Coming to the realization that Traditional is probably wiser

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Topic Author
illinin09
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Joined: Tue Apr 02, 2019 9:45 am

Coming to the realization that Traditional is probably wiser

Post by illinin09 » Sat Sep 21, 2019 10:41 am

Recently got married this year, and we both just turned 27. Neither one of us has been very good with our finances so this is the first time we really started to dive into it. I started making sure we were both contributing wisely but recently realized the long standing wisdom that Roth was a better option in our 403b might not have been true. So here is our current situation.

Emergency funds: 2-3 months saved up, split between High-Yield Savings at CIT Bank and both of our Roth IRAs at Vanguard in the VMMXX. Will fully fund both of our Roth IRAs this year in VMMXX in accordance with the wiki about staggering EF buildup while filling Roth space.

Debt: 47,500 in student loans at 5.81%

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 6.8% State

State of Residence: MN

Age: Both 27

Desired Asset allocation: 100% stocks / 0% bonds
Desired International allocation: 0% of stocks

Current retirement assets

His 403b
80% ($27,074) Vanguard 500 Index (VFIAX) (.04%)
20% ($6,768) Vanguard Small Cap Index (VSMAX) (.05%)

His Roth IRA at Vanguard
100% ($3,000) Vanguard Prime Money Market Fund (VMMXX) (.16%)

His HSA at myHSAinvestments
100% ($1,835) Vanguard 500 Index (VFIAX) (.04%)

Her 403b
80% ($2,716) Vanguard 500 Index (VFIAX) (.04%)
20% ($679) Vanguard Small Cap Index (VSMAX) (.05%)

Her Roth IRA at Vanguard
100% ($3,000) Vanguard Prime Money Market Fund (VMMXX) (.16%)

Her HSA at myHSAinvestments
100% ($1,813) Vanguard 500 Index (VFIAX) (.04%)

So, a couple notes, yes I know we are behind, but working on starting well now and can't keep kicking ourselves for not saving more in our past. Trying to tighten up for our future. I will make sure we both max out our HSAs this year and our Roth IRAs, and then when our EF eventually gets 3 months saved will transition our Roth IRAs to 100% VTSAX, but keeping it in VMMXX currently as it is part of our EF currently.

Heres the rub, we currently are contributing 5% each into our 403b which is Roth, and then we get a 5% Employer Contribution which is traditional. After reading the wiki and enough posts from KlangFool it seems like we should just be doing that 5% in traditional and use the extra savings in the paycheck to speed up the savings on the Efund. Is there anything I'm missing or should I just stay the course and keep doing our 5% 403b contribution towards the Roth?

AK62
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Re: Coming to the realization that Traditional is probably wiser

Post by AK62 » Sat Sep 21, 2019 12:51 pm

Hi. Don't kick yourselves too hard. You are not "behind"... you both are in your 20's with plenty of time to catch up.
Here's my opinion: You are focusing too much on your investments, when you should put focus (foremost) on kicking the student loans to the curb. Get a serious plan in place to pay that off pronto. Then, start really drilling into putting more $$ toward your investments.
Start a budget on what expenses you have (after loans are paid off) and then put as much as you can afford into your investments and savings.

tibbitts
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Re: Coming to the realization that Traditional is probably wiser

Post by tibbitts » Sat Sep 21, 2019 1:04 pm

After much thrashing about, it seems this is the issue:
illinin09 wrote:
Sat Sep 21, 2019 10:41 am
Heres the rub, we currently are contributing 5% each into our 403b which is Roth, and then we get a 5% Employer Contribution which is traditional. After reading the wiki and enough posts from KlangFool it seems like we should just be doing that 5% in traditional and use the extra savings in the paycheck to speed up the savings on the Efund. Is there anything I'm missing or should I just stay the course and keep doing our 5% 403b contribution towards the Roth?
You're talking about the difference in your paycheck purely due to taxation? This doesn't seem like a clear-cut difference to me - essentially a toss-up. Certainly not a "rub."

retiredjg
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Re: Coming to the realization that Traditional is probably wiser

Post by retiredjg » Sat Sep 21, 2019 1:15 pm

I don't think you are behind.

Your most important consideration is your student loans. It does not make a lot of sense to keep loans at 5.81% when your investments may not return that much. However, I would contribute enough to the 403bs to get all the match.

Whether you use Roth or traditional at this point is a bit of a toss up because you are in a low tax bracket (this favors Roth). However, it is not impossible you will be in even a lower bracket in retirement (this favors traditional).

There is no question that a combination of the two is a good choice - the question is how much of each? The combination of traditional 403b and Roth IRA is usually a good one. Take the tax savings and put that on the loans or emergency fund if you feel that is more important.

KlangFool
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Re: Coming to the realization that Traditional is probably wiser

Post by KlangFool » Sat Sep 21, 2019 1:33 pm

OP,

You are paying 28.8% taxes to contribute to Roth 403B and Roth IRAs. And, paying 5+% interest on your student loan at the same time. The difference is 30+%. Why do that?

You could contribute to Trad. 403B and use the tax savings to pay the student loan instead.

KlangFool
Last edited by KlangFool on Sat Sep 21, 2019 2:00 pm, edited 1 time in total.

Pops1860
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Re: Coming to the realization that Traditional is probably wiser

Post by Pops1860 » Sat Sep 21, 2019 1:37 pm

retiredjg wrote:
Sat Sep 21, 2019 1:15 pm
There is no question that a combination of the two is a good choice - the question is how much of each? The combination of traditional 403b and Roth IRA is usually a good one.
My suggestion: Contribute to the 403b to get the max employer match. Then focus on paying off student loans. Then, if still any $$ left you want to save/invest (even while focusing primarily on student loan payoffs), open and fund a Roth IRA.

Agree with earlier post that it is usually good to have some $$ in both traditional and Roth, and you can refine how much you contribute to each as you continue your careers and refine the tax advantage assessments of each once you retire.

