result is that I will retire late, possibly after age 75.
If I had retired young, the tax deferred accounts would have made a lot of sense, especially since NJ does not tax the first $20,000 of pension income if gross income is under $100,000. My late retirement combined with growth of my deferred accounts makes it impossible to keep my gross under $100,000 when I include minimum distributions.
My accounts are split between taxable, tax-deferred, and tax-free. With 20/20 hindsight, I think it would have been wiser for me to have had more Roth and less tax deferred. This is my last year before minimum required distributions, and I am converting as much as I can afford of my IRA to Roth.
You have to make decisions under uncertainty. I think it is best to diversify your tax options just as you diversify your asset allocation.
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Re: Should I continue to do Roth 401k and Roth IRA?
by Watty » Tue Mar 18, 2014 10:08 pm
2013 Tax Bracket
25% Federal
9.3% California
I think I will hit 28% federal bracket this year. My annual income is $62,500 and bonus.
In the 35%+ tax bracket it would take some very compelling numbers or a special situation to go with a Roth when you could use a deductible IRA or 401K.
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Re: Should I continue to do Roth 401k and Roth IRA?
by Bob's not my name » Wed Mar 19, 2014 4:33 am
DonCamillo wrote:I am in NJ. There are no deductions for contributions to retirement accounts, whether Roth or tax deferred. Earnings on tax deferred accounts, but not the original investment, are taxed by the state when withdrawn with a possible pension exclusion (see below). No part of qualified withdrawals from Roth are taxed.
New Jersey taxes IRA contributions and 403b contributions but not 401k contributions.
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Re: Should I continue to do Roth 401k and Roth IRA?
by Bob's not my name » Wed Mar 19, 2014 4:38 am
an_asker wrote:
Bob's not my name wrote:after tax = pre-taxed
after = post
before = pre
taxed = past participle of tax = post-tax
I pre-wrote this post before posting it. Then I previewed it post writing it and pre posting it.
Bob's not my name wrote:Roth and "pre-taxed" are the same thing, since Roth contributions are taxed.
Using quote #1 above, would that not make Roth = post taxed?
When you buy pre-cooked food at the store is it cooked? If it's cooked why don't they just call it cooked? What does the "pre-" refer to?
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Re: Should I continue to do Roth 401k and Roth IRA?
by an_asker » Wed Mar 19, 2014 10:04 am
Bob's not my name wrote:
an_asker wrote:
Bob's not my name wrote:after tax = pre-taxed
after = post
before = pre
taxed = past participle of tax = post-tax
I pre-wrote this post before posting it. Then I previewed it post writing it and pre posting it.
Bob's not my name wrote:Roth and "pre-taxed" are the same thing, since Roth contributions are taxed.
Using quote #1 above, would that not make Roth = post taxed?
When you buy pre-cooked food at the store is it cooked? If it's cooked why don't they just call it cooked? What does the "pre-" refer to?
I grant you that one. They should spell it out 'previously cooked'! 
Pre-tax contributions unequivocally refer to contributions made before tax. You make your health premiums pre-tax; you make your dependent care deductions pre-tax; you contribute to your 401(k) pre-tax.
However, the Roth 401(k) is definitely not pre-tax. Taxes are paid on that money. So it is decidedly post-tax, however you slice and dice it. It is up to you if you really want to say that the distributions are pre-taxed, i.e., similar to the pre-cooked food that you gave as an example.
PS: Going back to my previous response, there was nothing I should have apologized for when I edited it. I just did not read your deft definitions (which I disagree with now, BTW) carefully enough.
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Re: Should I continue to do Roth 401k and Roth IRA?
by an_asker » Wed Mar 19, 2014 10:56 am
ensign_lee wrote:With the ~10% of CALI taxes thrown in there, I think it's a slam dunk decision to go traditional for the 401k. Heck, you can really even make the argument that you should do a traditional IRA as well.
+1.
ensign_lee wrote:I do a traditional 401k in the 25% tax bracket here in Texas with a Roth IRA, with 0% state income tax.
Ditto, except the state is FL in my case and I did once dabble with the Roth 401(k) 
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Re: Should I continue to do Roth 401k and Roth IRA?
by rkhusky » Wed Mar 19, 2014 11:46 am
an_asker wrote:
ensign_lee wrote:With the ~10% of CALI taxes thrown in there, I think it's a slam dunk decision to go traditional for the 401k. Heck, you can really even make the argument that you should do a traditional IRA as well.
