26y/o in 25% bracket should I even be doing Roth IRA?

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beastykato
Posts: 166
Joined: Wed Aug 05, 2009 8:59 pm

26y/o in 25% bracket should I even be doing Roth IRA?

Post by beastykato »

I've been doing a lot of reading lately and am starting to question the likelihood that I'll receive any advantage in the future with a Roth IRA, especially considering I'm already above the 15% tax bracket at my age.

I currently hold ~50k in retirement. 20k of that is in my 401k and 30k in my Roth IRA. I started my Roth before I had access to a 401k. This year I made 72k in gross income and with the way things are going currently my income should remain consistent (increasing ~3%/year), unless I advance a great deal or return to school. I am currently investing 5% of my salary in my employer 401k and maxing out my Roth IRA.

Would I be better off just taking the tax advantage now provided by my employers 401k with the money I would have used to fund my Roth? Also, I live in PA in case state tax plays a role.

It is my understanding that a tIRA would be a bad idea, because my tIRA tax advantage would be phased out at my current earning level. Is that correct?

The only other use I have for my Roth is as an emergency fund. I don't have much to speak of in liquid cash after my house payment, car, etc. It's a gamble I chose to take to pump money into my retirement while I knew I had a stable income. My Roth is invested aggressively however, with 65/35 in admiral funds at vangaurd (total stock market and total international respectively). So, it's not exactly the "safest" emergency fund.

The new year is about to start and I'm just trying to get on the right track and make sure I'm investing properly.
Last edited by beastykato on Fri Dec 20, 2013 5:52 am, edited 4 times in total.
Topic Author
beastykato
Posts: 166
Joined: Wed Aug 05, 2009 8:59 pm

Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by beastykato »

This is a copy and paste job from my companies site so I hope it shows up well. These are the funds that I have available to me in my 401k in case this plays are role in sticking with my Roth at Vanguard. Also, if I should change my allocations from what they currently are listed at below please help me out with that and the reasons why.

EQUITY/STOCK Symbol Current Desired
ALLIANCEBERNSTEIN SMALL CAP GR QUAIX 0%
COLUMBIA SMALL CAP VALUE FUND CSCZX 0%
EATON VANCE LARGE CAP VALUE EILVX 0%
MFS INSTL:INTL EQUITY MIEIX 14%
NORTHERN TR CL EAFE INDX FD II NTDET 8%
NORTHERN TR CL S&P 400 IDX II NTDPT 18%
NORTHERN TR CL S&P 500 IDX II NTCST 50%
RAINIER LARGE CAP EQUITY FUND RIMEX 0%


BOND/FIXED INCOME Symbol Current Desired
PIMCO TOTAL RETURN PORT. INSTL PTTRX 5%
VANGUARD TOTAL BOND MKT VBTIX 5%

These are the expense ratios:

ALLIANCEBERNSTEIN SMALL CAP GR QUAIX 0.95%
COLUMBIA SMALL CAP VALUE FUND CSCZX 1.10%
EATON VANCE LARGE CAP VALUE EILVX 0.73%
MFS INSTL:INTL EQUITY MIEIX 0.78%
NORTHERN TR CL EAFE INDX FD II NTDET 0.10%
NORTHERN TR CL S&P 400 IDX II NTDPT 0.07%
NORTHERN TR CL S&P 500 IDX II NTCST 0.03%
RAINIER LARGE CAP EQUITY FUND RIMEX 1.19%


BOND/FIXED INCOME Symbol Current Desired
PIMCO TOTAL RETURN PORT. INSTL PTTRX 0.46%
VANGUARD TOTAL BOND MKT VBTIX 0.07%
Bonhomie
Posts: 67
Joined: Thu Aug 22, 2013 2:26 pm

Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by Bonhomie »

beastykato,

This could have been my own post, but I don't have as much saved in retirement accounts as you. Congrats on your early start! I contribute pre-tax dollars at 9% to my 401k and continue to max out my Roth IRA. Like you, I didn't want to pass up the opportunity to invest in my IRA so I considered it as a buffer for emergency savings until I had the rest saved up. I continue to contribute to my Roth IRA for three reasons 1) ability to withdraw the contributions if I decide to retire early 2) tax diversification and 3) my 401k fees are rather high.

Sounds like you are doing your homework. I think the most important things for young people is to "live beneath your means" and save/invest early. Sounds like you have the investing part down. If possible, I would look at trimming your budget and build back up that emergency fund!