Remember, a Roth IRA can also serve as an emergency fund (contributions can be withdrawn at any time, for any reason, without tax or penalty); this might be a rationale for you to open/fund a Roth IRA in your situation.

Good luck.
The power of accurate observation is often called cynicism by those who do not have it. ~George Bernard Shaw

bondsr4me
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Re: Coming to the realization that Traditional is probably wiser

Post by bondsr4me » Sat Sep 21, 2019 2:08 pm

KlangFool wrote:
Sat Sep 21, 2019 1:33 pm
OP,

You are paying 28.8% taxes to contribute to Roth 403B and Roth IRAs. And, paying 5+% interest on your student loan at the same time. The difference is 30+%. Why do that?

You could contribute to Trad. 403B and use the tax savings to pay the student loan instead.

KlangFool
+1...agree with above.
and when the debt is paid off, tax-free muni’s might be a reasonable investment for the tax savings of the traditional.

lakpr
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Re: Coming to the realization that Traditional is probably wiser

Post by lakpr » Sat Sep 21, 2019 2:40 pm

If the combined gross income is less than $103k, then Roth 403b is indeed the correct answer. That places this MN couple at a 12% tax bracket, which is the lowest tax bracket it has ever been in the past 40 years, and is scheduled to expire by the end of 2025. They should be paying taxes now and invest everything to Roth 403b and Roth IRA. At least until end of year 2025, then revisit the situation in 2026.

If the combined gross income is anywhere in between $103k and $141k, this couple should be contributing just enough to the Traditional 403b to get the AGI to $103k. The remaining buffer between $38k and what they have already contributed to Traditional 403b should go into Roth 403b.

If higher than $141k, of course, both should be contributing maximum $19k each to Traditional 403b. They can afford to.

After maxing out the 403b, yes I suggest they should laser focus on the student loans. Man, that interest rate hurts my eyes to even look at!

Compound
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Re: Coming to the realization that Traditional is probably wiser

Post by Compound » Sat Sep 21, 2019 2:40 pm

Consider implementing these priorities:
1. Fund 403b to get the full match but not more than that. (Roth vs traditional here seems like splitting hairs.)
2. Fund your EF to a level where you can sleep at night.
3. Pour everything else at those student loans until they are gone. The caveat here is that if you can refinance them to a much lower rate, you probably should.
(4.) After loans are gone, keep going with IRA, 403b, and then ultimately taxable investments.

Ferdinand2014
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Re: Coming to the realization that Traditional is probably wiser

Post by Ferdinand2014 » Sat Sep 21, 2019 2:46 pm

KlangFool wrote:
Sat Sep 21, 2019 1:33 pm
OP,

You are paying 28.8% taxes to contribute to Roth 403B and Roth IRAs. And, paying 5+% interest on your student loan at the same time. The difference is 30+%. Why do that?

You could contribute to Trad. 403B and use the tax savings to pay the student loan instead.

KlangFool
+1
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

cherijoh
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Location: Charlotte NC

Re: Coming to the realization that Traditional is probably wiser

Post by cherijoh » Sat Sep 21, 2019 2:57 pm

lakpr wrote:
Sat Sep 21, 2019 2:40 pm
Man, that interest rate hurts my eyes to even look at!
Then you really wouldn't have liked my initial mortgage rate on my condo (circa 1982) - it was 14.2%! :shock: I refinanced twice (or was it thrice?) before selling it in 1996.

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dodecahedron
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Re: Coming to the realization that Traditional is probably wiser

Post by dodecahedron » Sat Sep 21, 2019 3:06 pm

cherijoh wrote:
Sat Sep 21, 2019 2:57 pm
lakpr wrote:
Sat Sep 21, 2019 2:40 pm
Man, that interest rate hurts my eyes to even look at!
Then you really wouldn't have liked my initial mortgage rate on my condo (circa 1982) - it was 14.2%! :shock: I refinanced twice (or was it thrice?) before selling it in 1996.
Bought our first home in 1984 and refinanced it twice before selling in 1989. Bought a replacement home in 1990 and refinanced that twice within the next four years or so.

Result: had six mortgage closings (two original purchases with four refis) in ten years! Paid off the mortgage in 2003.

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dratkinson
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Re: Coming to the realization that Traditional is probably wiser

Post by dratkinson » Sat Sep 21, 2019 3:13 pm

Data points. (Based on my skewed opinion.)

--You've stated long before I did, so you're doing okay.

--Assuming you've read The Millionaire Next Door, then you are familiar with the examples of millionaire retired teachers. In which case they probably don't need the RMDs and would prefer to avoid them.

--The tax-advantage of traditional accounts in a low tax bracket is worth little. The tax cost to contribute to Roth accounts in the same tax bracket must also be little.

--Your Roths will be tax-sheltering 40yrs of growth when you retire. My opinion is that 40yrs of tax-sheltered growth greatly outweighs the smaller annual tax costs to get into a Roth.

--The benefit of a Roth is so great that high-income folks pay more in taxes to use the "Backdoor Roth" and "Mega Backdoor Roth" techniques. You've in a much lower tax bracket so your tax cost is much lower to get into your Roths.

Bottom line. If I'd had a Roth available to me when I started, I'd have used it. Instead, I had to pay taxes on 20yrs* of growth on the conversions after I retired to turn off unneeded RMDs. (* Late start.)



Debt vs investing. I believe the typical forum advice is that all debt is bad debt, except for a home mortgage. So I'm really torn in your case: (1) accelerate the pay off your student loans, or (2) max your Roth contributions?

Maybe split the difference: pay a little more than required on your student loans, and contribute the rest to your Roths.



EF (emergency fund). You do have the option to remove your principal from your Roths to use as an EF. But this action steals eggs from the golden goose sitting on your retirement nest egg. Your retired selves would not like it.

