Best protocol with Two Roths and 401K

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JB2013
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Best protocol with Two Roths and 401K

Post by JB2013 »

Curious if anyone can give me the general consensus on the approach of which to do first in the scenario of having two Roth IRAs and a 401K.

I know the approach is to take the match of the 401K (mine is 4%), then to fill up the Roth, and then go back to the 401k. My question is if we have my Roth and then my wife's Roth, should one take the match, fill up both Roths, and then go back to the 401K? Or, does one recommend match, Roth IRA, 401K, and then tackle the other Roth? Maybe there's a link somewhere that explains this, but I'm not completely sure how to approach this. Thanks!
MotoTrojan
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Re: Best protocol with Two Roths and 401K

Post by MotoTrojan »

Way too complicated to have a one size fits all solution honestly. What tax bracket are you in now? Do you think you'll be in a higher or lower one in retirement? What is your current breakdown of pre-tax (401k/tIRA) vs. Roth (401k/Roth IRA)?

Does your 401k have good fund choices with no admin fees, or are they high ER funds and/or other fees?

Nobody knows the future, I personally like having a bit of both so perhaps aim to max the 401k and one of the two Roths (might suggest your wife's if the 401k is yours, just to be fair).
KlangFool
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Re: Best protocol with Two Roths and 401K

Post by KlangFool »

OP,

If you could max the 401K and max the 2 X Roth IRAs, then, the answer is obvious. Max all of them. If you could not, then you need to provide your marginal tax rate and state income tax rate plus the amount of money that you could save: pre-tax or after-tax. Then, someone could calculate and give you the possible combinations.

KlangFool
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FiveK
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Re: Best protocol with Two Roths and 401K

Post by FiveK »

JB2013 wrote: Fri Aug 02, 2019 9:31 pm I know the approach is to take the match of the 401K (mine is 4%), then to fill up the Roth, and then go back to the 401k.
As the saying goes, sometimes what we know just isn't so. ;)

E.g., see Investment Order and note all the conditionals on step #5.
Topic Author
JB2013
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Re: Best protocol with Two Roths and 401K

Post by JB2013 »

KlangFool wrote: Fri Aug 02, 2019 9:42 pm OP,

If you could max the 401K and max the 2 X Roth IRAs, then, the answer is obvious. Max all of them. If you could not, then you need to provide your marginal tax rate and state income tax rate plus the amount of money that you could save: pre-tax or after-tax. Then, someone could calculate and give you the possible combinations.

KlangFool
Thanks for the info. I’m in the 22% tax rate for federal and 6.8% for Minnesota tax. As of now i can max out my Roth of $6000. I’ve never attempted to try to fill my spouses Roth IRA. I’ve always stayed at the 4% for my 401k but am now trying to determine after I max my Roth do I begin working on my wife’s Roth IRA or increase the 401k. No way I could max out the 401k. I’d say I could increase it to 10% which would be around $9300 per year.

So, what’s the best option here do you think? Thanks for everyone’s help. I’m getting excited to increase my savings.
fuddbogle
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Re: Best protocol with Two Roths and 401K

Post by fuddbogle »

JB2013 wrote: Sat Aug 03, 2019 5:30 am
Thanks for the info. I’m in the 22% tax rate for federal and 6.8% for Minnesota tax. As of now i can max out my Roth of $6000. I’ve never attempted to try to fill my spouses Roth IRA. I’ve always stayed at the 4% for my 401k but am now trying to determine after I max my Roth do I begin working on my wife’s Roth IRA or increase the 401k. No way I could max out the 401k. I’d say I could increase it to 10% which would be around $9300 per year.

So, what’s the best option here do you think? Thanks for everyone’s help. I’m getting excited to increase my savings.
Post all of your 401k funds as well as the ER. It's possible the best scenario is the put all your savings in the 401k.
retiredjg
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Re: Best protocol with Two Roths and 401K

Post by retiredjg »

I don't think one suggestion is going to be much better than any other suggestion. However, I probably would not put more into Roth than into the tax-deferred 401k if your 401k is a good one.

