Roth 401k vs Regular 401k when you have a pension

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Roth 401k vs Regular 401k when you have a pension

Postby 3CheersforLkyJack » Wed Jul 10, 2013 1:40 pm

Emergency funds: Yes
Debt: None
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, 8.98% State
Age: His – 29, Hers - 27
Desired Asset allocation: 90% stocks /10% bonds
Desired International allocation: 30% of stocks

Non Retirement Taxable – Plan to use some/all for down payment on first home purchase in 2-3 years, currently will cover 20% down payment.
1% EE Bonds (ticker symbol) (expense ratio)
3% Vanguard Short-Term Investment Grade (VFSTX) (0.20%)
31% Vanguard Life Strategy Income (VASIX) (0.14%)
8% Vanguard 500 Index (VFINX) (0.17%)
6% Vanguard International Growth (VWIGX) (0.49%)
18% Vanguard Large-Cap Index (VLCAX) (0.10%)
18% Vanguard Mid-Cap Index (VIMAX) (0.10%)
11% Vanguard REIT Index (VGSIX) (0.10%)
4% ESPP (not outside of 2 year window yet)
100%

Retirement Accounts
20% His Roth 401k – Contributing 8% of salary, Company match – Yes, Target 2050 (0.79%)
78% His Roth IRA at Vanguard, Vanguard Target Retirement 2055 Inv (VFFVX) (0.18%)
2% Her 403b, BlackRock LifePath 2050 (STLFX) (0.85%)
100%

His Pension – Cash Value

Her Pension – Defined Benefit
At 30 years of service pays 60% of average of 5 highest salary years

Contributions
$5,200/year his Roth 401k (including employer match 5,200+3,800=9,000)
$50/month her 403b (no employer match)-this is deposited by the employer for choosing a lower cost health plan
$5,500/year his Roth IRA
$5,500 her Roth IRA – not contributing currently, want to start and max by year-end
$3,250 his HSA – (500 provided by employer) cheaper for him to stay on high deductible plan than to join on her plan

Available funds

Funds available in his 401(k)
Bond and Mortgage Separate Account (ticker symbol) (0.45%)
Government & High Quality Bond Separate Account (ticker symbol) (0.45%)
Inflation Protection Separate Account (ticker symbol) (0.45%)
U.S. Property Separate Account (ticker symbol) (0.85%)
Principal LifeTime Strategic Income Separate Account (ticker symbol) (0.63%)
Principal LifeTime 2010 Separate Account (ticker symbol) (0.67%)
Principal LifeTime 2020 Separate Account (ticker symbol) (0.72%)
Principal LifeTime 2030 Separate Account (ticker symbol) (0.76%)
Principal LifeTime 2040 Separate Account (ticker symbol) (0.78%)
Principal LifeTime 2050 Separate Account (ticker symbol) (0.79%)
LargeCap Value Separate Account (ticker symbol) (0.45%)
Equity Income Separate Account (ticker symbol) (0.52%)
LargeCap S&P 500 Index Separate Account (ticker symbol) (0.06%)
LargeCap Growth Separate Account (ticker symbol) (0.35%)
LargeCap Growth I Separate Account (ticker symbol) (0.63%)
MidCap Separate Account (ticker symbol) (0.45%)
MidCap Growth III Separate Account (ticker symbol) (0.97%)
SmallCap Value II Separate Account (ticker symbol) (1.13%)
SmallCap S&P 600 Index Separate Account (ticker symbol) (0.06%)
SmallCap Growth I Separate Account (ticker symbol) (1.10%)
International Emerging Markets Separate Account (ticker symbol) (0.69%)
Diversified International Separate Account (ticker symbol) (0.69%)

Funds available in her 403(b) – was Hartford, now MassMutual with 0% Provider Fee. I only included Index funds, currently using the target fund option, thinking about switching this account to a 3-Fund Approach.
Vanguard Tot Bd Market Index (0.11%)
Vanguard 500 Index (0.06%)
Vanguard MC Index (0.12%)
Vanguard SC Index (0.17%)
Vanguard Tot Stock Index (0.07%)
Dreyfus Int’l Stock Index (0.60%) – only international index fund available

Questions:
1. His Roth vs His Regular 401k – Should we continue to contribute to the Roth 401k or switch over to the regular 401k. Assuming that we both retire with the pensions mentioned above and social security, I imagine we won’t be in the 15% tax bracket then. Maybe we should contribute to the Roth 401k until we hit the 28% bracket then switch to Traditional?