Suggestion. Try to build up an EF outside of your TA (tax-advantaged) accounts, in a taxable account in: savings, CDs, or safe bond fund(s).

Suggestion. If the money in your Roth mmkt fund is truly your EF, then consider mentally moving your EF from your Roth to a taxable account. Why? I believe money in a Roth should be invested in equities to "shoot for the moon". Therefore, money invested in a (low-yield, zero-growth) mmkt fund is wasting Roth space. Bottom line: If you don't want bonds in your Roth, then you also should not want a mmkt fund.



Idea: Taxable investing. One recommended author advises that we never have more that 75% stocks or bonds, nor less than 25% stocks or bonds. So consider changing your AA to 75/25. And put your 25% multi-duty bonds into a taxable account.

25% bonds in taxable will perform multiple duties: (1) as the last tier of your formal EFs, they shelter your Roth principal against EF use; (2) are used as retirement bonds if not used for an emergency; (3) free up your Roths for equity use to maximize tax-free growth; and (4) make you AA (asset allocation) less risky so your investments will be less whipsawed during market corrections, so you should worry less.

Your retired selves will thank you.



Disclosure.

--TBM (VBTLX, Vanguard's total bond market index fund, adm) is the recommended fund of the 3-fund portfolio. So I compare all fixed income investments to it, and try to do better.

--Dividends from muni bond funds don't add to AGI (adjusted gross incomes) so help to lower our tax bracket.


I'm in the 22% fed tax bracket and use muni bonds in my taxable account, so I can shoot for the moon in my Roth, turn off RMDs, and keep my tax bracket lower.

However, in the 22% tax bracket, I must use a more risky muni fund to produce more after-tax income than TBM. So I use VWLTX/VWLUX (Vanguard's long-term national muni bond fund), instead of the forum's recommended VWITX/VWIUX (Vanguard's intermediate-term national mun bond fund), as my major retirement bond holding.

I do have 3yrs of livings expenses in VWIUX. It doesn't produce more after-tax income than TBM, but it does produce more after-tax income than my CU's CDs. So I use it as a CD substitute and the last tier of my formal EFs, home projects, new car, and dry powder fund.

N.B. Both VWITX and VWLTX are "daily-accrual funds" which makes them exempt from the IRS 6mos holding-period requirement to protect tax-exempt dividends. Meaning shares can be sold at any time and dividends remain tax-exempt---a useful feature for an EF tier.

So far, so good.



Welcome.
Last edited by dratkinson on Sat Sep 21, 2019 4:01 pm, edited 1 time in total.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

retiredjg
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Re: Coming to the realization that Traditional is probably wiser

Post by retiredjg » Sat Sep 21, 2019 3:20 pm

dratkinson wrote:
Sat Sep 21, 2019 3:13 pm
--The benefit of a Roth is so great that high-income folks pay more in taxes to use the "Backdoor Roth" and "Mega Backdoor Roth" techniques. You've in a much lower tax bracket so your tax cost is much lower to get into your Roths.
You did say your opinion was skewed, but this one is hardly fair. :happy

Those high income folks are in a different position - their money is going to be taxed no matter what they do with it because they have already used up their tax-deferred options. That is not the case for this poster...who still has a choice between tax-deferred or Roth.

cherijoh
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Re: Coming to the realization that Traditional is probably wiser

Post by cherijoh » Sat Sep 21, 2019 6:38 pm

retiredjg wrote:
Sat Sep 21, 2019 3:20 pm
dratkinson wrote:
Sat Sep 21, 2019 3:13 pm
--The benefit of a Roth is so great that high-income folks pay more in taxes to use the "Backdoor Roth" and "Mega Backdoor Roth" techniques. You've in a much lower tax bracket so your tax cost is much lower to get into your Roths.
You did say your opinion was skewed, but this one is hardly fair. :happy

Those high income folks are in a different position - their money is going to be taxed no matter what they do with it because they have already used up their tax-deferred options. That is not the case for this poster...who still has a choice between tax-deferred or Roth.
+1

I'm with retiredjg. The examples cited by dratkinson have nothing to do with how people allocate their regular contributions to their workplace retirement plans (i.e., traditional vs. Roth). Sounds like it is time for him/her to read (or reread) the Boglehead Wiki.

Not that many people qualify for a deductible contribution to a traditional IRA unless they (a) have no workplace plan or (b) are below specified income limits. A Roth IRA is a better option than leaving it as a non-deductible contribution to a traditional IRA no matter what your tax bracket because earnings are tax-free upon withdrawal for a Roth IRA. (Backdoor Roth is simply a non-deductible traditional IRA contribution which has been converted to Roth).

The other alternative to a Roth IRA* is of course taxable investing and paying taxes on dividends and cap gains as they are distributed (i.e., no postponement of taxes). [* If you have other assets in a traditional IRAs, you might be better off in taxable because of the prorata rules governing taxation of Roth conversions].

Mega backdoor Roth is additional tax-sheltered space available to employees whose employers have their retirement plans set up to allow it. The choice here is between converting to a Roth or leaving it as after-tax contributions. Just like for IRAs, Roth wins out over "after tax". There is no option for extra pre-tax contributions. Again, the other alternative is taxable investing in a brokerage account.

Topic Author
illinin09
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Re: Coming to the realization that Traditional is probably wiser

Post by illinin09 » Sun Sep 22, 2019 6:40 am

lakpr wrote:
Sat Sep 21, 2019 2:40 pm
If the combined gross income is less than $103k, then Roth 403b is indeed the correct answer. That places this MN couple at a 12% tax bracket, which is the lowest tax bracket it has ever been in the past 40 years, and is scheduled to expire by the end of 2025. They should be paying taxes now and invest everything to Roth 403b and Roth IRA. At least until end of year 2025, then revisit the situation in 2026.