Do you expect to stay in or near the 22% bracket most of your career (modest raises) or is your salary likely to increase substantially?

How old are you?
Topic Author
JB2013
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Re: Best protocol with Two Roths and 401K

Post by JB2013 »

fuddbogle wrote: Sat Aug 03, 2019 5:53 am
JB2013 wrote: Sat Aug 03, 2019 5:30 am
Thanks for the info. I’m in the 22% tax rate for federal and 6.8% for Minnesota tax. As of now i can max out my Roth of $6000. I’ve never attempted to try to fill my spouses Roth IRA. I’ve always stayed at the 4% for my 401k but am now trying to determine after I max my Roth do I begin working on my wife’s Roth IRA or increase the 401k. No way I could max out the 401k. I’d say I could increase it to 10% which would be around $9300 per year.

So, what’s the best option here do you think? Thanks for everyone’s help. I’m getting excited to increase my savings.
Post all of your 401k funds as well as the ER. It's possible the best scenario is the put all your savings in the 401k.
Here are my funds:

Vanguard Target 2015 Fund through Vanguard Target 2065 Fund- Each ER is .07%
Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) - ER .02%
VANG INST INDEX PLUS (VIIIX) ER .02%
VANG SM CAP IDX INST (VSCIX) ER .04%
VANG TOT INTL STK AD (VTIAX) ER .11%
VANG TOT BD MKT ADM (VBTLX) ER .05%
VANG INFL PROT INST (VIPIX) ER .07%

The rest are active managed funds that aren't even worth posting because I know I would never invest in them. I currently have opted for the Vanguard Target 2040 for simplicity sake. Maybe doing a 3 fund with my options would lower my ER?

retiredjg wrote: Sat Aug 03, 2019 5:59 am I don't think one suggestion is going to be much better than any other suggestion. However, I probably would not put more into Roth than into the tax-deferred 401k if your 401k is a good one.

Do you expect to stay in or near the 22% bracket most of your career (modest raises) or is your salary likely to increase substantially?

How old are you?
I am 34 years old.

At my current job I get around 1-2.5% raises, some years the pay stays the same, but it's increased by at least 2% each year since I started here in 2015. So, in a perfect world in 10 years I would be making around $113K, if I stay in my current job. Making over 100K in mental health is not common. My field has an extreme range of pay depending on what sector you work in.

So yes, I don't expect to jump up into the next tax bracket anytime soon.
retiredjg
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Re: Best protocol with Two Roths and 401K

Post by retiredjg »

JB2013 wrote: Sat Aug 03, 2019 7:31 am I currently have opted for the Vanguard Target 2040 for simplicity sake. Maybe doing a 3 fund with my options would lower my ER?
The reduction in ER would buy a few cups of good coffee a year. Don't bother if you like the Target fund.

I am 34 years old.

At my current job I get around 1-2.5% raises, some years the pay stays the same, but it's increased by at least 2% each year since I started here in 2015. So, in a perfect world in 10 years I would be making around $113K, if I stay in my current job. Making over 100K in mental health is not common. My field has an extreme range of pay depending on what sector you work in.

So yes, I don't expect to jump up into the next tax bracket anytime soon.
Here's my best guess.

If you continue to be a one income family, you will likely always be in one of the lower tax brackets while working. But you also have a reasonable possibility of being 1 bracket lower in retirement. So you don't want to do all Roth now because you might pay less than 22% later on.

I would not use all traditional either. Getting money into Roth at only 22% is a good thing so I would continue to use Roth in addition to traditional.

While tax rates are lower (next few years), I might go as far as half and half. When/if tax rates revert you will be in the 25% bracket and then I'd probably use about 2/3 traditional and 1/3rd Roth. But if you used 2/3 traditional and 1/3 Roth now, that would be fine too.

An exception....if you will be getting a pension, I'd just do about half and half even after tax rates go back up (if they do).

Here's one other approach - save enough in the 401k (a very good one!) to get yourself into the 12% tax bracket (could you do that?) and put the tax savings into Roth IRA. This might be your best approach because I think putting $9,300 into 401k may pull you down into the 12% bracket. Then put the $6k into Roth (maybe your wife's Roth IRA for awhile).

