Roth/Traditional mix

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Topic Author
732002
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Joined: Wed Dec 16, 2009 10:56 am

Roth/Traditional mix

Post by 732002 »

Currently contributing 12% to Roth TSP, 26 years old.
$25K emergency cash savings and I don't feel this needs to be increased.
Will it make sense to add traditional as long as it is coming out of the 25% tax bracket?
Would a even 50/50 mix be reasonable?

Thanks
PFInterest
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Re: Roth/Traditional mix

Post by PFInterest »

state tax?
are you doing an IRA?
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FiveK
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Re: Roth/Traditional mix

Post by FiveK »

732002 wrote:Will it make sense to add traditional as long as it is coming out of the 25% tax bracket?
Probably.
Would a even 50/50 mix be reasonable?
Could be. Depends on your marginal tax saving rate now vs. your marginal withdrawal tax rate later. For some that means 100/0 is reasonable, for others 0/100.

See Traditional versus Roth - Bogleheads for more.

As PFInterest implied, more information is needed to give more specific advice.
Maxdog
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Re: Roth/Traditional mix

Post by Maxdog »

I've seen various threads where some folks are criticized for this, but I hedge my bets and have my tax advantaged retirement savings split pretty evenly between Roth and Traditional accounts. I figure I can run all the numbers I want with various assumptions (which may or may not be correct in 20 years) to make my case for one or the other being better. But, in the end, I won't really know till I get there. I guess you could say...I'm diversifying. I know this logic could be taken to the extreme with all parts of my portfolio, which I don't do (I tilt), but, in this case, I'm comfortable.

Just a thought, but I'm new around here
billfromct
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Re: Roth/Traditional mix

Post by billfromct »

If I were 26 years old with 40 years until retirement, I would contribute 100% of my retirement money into Roth accounts, TSP & IRA, at least until i was 30 or into my 30's.

You'll have plenty of time (30-35 years) to fund a pre-tax TSP later in your 30s.

You need to establish tax diversity in your retirement account while time is on your side. As you get older, get into a higher tax bracket, or at least into the upper range of the 25% tax bracket, you will have plenty of factors to encourage you to switch to a tax deductible retirement plan.

Others will say if you contribute to a tax deductible retirement plan, you can invest the tax savings and come out ahead. That's probably true, but everyone that I know who contributes to a tax deductible retirement plan uses those tax savings to pay bills, save up for a vacation or use the money for other priorities, such children.

The tax savings you forgo now from contributing to your Roth TSP will be a blip on your financial radar screen when you retire and are taking your Roth retirement distributions out state & Federal tax free.

If you can end up with 30%-40% of your retirement assets in Roth accounts when you retire, that will produce big tax savings & probably keep you at least 1 tax bracket lower than if you invested 100% in a tax deductible TSP, especially starting to fund your retirement at the young age of 26.

I started to fund my company 401k in the 80s before Roth accounts were established in 1997. I maxed out my Roth IRA each year since 1997 & I am now about 93% taxable/7% Roth in my retirement accounts.

When I retire & start taking retirement distributions along with SS at age 70, I will be in at least 1 higher tax bracket than I am now in my working years.

I wish the Roth accounts were available when I was 26 years old!

bill
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FiveK
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Re: Roth/Traditional mix

Post by FiveK »

billfromct wrote:If I were 26 years old with 40 years until retirement, I would contribute 100% of my retirement money into Roth accounts, TSP & IRA, at least until i was 30 or into my 30's.
...
When I retire & start taking retirement distributions along with SS at age 70, I will be in at least 1 higher tax bracket than I am now in my working years.
Reasonable under those circumstances.

For someone 26 years old with 20-some years until retirement, traditional would likely be better (unless there's that vested, guaranteed, high pension).

Neither traditional nor Roth is inherently better for all. Analysis of one's own situation (and appropriate guesswork about the future) is appropriate.
Maxdog
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Re: Roth/Traditional mix

Post by Maxdog »

It's the "appropriate guesswork about the future" part that got me. But I hear ya.

In this instance, I just couldn't get over all the what ifs.
Fishing50
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Re: Roth/Traditional mix

Post by Fishing50 »

732002 wrote: Will it make sense to add traditional as long as it is coming out of the 25% tax bracket?
I like your thinking. Traditional TSP to reduce your income to the top of the 15% tax bracket, then Roth TSP to the max. You have a safe government job, use your emergency fund for a 2016 & 2017 Roth IRA (you can withdraw contributions anytime).

Don't hesitate to contribute to Roth TSP during early years, your effective tax rate is really low now. Traditional will be your best option later in your career.
2yrs from military pension. 80 equites / 20 bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. | Gone Fishing At 52yrs old!
The Wizard
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Re: Roth/Traditional mix

Post by The Wizard »

I tend to disagree with billfromct.
In your 20s and 30s, people often are paying off educational loans and starting to pay off a big mortgage.
They may not comfortably be able to max out a traditional 401k yet.
Plus you can't see that far in the future. Layoffs and health problems can happen.