If the combined gross income is anywhere in between $103k and $141k, this couple should be contributing just enough to the Traditional 403b to get the AGI to $103k. The remaining buffer between $38k and what they have already contributed to Traditional 403b should go into Roth 403b.

If higher than $141k, of course, both should be contributing maximum $19k each to Traditional 403b. They can afford to.

After maxing out the 403b, yes I suggest they should laser focus on the student loans. Man, that interest rate hurts my eyes to even look at!
Where is the $103k number coming from? Everything I am seeing for this year is $78,951 to $168,400 is the 22% bracket. We make roughly combined gross of $135k before any deductions. Going to switch over the 5% contribution to pre-tax but that wont get us down below $78,951 to get into the 12% bracket unless I am missing something.

lakpr
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Re: Coming to the realization that Traditional is probably wiser

Post by lakpr » Sun Sep 22, 2019 6:47 am

$78,950 taxable income + $24,400 standard deduction = $103,350 gross income

You can defer $16k each to Traditional 401k/403b which drops you to $103k Adjusted Gross Income and thus to the 12% bracket. Rest $3k each to Roth 401k/Roth 403b

It might be even less to Traditional 403b/401k if you have medical insurance premiums taken off your pay checks on a pretax basis.

mptfan
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Re: Coming to the realization that Traditional is probably wiser

Post by mptfan » Sun Sep 22, 2019 7:30 am

illinin09 wrote:
Sat Sep 21, 2019 10:41 am
After reading the wiki and enough posts from KlangFool it seems like we should just be doing that 5% in traditional and use the extra savings in the paycheck to speed up the savings on the Efund.
Yes, you should be using the traditional instead of the Roth. For the reasons why, get the Bogleheads Guide to Financial Planning and read Chapter 10, in particular the part that begins on page 154 regarding tax deductible retirement accounts.

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CyclingDuo
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Re: Coming to the realization that Traditional is probably wiser

Post by CyclingDuo » Sun Sep 22, 2019 7:33 am

illinin09 wrote:
Sat Sep 21, 2019 10:41 am
Recently got married this year, and we both just turned 27. Neither one of us has been very good with our finances so this is the first time we really started to dive into it. I started making sure we were both contributing wisely but recently realized the long standing wisdom that Roth was a better option in our 403b might not have been true. So here is our current situation.

Emergency funds: 2-3 months saved up, split between High-Yield Savings at CIT Bank and both of our Roth IRAs at Vanguard in the VMMXX. Will fully fund both of our Roth IRAs this year in VMMXX in accordance with the wiki about staggering EF buildup while filling Roth space.

Debt: 47,500 in student loans at 5.81%

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 6.8% State

State of Residence: MN

Age: Both 27

Desired Asset allocation: 100% stocks / 0% bonds
Desired International allocation: 0% of stocks

Current retirement assets

His 403b
80% ($27,074) Vanguard 500 Index (VFIAX) (.04%)
20% ($6,768) Vanguard Small Cap Index (VSMAX) (.05%)

His Roth IRA at Vanguard
100% ($3,000) Vanguard Prime Money Market Fund (VMMXX) (.16%)

His HSA at myHSAinvestments
100% ($1,835) Vanguard 500 Index (VFIAX) (.04%)

Her 403b
80% ($2,716) Vanguard 500 Index (VFIAX) (.04%)
20% ($679) Vanguard Small Cap Index (VSMAX) (.05%)

Her Roth IRA at Vanguard
100% ($3,000) Vanguard Prime Money Market Fund (VMMXX) (.16%)

Her HSA at myHSAinvestments
100% ($1,813) Vanguard 500 Index (VFIAX) (.04%)

So, a couple notes, yes I know we are behind, but working on starting well now and can't keep kicking ourselves for not saving more in our past. Trying to tighten up for our future. I will make sure we both max out our HSAs this year and our Roth IRAs, and then when our EF eventually gets 3 months saved will transition our Roth IRAs to 100% VTSAX, but keeping it in VMMXX currently as it is part of our EF currently.

Heres the rub, we currently are contributing 5% each into our 403b which is Roth, and then we get a 5% Employer Contribution which is traditional. After reading the wiki and enough posts from KlangFool it seems like we should just be doing that 5% in traditional and use the extra savings in the paycheck to speed up the savings on the Efund. Is there anything I'm missing or should I just stay the course and keep doing our 5% 403b contribution towards the Roth?
Combined current assets in all of your portfolios: $46,885
Combined student loan debt: $-47,500

$-615 net worth when just looking at your debt vs. your portfolio

We would get very aggressive and attack that student loan debt ASAP as priority number one. I had the equivalent of $42K in today's dollars in student loan debt back in 1985 and attacked it aggressively between the age of 24-29 to retire it. Then I turned everything that was going towards the debt to go towards investing.

You didn't mention your household income, but we would turn off all investments for a year to 18 months and wipe out that debt as fast as you can. You won't miss out on much at all investing wise in such a short time frame (especially since you already have $47K in your portfolio) if you direct everything at the debt, retire it, then go back to investing with the money you were throwing at the debt.

CyclingDuo
"Everywhere is within walking distance if you have the time." ~ Steven Wright

k3vb0t
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Re: Coming to the realization that Traditional is probably wiser

Post by k3vb0t » Sun Sep 22, 2019 7:41 am

It’s hard to beat the rate of return on paying down that debt. I’d make a choice on the traditional vs Roth, contribute enough to get any match available, and throw the rest at the debt.

Once the debt is paid I would take the monthly payments I had been throwing at it and build an actual emergency fund. Then get back to maxing out retirement accounts.

Psychologically you might feel worse if you contribute into a retirement account and we have a serious market downturn while your debt stays the same. Some might call this a form of market timing, but behavioral mistakes happen all the time and a downturn could make you regret not paying down the debt.

