401k / IRA / Roth Ira/ tax bracket

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401k / IRA / Roth Ira/ tax bracket

Post by linguista57 » Tue Jun 11, 2019 12:04 am

Hello everybody,
I am maxing out on my 401k. 24k per year - bonds. SABX Western Ast Core plus
Putting $6500 into a Roth IRA - Vanguard total stock market.
Putting about $5000 per year into a 457B- Vanguard Developed Market funds
My portfolio is a three fund portfolio.

I am wondering if i am putting too much into 401k/457B, and if deferring taxes now is the best thing to do.

How can i figure out my tax bracket?
what is marginal tax rate? how to calculate it?

Can you give some pointers/ recommendation for books to read so i understand this a bit better.

Thank you

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Re: 401k / IRA / Roth Ira/ tax bracket

Post by fyre4ce » Tue Jun 11, 2019 12:54 am

You can look up your tax bracket here: https://taxfoundation.org/2019-tax-brackets/ There are a lot of other online sources as well.

It's important that you calculate your taxable income properly. The tax bracket is based on your income after deductions. So take your gross income (including investment income and all other taxable income), subtract any Traditional contributions like a 401k and 457b along with any other above-the-line deductions, then subtract either the standard deduction ($12,200 single or $24,400 married joint) or your Schedule A itemized deductions. Last year's taxable income is listed on Line 10 of your Form 1040.

Marginal tax rate means your tax rate on a small amount of additional income. Ordinarily it would be the same as your tax bracket, but there are a lot of other tax benefits that get phased out with income (Earned Income Tax Credit, Child Tax Credit, Student Loan Interest Deduction, etc etc). If you are in the income range where one of these benefits is phased out, more income means you pay the additional rate of tax, PLUS you lose some percentage of that income in lost benefits. For example, getting phased out of the Child Tax Credit adds 5% to your marginal tax rate, if you're in that range. State income taxes also add to your marginal tax rate. If you use software to prepare your taxes, add $100 to the income and see how much additional tax is due. The ratio is your marginal rate (eg. $32/$100 = 32%). If you use an accountant, ask your accountant to calculate it for you.

You are probably not putting too much into your 401k and 457b. As a rough general rule, you want to save at least 15-20% of your gross income for retirement, and more is usually better. The "Traditional versus Roth" question is extremely common here, but if you predict future tax rates will be higher (true for only a minority of people), then you would prefer more Roth contributions. Likely the only way to do this is if your 401k has a Roth option. I don't think 457b's have Roth options. It would probably NOT be a good idea to save more money in a taxable account compared to a 401k or 457b - the tax drag hurts performance too much. Traditional and Roth are both generally better than a taxable account. Even if you preferred Roth, Traditional is almost as good, and is almost certainly better than a taxable account.

If you want to post more details here, we can help you estimate your current and future marginal tax rates. We'd need current and projected future income, current taxable and tax-deferred investment balances, current and projected future investments (eg. 50/50 stock/bond) for each account, current age and expected retirement age, expected Social Security benefit in retirement, and any other taxable income in retirement (eg. pensions).

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Re: 401k / IRA / Roth Ira/ tax bracket

Post by retiredjg » Tue Jun 11, 2019 8:51 am

linguista57 wrote:
Tue Jun 11, 2019 12:04 am
I am wondering if i am putting too much into 401k/457B, and if deferring taxes now is the best thing to do.
I think this is a very good question for you to be asking at this time.

I've looked over your earlier posts over the years. Looks like your last request for assistance this last February did not get a complete response. There are things to talk about in that post as well. But right now, let's look at this question above.

I gather you are single and about 61 years old and still working. You have about $350k in savings in various accounts. Your expenses are quite low, and you will have both SS and a small pension when you retire in a few years.

You think you are currently in the 22% tax bracket. It is unclear to me if you will drop into a lower tax bracket in retirement. It seems possible but many single people never fall below the 22% bracket in retirement (25% if tax rates revert).

If I understand your situation, your pension and SS will cover most of your expected expenses in retirement. Is that correct?

I am thinking that you should be saving more in Roth IRA accounts now and less in tax-deferred accounts. The reason for this is that you will probably never take money out of your tax-deferred accounts at a rate less than 22% (25% if tax rates revert). If that is correct, you might as well pay 22% on some (maybe a lot) of that money now instead of putting all of that money into tax-deferral.

I am especially concerned since you appear to be putting money into traditional IRA each year instead of Roth IRA. That discussion needs to happen back at your thread this last February. I will post there too.

Please indicate if I have made in mistakes in my "summary" of where I think you are above. And do use the information from fyre4ce to determine if your federal rate is currently 22%. Find a similar website on the internet to get a handle on your CA tax rate. It may be fairly high.

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