2. Given the low expense funds and 0% provider fee in her 403b, we plan to convert her target date fund to a 3-fund approach mirroring Vanguard’s 2050 Fund (63% Total Stock, 27% International Stock, 10% Total Bond). After contributing 8% of salary to his 401k to get the 6% employer match, we are thinking the additional retirement savings would go to the 403b. Should we stop contributing to the Roth IRA and max out the 403b, then contribute to the Roth IRA with available funds that are left?

3. Would we be better off leaving the Target Date 2050 fund with the 0.79% expense ratio and setup our own asset allocation across the 401k/403b/Roth IRA and rebalance as needed? Not sure if there are enough of the appropriate stock funds in the 401k to accomplish this. The simplicity of the target date funds are appealing, but rebalancing would be easy enough once the funds are setup.

We’ve spent quite a bit of time researching and compiling all of this information. We are looking forward to reading the responses. Thank you so much in advance for the help everyone!

-Mike
Last edited by 3CheersforLkyJack on Fri Jul 19, 2013 9:02 am, edited 2 times in total.
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Re: Help with Retirement/Savings Planning - Young Profession

Postby 3CheersforLkyJack » Fri Jul 12, 2013 8:43 am

Our main concern is question 1 about the Roth 401k vs Regular 401k.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby seeingeyestrike » Fri Jul 12, 2013 3:14 pm

I'll take a stab at answering the 1st question. I'm in a similar situation- I'm 26, in the 25% tax bracket now and expect to have a pension when I retire. For what it's worth- I'm currently contributing to my roth option. This is the first year I have the roth option, so my previous 3 years of contributions are all in traditional. I intend to switch back to traditional if/when I end up in the 28% bracket. One of the things driving my decision is the fact that I'm currently contributing the max to that account so contributing via roth gives me more tax advantaged space. This doesn't apply to you now, so in my opinion, it'll probably be a wash as to whether you should contribute to traditional or roth now.

One thing you should think about is whether you or your wife might stop working for a few years if you have children or if you might retire before you start collecting your penion and/or social security. Either of these situations could drop you into a lower tax bracket temporarily and give you the option of doing roth conversions.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby JW Nearly Retired » Fri Jul 12, 2013 6:31 pm

Emergency funds: Yes - six months of expenses
Income: $110,000
Debt: None
Tax Filing Status: Married Filing Jointly (Newly married this year)
Tax Rate: 25% Federal, 8.98% State

Retirement Contributions
$5,200/year his Roth 401k (including employer match 5,200+3,800=9,000)
$50/month her 403b (no employer match)-this is deposited by the employer for choosing a lower cost health plan
$5,500/year his Roth IRA
$5,500 her Roth IRA – not contributing currently, want to start and max by year-end
$3,250 his HSA – (500 provided by employer) cheaper for him to stay on high deductible plan than to join on her plan


RE Q1: You should plan to end up retiring with some mix of pre-tax and Roth type retirement savings. Right now it's all Roth IRA & Roth 401k. If you were getting the fed + state tax deductions you could afford to save a lot more in the 401k. You said you are unsure of waiting until you are in the 28% bracket to switch to a trad 401k, and I'm wondering if that will be a long wait anyway.

How fast/high do you expect your income to grow? Is that $110k/year your joint annual gross income? I would point out that the 25% MFJ tax bracket is 72,501 to 146,400 taxable income. That's your 110k AGI less at least the MFJ std deduction of $11.9k and exemptions of $7.6k (2 exemptions) = about $90k. If you were together making ~$18k of traditional 401k contributions you would be in the 15% bracket. My point is I think you are going to need to boost your income a lot before you get near the 28% bracket, especially after a house and a mortgage give you more tax deductions. Are you sure you will ever get to 28%?

