Which account: Roth Vs. Traditional 401k

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BUBear29
Posts: 138
Joined: Wed Aug 19, 2015 4:20 pm
Location: Dallas, TX

Which account: Roth Vs. Traditional 401k

Post by BUBear29 » Wed Apr 12, 2017 9:33 pm

Hello Bogleheads:

I keep going back and forth on whether to contribute to my Roth 401k or traditional 401k at work - I have read every Bogle and Reddit thread in addition to finance blogs on the subject and there really is no consensus. So I decided to ask for advice on my situation directly.

My Investments:
Max Roth 401k @ $18,000 - Balance is currently $50,000
Employer Match @ 5% to traditional 401k
Employer "Pension" Plan @ 3,4 or 5% of salary a year based on years of service - Pension Balance is $10,000
Max Roth IRA @ $5,500 a year - Balance is $31,000

All funds are 2055 retirement funds with low EF's

Her Investments
TMRS (Texas Municipal Retirement System) @ 7% of salary - Balance of $4,000
Employer Match @ 14% of salary
Max Governmental 457 @ $18,000 (tax deductible) - Balance of $5,000
Max Roth IRA $5,500 - Balance of $35,000

All funds are 2055 retirement funds with low EF's
--

We are both 27/28 and live in Texas. In the 25% tax bracket (for now) and expect to be in 28% bracket in the next several years. Goal is to retire at age 50 then move to Colorado and work part - time jobs in the mountains for income and fun.

Main question: Should I contribute to Roth 401k since 1) I can max it out (and effectively contribute more to a tax sheltered account) 2) I expect to live in a state with income tax in retirement vs Texas having none 3) I expect to be in the 28% bracket in the near future OR should I contribute to traditional 401k and fund additional in a taxable account for early retirement. My wife's 457 can be drawn early for retirement without penalty also.

Thanks
Last edited by BUBear29 on Thu Apr 13, 2017 8:59 am, edited 1 time in total.
There is no dignity quite so impressive, and no one independence quite so important, as living within your means.

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FiveK
Posts: 4675
Joined: Sun Mar 16, 2014 2:43 pm

Re: Which account: Roth Vs. Traditional 401k

Post by FiveK » Wed Apr 12, 2017 11:58 pm

BUBear29 wrote:... and there really is no consensus.
The math is straightforward enough and, being math, opinions don't really matter. See Traditional versus Roth - Bogleheads for that, including "how much" it matters if you can max out the Roth.
Main question: Should I contribute to Roth 401k since 1) I can max it out (and effectively contribute more to a tax sheltered account) 2) I expect to live in a state with income tax in retirement vs Texas having none 3) I expect to be in the 28% bracket in the near future OR should I contribute to traditional 401k and fund additional in a taxable account for early retirement. My wife's 403B can be drawn early for retirement without penalty also.
Despite the comment about math, there is plenty of room for reasonable disagreement about strategy, given that the future is unknown.

For my $0.02,
- the difference between 25% and 28% is noise
- you should contribute to traditional until you are "guaranteed" (you get to define) that your withdrawal marginal rate (including fed and state tax) will be high enough, compared with your marginal saving rate, to make Roth a better deal.

Note: are you sure about that penalty-free early distribution from a 403b?

Fishing50
Posts: 227
Joined: Tue Sep 27, 2016 1:18 am

Re: Which account: Roth Vs. Traditional 401k

Post by Fishing50 » Thu Apr 13, 2017 12:32 am

If you predict future 33% tax bracket, contribute 100% to the Roth 401k now. You make a strong case for Roth now, but 25% taxes is a high hurdle. Being young and in the 25/28% tax bracket you could split the difference. $9k traditional to take advantage of the tax break, $9k Roth to take advantage of tax free growth.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

BUBear29
Posts: 138
Joined: Wed Aug 19, 2015 4:20 pm
Location: Dallas, TX

Re: Which account: Roth Vs. Traditional 401k

Post by BUBear29 » Thu Apr 13, 2017 8:59 am

FiveK wrote:
BUBear29 wrote: Note: are you sure about that penalty-free early distribution from a 403b?
Sorry meant 457 deferred comp plan. will edit OP
There is no dignity quite so impressive, and no one independence quite so important, as living within your means.

BUBear29
Posts: 138
Joined: Wed Aug 19, 2015 4:20 pm
Location: Dallas, TX

Re: Which account: Roth Vs. Traditional 401k

Post by BUBear29 » Thu Apr 13, 2017 9:02 am

Fishing50 wrote:If you predict future 33% tax bracket, contribute 100% to the Roth 401k now. You make a strong case for Roth now, but 25% taxes is a high hurdle. Being young and in the 25/28% tax bracket you could split the difference. $9k traditional to take advantage of the tax break, $9k Roth to take advantage of tax free growth.
I don't think I'll ever make to 33%. I think 28% is the tops. I have considered the split but then I keep saying to myself, you aren't tax sheltering as my retirement as you would be if you went all roth.
There is no dignity quite so impressive, and no one independence quite so important, as living within your means.

Fishing50
Posts: 227
Joined: Tue Sep 27, 2016 1:18 am

Re: Which account: Roth Vs. Traditional 401k

Post by Fishing50 » Thu Apr 13, 2017 1:02 pm

BUBear29 wrote: I think 28% is the tops. I have considered the split but then I keep saying to myself, you aren't tax sheltering as my retirement as you would be if you went all roth.
You might retire in the 15% tax bracket, so tax-deferred would save 13%.

Even with my military pension, we'll have the years before SS for Roth conversions in the 15% bracket.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

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