When you get "older", have the edu loans paid off and the mortgage is less of a burden, you can now plan more accurately for retirement.
You can do reasonable projections of retirement income seven years from now.
And you have "extra" income to allow a portion of your retirement savings to go to the Roth side of your TSP/401K/403B.

I do recommend contributing to your Roth IRA from the beginning, in addition to your employer plan, but IRA limits are rather modest...
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Topic Author
732002
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Re: Roth/Traditional mix

Post by 732002 »

Thanks for the replies, I think going overweight on the Roth makes sense for now.
He may not even be in the 25% bracket because I failed to consider that the (BAH) basic
allowance for housing is tax free, also income while deployed is tax advantaged.........
KlangFool
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Re: Roth/Traditional mix

Post by KlangFool »

billfromct wrote:If I were 26 years old with 40 years until retirement, I would contribute 100% of my retirement money into Roth accounts, TSP & IRA, at least until i was 30 or into my 30's.


bill
billfromct,

You would not know that you have 40 years until retirement until you are 66 years old. So, what is the point of your statement?

KlangFool
KlangFool
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Re: Roth/Traditional mix

Post by KlangFool »

Maxdog wrote:I've seen various threads where some folks are criticized for this, but I hedge my bets and have my tax advantaged retirement savings split pretty evenly between Roth and Traditional accounts. I figure I can run all the numbers I want with various assumptions (which may or may not be correct in 20 years) to make my case for one or the other being better. But, in the end, I won't really know till I get there. I guess you could say...I'm diversifying. I know this logic could be taken to the extreme with all parts of my portfolio, which I don't do (I tilt), but, in this case, I'm comfortable.

Just a thought, but I'm new around here
Maxdog,

<< I hedge my bets and have my tax advantaged retirement savings split pretty evenly between Roth and Traditional accounts. >>

I hedged my bet by contributing to the max of my Trad. 401K and put the tax savings into the Roth IRA and the taxable account. I get to keep more of my money in my own pocket instead of paying tax. So, I do not understand what do you mean by hedging since you are paying more tax than necessary now. You cannot get the money back from IRS.

KlangFool
KlangFool
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Re: Roth/Traditional mix

Post by KlangFool »

732002 wrote:Thanks for the replies, I think going overweight on the Roth makes sense for now.
He may not even be in the 25% bracket because I failed to consider that the (BAH) basic
allowance for housing is tax free, also income while deployed is tax advantaged.........
732002,

<< I think going overweight on the Roth makes sense for now. >>

<<He may not even be in the 25% bracket>>

How do you know without checking with a tax software?

He might be foregoing Earned Income Tax Credit and/or saver's credit by contributing to Roth TSP.

KlangFool
aristotelian
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Re: Roth/Traditional mix

Post by aristotelian »

I also do a mix--Roth for IRA's, Traditional for 401k's. I started with Roth when younger and lower tax bracket. You have the double uncertainty of your future tax bracket and future tax rates. Having a mix will allow you to have the most flexibility, using Roth and savings to stay in a lower bracket some years, paying taxes on the deferred funds in other years.

Of course, if Roth is putting you in a higher tax bracket, that is a consideration.
Topic Author
732002
Posts: 70
Joined: Wed Dec 16, 2009 10:56 am

Re: Roth/Traditional mix

Post by 732002 »

KlangFool wrote:
732002 wrote:Thanks for the replies, I think going overweight on the Roth makes sense for now.
He may not even be in the 25% bracket because I failed to consider that the (BAH) basic
allowance for housing is tax free, also income while deployed is tax advantaged.........
732002,

<< I think going overweight on the Roth makes sense for now. >>

<<He may not even be in the 25% bracket>>

How do you know without checking with a tax software?

He might be foregoing Earned Income Tax Credit and/or saver's credit by contributing to Roth TSP.

KlangFool
I will ask what the AGI was on the 2016 returns, hard to find time, always studying, moved four time the
last three years, other priorities (social life)

He is getting back a lot on his 2016 taxes..........no dependents for earned income credit, income does not look
like he will qualify for saver's credit.
Maxdog
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Joined: Mon Mar 27, 2017 9:30 pm

Re: Roth/Traditional mix

Post by Maxdog »

KlangFool wrote:
Maxdog wrote:I've seen various threads where some folks are criticized for this, but I hedge my bets and have my tax advantaged retirement savings split pretty evenly between Roth and Traditional accounts. I figure I can run all the numbers I want with various assumptions (which may or may not be correct in 20 years) to make my case for one or the other being better. But, in the end, I won't really know till I get there. I guess you could say...I'm diversifying. I know this logic could be taken to the extreme with all parts of my portfolio, which I don't do (I tilt), but, in this case, I'm comfortable.