Given the amount you can afford to save right now, IMO the 2 Roth IRAs and as much as you can save in a traditional 401k/403b would be a good mix.

On Q2 & 3: I would use her 403b to a much greater extent because it has better low cost index funds (total stock & total bond). Also, paying a 0.8% ER for the target date fund is a very expensive convenience. You should be able to easily make a 3 fund like portfolio AA across all your 401k/403b/IRA assets using only the lowest cost index funds. Your IRAs can hold international.

This nice calculator will show you what a 0.8% ER can do to a growing retirement nest egg. http://www.buyupside.com/calculators/feesdec07.htm
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Re: Roth 401k vs Regular 401k when you have a pension

Postby 3CheersforLkyJack » Sun Jul 14, 2013 10:49 pm

My income number was combined so you are correct that it would take quite a bit of time to hit the 28% bracket. I think we will max the Roth IRAs, change the 401k contributions to be regular just enough to get the full employer match, then save the remainder in the 403b utilizing a 3 fund approach.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby Watty » Sun Jul 14, 2013 11:20 pm

Tax Rate: 25% Federal, 8.98% State
......Age: His – 29, Hers - 27


You are in a combined tax bracket of almost 34% so there is no way that I would even think twice about using a Roth instead of a deductible retirement account, at least until you got down to the 15% federal tax bracket.

You are only in your 20's so there is a lot that can change between now and when your are ready to retire. This isn't all bad stuff either, you could very well decide to retire in your fifties in a lower tax bracket instead of working another ten years. You state tax bracket is pretty high, you might also move to a state with lower tax brackets.

If you were in your 50's then it might be easier to make case to use the Roth in a higher tax bracket but even that would be har to do in a 34% tax bracket.

You will also have the chance to do Roth conversions when you are retired or near retirement or if you have a few years with lower income. If you are likely to have kids then you may be in a lower tax bracket then too,
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Re: Roth 401k vs Regular 401k when you have a pension

Postby 3CheersforLkyJack » Mon Jul 15, 2013 7:50 am

Watty wrote:
Tax Rate: 25% Federal, 8.98% State
......Age: His – 29, Hers - 27


You are in a combined tax bracket of almost 34% so there is no way that I would even think twice about using a Roth instead of a deductible retirement account, at least until you got down to the 15% federal tax bracket.
,


I think you meant to put to use a deductible instead of a Roth?
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Re: Roth 401k vs Regular 401k when you have a pension

Postby Watty » Mon Jul 15, 2013 7:09 pm

I think you meant to put to use a deductible instead of a Roth?


The way I phrased it was not very clear.

I would use the deductible accounts until I got my income down to the 15% tax bracket.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby 3CheersforLkyJack » Mon Jul 15, 2013 10:35 pm

Watty wrote:
I think you meant to put to use a deductible instead of a Roth?


The way I phrased it was not very clear.

I would use the deductible accounts until I got my income down to the 15% tax bracket.


Should we continue to max both Roth IRAs and then do traditional 401k/403b? Or do we switch the IRA contributions to traditional (as long as we can get full deductibility) and then traditional 401k/403b?
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Re: Roth 401k vs Regular 401k when you have a pension

Postby Watty » Tue Jul 16, 2013 12:15 am

Should we continue to max both Roth IRAs and then do traditional 401k/403b? Or do we switch the IRA contributions to traditional (as long as we can get full deductibility) and then traditional 401k/403b?


You have at least a few very good investment choices in both the 401K and 403B so I would just direct as much as you can into those, at least as long as you are above the 15% federal tax bracket. There is no question about those being deductible. A huge advantage of this is the money comes straight out of your paycheck so the contributions actually get made. It is very easy to plan on making a Roth or IRA contribution but all to often it does not actually happen.