It's important to realize that all of this is a guess and there really is no bad choice as long as you are saving money. We spend incredible amounts of time here discussing this traditional vs Roth decision, but in reality any decision is a good one if you are saving a reasonable amount of money.
jbinpa59
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Re: Best protocol with Two Roths and 401K

Post by jbinpa59 »

At least you have some decent 401k fund choices imo

How often can you change your contribution level on the 401k?
balance compared to roths?

The 401k is dca each pay and thus not as easy to throw "found $" at as the Ira would be

Presuming you have at least a 3mo emf?

at your age I'd be going for the 401k full match first
then stuffing both Roths to max if possible till
The 401k and total Roth balances were about equal then reevaluate

Nice to have choices on where to pull the $ from down the road

I'm closer to retirement than you and looking at what rmds and potential soc sec taxing
I'm wishing my Roth vs 401k split was more roth

Ymmv
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FiveK
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Re: Best protocol with Two Roths and 401K

Post by FiveK »

JB2013 wrote: Sat Aug 03, 2019 5:30 am I’m in the 22% tax rate for federal and 6.8% for Minnesota tax.
JB2013 wrote: Sat Aug 03, 2019 7:31 am At my current job I get around 1-2.5% raises, some years the pay stays the same, but it's increased by at least 2% each year since I started here in 2015. So, in a perfect world in 10 years I would be making around $113K, if I stay in my current job.
Based on $113K/(1.02^10)=$92.7K current salary, and assuming no more than $10K other income, that's the 12% federal bracket for MFJ and the 7.05% Minnesota Tax Bracket.

If that is correct, and you expect to stay in MN, 100% Roth now (including Roth 401k if available) is very defensible. Do get the 401k match first, even if you "have to" use a traditional 401k.
Topic Author
JB2013
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Re: Best protocol with Two Roths and 401K

Post by JB2013 »

retiredjg wrote: Sat Aug 03, 2019 8:39 am
JB2013 wrote: Sat Aug 03, 2019 7:31 am I currently have opted for the Vanguard Target 2040 for simplicity sake. Maybe doing a 3 fund with my options would lower my ER?
The reduction in ER would buy a few cups of good coffee a year. Don't bother if you like the Target fund.

I am 34 years old.

At my current job I get around 1-2.5% raises, some years the pay stays the same, but it's increased by at least 2% each year since I started here in 2015. So, in a perfect world in 10 years I would be making around $113K, if I stay in my current job. Making over 100K in mental health is not common. My field has an extreme range of pay depending on what sector you work in.

So yes, I don't expect to jump up into the next tax bracket anytime soon.
Here's my best guess.

If you continue to be a one income family, you will likely always be in one of the lower tax brackets while working. But you also have a reasonable possibility of being 1 bracket lower in retirement. So you don't want to do all Roth now because you might pay less than 22% later on.

I would not use all traditional either. Getting money into Roth at only 22% is a good thing so I would continue to use Roth in addition to traditional.

While tax rates are lower (next few years), I might go as far as half and half. When/if tax rates revert you will be in the 25% bracket and then I'd probably use about 2/3 traditional and 1/3rd Roth. But if you used 2/3 traditional and 1/3 Roth now, that would be fine too.

An exception....if you will be getting a pension, I'd just do about half and half even after tax rates go back up (if they do).

Here's one other approach - save enough in the 401k (a very good one!) to get yourself into the 12% tax bracket (could you do that?) and put the tax savings into Roth IRA. This might be your best approach because I think putting $9,300 into 401k may pull you down into the 12% bracket. Then put the $6k into Roth (maybe your wife's Roth IRA for awhile).