Just a thought, but I'm new around here
Maxdog,

<< I hedge my bets and have my tax advantaged retirement savings split pretty evenly between Roth and Traditional accounts. >>

I hedged my bet by contributing to the max of my Trad. 401K and put the tax savings into the Roth IRA and the taxable account. I get to keep more of my money in my own pocket instead of paying tax. So, I do not understand what do you mean by hedging since you are paying more tax than necessary now. You cannot get the money back from IRS.

KlangFool
KlangFool,

I max out my 401K & his/her Roth IRAs, so my choice doesn't allow me to add additional funds/tax savings to my Roth IRAs (they are already maxed). So, my choice is whether to max out my 401K as a Traditional 401K or as a Roth 401k (my employer lets us choose Roth 401K vs. traditional 401K)--I'm maxing it out either way.

Not knowing what the tax issues will be surrounding my 401K & Roth IRAs in the future, I'm not certain whether it's better to max out my 401K as a traditional or Roth 401K. So, "I hedge my bets" and choose a Roth 401K. I max my Roth 401K out ($54,000), so $18,000 is Roth portion, but the employer portion of $36,000 is traditional tax deferred portion. When combined with my $11,000 Roth IRA contributions, that leaves me $29,000 Roth and $36,000 tax deferred.
KlangFool
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Re: Roth/Traditional mix

Post by KlangFool »

Maxdog wrote:
KlangFool,

I max out my 401K & his/her Roth IRAs, so my choice doesn't allow me to add additional funds/tax savings to my Roth IRAs (they are already maxed). So, my choice is whether to max out my 401K as a Traditional 401K or as a Roth 401k (my employer lets us choose Roth 401K vs. traditional 401K)--I'm maxing it out either way.

Not knowing what the tax issues will be surrounding my 401K & Roth IRAs in the future, I'm not certain whether it's better to max out my 401K as a traditional or Roth 401K. So, "I hedge my bets" and choose a Roth 401K. I max my Roth 401K out ($54,000), so $18,000 is Roth portion, but the employer portion of $36,000 is traditional tax deferred portion. When combined with my $11,000 Roth IRA contributions, that leaves me $29,000 Roth and $36,000 tax deferred.
Maxdog,

Let me play devil advocate here:

How could you say that you are hedging your bet when you only have only money in 2 buckets: tax -deferred and Roth? How about the taxable account?

In order to have true tax diversification, you need to have money in all 3 buckets: tax-deferred, Roth, and the taxable.

KlangFool
Maxdog
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Re: Roth/Traditional mix

Post by Maxdog »

KlangFool wrote:
Maxdog,

Let me play devil advocate here:

How could you say that you are hedging your bet when you only have only money in 2 buckets: tax -deferred and Roth? How about the taxable account?

In order to have true tax diversification, you need to have money in all 3 buckets: tax-deferred, Roth, and the taxable.

KlangFool
Klangfool,

Ha...that's why I'm loving this forum--should have joined years ago. I agree with you whole heartedly.

I was just referring to the title of the OP and discussing hedging my bets with regards to my 401K Roth option or traditional, but I am working on the taxable account right now. I'm always open to advice :happy . My Daddy always told me, "Take all the help you can get."

viewtopic.php?f=1&t=214964
Fishing50
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Re: Roth/Traditional mix

Post by Fishing50 »

732002 wrote:Thanks for the replies, I think going overweight on the Roth makes sense for now.
He may not even be in the 25% bracket because I failed to consider that the (BAH) basic
allowance for housing is tax free, also income while deployed is tax advantaged.........
Roth TSP is definitely the correct choice for active military not completely in the 25% tax bracket.
Here's great idea for deployment: viewtopic.php?f=1&t=211985&p=3259810#p3259810
2yrs from military pension. 80 equites / 20 bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. | Gone Fishing At 52yrs old!
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Roth/Traditional mix

Post by The Wizard »

KlangFool wrote:
billfromct wrote:If I were 26 years old with 40 years until retirement, I would contribute 100% of my retirement money into Roth accounts, TSP & IRA, at least until i was 30 or into my 30's.


bill
billfromct,

You would not know that you have 40 years until retirement until you are 66 years old. So, what is the point of your statement?

KlangFool
Klang makes a good sobering point here, one which I've often used as well.
You may have an approximate plan for your working career early on, but there's no way to be certain, due to things like job loss and health problems.

So you need to have a plan for putting money away for a somewhat early retirement assuming things go well, but also a certain skepticism about the future until it gets within five years.
We see this often with younger people and their projected SS retirement benefits...
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