I would just use three index funds instead of the targeted date fund in the 401k/403b. You need to be obsessive about keeping cost low and you can save about a half of a percent that way. Compounded over 70 years until you are in your 90's that makes a huge difference.

For the Roth and Traditional IRA you can wait to figure out what to do about those contributions until next April 15th when you will know your exact tax numbers. If you are just a bit above the 15% tax bracket still, then you could contribute just enough to a deductible IRA to just get into the 15% tax bracket. It is even possible to fine tune this down to the dollar. :beer

Next April if you find that you have made all the 2013 retirement contributions that you want to then you could put some of your emergency money into a Roth that you would not otherwise be using to get the tax advantages. If you search the boards for something like "Roth emergency fund" you will find a number of posts that discuss how a Roth can be used for part of your emergency fund since you can always withdraw the contributions, but not earnings.
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Re: Help with Retirement/Savings Planning - Young Profession

Postby FinancialDave » Tue Jul 16, 2013 2:14 am

3CheersforLkyJack wrote:Our main concern is question 1 about the Roth 401k vs Regular 401k.


My feeling on this is two-fold:

1. At age 29 you cannot assume that you will be working at the same job for 30 years and that you will therefore have a meaningful pension, so don't even worry about that. Call it a bonus if it happens -- and make adjustments if you need to as your "vested pension" becomes larger over time -- mainly by holding back on a big bond asset allocation, at least with interest rates this low.

2. For the Roth, non-Roth question, there is NO certain answer at this point in your life, so I almost always say your best course of action is a 50/50 split between the two options, or sway 40/60 either way.

There is just no way to know 30-40 years down the road how our tax structure will look, so you need to keep both options open and just bite the bullet by maybe paying slightly higher taxes now, with the possibility of lower taxes and more flexibility later. Remember, if I am not mistaken, the highest marginal tax rate was somewhere near 90% earlier in my career, though I was never in jeopardy of paying that rate, I do remember some upper 30's marginal rates.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby 3CheersforLkyJack » Tue Jul 16, 2013 1:38 pm

After reading everything and more research, I'm thinking about the following action.

1. Change his future 401k contributions to traditional and continue to contribute 8% to get max employer 6% match.
2. Continue his maxing of Roth IRA.
3. Take all remaining retirement savings and put in her 403b as traditional. (We haven't opened an IRA for her yet, perhaps simplify things and just use her 403b)

Does this sound like a good balance between Roth and Traditional?
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Re: Roth 401k vs Regular 401k when you have a pension

Postby FinancialDave » Tue Jul 16, 2013 3:17 pm

3CheersforLkyJack wrote:After reading everything and more research, I'm thinking about the following action.

1. Change his future 401k contributions to traditional and continue to contribute 8% to get max employer 6% match.
2. Continue his maxing of Roth IRA.
3. Take all remaining retirement savings and put in her 403b as traditional. (We haven't opened an IRA for her yet, perhaps simplify things and just use her 403b)

Does this sound like a good balance between Roth and Traditional?


Considering that most of your existing money appears to be in the Roth, I think it is ok for now, but the $14,000 non-Roth will most likely overpower the $5500 Roth in a few years, so why not at least do 4% Roth and 4% non-Roth in the 401k -- the company match is still going to be 6% non-Roth either way.

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Re: Roth 401k vs Regular 401k when you have a pension

Postby JW Nearly Retired » Tue Jul 16, 2013 4:33 pm

3CheersforLkyJack wrote:After reading everything and more research, I'm thinking about the following action.

1. Change his future 401k contributions to traditional and continue to contribute 8% to get max employer 6% match.
2. Continue his maxing of Roth IRA.
3. Take all remaining retirement savings and put in her 403b as traditional. (We haven't opened an IRA for her yet, perhaps simplify things and just use her 403b)

Does this sound like a good balance between Roth and Traditional?

This is probably fine.