It's important to realize that all of this is a guess and there really is no bad choice as long as you are saving money. We spend incredible amounts of time here discussing this traditional vs Roth decision, but in reality any decision is a good one if you are saving a reasonable amount of money.
Thanks for the response. I’m not doubting you at all, but can you please explain how I would be in the 12% tax bracket if I put the $9300 into my 401(k)?
Topic Author
JB2013
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Re: Best protocol with Two Roths and 401K

Post by JB2013 »

FiveK wrote: Sat Aug 03, 2019 9:13 am
JB2013 wrote: Sat Aug 03, 2019 5:30 am I’m in the 22% tax rate for federal and 6.8% for Minnesota tax.
JB2013 wrote: Sat Aug 03, 2019 7:31 am At my current job I get around 1-2.5% raises, some years the pay stays the same, but it's increased by at least 2% each year since I started here in 2015. So, in a perfect world in 10 years I would be making around $113K, if I stay in my current job.
Based on $113K/(1.02^10)=$92.7K current salary, and assuming no more than $10K other income, that's the 12% federal bracket for MFJ and the 7.05% Minnesota Tax Bracket.

If that is correct, and you expect to stay in MN, 100% Roth now (including Roth 401k if available) is very defensible. Do get the 401k match first, even if you "have to" use a traditional 401k.
My mistake. I was looking at single filing for the tax brackets. 12% is correct. Thanks for the heads up.

So would you max both Roth’s first while staying at the match for the 401k?
retiredjg
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Re: Best protocol with Two Roths and 401K

Post by retiredjg »

Your tax bracket is based on your taxable income, not your total income.

It was a guess that your salary is about $93,000. Subtract $9,300 for the pre-tax 401k and $24,400 for the standard deduction for a couple. That brings your taxable income down to $59,300...which is in the 12% tax bracket for a couple. Could be even lower if you pay health insurance through your employer.

In reality, I guess your Roth is already being taxed at only 12% since you don't need the full $9,300 pre-tax 401k contribution to get you into the 12% bracket.

In fact, I don't think you are in the 22% bracket at all if your total family income is about $93,000. I think you are in the 12% bracket, even without the pre-tax contribution to the 401k.

If that is correct, I would not go all Roth as suggested by FiveK, but probably more Roth than I suggested above. So the revised answer to the original question would be to put money in spouse's Roth IRA before adding much more to the 401k.
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FiveK
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Re: Best protocol with Two Roths and 401K

Post by FiveK »

JB2013 wrote: Sat Aug 03, 2019 9:25 am
FiveK wrote: Sat Aug 03, 2019 9:13 am
JB2013 wrote: Sat Aug 03, 2019 5:30 am I’m in the 22% tax rate for federal and 6.8% for Minnesota tax.
JB2013 wrote: Sat Aug 03, 2019 7:31 am At my current job I get around 1-2.5% raises, some years the pay stays the same, but it's increased by at least 2% each year since I started here in 2015. So, in a perfect world in 10 years I would be making around $113K, if I stay in my current job.
Based on $113K/(1.02^10)=$92.7K current salary, and assuming no more than $10K other income, that's the 12% federal bracket for MFJ and the 7.05% Minnesota Tax Bracket.

If that is correct, and you expect to stay in MN, 100% Roth now (including Roth 401k if available) is very defensible. Do get the 401k match first, even if you "have to" use a traditional 401k.
My mistake. I was looking at single filing for the tax brackets. 12% is correct. Thanks for the heads up.

So would you max both Roth’s first while staying at the match for the 401k?
Yes.

See Traditional versus Roth (and the whole Investment Order post linked earlier) for more details on why. If the reasoning isn't clear after you read those, just come back and ask about the unclear parts. Good luck!
retiredjg
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Re: Best protocol with Two Roths and 401K

Post by retiredjg »

Here's why I disagree with FiveK about going all Roth now.

You want to arrive in retirement with both pre-tax money and post tax money. Since you expect to be in about the same tax position for much of or most of your career, if you go all Roth now (only the 401k match would go to traditional) you may not build up enough of a pre-tax balance to take full advantage of it later.

How is pre-tax money an advantage later? Remember that some of the money in your taxable income is not taxed at your highest rate. Some is taxed at 0%, some at 10%, and only the last part is taxed at 12%. In retirement, you want some pre-tax money (in addition to SS) to fill in those lower brackets of 0% and 10% (rather than paying 12% on all of it now). Of course later, those lower brackets may different, but there will always be some 0% space as long as there are tax deductions (such as the standard deduction).