Regards,

Bonhomie
assumer
Posts: 432
Joined: Fri Dec 21, 2012 10:11 pm

Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by assumer »

Bonhomie wrote:2) tax diversification
This is an important point. We don't know what the future holds, and if tax rates increase by a significant amount, it may be prudent to hedge your bets and have some after-tax retirement savings in a Roth IRA.
lrak
Posts: 87
Joined: Tue Jun 26, 2012 9:46 am

Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by lrak »

I think having more than 1/4 but less than 1/2 of your retirement in Roth will likely make sense for you.

Roths have higher effective contribution limits than traditional IRA/401ks since you are paying the taxes up front instead of after it comes out.

Withdrawals from Roths don't count as income. This impacts:
- Social security taxation/means testing.
- Major purchase years of retirement like a new car or a new roof which would bump your traditional withdrawals into a higher tax bracket.
- Current ACA subsidies (hopefully we are single payer by the time you retire).

There are no RMDs on Roth IRAs (and Roth 401ks rolled to Roth IRAs) so if you have more than you need, you aren't forced to take out from traditional and recognize taxable income after age 70.

If you retire early, you can withdraw the Roth principal before 59 1/2 without messing around with years of 72T withdrawals.
SobeCane
Posts: 283
Joined: Mon Oct 25, 2010 11:13 am

Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by SobeCane »

Beastykato,

Why not use the 401(k) and other deductions to bring you down close to the 15% bracket before funding your Roth IRA? Your adjustments or itemized deductions may be different but here's an example:


Salary 72,000
Health Ins. Premiums (2,000)
HSA Contributions (3,250)
401(k) Deferral (17,500)
Capital Loss (3,000)
AGI 46,250

Standard Deduction (6,100)
Personal Exemption (3,900)
Taxable Income 36,250

Image
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Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by Watty »

Be sure to see this;

http://www.bogleheads.org/wiki/Traditional_versus_Roth


Having a mixture of account types is usually a good choice so it

The income limits are based on a your income after a lot of payroll deductions including your 401K and heath insurance so I suspect that you will still qualify for a deductible IRA for at least the next few years. In future years you can wait until you do your taxes to make either contribution so you will know for sure.

http://www.irs.gov/Retirement-Plans/201 ... an-at-Work

If you are eligible to make a fully deductible IRA contribution then at your age and in the 25% tax bracket I would not make a Roth contribution instead unless I wanted to have the Roth money available in an emergency since you can always withdrawal your Roth contributions if you need to.

Tax wise the in the 25% tax bracket the tax savings in retirement are "iffy" and I have seen lots of people run into health, career, or life setbacks and end up in lower than expected tax brackets in retirement. Some people even get into their 40's or 50's and decide to retire early in a lower tax bracket when they can.
Carl53
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Joined: Sun Mar 07, 2010 7:26 pm

Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by Carl53 »

lrak wrote:If you retire early, you can withdraw the Roth principal before 59 1/2 without messing around with years of 72T withdrawals.
If you are still with the employer that has the 401k when you separate in the year you turn 55 or later there is no penalty from 401k withdrawals unlike IRAs from which you must be 59.5.
snapwa
Posts: 22
Joined: Mon Nov 28, 2011 1:54 pm

Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by snapwa »

I think you might want to consider increasing your 401k contribution. Every $ amount (within reason :happy ) that you can get out of the 25% bracket and into the 15% bracket is worthwhile IMO.
sls239
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Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by sls239 »

Do you plan to stay in PA?

Because that would give another advantage to the 401k. In PA, you are taxed on money you put in a 401k (at 3.07%) but if you are still in PA when you withdraw it, you are not charged state tax on the withdrawal - including the earnings. So that means at the state level, the 401(k) is like a roth. But I suppose this could change at any time.
travellight
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Location: San Diego

Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by travellight »

My understanding of the ladder of preference is this:

employer matched 401k
non matched 401k
deductible tIRA
Roth IRA
non deductible tIRA.