I would be very careful about opening a traditional IRA. If you think you might eventually exceed the income limit to contribute directly to a Roth IRA ($178k-$188k MAGI phaseout) then don't open a TIRA. Once you reach the Roth limit you can still do a "backdoor" Roth, but having a TIRA basically stops you from using this method. For the same reason you should avoid rolling over 401k funds to a rollover IRA if you change employers (if you might eventually have a high income).
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Re: Roth 401k vs Regular 401k when you have a pension

Postby FinancialDave » Tue Jul 16, 2013 8:01 pm

JW,
I think when OP said IRA he really meant Roth IRA, as he states in opening details, but it is a good point to remember about rollovers and other IRA's that people don't learn about until it is too late.

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Re: Roth 401k vs Regular 401k when you have a pension

Postby Watty » Tue Jul 16, 2013 9:27 pm

3CheersforLkyJack wrote:After reading everything and more research, I'm thinking about the following action.

1. Change his future 401k contributions to traditional and continue to contribute 8% to get max employer 6% match.
2. Continue his maxing of Roth IRA.
3. Take all remaining retirement savings and put in her 403b as traditional. (We haven't opened an IRA for her yet, perhaps simplify things and just use her 403b)

Does this sound like a good balance between Roth and Traditional?



That sounds pretty reasonable. One of the reasons that deciding that if a Roth or deductible retirement account is best is that most likely the right answer is to have a mixture of the two.

It was sort of implied but in setting this up when you change your budget to use the deductible retirement accounts be sure to increase the amounts for the deductible savings. For example (in very round numbers) in your original post you were going to put $10,000 in Roth accounts and pay $5000 in taxes. If that money now goes into a deductible retirement account then you need to put the full $15,000 in the retirement account to make it a fair tradeoff.

If the Roth money is taxed above the 15% federal tax bracket that is a bit more aggressive than I would suggest but that is OK as long you understand it is aggressive at your age and you want plan that way. The top of the 15% tax bracket for married filing jointly is about $72K so with your deductible retirement contributions, standard deduction, exclusions, pre-tax payroll withholdings, etc you will likely be getting close to that. You might want to save up the Roth money and decide on that when you do your taxes after the first of the year.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby 3CheersforLkyJack » Wed Jul 17, 2013 8:52 am

Watty wrote:If the Roth money is taxed above the 15% federal tax bracket that is a bit more aggressive than I would suggest but that is OK as long you understand it is aggressive at your age and you want plan that way. The top of the 15% tax bracket for married filing jointly is about $72K so with your deductible retirement contributions, standard deduction, exclusions, pre-tax payroll withholdings, etc you will likely be getting close to that. You might want to save up the Roth money and decide on that when you do your taxes after the first of the year.


This sounds like the best idea. Once we prepare our taxes, if we are in the 15% bracket, we can hit an extra Roth IRA as a bonus.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby FinancialDave » Wed Jul 17, 2013 12:23 pm

3CheersforLkyJack wrote:
Watty wrote:If the Roth money is taxed above the 15% federal tax bracket that is a bit more aggressive than I would suggest but that is OK as long you understand it is aggressive at your age and you want plan that way. The top of the 15% tax bracket for married filing jointly is about $72K so with your deductible retirement contributions, standard deduction, exclusions, pre-tax payroll withholdings, etc you will likely be getting close to that. You might want to save up the Roth money and decide on that when you do your taxes after the first of the year.


This sounds like the best idea. Once we prepare our taxes, if we are in the 15% bracket, we can hit an extra Roth IRA as a bonus.


I am a little confused by the above statement - unless you think you need to save up the Roth money as a hedge against possibly owing a big tax bill. If that is the case it would be better to put more effort into getting the taxes a little closer.

If taxes weren't the consideration, then I don't see the reason for waiting on the Roth, as it won't affect your taxes whether you contribute or not. If you have the money on Jan 1, you could easily invest the money in the Roth. In fact even if you need some of the money for taxes later, you could take out 100% of what you put in the Roth with no penalty, provided of course it has not lost value.

