Complete newbie here! Would like help determining Roth vs Traditional IRA...

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IWTLinvesting
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Joined: Mon Oct 15, 2018 10:59 am

Complete newbie here! Would like help determining Roth vs Traditional IRA...

Post by IWTLinvesting » Mon Oct 15, 2018 12:31 pm

Hi all!

New guy here looking to dive into indexing! I've read a couple of the Bogleheads' books (Little Book of Common Sense and Guide to Investing), but I still had a few questions before I'm ready to get started I think...

1st of which... Roth or Traditional? I know one of the books had some rules of thumb, and I've read through the relevant posts on the PersonalFinance subreddit, but still feel a little lost.

I'm 24, wife is 26, and we currently make about ~$120K combined. I would like to retire around 55ish. I expect that our combined household income once we are 55 will be ~$225K. In other words, I'd expect my tax rate to be higher in 30 years. However... if I am retired, would I actually be in a lower tax bracket, since I wouldn't have a salary from a job anymore?

Or am I completely misunderstanding?

Thanks in advance! I apologize if I have more basic questions or if I've posted this in the wrong area!

Edit to add more information:

I will be able to contribute to my employer 401K in two more months and I don't believe either of us will be eligible for any kind of pension, at least not at our current jobs.
Last edited by IWTLinvesting on Mon Oct 15, 2018 3:54 pm, edited 1 time in total.

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David Jay
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Re: Complete newbie here! Would like help determining Roth vs Traditional IRA...

Post by David Jay » Mon Oct 15, 2018 2:38 pm

Welcome to the forum.

One of our resources is the Bogleheads Wiki. It has a bunch of information, including a page on this exact issue here: https://www.bogleheads.org/wiki/Traditional_versus_Roth

I think there is a trend towards doing a bit of both. It is hard to predict in advance if your income will be lower in retirement, especially when you are young. If you put it all in traditional for 20 years then you may have an issue with the required withdrawals in later retirement. On the other hand, getting an immediate 22% (+ state?) deduction is good too!
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Earl Lemongrab
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Re: Complete newbie here! Would like help determining Roth vs Traditional IRA...

Post by Earl Lemongrab » Mon Oct 15, 2018 3:31 pm

Not nearly enough information. Do you either or both of you have 401(k) or similar plans? That can have a huge impact on whether you can deduct Traditional IRA contributions.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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ruralavalon
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Re: Complete newbie here! Would like help determining Roth vs Traditional IRA...

Post by ruralavalon » Mon Oct 15, 2018 3:41 pm

Welcome to the forum :) .

Those are good choices in books on investing.

IWTLinvesting wrote:
Mon Oct 15, 2018 12:31 pm
Hi all!

New guy here looking to dive into indexing! I've read a couple of the Bogleheads' books (Little Book of Common Sense and Guide to Investing), but I still had a few questions before I'm ready to get started I think...

1st of which... Roth or Traditional? I know one of the books had some rules of thumb, and I've read through the relevant posts on the PersonalFinance subreddit, but still feel a little lost.

I'm 24, wife is 26, and we currently make about ~$120K combined. I would like to retire around 55ish. I expect that our combined household income once we are 55 will be ~$225K. In other words, I'd expect my tax rate to be higher in 30 years. However... if I am retired, would I actually be in a lower tax bracket, since I wouldn't have a salary from a job anymore?

Or am I completely misunderstanding?

Thanks in advance! I apologize if I have more basic questions or if I've posted this in the wrong area!
Do either or both of you have a work-based plan (such as a 401k, 403b, 457, TSP)? If so how large is/are the accounts?

Will either or both of you be eligible for a significant pension? Do either or both of you contribute to Social Security?

You can simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

IWTLinvesting
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Joined: Mon Oct 15, 2018 10:59 am

Re: Complete newbie here! Would like help determining Roth vs Traditional IRA...

Post by IWTLinvesting » Mon Oct 15, 2018 3:51 pm

David Jay wrote:
Mon Oct 15, 2018 2:38 pm
Welcome to the forum.

One of our resources is the Bogleheads Wiki. It has a bunch of information, including a page on this exact issue here: https://www.bogleheads.org/wiki/Traditional_versus_Roth

I think there is a trend towards doing a bit of both. It is hard to predict in advance if your income will be lower in retirement, especially when you are young. If you put it all in traditional for 20 years then you may have an issue with the required withdrawals in later retirement. On the other hand, getting an immediate 22% (+ state?) deduction is good too!
Thanks for the response! I will take a look through that page. As for doing a bit of both, is it as simple as allotting a 50-50 split? Or is there a simple way to determine how much to contribute each way? Thanks!

IWTLinvesting
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Joined: Mon Oct 15, 2018 10:59 am

Re: Complete newbie here! Would like help determining Roth vs Traditional IRA...

Post by IWTLinvesting » Mon Oct 15, 2018 3:52 pm

ruralavalon wrote:
Mon Oct 15, 2018 3:41 pm
Welcome to the forum :) .

Those are good choices in books on investing.

IWTLinvesting wrote:
Mon Oct 15, 2018 12:31 pm
Hi all!