If your salary was expected to have some big jumps, going all Roth right now would be just fine. You could fill in the pre-tax accounts later after the salary jumps.

Now, here's my exception to what I just said. You could reasonably go all Roth now (assuming you do have Roth 401k available) while your marginal tax rate is only 12%. Later when/if tax rates revert to 15%, start using some traditional then.
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FiveK
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Re: Best protocol with Two Roths and 401K

Post by FiveK »

retiredjg wrote: Sat Aug 03, 2019 9:51 am You could reasonably go all Roth now (assuming you do have Roth 401k available) while your marginal tax rate is only 12%. Later when/if tax rates revert to 15%, start using some traditional then.
^retiredjg and I are in full agreement here, and with her rationale for having some amount of traditional savings. :)

With 2019 tax law, it does take about $1 million in a traditional account for a 4%/yr withdrawal from that account (and no other income) to reach the 12% bracket (and $600K for a 4%/yr withdrawal to incur any federal tax at all). Thus, depending on one's expectations for retirement income, using traditional in the 12% bracket now could be reasonable.

You pays your money and you takes your chances. ;)
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JB2013
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Re: Best protocol with Two Roths and 401K

Post by JB2013 »

retiredjg wrote: Sat Aug 03, 2019 9:51 am Here's why I disagree with FiveK about going all Roth now.

You want to arrive in retirement with both pre-tax money and post tax money. Since you expect to be in about the same tax position for much of or most of your career, if you go all Roth now (only the 401k match would go to traditional) you may not build up enough of a pre-tax balance to take full advantage of it later.

How is pre-tax money an advantage later? Remember that some of the money in your taxable income is not taxed at your highest rate. Some is taxed at 0%, some at 10%, and only the last part is taxed at 12%. In retirement, you want some pre-tax money (in addition to SS) to fill in those lower brackets of 0% and 10% (rather than paying 12% on all of it now). Of course later, those lower brackets may different, but there will always be some 0% space as long as there are tax deductions (such as the standard deduction).

If your salary was expected to have some big jumps, going all Roth right now would be just fine. You could fill in the pre-tax accounts later after the salary jumps.

Now, here's my exception to what I just said. You could reasonably go all Roth now (assuming you do have Roth 401k available) while your marginal tax rate is only 12%. Later when/if tax rates revert to 15%, start using some traditional then.
I appreciate everyone’s feedback and help.I should mention this is not a Roth 401K. Just a traditional 401K. Not sure if that changes anything or
Not.
retiredjg
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Re: Best protocol with Two Roths and 401K

Post by retiredjg »

JB2013 wrote: Sat Aug 03, 2019 11:48 am I appreciate everyone’s feedback and help.I should mention this is not a Roth 401K. Just a traditional 401K. Not sure if that changes anything or
Not.
Well, it means you cannot go "all in" to Rothness. :happy

Put the 4% in the 401k to get your full match. Put everything else into Roth IRA(s). If you can save more than that, increase the contribution to the 401k. When/if tax rates go back up or if your income situation changes, re-evaluate.
Topic Author
JB2013
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Re: Best protocol with Two Roths and 401K

Post by JB2013 »

retiredjg wrote: Sat Aug 03, 2019 11:57 am
JB2013 wrote: Sat Aug 03, 2019 11:48 am I appreciate everyone’s feedback and help.I should mention this is not a Roth 401K. Just a traditional 401K. Not sure if that changes anything or
Not.
Well, it means you cannot go "all in" to Rothness. :happy

Put the 4% in the 401k to get your full match. Put everything else into Roth IRA(s). If you can save more than that, increase the contribution to the 401k. When/if tax rates go back up or if your income situation changes, re-evaluate.
So max out both Roths before increasing the 401k contributions, correct?
retiredjg
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Re: Best protocol with Two Roths and 401K

Post by retiredjg »

That's what I would do in the 12% bracket.
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