401k pre-tax, Roth, or a blend?

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youngpleb
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401k pre-tax, Roth, or a blend?

Post by youngpleb » Sun Feb 11, 2018 3:04 pm

Hi everybody, so this year will be my first full year of employment with the company I'm working for. I'm currently 26 and living at home for this year just trying to save a lot of money so I can get a good investment foundation. My salary is $60K/year, and currently I am set to max out my HSA, Roth IRA, and 401k via Roth investments. What I'm wondering is if going 100% Roth for my 401k at this point and this salary is a good thing, or should I have some type of blend between Roth and pre-tax contributions. Previously I've just held the opinion that whatever happens tax-wise in the future, my money will be safer with Roth investments and have therefore done Roth contributions up to now. However, being in the 22% federal income tax bracket and 5.75% state bracket, I'm wondering if 100% Roth is the best option. I wanted to hear from some people who have been doing this a lot longer than myself in order to get an outside perspective!

Basically my health insurance and HSA contributions get me down to around $56K gross income. And now with the standard deduction being $13,000, that's down to $43K taxable, which is quite close to the 12%-22% federal tax bracket borderline (at $38.7K). So should I make that remaining five thousand or so bit pre-tax and then do Roth contributions once I slide down into the 12% tax bracket? It seems like a good idea on paper, but I'm worried that since I'm still relatively new to this that I'm missing out on some aspect of it. What do you think?
27. Always learning.

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whodidntante
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Re: 401k pre-tax, Roth, or a blend?

Post by whodidntante » Sun Feb 11, 2018 3:19 pm

I would do pre-tax at least to top of 12% bracket and invest the tax savings. Since you're already maxing tax advantaged accounts, put the tax savings in equity index ETFs in a taxable account.

Your savings rate is fantastic, BTW.

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FiveK
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Re: 401k pre-tax, Roth, or a blend?

Post by FiveK » Sun Feb 11, 2018 3:31 pm

youngpleb wrote:
Sun Feb 11, 2018 3:04 pm
...make that remaining five thousand or so bit pre-tax and then do Roth contributions once I slide down into the 12% tax bracket?
Yes, that is a fine plan.

Wall_St_Survivor
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Re: 401k pre-tax, Roth, or a blend?

Post by Wall_St_Survivor » Sun Feb 11, 2018 3:40 pm

I don't know if I understand you fully, so correct me if I'm wrong. I think what you're getting at is whether you should defer your income so it reduces your tax burden now, to the point where your in a lower taxable situation now and then try to max out a Roth vehicle if possible.

Objectively, if you were to compare pre-tax vehicles or Roths, I truly believe Roths are one of the best vehicles out there. Take the tax hit now but reap the rewards down the road where your gains are also tax free, huge advantage over pre-tax vehicles. There are numerous studies out there that show Roths as the better vehicle compared to pre-tax vehicles.

But we don't live in a perfect world, so you have to consider other factors in your personal life. Where will your career take you, will you make more money where you don't qualify for Roth? Then it might be better to take advantage of it now since you'll lose the Roth advantage at a high income level. Will your future spouse make too much money also? What happens when you start a family? You're living at home, do you want to buy a house soon? Maybe doing a pre-tax vehicle to lower your taxable situation can allow you to save more for these near term purchases?

I don't think there's a perfect answer to your question. If we didn't take anything else into consideration, Roths are best. But consider your personal factors, maybe pre-tax or a blend of both might be best.

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sometimesinvestor
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Re: 401k pre-tax, Roth, or a blend?

Post by sometimesinvestor » Sun Feb 11, 2018 4:04 pm

Eventually you should have both kinds of IRA and at times 100% traditional but at your current age and income 100% ROth seems right. When eitherage or income changes significantly you can come back to this site for additional and perhaps different advice.

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FiveK
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Re: 401k pre-tax, Roth, or a blend?

Post by FiveK » Sun Feb 11, 2018 4:19 pm

Wall_St_Survivor wrote:
Sun Feb 11, 2018 3:40 pm
Objectively, if you were to compare pre-tax vehicles or Roths...
...the best way to do so is using marginal tax saving rate now vs. expected marginal tax rate on withdrawals later.

Unqualified statements that "traditional is best" or "Roth is best" are easily disproved with realistic counterexamples and are thus unhelpful.

Wall_St_Survivor
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Re: 401k pre-tax, Roth, or a blend?

Post by Wall_St_Survivor » Sun Feb 11, 2018 4:43 pm

FiveK wrote:
Sun Feb 11, 2018 4:19 pm
Wall_St_Survivor wrote:
Sun Feb 11, 2018 3:40 pm
Objectively, if you were to compare pre-tax vehicles or Roths...
...the best way to do so is using marginal tax saving rate now vs. expected marginal tax rate on withdrawals later.

Unqualified statements that "traditional is best" or "Roth is best" are easily disproved with realistic counterexamples and are thus unhelpful.
Good point! I'll be mindful on how I use absolute statements

suemarkp
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Re: 401k pre-tax, Roth, or a blend?