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Re: Roth 401k vs Regular 401k when you have a pension

Postby 3CheersforLkyJack » Wed Jul 17, 2013 1:45 pm

FinancialDave wrote:
3CheersforLkyJack wrote:
Watty wrote:If the Roth money is taxed above the 15% federal tax bracket that is a bit more aggressive than I would suggest but that is OK as long you understand it is aggressive at your age and you want plan that way. The top of the 15% tax bracket for married filing jointly is about $72K so with your deductible retirement contributions, standard deduction, exclusions, pre-tax payroll withholdings, etc you will likely be getting close to that. You might want to save up the Roth money and decide on that when you do your taxes after the first of the year.


This sounds like the best idea. Once we prepare our taxes, if we are in the 15% bracket, we can hit an extra Roth IRA as a bonus.


I am a little confused by the above statement - unless you think you need to save up the Roth money as a hedge against possibly owing a big tax bill. If that is the case it would be better to put more effort into getting the taxes a little closer.

If taxes weren't the consideration, then I don't see the reason for waiting on the Roth, as it won't affect your taxes whether you contribute or not. If you have the money on Jan 1, you could easily invest the money in the Roth. In fact even if you need some of the money for taxes later, you could take out 100% of what you put in the Roth with no penalty, provided of course it has not lost value.

fd


What I was trying to say was that I was adding a step 4:
1. Change his future 401k contributions to traditional and continue to contribute 8% to get max employer 6% match.
2. Continue his maxing of Roth IRA.
3. Take all remaining retirement savings and put in her 403b as traditional. (We haven't opened an IRA for her yet, perhaps simplify things and just use her 403b)
4. If at tax time we find that we are in the 15% bracket and have some extra money, we can open a Roth IRA for her and contribute at the 15% tax rate.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby FinancialDave » Wed Jul 17, 2013 2:34 pm

3Cheers,
What I don't understand is what your tax rate has to do with whether you open the Roth or not, unless you plan to do it with a tax refund. If you have money at the end of the year, you have already paid taxes on it, so unless you are considering opening a traditional IRA where you could get an extra tax deduction, I don't see the reason for waiting.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby 3CheersforLkyJack » Wed Jul 17, 2013 4:43 pm

FinancialDave wrote:3Cheers,
What I don't understand is what your tax rate has to do with whether you open the Roth or not, unless you plan to do it with a tax refund. If you have money at the end of the year, you have already paid taxes on it, so unless you are considering opening a traditional IRA where you could get an extra tax deduction, I don't see the reason for waiting.


I was under the assumption that if you were able to make enough deductible 401k contributions to get your income down into the 15% tax bracket, then all money after that should go as Roth since you would then be at 15%. I must be looking at that wrong.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby FinancialDave » Wed Jul 17, 2013 8:42 pm

It seems a little mis-guided to me to decide the Roth / non-Roth question based on your tax rate, as there is no way to know what your future retirement tax rate will be, as I mentioned previously. That is why IMO your best bet is to split it up and not worry about the taxes.

I believe you are thinking about your tax-rate wrong, as by Dec 31st, you have already earned (and been taxed) on everything. Sure there are a few strategies where you could put money into a tax-deferred account prior to April 15th and get a tax deduction but that is not what we are talking about here.

Let's look at how your money gets taxed -- this happens essentially on the day you earn the money - so if you earn a bonus in March and you put this in an account waiting to see what your tax rate is, it really doesn't matter - provided you keep it in the account all year (and don't change its status by putting it in some tax-deferred account) - the post tax status of the money was created in March and whether you put it in a Roth or not will not affect your taxes one way or the other. Sure you may find out by the end of December that the money you earned will be taxed at 38%, but once again, putting it in the Roth or not will not affect your tax rate.

Also, even if your marginal tax rate is 25%, that does not mean that all your money is taxed at 25% -- your overall taxes could still work out to an effective rate of 15%.

Does that make sense?

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Re: Roth 401k vs Regular 401k when you have a pension

Postby Watty » Wed Jul 17, 2013 10:11 pm

It seems a little mis-guided to me to decide the Roth / non-Roth question based on your tax rate, as there is no way to know what your future retirement tax rate will be...



The future tax rates are unknowable so you will always in effect be making a bet about the future tax rates.

