Trying To Decide how Much to Put in Roth 401k vs Traditional

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Topic Author
jimmyrules712
Posts: 640
Joined: Thu Jan 06, 2011 10:36 pm

Trying To Decide how Much to Put in Roth 401k vs Traditional

Post by jimmyrules712 »

I'd like to get some opinions on whether or not it would be better to switch some or all of my 401k contributions to ROth 401k given our situation.

Expect 2013 gross income (before deductions): $140k at the most.
25% federal tax bracket, 5.5% state income tax. Expect to hit 28% bracket within the next 2-5 years.
Married filing jointly.
Ages: Both 26


Current accounts:
Roth IRAs/401ks: $12,000
Traditional IRAs/401ks: $51,000
Defined Contribution Pension: $20,000

Current annual contributions:
Roth IRAs/401ks: $11,000 (his and her Roth IRAs)
Traditional IRAs/401ks: $27,500 ($18,500 my 401k + $6000 his company match + $1,500 her 401k + $1,500 her company match)
Defined Contribution Pension: $7,000

The pension would be rolled into a traditional IRA if/when I leave my current employer, so I believe we should consider that "Traditional" dollars.

I'm considering switching all or part of my $18,500 401k contributions to Roth 401k due to how much I'm getting into traditional accounts from my pension and company matches. However since we're paying 30.5% marginal tax rates I'm not sure it's worth it, however, I also know that we are likely to go into higher brackets in the coming years (although this may not happen very soon as we are considering starting to have kids next year so my wife's income would drop). Additionally I'd probably have to reduce my contributon amount if I switched to Roth because I don't have enough room in the budget to pay the extra taxes on the roth money. Thoughts?
ShowMeTheER
Posts: 511
Joined: Mon May 24, 2010 9:12 am

Re: Trying To Decide how Much to Put in Roth 401k vs Traditi

Post by ShowMeTheER »

I would not change a thing given 1) the amount of uncertainty in your future income and earnings situation; and 2) the fact that you are already hedging well between the pre-tax and Roth. It's possible that you may even want to consider adding more to Her pre-tax 401(k) on an annual basis before filling your Roth contributions in a year!

Remember, you likely will have the opportunity to convert from pre-tax to Roth down the road, but really can't go the other way. At your age and situation, I'd say stay firm with the pre-tax until you at least get into the family/kids phase.

And... I've been in the same boat and feel I made the wrong decision. Didn't know enough at the time to make sure I filled pre-tax before dealing with Roth... since that was probably the best play for my situation. Wish I could go back and re-class those, but at the end of the day it's still OK to have a hedged tax strategy on this tax-advantaged money.
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Skinut
Posts: 87
Joined: Fri Mar 30, 2012 9:37 am

Re: Trying To Decide how Much to Put in Roth 401k vs Traditi

Post by Skinut »

ShowMeTheER wrote:I would not change a thing given 1) the amount of uncertainty in your future income and earnings situation; and 2) the fact that you are already hedging well between the pre-tax and Roth. It's possible that you may even want to consider adding more to Her pre-tax 401(k) on an annual basis before filling your Roth contributions in a year!
+1 Reduce your taxes you're paying now, then focus on increasing contributuions to max his and hers 401ks, then do Roth (or backdoor Roth) once you get there.
Topic Author
jimmyrules712
Posts: 640
Joined: Thu Jan 06, 2011 10:36 pm

Re: Trying To Decide how Much to Put in Roth 401k vs Traditi

Post by jimmyrules712 »

Thanks for the input to both of you. Her 401k plan options suck (1% or more fees on everything) so that's the main reason I'm currently maxing Roth IRAs before her 401k.
Default User BR
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Joined: Mon Dec 17, 2007 6:32 pm

Re: Trying To Decide how Much to Put in Roth 401k vs Traditi

Post by Default User BR »

jimmyrules712 wrote:I'm considering switching all or part of my $18,500 401k contributions to Roth 401k
I think you mean $17,500.


Brian
WHL
Posts: 789
Joined: Mon Dec 10, 2012 1:22 pm

Re: Trying To Decide how Much to Put in Roth 401k vs Traditi

Post by WHL »

I've seen a lot of talk lately about the Roth 401k; here, other places online, Suze Orman, financial magazines. I'm standing tough with my t401k.

If I didn't have the $17,500 pre-tax contribution reducing my taxable income, I'd be in the 28% bracket. At today's tax rates, there's no way I'll be in the 28% bracket in retirement, I just won't need that much money. I'm hoping to be in the 15% bracket, if it still exists! If I keep putting together a nice taxable investment bundle like I have been, I may even be in a lower than 15% bracket in retirement!

I would definitely put any "extra" money into your wife's 401k, or buy I or EE bonds.
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