Contribute to 401k or Roth IRA

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stuper1
Posts: 38
Joined: Tue Apr 03, 2018 9:30 am

Contribute to 401k or Roth IRA

Post by stuper1 » Tue Apr 10, 2018 1:44 pm

My wife and I file taxes jointly and are squarely within the new 22% federal tax bracket, whether we contribute to my 401k or not. Currently, we fully contribute to our HSA and contribute the full $24,500 to my 401k. I am 52 and plan to retire at 62 to 65, not take SS until 70, and use the time between retirement and 70 to possibly do Roth conversions. Our income in retirement will in all likelihood put us in the 12% tax bracket (realizing that it very well may be 15% or more by that time, but let's leave such speculation out of this discussion).

I'm wondering whether I should contribute less to my 401k at this time and fully contribute to my Roth IRA instead? I can't afford to do both. If I did that, I would still get the full company match on my 401k (they only match half up to 6% of my salary) and still fully contribute to the HSA. I'm thinking that there is no reason to contribute to the Roth IRA instead of the 401k, but please let me know if I'm missing anything. Worst-case scenario would be that we can't do enough Roth conversions before age 70, and then the RMDs push us a little into the 22% bracket (of course, it might be 25% or more at that time, but again I'd rather not speculate, and a few percentage points won't make much difference). So, in my mind we are avoiding 22% taxes now with the hope of only paying 12% in the future and the risk that some of it may end up at 22%, which would be a wash for that amount. That's why I don't see any reason to contribute to the Roth IRA at this time. Please let me know if I am missing anything. Thanks!

N10sive
Posts: 524
Joined: Thu May 05, 2016 6:22 pm

Re: Contribute to 401k or Roth IRA

Post by N10sive » Tue Apr 10, 2018 1:52 pm

Do you have state income tax? Where do you plan to retire(a place that has state income tax or not? What is your overall allocation of your retirement savings, i.e how much is in your 401k vs roth?

In most cases, especially since your doing catch up contributions to your 401k, I would do the standard 18.5k to the 401k and max out your Roth as well. *This could change bases on if you live in a state with income tax and plan to retire in one without it or vice versa.

mhalley
Posts: 5667
Joined: Tue Nov 20, 2007 6:02 am

Re: Contribute to 401k or Roth IRA

Post by mhalley » Tue Apr 10, 2018 2:02 pm

A rule of thumb I have seen in the past is 401k to the match, max Roth, then max 401k. The main variable is the savings rate, where it goes is not quite as important. Maxing everything is the eventual goal, but not everyone can afford to do that. The future of taxes is unknowable, so having a mix of taxable, tax free and tax deferred covers all bases.

stuper1
Posts: 38
Joined: Tue Apr 03, 2018 9:30 am

Re: Contribute to 401k or Roth IRA

Post by stuper1 » Tue Apr 10, 2018 3:27 pm

N10sive wrote:
Tue Apr 10, 2018 1:52 pm
Do you have state income tax? Where do you plan to retire(a place that has state income tax or not? What is your overall allocation of your retirement savings, i.e how much is in your 401k vs roth?

In most cases, especially since your doing catch up contributions to your 401k, I would do the standard 18.5k to the 401k and max out your Roth as well. *This could change bases on if you live in a state with income tax and plan to retire in one without it or vice versa.
Yes, I pay 9.3% state income taxes. I live in California. In retirement, we plan to stay in California, but might be down around 6% or 8% state taxes. I guess that would be a small reason to continue maxing out 401k contributions.

Currently, we have about three times as much in the 401k as in the Roth. The Roth conversions after 62 will help to even that up a bit, although not completely I don't think.

fujiters
Posts: 43
Joined: Tue Mar 06, 2018 2:17 pm

Re: Contribute to 401k or Roth IRA

Post by fujiters » Tue Apr 10, 2018 4:11 pm

I think your plan is reasonable. If you expect to be in a lower tax bracket when you withdraw the funds, traditional 401k makes more sense than Roth, assuming you have equally good investment options available in your 401k.

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FiveK
Posts: 4626
Joined: Sun Mar 16, 2014 2:43 pm

Re: Contribute to 401k or Roth IRA

Post by FiveK » Tue Apr 10, 2018 5:28 pm

stuper1 wrote:
Tue Apr 10, 2018 1:44 pm
So, in my mind we are avoiding 22% taxes now with the hope of only paying 12% in the future and the risk that some of it may end up at 22%, which would be a wash for that amount.
At equal tax rates for a maximum contribution, the Roth is actually better. See Maxing out your retirement accounts.