I would do max the 401k and deductible tIRA before doing the ROTH.
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englishgirl
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Location: FL

Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by englishgirl »

If you want to retire early or late, I think a Roth can be your friend. If you retire early, you can withdraw contributions without penalty. This could be really useful if you are younger than 59.5 - although I don't plan to retire that early, you never know if disability or something else will force it on you. If you retire late you avoid Required Minimum Distributions (RMDs), as already mentioned. RMDs require you to take a certain percentage from tIRAs and 401ks. These start in the year you turn 70.5. If you plan to delay social security to 70, that's two big income sources happening close together. You might end up needing to withdraw more than you need to spend, so you end up reinvesting your IRA withdrawals into a taxable account, and yet have the privilege of paying tax on those withdrawals. My plan would be to withdraw as much as I need to live on from my tIRA/rollover 401k as soon as I retire, and before taking SS, and leave the Roth to continue to grow. Hopefully then my SS income coupled with Roth withdrawals (tax free) plus whatever RMDs I still have to make from a lower balance in my tIRA would not push me into a higher tax bracket.
Sarah
pingo
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Joined: Sat Sep 19, 2009 8:24 pm

Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by pingo »

What a great question. For me, it's your account situation that that tells me what to do. You have more Roth assets than pre-tax assets. Having some Roth assets in retirement is very helpful to keep your tax bracket down so that you can withdraw from the 401k at a lower bracket than now. For most people, including you, having half of all assets in a Roth is more than enough. And you have more than half in a Roth, not that you shouldn't save in a Roth, or Roth convert, given a different set of circumstances.

Why not try saving more money in the 401k for now? See what develops. You can always change your mind later. That $5,500 Roth contribution post-tax should be worth at least $7,333 pre-tax, so you could increase your 401k contributions to at least $10,933/yr or 15% of your income without affecting whatever else it is you do with your income.

If you go back to school (a possibility you mentioned), you might be able to roth convert assets at a low rate. If you marry, that might change your brackets to make a Roth the clear winner. If you don't expect a pension, it may be possible to use and convert pre-tax assets at a lower rate during retirement. Any number of circumstances can change to make one or the other the clear answer.

If you were to apply each 3% raise to your 401k, you'd be maxing your 401k contributions in 3 years or less. After that, you'd be able to max your Roth again within 2 years or so.

After skipping Roth contributions for a year, review your circumstances to see how soon you might be able max out your 401k and then save in your Roth again.
Last edited by pingo on Sat Dec 21, 2013 12:23 am, edited 5 times in total.
wander
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Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by wander »

Our 401k, Traditional & Roth IRAs, and HSA are diversified.
pingo
Posts: 2638
Joined: Sat Sep 19, 2009 8:24 pm

Re: 26y/o in 25% bracket should I even be doing Roth IRA?

Post by pingo »

This is how we see your portfolio:

401k (40%)
20% Northern Trust CL S&P 500 Index (NTCST) .03
7.2% Northern Trust CL S&P 400 Index (NTDPT) .07
5.6% MFS International Equity - Institutional (MIEIX) .78 <--95% EAFE, 5% Emerging Mkts. (EM are way underweight.)
3.2% Northern Trust CL EAFE Index Fund (NTDET) .10 <--100% EAFE, 0% Emerging Mkts.
2.0% Pimco Total Return - Institutional (PTTRX) .46
2.0% Vanguard Total Bond - Institutional (VBTIX) .07

Roth (60%)
xx% Vanguard Total U.S. Stock - Admiral (VTSAX) .05
yy% Vanguard Total International - Admiral (VTIAX) .16



Below is something simpler, more complete, and more diversified without overweighting EAFE/underweighting EM:

401k (40%) <--$10,933 in 2014.
20% Northern Trust CL S&P 500 Index (NTCST) .03 <--7325 or 67% of 401k contributions
20% Vanguard Total Bond -Institutional (VBTIX) .07 $3,608 or 33% of 401k contributions. It's okay to split bonds 50:50 Total Bond/Pimco, if you prefer.

Roth (60%)
25% Vanguard 500 Index Fund - Admiral (VFIAX) .05
11% Vanguard Extend Market - Investor (VEXMX) .24 <--$1,556; converts to (VEXAX) .10 @ $10k.
24% Vanguard Total International - Admiral (VTIAX) .16 <--$3944; Emerging Mkts are at market weight (15-22%)

To rebalance, you determine how much must be in bonds to make up 20% of portfolio, and balance in/out of 401k bonds to make them 20%. All remaining 401k assets stay/leave/enter S&P 500 fund. One the same day, you determine how much is needed in Roth to represent 24% for Total International and 11% for Extended Mkt. Any remaining assets stay/leave/enter the 500 fund fund.

Something to think about.
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