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Re: Coming to the realization that Traditional is probably wiser

Post by KlangFool » Sun Sep 22, 2019 7:53 am

k3vb0t wrote:
Sun Sep 22, 2019 7:41 am

Psychologically you might feel worse if you contribute into a retirement account and we have a serious market downturn while your debt stays the same. Some might call this a form of market timing, but behavioral mistakes happen all the time and a downturn could make you regret not paying down the debt.
Who says that OP must invest the money in the 403B account? He could take the tax savings and put the money into money market fund inside the 403B.

If we hit a recession and OP is unemployed, he could take the money out of the 403B and pay the 10% tax penalty and still save taxes.

How does paying 28+% taxes help OP? It does not.

28+% is bigger than 5+%.

Klangfool

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dratkinson
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Re: Coming to the realization that Traditional is probably wiser

Post by dratkinson » Sun Sep 22, 2019 5:51 pm

cherijoh wrote:
Sat Sep 21, 2019 6:38 pm
retiredjg wrote:
Sat Sep 21, 2019 3:20 pm
dratkinson wrote:
Sat Sep 21, 2019 3:13 pm
--The benefit of a Roth is so great that high-income folks pay more in taxes to use the "Backdoor Roth" and "Mega Backdoor Roth" techniques. You've in a much lower tax bracket so your tax cost is much lower to get into your Roths.
You did say your opinion was skewed, but this one is hardly fair. :happy

Those high income folks are in a different position - their money is going to be taxed no matter what they do with it because they have already used up their tax-deferred options. That is not the case for this poster...who still has a choice between tax-deferred or Roth.
+1

I'm with retiredjg. The examples cited by dratkinson have nothing to do with how people allocate their regular contributions to their workplace retirement plans (i.e., traditional vs. Roth). Sounds like it is time for him/her to read (or reread) the Boglehead Wiki.

Not that many people qualify for a deductible contribution to a traditional IRA unless they (a) have no workplace plan or (b) are below specified income limits. A Roth IRA is a better option than leaving it as a non-deductible contribution to a traditional IRA no matter what your tax bracket because earnings are tax-free upon withdrawal for a Roth IRA. (Backdoor Roth is simply a non-deductible traditional IRA contribution which has been converted to Roth).

The other alternative to a Roth IRA* is of course taxable investing and paying taxes on dividends and cap gains as they are distributed (i.e., no postponement of taxes). [* If you have other assets in a traditional IRAs, you might be better off in taxable because of the prorata rules governing taxation of Roth conversions].

Mega backdoor Roth is additional tax-sheltered space available to employees whose employers have their retirement plans set up to allow it. The choice here is between converting to a Roth or leaving it as after-tax contributions. Just like for IRAs, Roth wins out over "after tax". There is no option for extra pre-tax contributions. Again, the other alternative is taxable investing in a brokerage account.

Lemons into lemonade?

Your basic points are conceded. But I believe there is something else going on. What?


It has been a while since I read the Wiki topics, but I do believe I remember the gist of them. You take an unhappy situation in tax-deferred investments (non-deductible contributions, growth taxed as ordinary income upon withdrawal, LTCG/QDI benefits lost, RMDs which raise AGI) and turn it into a better situation in tax-free investments (untaxed growth, LTCG/QDI benefits protected/improved, and no unneeded RMDs which raise AGI).


(1) I do understand the taxable investing option when faced with non-deductible contributions. In my case, it takes every new dollar I have to rebalance into taxable bonds (munis) in an attempt to keep my AA in balance with the market run up since 2009. So my choices would be (assuming I were still employed and faced with non-deductible tax-deferred contributions)....
--Contribute to a non-deductible traditional retirement account, and be taxed again upon withdrawal. Or...
--Contribute to a taxable account (my munis) and withdraw tax-free dividends. (Advantage: taxable.)


(2) The Roth option improves upon the taxable option due to tax-free growth/withdrawals (equities + bonds), protection of LTCG/QDI benefits, and the ability to not raise AGI if withdrawals are needed.


(3) I'm familiar with the Wiki topic that says we should mentally reduce our AA in tax-deferred holdings to account for the amount that will be eventually removed as tax payments.


(4) Give above, I'm familiar with the forum advice that we should skew the holding of each to...
--Tax-deferred. Skew toward bonds, because tax treatment is no worse than taxable when withdrawn.
--Tax-free. Skew toward equities, to protect LTCG/QDI and maximize tax-free growth/withdrawals.


One member has a signature block that nicely encapsulates above points with the ~saying, "A dollar in tax-free is worth more than a dollar in taxable, a dollar in taxable is worth more than a dollar in tax-deferred." Hence the advice that the OP's (original poster, original post) retired self would favor the Roth option.


(5) I'm also familiar with posters being advised to select (all else being equal) the job offer that allows after-tax contributions and immediate rollover to a (mega backdoor) Roth.



Bottom line. Given the above investment preference hierarchy:
(least preferred) Tax-deferred -- Taxable -- Tax-free (most preferred)

I believe, when folks are advised (1) to contribute to a non-deductible tax-deferred account so they can rollover into a Roth and so leap-frog over tax-efficient taxable investments, or (2) to choose among jobs so they have available the mega backdoor Roth option, ...then the spirit of the argument has moved beyond simply "turning lemons into lemonade". :)

Why? I believe when folks actively pursue an outcome---backdoor or mega backdoor Roth, skipping over the intermediate taxable step---then the Roth is NOT a consolation prize, it is the primary goal. I believe it is only mischaracterized as turning lemons into lemonade.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

cherijoh
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Location: Charlotte NC

Re: Coming to the realization that Traditional is probably wiser

Post by cherijoh » Mon Sep 23, 2019 9:13 am

dratkinson wrote:
Sun Sep 22, 2019 5:51 pm
I do understand the taxable investing option when faced with non-deductible contributions. In my case, it takes every new dollar I have to rebalance into taxable bonds (munis) in an attempt to keep my AA in balance with the market run up since 2009. So my choices would be (assuming I were still employed and faced with non-deductible tax-deferred contributions)....
--Contribute to a non-deductible traditional retirement account, and be taxed again upon withdrawal. Or...
--Contribute to a taxable account (my munis) and withdraw tax-free dividends. (Advantage: taxable.)
I'm not sure what your point was with this if you really intended to say "non-deductible" traditional retirement account, since I already agreed that taxable beats non-deductible.