The difference in the "bet" costs a lot more when you are in a higher tax bracket.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby FinancialDave » Thu Jul 18, 2013 12:25 am

Watty wrote:
It seems a little mis-guided to me to decide the Roth / non-Roth question based on your tax rate, as there is no way to know what your future retirement tax rate will be...



The future tax rates are unknowable so you will always in effect be making a bet about the future tax rates.

The difference in the "bet" costs a lot more when you are in a higher tax bracket.


We will just have to disagree on this point - my point being that you cannot really tilt the scale at all for a 29 year old person with probably 55-60 years of taxes ahead. If you doubt this at all review a plot of the max marginal tax rates over the last 60 years to see where we have been.

Many people think that a higher wage earner deserves more of a tilt to tax-deferred, just because it would seem logical they could have a lower tax rate later. If you stop and think about it, it is more logical that a person with a higher income will also have higher expenses in retirement as well. IMO, the tilt comes later in life for a 40-60 year old who has less pre-retirement earning potential. Not that it gives you much advantage one way or other, but you do have the knowledge of what has gone into your tax-deferred account so far. However, it would take probably less than a year for Congress to completely overhaul our taxes, or even go to a flat tax (though I'm not holding my breath) -- point being, there is no "bet" to be made, unless you call "No bet" or the 50/50 plan a bet in itself.

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Re: Roth 401k vs Regular 401k when you have a pension

Postby House Blend » Thu Jul 18, 2013 10:50 am

FinancialDave wrote:If you stop and think about it, it is more logical that a person with a higher income will also have higher expenses in retirement as well.

High spending rates in retirement do not imply high tax rates.

The higher the wage during accumulation, the smaller the percentage of tax-advantaged savings. (Once the wage is high enough to "max out".)

A high earner then, is likely to have a large taxable account. Living off of a taxable account in retirement is very cheap no matter what [sustainable] level of spending is required. Return of capital is tax free; cap gains and qualified dividends are taxed at lower rates. And there's always the muni option.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby FinancialDave » Thu Jul 18, 2013 1:55 pm

That is true if you make your tax decisions by looking in the rear view mirror.

We are looking at a 29 year old here trying to make a decision today on Roth or non-Roth. I content it does not really matter today what tax bracket you are in at age 29, and assuming you can get your "return of capital" out at a low rate later could be a dangerous assumption.

Also don't forget at age 70.5 you will have to start taking out that pile of money in the tax-deferred account, at least under todays rules - and who knows how these rules will change and if you will have to take out more or take it out sooner.

All in all, advice predicated on tax rates and laws 50 years in the future seems a little bit mis-guided, at least to me.

I understand completely about what you are saying, as I have all three types of accounts and I am in retirement, but this is today, and not 30-50 years into the future. Having all three types of money (taxable, tax-deferred, and tax-free) gives me options to adjust my tax rate to just about anything and roll with most any tax changes that come down the road -- this is the only message I am trying to convey to the 29 year old, be flexible, put money into both "tax buckets."


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Re: Roth 401k vs Regular 401k when you have a pension

Postby House Blend » Thu Jul 18, 2013 4:29 pm

FinancialDave wrote:I understand completely about what you are saying, as I have all three types of accounts and I am in retirement

OK, so you agree with the point of my post, which is that having high expenses in retirement does not necessarily mean you will pay taxes at a high rate.

this is the only message I am trying to convey to the 29 year old, be flexible, put money into both "tax buckets."

I don't use rear view mirrors; everyone has to make their best guesses about the future. We can agree that it is harder at 29 than 59.

Your message seems to be that there's no way for a 29 year old to know what the future will hold, including taxes, so you should go 50:50 on Roth vs. traditional (to the extent you have a choice to make).

My message is that most 29 year olds don't understand all of the ways their tax rates could go down in retirement, and that it can happen even while their inflation-adjusted spending goes up. In my post I mentioned just one such scenario. With this understanding, they might not peg the over/under odds of paying tax at a higher/lower rate in retirement at 50:50.

