JW, I expect to have a pension when I retire since i'm currently contributing to it. I'm not sure how social security works for NYS employees. I don't receive any matching funds from NY state.
I am planning on living off my pension, (around 15K if I retire at 55, 40K if i retire at 63), my 457, and my spouse's 457. (i'm not married yet but should be in 1-2 years.. my spouse will be making 100K and we plan to max her 457 out.)
In regards to what you said about comparing my average taxation rate in retirement with the present 15%, rather than the marginal rate, The Finance Buff says:
"Even if you think the marginal tax rate in the future will be higher, there will still be lower brackets and these lower brackets should be filled with money from a Traditional 401(k)."
What does it mean the "lower brackets should be filled from the traditional 401k?" Does the 401k fill in from the bottom of the marginal tax bracket because it is my main source of income?
So, wouldn't it make sense for me to contribute to Roth 457 until I get married as I am making so little?
TFB says: "If you have a defined benefit pension plan and/or you expect to have a large balance in Traditional 401(k)/IRA, large enough to fill the lower brackets every year, then contributing to Roth makes some sense."
"A Roth 401(k) is good for people in low paying jobs now but expect to have high paying jobs later." (I don't expect to get a huge salary raise though, as I make $37k now and will max out at around $58k.)
I think the Roth 401k while you are in the 15% bracket would be a good choice. Switch to traditional as soon as you are married and spouse is making $100k. Your combined income is going to set your marginal tax bracket and it will be 25% with a $137k joint income.
As to fill up the lower brackets with the pension and/or TIRA RMDs
. You pay different tax rates on different layers of your income. In rough numbers a couple can have a gross income up to $19k before they pay any federal taxes at all because the standard deduction and exemptions add to that much. The next $18k income layer is taxed at 10% (i.e. gets you up to $37k gross income), next $55k layer is taxed at 15% (now at $92k gross income), next $74k layer is taxed at 25% (to $166k gross income), an so on.
Bottom line is if you are at the top of the 15% bracket with a $92k gross income, you will pay just 0 x 19000 + 0.10 x 18000 + 0.15 x 55000 = $10050 in taxes. Note that is an average
tax rate of just 11% on the gross income. But really the marginal rates should control your decision. If you add say another $20k to your taxable income it's all in the layer taxed at 25%. You have already filled the 15% bracket so taxes will go up by 0.25 x 20000 = $5000.
If that extra income came a traditional 401k withdrawel you would pay that extra tax. If it came from a Roth it isn't taxable income and you would pay nothing on it.
Conclusion is if you expect to be in the 25% marginal bracket in retirement it will pay to do the Roth 401k while you are in the 15% marginal bracket now. If you are in the 15% marginal bracket in retirement then using the Roth now does no good but no harm either. If you end up lower than the 15% bracket in retirement then using the Roth would have been a mistake. Using some Roth now is a hedge against getting up into the 25% bracket in retirement. Also a hedge against tax rates going up.