If you meant traditional pre-tax, are you saying that muni-bonds are always better than bonds in traditional? They may be for you, but I don't think it is so universally. What is the break-even marginal tax rate now for muni funds? I think it used to be 28% (unless you were in a high tax state with a single state muni). My highest marginal tax bracket while working was 25%. By investing in traditional, I was able to get tax-sheltering for what is now predominantly bonds, while taking the cash flow that would otherwise be going towards taxes and investing it in stock index funds in taxable. It isn't an either or proposition. It is what is the best for you and that may be different depending on your circumstances.

That is the conundrum of traditional vs. Roth. The people who benefit the least from the tax avoidance of Traditional, benefit the most from its impact on cash flow and the ability to set aside money for retirement NOW to allow for maximum growth. The people who can max out Roth (and don't need to worry about where their retirement savings are coming from) are the ones likely to get the most benefit from traditional and are also the most likely to have a window to do inexpensive Roth conversions in the future due to early retirement and/or postponement in taking SS.

dratkinson wrote:
Sun Sep 22, 2019 5:51 pm
I believe, when folks are advised (1) to contribute to a non-deductible tax-deferred account so they can rollover into a Roth and so leap-frog over tax-efficient taxable investments, or (2) to choose among jobs so they have available the mega backdoor Roth option, ...then the spirit of the argument has moved beyond simply "turning lemons into lemonade". :)

Why? I believe when folks actively pursue an outcome---backdoor or mega backdoor Roth, skipping over the intermediate taxable step---then the Roth is NOT a consolation prize, it is the primary goal. I believe it is only mischaracterized as turning lemons into lemonade.
I never said Roth was the consolation prize, I was simply pointing out that your statement that
The benefit of a Roth is so great that high-income folks pay more in taxes to use the "Backdoor Roth" and "Mega Backdoor Roth" techniques.
was misleading because you left out the fact that these same people were also taking full advantage of traditional. I pesonally think investors should have some of both. And that each individual needs to run the numbers for themselves.

Now that I'm retired :annoyed, my former megacorp employer implemented in-service Roth conversions. I think that offers te best of both worlds. An employee could have the advantage of the tax-deferral now and then choose when they wanted to switch to tax-free growth. You could use a bigger-than-expected bonus to convert a chunk of traditional into Roth. Or you could leverage a dip into a lower marginal tax bracket (e.g., spouse temporarily jobless or becoming a SAH parent) or a dip in the stock market to convert to Roth at bargain prices.

During the Great Recession, I leveraged both a lower marginal tax bracket (15% vs. 25%) and a tanking stock market to greatly improve my ratio of Roth to traditional at very little cost (far less than the taxes I had deferred). I also leveraged the dip in stock prices last December to do several Roth conversions up to the top of the 22% marginal tax bracket which has further boosted my % of holdings in Roth.

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Re: Coming to the realization that Traditional is probably wiser

Post by deltaneutral83 » Mon Sep 23, 2019 10:26 am

KlangFool wrote:
Sun Sep 22, 2019 7:53 am
k3vb0t wrote:
Sun Sep 22, 2019 7:41 am

Psychologically you might feel worse if you contribute into a retirement account and we have a serious market downturn while your debt stays the same. Some might call this a form of market timing, but behavioral mistakes happen all the time and a downturn could make you regret not paying down the debt.
Who says that OP must invest the money in the 403B account? He could take the tax savings and put the money into money market fund inside the 403B.

If we hit a recession and OP is unemployed, he could take the money out of the 403B and pay the 10% tax penalty and still save taxes.

How does paying 28+% taxes help OP? It does not.

28+% is bigger than 5+%.

Klangfool
Klang, I do no not understand anything you said here. Investing to the match (tax issues aside) then paying the rest on student loan debt at 5.8% has to make sense?

KlangFool
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Re: Coming to the realization that Traditional is probably wiser

Post by KlangFool » Mon Sep 23, 2019 10:31 am

deltaneutral83 wrote:
Mon Sep 23, 2019 10:26 am
KlangFool wrote:
Sun Sep 22, 2019 7:53 am
k3vb0t wrote:
Sun Sep 22, 2019 7:41 am

Psychologically you might feel worse if you contribute into a retirement account and we have a serious market downturn while your debt stays the same. Some might call this a form of market timing, but behavioral mistakes happen all the time and a downturn could make you regret not paying down the debt.
Who says that OP must invest the money in the 403B account? He could take the tax savings and put the money into money market fund inside the 403B.

If we hit a recession and OP is unemployed, he could take the money out of the 403B and pay the 10% tax penalty and still save taxes.

How does paying 28+% taxes help OP? It does not.

28+% is bigger than 5+%.

Klangfool
Klang, I do no not understand anything you said here. Investing to the match (tax issues aside) then paying the rest on student loan debt at 5.8% has to make sense?
deltaneutral83,

<<paying the rest on student loan debt at 5.8% has to make sense?>>

How does paying 28+% taxes in order to pay off a 5.8% debt makes any senses?

OP should contribute to the max that he can afford to the tax-deferred accounts and use the tax savings to pay off the 5.8% debt.

Let's assume that OP can save 10K after tax.

So, the choice is

A) Contribute 10K to Roth 403B and Roth IRA and pay 28.8% ($2,880) tax.

or,

B) Contribute 10K to Trad. 403B and use the tax savings of $2,880 to pay off the 5.8% student loan.

Please tell me why (A) is better than (B)?