+1.
ensign_lee wrote:I do a traditional 401k in the 25% tax bracket here in Texas with a Roth IRA, with 0% state income tax.
Ditto, except the state is FL in my case and I did once dabble with the Roth 401(k) 
If you are going to pay the CA tax on withdrawal then the state tax is a bit of a moot point, although I don't know if CA has a flat or progressive tax or what deductions/exemptions they provide. Those issues may make the state tax relevant.
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Re: Should I continue to do Roth 401k and Roth IRA?
by mnvalue » Wed Mar 19, 2014 11:55 am
fareastwarriors wrote:
mnvalue wrote:I would definitely do enough Traditional 401k to keep from hitting the 28% bracket, and probably even 100% Traditional. I assume you're earning enough that you can't make deductible IRA contributions because you're over the limit for people who are covered by a plan at work. So the IRA will have to continue to be Roth.
My income is not that high. My income was $62,500 last year plus a bonus of about 15k.
How do you figure you're in the 28% bracket then? Even if you forgot to subtract the standard deduction and one exemption, you still don't make it. But anyway, being in the 25% bracket just changes the magnitude, not the direction, of the conclusion. You should still be doing almost all Traditional.
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Re: Should I continue to do Roth 401k and Roth IRA?
by fareastwarriors » Wed Mar 19, 2014 12:38 pm
mnvalue wrote:
fareastwarriors wrote:
mnvalue wrote:I would definitely do enough Traditional 401k to keep from hitting the 28% bracket, and probably even 100% Traditional. I assume you're earning enough that you can't make deductible IRA contributions because you're over the limit for people who are covered by a plan at work. So the IRA will have to continue to be Roth.
My income is not that high. My income was $62,500 last year plus a bonus of about 15k.
How do you figure you're in the 28% bracket then? Even if you forgot to subtract the standard deduction and one exemption, you still don't make it. But anyway, being in the 25% bracket just changes the magnitude, not the direction, of the conclusion. You should still be doing almost all Traditional.
I actually just finished inputing my data into TaxAct.
According to the summary page,
AGI = 89,506
Deductions = 9,412
Exemption = 3,900
Taxable Income = 76,194
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Re: Should I continue to do Roth 401k and Roth IRA?
by Bob's not my name » Wed Mar 19, 2014 12:42 pm
an_asker wrote:Roth 401(k) is definitely not pre-tax.
Agreed. But it is definitely pre-taxed.
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Re: Should I continue to do Roth 401k and Roth IRA?
by mnvalue » Wed Mar 19, 2014 8:07 pm
fareastwarriors wrote:Taxable Income = 76,194
So you're definitely in the 25% bracket (assuming Single filing status).
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Re: Should I continue to do Roth 401k and Roth IRA?
by fareastwarriors » Wed Mar 19, 2014 9:53 pm
Thanks for the answers everyone. I think I will stop contributing my bonus money to my Roth part of my 401k and stick everything in regular 401k. I will continue to max my roth IRA.
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Re: Should I continue to do Roth 401k and Roth IRA?
by grabiner » Wed Mar 19, 2014 11:10 pm
DonCamillo wrote:I am in NJ. There are no deductions for contributions to retirement accounts, whether Roth or tax deferred.
NJ gives a deduction for contributions to a traditional 401(k), but not any other type of retirement account. Thus you should prefer a Roth IRA in NJ, and if you have a 403(b) or TSP, you should also prefer the Roth option, unless you expect to retire in a much lower federal tax bracket. (If you are in a 25% bracket now and will retire in a 15% bracket, it's better to take the federal tax savings even if you have to pay NJ tax twice.)
I had originally expected to retire young, then found a second (actually fifth) career I enjoyed (college teaching) and the result is that I will retire late, possibly after age 75.
And it looks like, from this quote, you do have a 403(b), and thus a good reason to go Roth.
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Re: Should I continue to do Roth 401k and Roth IRA?
by wholeinone04 » Thu Mar 20, 2014 2:06 am
Everyone always argues about roth vs 401k but the truth is you won't know until it's too late. You might have a good idea of where your income will be in retirement relative to where it is but you have no idea where tax rates will be. So why worry about it?
Do the same thing that BH's preach about stock/bonds - diversify. I don't know why people don't diversify from a tax perspective but to me it makes perfect sense. If you're in the 25% or higher bracket, max out your 401k with pre-tax contributions and max out your roth ira with after-tax contributions. You'll get a nice deduction on your taxes and you'll also have a small hedge against uncertainty. KISS.
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