Post by suemarkp » Sun Feb 11, 2018 5:00 pm

What is your salary potential? 10 years from now, what tax bracket do you think you'll be in? How about 20 years from now?

I did mine sort of backwards, because I had no Roth 401K option until recently. So I did all pre-tax 401K most of my career. Now that I'm up in the 28% bracket, I'm doing a Roth 401K because I plan to make it the last money I take out and I have plenty of pre-tax 401K money. If I was young today, I'd do my 401K as Roth until I was maybe 40-45 years old and then switch to a pre-tax 401K and become more bond heavy then. The exact time to switch would depend on your income and tax rates. It also isn't all or nothing -- you could begin to transition to pretax in your 40's and be fully pre-tax in your 50's.
Mark | Kent, WA

youngpleb
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Re: 401k pre-tax, Roth, or a blend?

Post by youngpleb » Sun Feb 11, 2018 7:10 pm

whodidntante wrote:
Sun Feb 11, 2018 3:19 pm
I would do pre-tax at least to top of 12% bracket and invest the tax savings. Since you're already maxing tax advantaged accounts, put the tax savings in equity index ETFs in a taxable account.

Your savings rate is fantastic, BTW.
Haha thanks! It won't always be this crazy, but I'm really trying to lock down this year and live super minimal to save as much as I possibly can before I move out next year.
Wall_St_Survivor wrote:
Sun Feb 11, 2018 3:40 pm
But we don't live in a perfect world, so you have to consider other factors in your personal life. Where will your career take you, will you make more money where you don't qualify for Roth? Then it might be better to take advantage of it now since you'll lose the Roth advantage at a high income level. Will your future spouse make too much money also? What happens when you start a family? You're living at home, do you want to buy a house soon? Maybe doing a pre-tax vehicle to lower your taxable situation can allow you to save more for these near term purchases?

I don't think there's a perfect answer to your question. If we didn't take anything else into consideration, Roths are best. But consider your personal factors, maybe pre-tax or a blend of both might be best.
suemarkp wrote:
Sun Feb 11, 2018 5:00 pm
What is your salary potential? 10 years from now, what tax bracket do you think you'll be in? How about 20 years from now?

I did mine sort of backwards, because I had no Roth 401K option until recently. So I did all pre-tax 401K most of my career. Now that I'm up in the 28% bracket, I'm doing a Roth 401K because I plan to make it the last money I take out and I have plenty of pre-tax 401K money. If I was young today, I'd do my 401K as Roth until I was maybe 40-45 years old and then switch to a pre-tax 401K and become more bond heavy then. The exact time to switch would depend on your income and tax rates. It also isn't all or nothing -- you could begin to transition to pretax in your 40's and be fully pre-tax in your 50's.
Thanks for the replies! If I stay where I'm at for the rest of my career, I think it maxes out around $100K-120K salary-wise, with the company match increasing from 6 to 11 percent by one percentile every 5 years I'm there so that's nice. In 10 years I expect to be in the lower region of the 24% tax bracket and basically never leave, if I stay where I currently am! :mrgreen:
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Bob's not my name
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Re: 401k pre-tax, Roth, or a blend?

Post by Bob's not my name » Sun Feb 11, 2018 7:51 pm

You'll get better answers if you tell us what state you're in (since states tax Roth and traditional contributions and withdrawals differently) and how much you would contribute to Roth accounts vs. traditional at the same savings rate.

youngpleb
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Re: 401k pre-tax, Roth, or a blend?

Post by youngpleb » Mon Feb 12, 2018 7:27 pm

Bob's not my name wrote:
Sun Feb 11, 2018 7:51 pm
You'll get better answers if you tell us what state you're in (since states tax Roth and traditional contributions and withdrawals differently) and how much you would contribute to Roth accounts vs. traditional at the same savings rate.
Thanks! I live in Virginia, and am in the 5.75% income tax bracket. I don't think I'd be the type of person to retire to a different state just for tax purposes, so I'll likely stay in VA unless some big life change takes me elsewhere. As for Roth vs. traditional, I was initially going to max out my 401k with Roth this year, but I'd like to save up a bit more for more short-term things (i.e. house) than that would allow me, so that is why I'm considering doing pre-tax contributions for about $5,000 and then Roth for the remainder.
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Bob's not my name
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Re: 401k pre-tax, Roth, or a blend?

Post by Bob's not my name » Mon Feb 12, 2018 8:30 pm

$5,000 pre-tax will consume $5,000 gross. $5,000 Roth in the same tax bracket would consume $6,920 gross and throw away $1,920 in taxes. My point was only that you make sure you are making this comparison when you decide how much to save and how much to pay in taxes.

suemarkp
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Re: 401k pre-tax, Roth, or a blend?

Post by suemarkp » Mon Feb 12, 2018 11:26 pm

The original poster is in a lower tax bracket, so it seems like now is better than later for a Roth 401K. For me, I'm looking at the $ lost to taxes as an investment in tax free gains 20 to 30 years from now as opposed to forced RMD withdraws at who knows what tax rate. It is harder to calculate and I might be better off still doing pre-tax 401K instead of Roth 401K. I wish I could do more of both.
Mark | Kent, WA

bling
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Re: 401k pre-tax, Roth, or a blend?