But if you aren't sure you would reach the 22% rate in retirement (even after accounting for Taxation of Social Security benefits) then traditional seems better: if that is wrong it will be because you have "more money than expected", which isn't all that bad....

bradpevans
Posts: 106
Joined: Sun Apr 08, 2018 1:09 pm

Re: Contribute to 401k or Roth IRA

Post by bradpevans » Tue Apr 10, 2018 5:42 pm

my $0.02 worth:
if you go Roth, you:
pay todays ordinary income tax rate
simplify income in the future
avoid RMDs forever
allow a greater % of 401k to be converted to Roth later (since you aren't doing both)

if you go (pre-tax) 401k, you
save the tax hit today
will owe ordinary income hit at some point
trigger RMDs at some point

if you can "go poor" after retirement, before SS, before 70.5, then you can convert 401 to Roth as a double win:
avoid high taxes on front end (401)
only pay low taxes upon conversion (due to your income at the time of Roth conversion)

If you had space to convert all - at low tax rates - before RMD's, that seems the best combination. But your total 401k and the time before 70.5 (as well as desired income during that time) may not allow you to cheaply convert.

I'm leaning more and more toward Roth:
a dollar is a dollar, no matter your other income
no RMDs

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Artsdoctor
Posts: 3252
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Contribute to 401k or Roth IRA

Post by Artsdoctor » Tue Apr 10, 2018 6:18 pm

stuper1 wrote:
Tue Apr 10, 2018 1:44 pm
My wife and I file taxes jointly and are squarely within the new 22% federal tax bracket, whether we contribute to my 401k or not. Currently, we fully contribute to our HSA and contribute the full $24,500 to my 401k. I am 52 and plan to retire at 62 to 65, not take SS until 70, and use the time between retirement and 70 to possibly do Roth conversions. Our income in retirement will in all likelihood put us in the 12% tax bracket (realizing that it very well may be 15% or more by that time, but let's leave such speculation out of this discussion).

I'm wondering whether I should contribute less to my 401k at this time and fully contribute to my Roth IRA instead? I can't afford to do both. If I did that, I would still get the full company match on my 401k (they only match half up to 6% of my salary) and still fully contribute to the HSA. I'm thinking that there is no reason to contribute to the Roth IRA instead of the 401k, but please let me know if I'm missing anything. Worst-case scenario would be that we can't do enough Roth conversions before age 70, and then the RMDs push us a little into the 22% bracket (of course, it might be 25% or more at that time, but again I'd rather not speculate, and a few percentage points won't make much difference). So, in my mind we are avoiding 22% taxes now with the hope of only paying 12% in the future and the risk that some of it may end up at 22%, which would be a wash for that amount. That's why I don't see any reason to contribute to the Roth IRA at this time. Please let me know if I am missing anything. Thanks!
So when you say "Roth IRA," you are definitely not talking about a Roth 401k, right?

Your first priority would be to contribute to the 401k up to match. Then your next question, as I understand it, is where to put the money AFTER that, correct?

It's going to be wash. You'll find pros and cons to contributions to both accounts. If you're planning on doing Roth conversions after retiring, you're going to want to watch IRMAA surcharges (when you start hitting 63+), if that applies; it may not. There's no way to really predict whether your retirement tax rate will be higher or lower, but I agree with your assessment--probably lower.

I don't think you'll go wrong either way. A Roth is a great investment vehicle, especially if you're thinking about estate planning on top of everything else. But the tax savings now with a 401k is a fine option as well.

Just make sure you do what it takes to get the employer match.

02nz
Posts: 247
Joined: Wed Feb 21, 2018 3:17 pm

Re: Contribute to 401k or Roth IRA

Post by 02nz » Tue Apr 10, 2018 6:22 pm

Your plan makes sense, as yours is a relatively clear case for preferring 401k/traditional over Roth, given anticipated lower tax bracket in retirement and current high-tax state. You have realized (as I did only relatively recently) that, while the Roth is a wonderful retirement saving tool, the best way into it is often by converting from traditional during years of no or low income, rather than direct contributions.

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