In (A), the net worth increased by $10,000. In (B), the net worth increased by $12,880.

KlangFool

deltaneutral83
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Re: Coming to the realization that Traditional is probably wiser

Post by deltaneutral83 » Mon Sep 23, 2019 10:44 am

KlangFool wrote:
Mon Sep 23, 2019 10:31 am

deltaneutral83,

<<paying the rest on student loan debt at 5.8% has to make sense?>>

How does paying 28+% taxes in order to pay off a 5.8% debt makes any senses?

OP should contribute to the max that he can afford to the tax-deferred accounts and use the tax savings to pay off the 5.8% debt.

Let's assume that OP can save 10K after tax.

So, the choice is

A) Contribute 10K to Roth 403B and Roth IRA and pay 28.8% ($2,880) tax.

or,

B) Contribute 10K to Trad. 403B and use the tax savings of $2,880 to pay off the 5.8% student loan.

Please tell me why (A) is better than (B)?

KlangFool
I see what you were trying to convey, the age old "which tax bracket will I be in in in the future." OP will pay taxes now or later, it's not quite "why does paying 28% to pay down 5.8% make sense." That's a little Ramsey-esque :D . State is state, that's not going to change much in 20/30/40 years? OP is 22% federal. How does one know OP won't be at or higher tax bracket for the next 35 consecutive years? Taking a hit at 22% today isn't the end of the world unless you know with somewhat certainty you'll be in the 12% sometime in the future. Not only that, these tax laws sunset in 2025 which is the only think known as of today (staying within board guidelines). Assuming we've even assessed the OP to be one who is capable of games with debt (and I am too) I don't think avoiding 22% in taxes to invest now to possibly get to a lower tax bracket in the future keeping a 5.8% debt presently on the books is a game tilted in my favor. Just my $.02

KlangFool
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Re: Coming to the realization that Traditional is probably wiser

Post by KlangFool » Mon Sep 23, 2019 11:03 am

deltaneutral83 wrote:
Mon Sep 23, 2019 10:44 am
KlangFool wrote:
Mon Sep 23, 2019 10:31 am

deltaneutral83,

<<paying the rest on student loan debt at 5.8% has to make sense?>>

How does paying 28+% taxes in order to pay off a 5.8% debt makes any senses?

OP should contribute to the max that he can afford to the tax-deferred accounts and use the tax savings to pay off the 5.8% debt.

Let's assume that OP can save 10K after tax.

So, the choice is

A) Contribute 10K to Roth 403B and Roth IRA and pay 28.8% ($2,880) tax.

or,

B) Contribute 10K to Trad. 403B and use the tax savings of $2,880 to pay off the 5.8% student loan.

Please tell me why (A) is better than (B)?

KlangFool
I see what you were trying to convey, the age old "which tax bracket will I be in in in the future." OP will pay taxes now or later, it's not quite "why does paying 28% to pay down 5.8% make sense." That's a little Ramsey-esque :D . State is state, that's not going to change much in 20/30/40 years? OP is 22% federal. How does one know OP won't be at or higher tax bracket for the next 35 consecutive years? Taking a hit at 22% today isn't the end of the world unless you know with somewhat certainty you'll be in the 12% sometime in the future. Not only that, these tax laws sunset in 2025 which is the only think known as of today (staying within board guidelines). Assuming we've even assessed the OP to be one who is capable of games with debt (and I am too) I don't think avoiding 22% in taxes to invest now to possibly get to a lower tax bracket in the future keeping a 5.8% debt presently on the books is a game tilted in my favor. Just my $.02
deltaneutral83,

<<How does one know OP won't be at or higher tax bracket for the next 35 consecutive years?>>

This is a good thing. How do you know that OP will not be unemployed next year while we are in a recession? That is riskier and more dangerous to OP.

In that case, is (A) or (B) better? OP cannot get the money back from IRS with (A).

Money in your own pocket is safer than assuming you will be fully-employed continuously for the next 20 to 30 years.

<<OP will pay taxes now or later,>>

I disagreed. I believe in paying fewer taxes now and in the future. OP's net worth is close to zero. The chances of paying a lot more taxes in the future are slim to none. And, if it happened, it will be a fabulous outcome for OP. The greater danger is in surviving the next recession first.

KlangFool

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illinin09
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Re: Coming to the realization that Traditional is probably wiser

Post by illinin09 » Mon Sep 23, 2019 11:10 am

So the student debt is my wifes and we have looked at refinancing recently. I think we can get refi to get it down to 4.5ish% soon.

Say we get it down to 4.5%, with the 4.5%, and interest being tax-deductible, every calculator I looked at said that over the long term its better to invest and keep paying off the loan, vs solely paying off the loan and getting started with the investing a few years later.

https://studentloanhero.com/calculators ... alculator/

Even on this calculator if we didnt refinance, and we assumed a conservative 3% rate of return on our investment, If we invested the $1500 per month instead, over 30 yr we will have earned an extra $57,539 over the long term.

If I tweak the inputs and assume we do get down to 4.5% and assumed a 5% return, If we invested the $1500 per month instead, over 30 yr we will have earned an extra $130,301 over the long term.

Are the calculators I am looking at flawed or is it just the general forum wisdom that the psychological reasons outweigh the math when it comes to carrying student debt, similar to Dave Ramsey?

KlangFool
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Re: Coming to the realization that Traditional is probably wiser

Post by KlangFool » Mon Sep 23, 2019 11:17 am

illinin09 wrote:
Mon Sep 23, 2019 11:10 am
So the student debt is my wifes and we have looked at refinancing recently. I think we can get refi to get it down to 4.5ish% soon.

Say we get it down to 4.5%, with the 4.5%, and interest being tax-deductible, every calculator I looked at said that over the long term its better to invest and keep paying off the loan, vs solely paying off the loan and getting started with the investing a few years later.

https://studentloanhero.com/calculators ... alculator/

Even on this calculator if we didnt refinance, and we assumed a conservative 3% rate of return on our investment, If we invested the $1500 per month instead, over 30 yr we will have earned an extra $57,539 over the long term.