Post by bling » Mon Feb 12, 2018 11:36 pm

sometimesinvestor wrote:
Sun Feb 11, 2018 4:04 pm
Eventually you should have both kinds of IRA and at times 100% traditional but at your current age and income 100% ROth seems right. When eitherage or income changes significantly you can come back to this site for additional and perhaps different advice.
i disagree. if the OP's salary is expected to grow over time it won't take long for him to require performing backdoor roths. and you definitely don't want any traditional IRAs hanging around when you do that.

youngpleb
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Re: 401k pre-tax, Roth, or a blend?

Post by youngpleb » Tue Feb 13, 2018 7:40 pm

Bob's not my name wrote:
Mon Feb 12, 2018 8:30 pm
$5,000 pre-tax will consume $5,000 gross. $5,000 Roth in the same tax bracket would consume $6,920 gross and throw away $1,920 in taxes. My point was only that you make sure you are making this comparison when you decide how much to save and how much to pay in taxes.
Yeah, I guess this is really what my question boils down to. I do plan on putting the additional money saved from taxes into non-retirement investments for use in the next 7-10 years.

Hey, not to derail my own thread or anything, but this makes me have another question as well. I"ll be having some short-term capital gains during this year, so if I do contribute a portion of my 401k as pre-tax and lower myself below $38,701 into the 12% federal tax bracket, does that mean that my short-term capital gains for this year will only be taxed at 12% instead of 22%? That would be the case, correct? Sorry, I tried googling this but it's quite wordy and I can't find the answers I was looking for. :confused
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Bob's not my name
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Re: 401k pre-tax, Roth, or a blend?

Post by Bob's not my name » Tue Feb 13, 2018 8:17 pm

Yeah but they have to FIT in the 12% bracket, meaning that you have to get your earned income low enough to give yourself the headroom.

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arcticpineapplecorp.
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Re: 401k pre-tax, Roth, or a blend?

Post by arcticpineapplecorp. » Tue Feb 13, 2018 9:22 pm

youngpleb wrote:
Sun Feb 11, 2018 3:04 pm
Hi everybody, so this year will be my first full year of employment with the company I'm working for. I'm currently 26 and living at home for this year just trying to save a lot of money so I can get a good investment foundation. My salary is $60K/year, and currently I am set to max out my HSA, Roth IRA, and 401k via Roth investments. What I'm wondering is if going 100% Roth for my 401k at this point and this salary is a good thing, or should I have some type of blend between Roth and pre-tax contributions. Previously I've just held the opinion that whatever happens tax-wise in the future, my money will be safer with Roth investments and have therefore done Roth contributions up to now. However, being in the 22% federal income tax bracket and 5.75% state bracket, I'm wondering if 100% Roth is the best option. I wanted to hear from some people who have been doing this a lot longer than myself in order to get an outside perspective!

Basically my health insurance and HSA contributions get me down to around $56K gross income. And now with the standard deduction being $13,000, that's down to $43K taxable, which is quite close to the 12%-22% federal tax bracket borderline (at $38.7K). So should I make that remaining five thousand or so bit pre-tax and then do Roth contributions once I slide down into the 12% tax bracket? It seems like a good idea on paper, but I'm worried that since I'm still relatively new to this that I'm missing out on some aspect of it. What do you think?
didn't see anyone correct it so far so thought I would...considering you want to make sure you're correcting the right amounts to get within the 12% bracket:

The standard deduction is not $13,000 for a single person in 2018...it's $12,000. You're not over 65 or blind/disabled so you don't get another $1600. Sorry.

https://www.google.com/search?q=standar ... fox-b-1-ab
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

MrBeaver
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Re: 401k pre-tax, Roth, or a blend?

Post by MrBeaver » Wed Feb 14, 2018 6:00 pm

Just pointing out that while Roth in lower brackets is 'usually' the right call, there are narrow bands where it can make a lot of sense to contribute some into traditional in order to qualify for the Saver's Credit (https://www.bogleheads.org/wiki/Saver%27s_credit).

If you are single with no dependents, it sounds like this may not be the case, but I'd run the numbers. If you're just above one of the limits, or you become above one of the limits due to a future spouse or dependent with similar income or a year with a job loss, then it's good to keep this in mind.

youngpleb
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Re: 401k pre-tax, Roth, or a blend?

Post by youngpleb » Wed Feb 14, 2018 9:21 pm

arcticpineapplecorp. wrote:
Tue Feb 13, 2018 9:22 pm
didn't see anyone correct it so far so thought I would...considering you want to make sure you're correcting the right amounts to get within the 12% bracket:

The standard deduction is not $13,000 for a single person in 2018...it's $12,000. You're not over 65 or blind/disabled so you don't get another $1600. Sorry.

https://www.google.com/search?q=standar ... fox-b-1-ab
Thanks for the catch! It makes a difference!
27. Always learning.

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