They should also think about the consequences of betting wrong on the high side versus betting wrong on the low side.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby FinancialDave » Thu Jul 18, 2013 7:11 pm

They should also think about the consequences of betting wrong on the high side versus betting wrong on the low side.



I don't think I can really quantify this because I have no idea what the tax structure will look like. For me I am happy that I have a larger tax-deferred bucket that I am paying much lower taxes on now -- but the downside to this is if I want to take $100k out or more for some serious fun, the taxes will be a serious deterrent. Now if I had bit the bullet and built up a much higher Roth account, I could easily take out a big chunk and feel no pain. This is the problem with trying to overthink this analysis, you can easily forget there are much more limitations to what you can do. Maybe those limitations are partially self inflicted because the tax-man is going to take what will turn out to be an unknown amount of your tax-deferred savings no matter how you look at it -- and this is an unknown RISK during retirement. The Roth account has no such risk in retirement - at least at this point in time.

The other factor that most people fail to realize is we tend to save a specific percentage of our salary and spend the rest. So taking that factor into consideration, the person who saves a fixed 15% to a standard 401k, will spend more money during pre-retirement years, but the person who puts 15% into the Roth, will live on less pre-retirement, but essentially be able to spend most anything they want, when they want, in retirement - of course subject to the size of the nest egg.

Sure the counter argument is that the tax-deferred investor can save more during pre-retirement, however I just don't always see that as being the case. I suspect that is probably because 99% of the world are not Bogleheads.

:sharebeer

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Re: Roth 401k vs Regular 401k when you have a pension

Postby Watty » Fri Jul 19, 2013 12:47 pm

They should also think about the consequences of betting wrong on the high side versus betting wrong on the low side.


OK

The way that I think about it is that if I choose the incorrect type then the extreams types of situations that I could end up in are;

1) I end up with so much retirment income that I am in a high tax bracket and the traditional IRA withdrawls and RMD cause to pay more taxes which forces me to take a shorter cruise.

2) I end up short of funds in retirment and in a low tax bracket so that having the larger amount in the deductable IRA would look mightly good. They are in about the 33% tax bracket now so in 50 years they could get 50% more(pre tax) out of deductable retirment account, like $15000 instead of $10000 from a Roth which would be a huge difference if they are struggelling and end up in the zero percent tax bracket then. This would not even have to be real a dire situation since including social security they could have $30K of income and pay zero taxes and the first $50K or so of income for a couple is likely taxed

I'm not even retired yet but I've already seen a lot of people end up retiring at a lower level than they expect because of things like career setbacks, choosing to retire earely, health issues, divorce, and investments not working out as well as planned for.

That is why I've think it is a good idea to first work what I think of as your core "I'm not going to eat dog food" retirment money and to not worry about paying high taxes in retirment untill you have that well under control. There are of course some high income career paths where the concern about high retirment taxes is more of an issue but while the OP and wife are doing very well it sounds like individually they are in good but typical career paths.

More realistically the retirment income tax rate could be about the same same or it might not matter or they might be able midigate their taxes by doing things like Roth conversions when they are near retirment.
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Re: Roth 401k vs Regular 401k when you have a pension

Postby FinancialDave » Sat Jul 20, 2013 12:34 pm

Watty,
Very good explanation about considering the core position, which I think is a good idea.

I also think that just a little bit of money in a Roth account with a good total stock index fund when you are young will compound nicely.

Like you say it is maybe good to not go to extremes either way.

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Re: Roth 401k vs Regular 401k when you have a pension

Postby nedsaid » Sat Jul 20, 2013 1:09 pm

Financial decisions are rarely all or nothing decisions. Why not do some of both? Some Regular 401K and some Roth 401K?

We can make all kinds of assumptions and projections about tax rates and such when working and in retirement. The truth is that no one knows for sure. For most people, their tax rate should be the same or lower than when they worked. In these cases, the regular 401k is the same or better than a Roth 401k. The Roth 401k is better only if your tax rates are higher in retirement. But seeing that the future is uncertain, why not do some of both?
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