Roth option within 403b

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Roth option within 403b

Post by Kathys » Wed Apr 11, 2018 3:59 pm

When is it a good idea to split your 403b contributions into pre-tax and Roth within one's 403b or 401K plan? Same rules as traditional IRA vs Roth IRA?

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Re: Roth option within 403b

Post by retiredjg » Wed Apr 11, 2018 4:01 pm

Lower income earners might benefit more from Roth than high income earners.

A good combination is traditional 401k and Roth IRA.

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Re: Roth option within 403b

Post by livesoft » Wed Apr 11, 2018 4:17 pm

Probably never.

If one is low income, then it depends on whether one will be low income when they retire or not. If low income in retirement, then stick with traditional 403(b). That is, don't pay taxes now and don't pay taxes later either.

If one is low income, but expects to be high income in retirement, then maybe Roth 403(b) makes sense. But you had better not be paying taxes now.

So an easy rule of thumb: If you aren't going to pay any taxes on your Roth 403(b) contribution, then Roth 403(b) is a good choice.
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Re: Roth option within 403b

Post by 02nz » Wed Apr 11, 2018 4:25 pm

It all comes down to anticipated tax rates in retirement vs. current marginal rate. Impossible to predict with certainty, obviously. My recommendation: any income in the 22% federal tax bracket and higher, you should defer by contributing to traditional 401k's and their equivalents. Lower tax brackets (12% and below), lock in the rate now by contributing to Roth, IRA first and then 401k/equivalents.

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Re: Roth option within 403b

Post by Better2bWise » Wed Apr 11, 2018 4:48 pm

The key to retirement savings is put as much as you can bear. The more that you can stuff into tax advantaged accounts, the better. Roth 403b allow larger amounts to save in these type of accounts than pretax. 18500 into Roth 403b (taxed) is technically more monies saved than pretax 403b. If the market never performs well, savings rate is the only thing that can be increased for your retirement plan besides riskier investments.

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Re: Roth option within 403b

Post by Tal- » Wed Apr 11, 2018 5:10 pm

I don't think a lot of people do both a traditional and Roth account at the same time. This is because there is probably a "right" choice - or at least one that you prefer.

With that said, we do both. The wife and I don't really agree on what the "right" choice is for us, and we find that splitting this 50/50 is enough to keep us both happy.
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Re: Roth option within 403b

Post by frickshin » Wed Apr 11, 2018 7:29 pm

There is certainly an advantage to having both Roth and tax-deferred accounts with substantial funds for retirement. You can fill up the lower tax brackets with distributions from the tax-deferred accounts, and then take additional distributions from the Roth account. Tax diversification is quite an effective way to lower your tax burden.

What exactly the "right" amount is -- well that's impossible to say. It depends upon many things, not the least of which is current income tax, which can rapidly change.

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Re: Roth option within 403b

Post by EdLaFave » Tue Apr 24, 2018 12:21 pm

I just wanted to provide a mathematical foundation that may not be immediately obvious to everybody. For each dollar you invest in a Traditional/Roth account you'll get theses results:

Traditional = $1 * (1 + Growth Rate) ^ (n years) * (1 - tax rate in retirement)
Roth = $1 * (1 - highest current tax bracket) * (1 + Growth Rate) ^ (n years)

Thanks to the commutative property of multiplication the only difference between the two equations is the tax rate that'll be applied to each dollar.

It is important to understand that our progressive tax code means that the first X dollars aren't taxed at all, the next Y dollars are taxed at a higher rate, the next Z dollars are taxed at a yet higher rate, and so on and so forth.

So if you wanted to optimize your retirement savings, you'd ask yourself how much money you can put into a Traditional account such that every dollar you pull out in retirement is in a lower or equal tax bracket than the highest tax bracket you were in when you earned the dollar?

Before you start down the road of trying to estimate all of the variables you'd need to answer that question, you should know it is rare for somebody to have more taxable income in retirement than they did when working. I'd argue if you have more taxable income it is because you over-saved or unnecessarily under-spent while working and I consider both of those to be far greater hazards than tax optimization.

So if you assume the tax code isn't going to change then you probably ought to feel quite confident being 100% invested in Traditional accounts. Of course nobody knows the legislative future so I don't consider tax diversification (doing both Traditional and Roth) to be "wrong."

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Re: Roth option within 403b

Post by ruralavalon » Tue Apr 24, 2018 12:57 pm

Kathys wrote:
Wed Apr 11, 2018 3:59 pm
When is it a good idea to split your 403b contributions into pre-tax and Roth within one's 403b or 401K plan? Same rules as traditional IRA vs Roth IRA?
It depends. More information is necessary.

Will you be eligible for a significant pension?

What is your tax bracket, both federal and state?

What is your age, occupation, and future earning potential?

. . . . .

Here is some general information on your question.

Retirement usually means that employment income has ended. Most people are in a lower tax bracket in retirement. The income tax code is progressive, with a lower tax rate for lower income. Therefore most people will likely find that traditional 401k contributions will be better. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."

A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
"Tax considerations:
* If your current marginal tax rate is 15% or less, prefer a Roth.
* If you expect to have higher marginal rates than your current marginal rate for most of your career, prefer a Roth.
* If you will have a traditional account or a pension large enough to meet your expected retirement expenses (and you expect to take that pension shortly after retiring), prefer a Roth.
* Otherwise, prefer a traditional account."
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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