New guy here looking to dive into indexing! I've read a couple of the Bogleheads' books (Little Book of Common Sense and Guide to Investing), but I still had a few questions before I'm ready to get started I think...

1st of which... Roth or Traditional? I know one of the books had some rules of thumb, and I've read through the relevant posts on the PersonalFinance subreddit, but still feel a little lost.

I'm 24, wife is 26, and we currently make about ~$120K combined. I would like to retire around 55ish. I expect that our combined household income once we are 55 will be ~$225K. In other words, I'd expect my tax rate to be higher in 30 years. However... if I am retired, would I actually be in a lower tax bracket, since I wouldn't have a salary from a job anymore?

Or am I completely misunderstanding?

Thanks in advance! I apologize if I have more basic questions or if I've posted this in the wrong area!
Do either or both of you have a work-based plan (such as a 401k, 403b, 457, TSP)? If so how large is/are the accounts?

Will either or both of you be eligible for a significant pension? Do either or both of you contribute to Social Security?

You can simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.
Thank you for the response! I will edit those in. I have another 2 months before I can contribute to my employer's 401K. Neither of us will be eligible for a pension/contribute to SS (at least as far as I know...)

Tdubs
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Re: Complete newbie here! Would like help determining Roth vs Traditional IRA...

Post by Tdubs » Mon Oct 15, 2018 4:48 pm

Keep in mind also that the lower taxes we have now will likely reset higher in the the not so distant future. Given that you are still pretty young, going with a Roth now buys you insurance against the uncertainty of future tax increases. It is very possible you could retire at a lower income than you have now and still pay higher taxes.

On the other hand, you are likely now above the 12 percent marginal tax rate-- 22 percent? If so you may want to do a combination of tax deferred till you get below 12 then do Roth after that.

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FiveK
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Re: Complete newbie here! Would like help determining Roth vs Traditional IRA...

Post by FiveK » Mon Oct 15, 2018 7:27 pm

IWTLinvesting wrote:
Mon Oct 15, 2018 12:31 pm
I expect that our combined household income once we are 55 will be ~$225K. In other words, I'd expect my tax rate to be higher in 30 years. However... if I am retired, would I actually be in a lower tax bracket, since I wouldn't have a salary from a job anymore?

Or am I completely misunderstanding?
Is that $225K/yr just prior to retirement, or after retirement? It's the "after retirement" income and thus tax rate that is of primary importance in the t vs. R question.

Assuming gross income of exactly $120K, with no other income or deductions, if one of you put $18.5K into a traditional 401k, the other put $18.5K into a Roth 401k, and both of you put $5500 into Roth IRAs, you would save 22% on the t401k and be paying only 12% for all but $100 of the Roth accounts.

No guarantees, but that is a defensible approach (and pretty much what Tdubs also suggested).

After reading the wiki, is it clear why you might want to use traditional to save 22% but accept paying 12% to use Roth?

JerryB
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Re: Complete newbie here! Would like help determining Roth vs Traditional IRA...

Post by JerryB » Tue Oct 16, 2018 4:37 pm

Is the Bogleheads Guide to Retirement updated to the current tax law changes and is the wiki post mentioned above still current?

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ruralavalon
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Re: Complete newbie here! Would like help determining Roth vs Traditional IRA...

Post by ruralavalon » Tue Oct 16, 2018 5:27 pm

IWTLinvesting wrote:
Mon Oct 15, 2018 12:31 pm
Hi all!

New guy here looking to dive into indexing! I've read a couple of the Bogleheads' books (Little Book of Common Sense and Guide to Investing), but I still had a few questions before I'm ready to get started I think...

1st of which... Roth or Traditional? I know one of the books had some rules of thumb, and I've read through the relevant posts on the PersonalFinance subreddit, but still feel a little lost.

I'm 24, wife is 26, and we currently make about ~$120K combined. I would like to retire around 55ish. I expect that our combined household income once we are 55 will be ~$225K. In other words, I'd expect my tax rate to be higher in 30 years. However... if I am retired, would I actually be in a lower tax bracket, since I wouldn't have a salary from a job anymore?

Or am I completely misunderstanding?

Thanks in advance! I apologize if I have more basic questions or if I've posted this in the wrong area!

Edit to add more information:

I will be able to contribute to my employer 401K in two more months and I don't believe either of us will be eligible for any kind of pension, at least not at our current jobs.
For most people traditional IRA contributions will likely be better.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional IRA contributions will probably be better. In addition when you withdraw from your traditional IRA in retirement, your income is not all taxed at your marginal tax rate specified for your tax bracket. 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)."

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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FiveK
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Re: Complete newbie here! Would like help determining Roth vs Traditional IRA...

Post by FiveK » Tue Oct 16, 2018 6:05 pm

JerryB wrote:
Tue Oct 16, 2018 4:37 pm
...is the wiki post mentioned above still current?
Yes.

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FiveK
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Re: Complete newbie here! Would like help determining Roth vs Traditional IRA...

Post by FiveK » Tue Oct 16, 2018 6:08 pm

ruralavalon wrote:
Tue Oct 16, 2018 5:27 pm
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."
Note that those suggestions "...assume a marginal withdrawal tax rate of 15% or more." If that assumption does not hold, the suggestions may or may not hold.

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