Help me decide Roth vs Trad 401k

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Topic Author
epeterson1970
Posts: 12
Joined: Wed Sep 10, 2014 5:01 pm

Help me decide Roth vs Trad 401k

Post by epeterson1970 » Fri Jan 11, 2019 1:38 pm

As the title suggests I am trying to decide between Roth and Trad 401k. I am currently enrolled in the Roth but think I might want to consider Traditional

About Me
Male
Divorced w/3 young kids
Age 48
Planned retirement age- 67
Annual Income- approx 80,000
Employer- Class 1 Railroad
Pension- Tier 1 and 2 Railroad retirement

I am unsure of which is best for my situation. My income would probably be best suited with a traditional. However I contribute to the Railroad retirement system. There are two tiers with Tier 1 being comparable to Social Security and Tier 2 providing an additional benefit. All together the estimated benefit at retirement would be approximately $4000-4500 per month. I will have house and all debts paid off by retirement age and would be able to meet my obligations with my RR retirement benefit.
Any help appreciated

02nz
Posts: 912
Joined: Wed Feb 21, 2018 3:17 pm

Re: Help me decide Roth vs Trad 401k

Post by 02nz » Fri Jan 11, 2019 1:48 pm

You're correct that generally your income level/tax rate (assuming you file as a single) favors traditional, but the pension argues for Roth.

You didn't mention your state. If you're in a state with moderate to high income taxes, that's another argument for traditional, especially if you might retire in a state with lower/no income tax. (I admit I'm not familiar with individual states' treatment of RR retirement benefits though.)

When there's not a clear "winner" either way, I'd err on the side of traditional. If that choice turns out to be "wrong," it'll likely be because you're better off than anticipated in retirement. You pay more taxes, but a "nice" problem to have. If you choose Roth and that choice is wrong, it'll likely be because you're poorer than anticipated in retirement. You'll have given up tax savings that could've really made a difference.

Bottom line: Most likely, all-traditional is the right answer for the 401k. Add diversification by also contributing the max to a Roth IRA.

Topic Author
epeterson1970
Posts: 12
Joined: Wed Sep 10, 2014 5:01 pm

Re: Help me decide Roth vs Trad 401k

Post by epeterson1970 » Fri Jan 11, 2019 1:51 pm

I live in New York.

lakpr
Posts: 419
Joined: Fri Mar 18, 2011 9:59 am

Re: Help me decide Roth vs Trad 401k

Post by lakpr » Fri Jan 11, 2019 1:58 pm

A mix of Traditional 401(k) and Roth 401(k).

With an annual income of $80,000, less standard deduction of $18350, your taxable income is $61,650. I assume your portion of health insurance premiums taken from your paycheck will be around $6000 for you and your three kids. $55,650 taxable income.

If you can contribute at least $6000 to a tradition plan, your taxable income drops below $50,000. This income level is important because it allows you to capture a portion of the Earned Income Tax Credit as Head of Household with three children.

Assuming a $50k taxable income, you will be in the 12% tax bracket. In retirement, with no kids, and a retirement benefit of $48k to $50k, you will be in a 22% tax bracket.

Don’t forget that tax rates are also poised to increase in 2028 when the TCJA expires. Your tax bracket will be then expected to be 25%.

Therefore you will need to contribute to Roth 401(k).

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grabiner
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Re: Help me decide Roth vs Trad 401k

Post by grabiner » Fri Jan 11, 2019 10:13 pm

epeterson1970 wrote:
Fri Jan 11, 2019 1:51 pm
I live in New York.
That strongly favors Traditional if you might not retire in New York, as you can deduct your contributions from NY tax, and will pay no state tax on withdrawals if you retire in a state with no income tax such as FL.
Wiki David Grabiner

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