Roth or Traditional 401k? + Roth IRA

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mford592
Posts: 2
Joined: Wed Apr 11, 2018 6:21 pm

Roth or Traditional 401k? + Roth IRA

Post by mford592 » Thu Aug 16, 2018 7:14 pm

I've read a lot of responses on this question but haven't seen a post that seemed close enough to my own situation so I figured I'd post one. Basically, I'm trying to figure out whether to contribute to my roth or traditional 401k. Below are some basic facts about me.

-26, single (remaining single for planning purposes)
-live in Iowa, planning on staying
-75k salary
-currently have 80k in retirement accounts (5k roth ira, 10k roth 401k, 70k traditional 401k)
-planning on retiring at 60 but will fund a taxable account as available to provide for early retirement if possible

I currently and will continue (no matter what anyone here says) to contribute 5500 to a roth ira annually. I also contribute 17% of my salary into a roth 401k. If I switched to all traditional I would be able to put in the max 18500 with minimal changes to takehome pay.

I honestly have no idea how much I'll be spending when I actually start withdrawing money but I'm guessing I'd want to be at least at my current income level (adjusted for inflation) but it could easily be more if I have the funds available. As far as taxes go, I have no idea what they will actually but but I'm of the opinion that they're probably the lowest they'll ever be. Unless we go to a federal sales tax or VAT. At some point though when I start earning a lot more I assume I will cross some threshold where traditional accounts are a no brainer but idk what that threshold is. Hopefully this community can come to some consensus as to the best approach I should take, roth or traditioanal for my 401k.

JBTX
Posts: 3913
Joined: Wed Jul 26, 2017 12:46 pm

Re: Roth or Traditional 401k? + Roth IRA

Post by JBTX » Thu Aug 16, 2018 8:19 pm

mford592 wrote:
Thu Aug 16, 2018 7:14 pm
I've read a lot of responses on this question but haven't seen a post that seemed close enough to my own situation so I figured I'd post one. Basically, I'm trying to figure out whether to contribute to my roth or traditional 401k. Below are some basic facts about me.

-26, single (remaining single for planning purposes)
-live in Iowa, planning on staying
-75k salary
-currently have 80k in retirement accounts (5k roth ira, 10k roth 401k, 70k traditional 401k)
-planning on retiring at 60 but will fund a taxable account as available to provide for early retirement if possible

I currently and will continue (no matter what anyone here says) to contribute 5500 to a roth ira annually. I also contribute 17% of my salary into a roth 401k. If I switched to all traditional I would be able to put in the max 18500 with minimal changes to takehome pay.

I honestly have no idea how much I'll be spending when I actually start withdrawing money but I'm guessing I'd want to be at least at my current income level (adjusted for inflation) but it could easily be more if I have the funds available. As far as taxes go, I have no idea what they will actually but but I'm of the opinion that they're probably the lowest they'll ever be. Unless we go to a federal sales tax or VAT. At some point though when I start earning a lot more I assume I will cross some threshold where traditional accounts are a no brainer but idk what that threshold is. Hopefully this community can come to some consensus as to the best approach I should take, roth or traditioanal for my 401k.
It looks like you are probably in the 22% bracket. At that rate you can really make a case either way. I don't think you can lower your income enough to get to 12% bracket or become eligible for savers credit.

I think you should at least put some of it in traditional. If you have no other income sources in retirement, then it is worthwhile to have enough in traditional to fill up the lower tax brackets. That could be up to $500k in traditional savings, and higher if you retire before social security.

I think it is good to have both. But if you can't max out your 401k with Roth, then I'd probably go with traditional if that allows you to max it. Your numbers don't totally make sense though. You are saying you put $12750 in Roth 401k but could out $18500 if traditional. 5750/18500 is 31.5% marginal rate but you aren't more than 22%.

billfromct
Posts: 722
Joined: Tue Dec 03, 2013 9:05 am

Re: Roth or Traditional 401k? + Roth IRA

Post by billfromct » Thu Aug 16, 2018 9:51 pm

If I was in my 20s, I would bite the tax bullet and contribute to the Roth 401k, at least through your 20s. You can determine if it makes sense to stay with the Roth 401k when you get into your 30s. You have these Roth retirement accounts to grow tax free for 35-40 year & take out state/Federal tax free after you hit 59.5.

You want to build your retirement tax diversity while you are young & probably in the lowest tax bracket of your career.

I wish Roth retirement accounts were available when I was in my 20s. My retirement accounts are now 94% taxable/6% Roth & when I start SS & RMDs next year, I will be bumped up a tax bracket as well as higher Medicare charges due to the higher income (higher income is a good thing).

I encourage my kids to contribute as much into their Roth retirement accounts (where available) while they are young because once they get married & start a family, the tax deductions will probably be more beneficial.

bill

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FiveK
Posts: 5386
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth or Traditional 401k? + Roth IRA

Post by FiveK » Thu Aug 16, 2018 10:37 pm

mford592 wrote:
Thu Aug 16, 2018 7:14 pm
-26, single (remaining single for planning purposes)
-live in Iowa, planning on staying
-75k salary
-currently have...70k traditional 401k)
-planning on retiring at 60
Your current marginal rate for traditional savings is ~30% (fed+state).

If your $70K earns 4% real for 34 years, and you then withdraw 4%/yr as your only taxable income, that will be $10.6K/yr. The marginal rate for more traditional withdrawals at that level is 4.5%.

Until your expected withdrawal marginal rate reaches (or at least approaches) your current marginal saving rate, using traditional is likely correct.

See the personal finance toolbox spreadsheet (or your tax software of choice) if you would like to do your own marginal rate calculations with more complete numbers.

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BL
Posts: 8240
Joined: Sun Mar 01, 2009 2:28 pm

Re: Roth or Traditional 401k? + Roth IRA

Post by BL » Thu Aug 16, 2018 11:11 pm

I tend to think that using traditional makes more sense if you are not filling 401k and Roth IRA completely, especially if you are above the 12% tax bracket and don't expect a sizable pension or high professional income.

Anyway, here is a Wiki page on the subject, written by very qualified Boglehead advisers:
https://www.bogleheads.org/wiki/Traditional_versus_Roth

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