If I tweak the inputs and assume we do get down to 4.5% and assumed a 5% return, If we invested the $1500 per month instead, over 30 yr we will have earned an extra $130,301 over the long term.

Are the calculators I am looking at flawed or is it just the general forum wisdom that the psychological reasons outweigh the math when it comes to carrying student debt, similar to Dave Ramsey?
OP,

You need to separate this into two questions:

1) How much should I tax-deferred by contributing to Trad. 403B?

2) How much should I invest?

They are two separate questions. For example, you contribute to Trad. 403B and do not invest the money. You just put the money into money market fund and treat it as a tier 2 emergency fund.

For (1), does it makes sense to pay 28.8% taxes in order to pre-pay the student loan?

KlangFool

deltaneutral83
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Re: Coming to the realization that Traditional is probably wiser

Post by deltaneutral83 » Mon Sep 23, 2019 12:53 pm

KlangFool wrote:
Mon Sep 23, 2019 11:03 am

deltaneutral83,

<<How does one know OP won't be at or higher tax bracket for the next 35 consecutive years?>>

This is a good thing. How do you know that OP will not be unemployed next year while we are in a recession? That is riskier and more dangerous to OP.

In that case, is (A) or (B) better? OP cannot get the money back from IRS with (A).

Money in your own pocket is safer than assuming you will be fully-employed continuously for the next 20 to 30 years.

<<OP will pay taxes now or later,>>

I disagreed. I believe in paying fewer taxes now and in the future. OP's net worth is close to zero. The chances of paying a lot more taxes in the future are slim to none. And, if it happened, it will be a fabulous outcome for OP. The greater danger is in surviving the next recession first.

KlangFool
Your sentiment is well noted but the "Pay 28% to save 5.8%" claim is misdirected at best. One with this belief needed to just say (as you later did) that you believe in deferring taxes in the future rather than create a false narrative that my belief equates to using money that's taxed at 28% in a vacuum to pay down 5.8% debt; because that is incorrect.

I was honestly shocked that someone as conservative as your posts indicate would play games with debt but I see what you are suggesting. You mentioned OP's net worth, he is 27 years of age and we can only assume his income will climb in the face of disability/unemployment. I am fully aware of your strategy of planning for 24 months of unemployment, the market getting halved, etc etc. I think what I would rather do is just hustle to get 18-24 months in cash as quickly as possible and then get back to basics of getting the match on retirement account(s) and then knocking out debt accruing 5.8%. I guess what I am having trouble seeing is someone as extremely conservative but yet not into piling up cash, or am I missing something ? If 24 months cash doesn't cure your ills, then my point is that you couldn't plan for it in the first place so why bother being concerned about it.

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Re: Coming to the realization that Traditional is probably wiser

Post by GlacierRunner » Mon Sep 23, 2019 12:58 pm

lakpr wrote:
Sun Sep 22, 2019 6:47 am
$78,950 taxable income + $24,400 standard deduction = $103,350 gross income

You can defer $16k each to Traditional 401k/403b which drops you to $103k Adjusted Gross Income and thus to the 12% bracket. Rest $3k each to Roth 401k/Roth 403b

It might be even less to Traditional 403b/401k if you have medical insurance premiums taken off your pay checks on a pretax basis.
Yes. This. It was our approach until we made too much money to stay below the 25% tax bracket. It took us a while to max all of the various accounts, but we were able to balance several goals at the same time.

I would recommend that you create a spreadsheet with all of your income for the year. Note the Gross, Taxable, and Net amounts. Make a column for the amount already paid in taxes. Then create a mock tax return which will consider any additional income such as dividends and interest (can be done within the spreadsheet). Then you can play with various numbers and see what makes the most sense to you and your situation. A paycheck calculator might be helpful in running the various numbers.

KlangFool
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Re: Coming to the realization that Traditional is probably wiser

Post by KlangFool » Mon Sep 23, 2019 1:05 pm

deltaneutral83 wrote:
Mon Sep 23, 2019 12:53 pm

I think what I would rather do is just hustle to get 18-24 months in cash as quickly as possible and then get back to basics of getting the match on retirement account(s)
deltaneutral83,

A) Piling cash into the retirement account by saving 28.8% taxes.

B) Piling cash in the taxable by paying 28.8% taxes.

Which one will reach the 18 to 24 months goal faster? (A) or (B).

Which one is more conservative? If the person is unemployed over the next few years, (A) or (B) is safer?

Money is fungible. When a person is young, the person has less money to survive short-term employment in a recession. He/she should build up the cash as soon as possible.

KlangFool

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Re: Coming to the realization that Traditional is probably wiser

Post by ruralavalon » Mon Sep 23, 2019 1:25 pm

illinin09 wrote:
Sat Sep 21, 2019 10:41 am
Debt: 47,500 in student loans at 5.81%

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 6.8% State

State of Residence: MN

Age: Both 27

. . . . . .

Heres the rub, we currently are contributing 5% each into our 403b which is Roth, and then we get a 5% Employer Contribution which is traditional. After reading the wiki and enough posts from KlangFool it seems like we should just be doing that 5% in traditional and use the extra savings in the paycheck to speed up the savings on the Efund. Is there anything I'm missing or should I just stay the course and keep doing our 5% 403b contribution towards the Roth?
illinin09 wrote:
Sun Sep 22, 2019 6:40 am
. . . We make roughly combined gross of $135k before any deductions. . . .
illinin09 wrote:
Mon Sep 23, 2019 11:10 am
So the student debt is my wifes and we have looked at refinancing recently. I think we can get refi to get it down to 4.5ish% soon.
. . . . .

Additional information.
Some additional information will be helpful.

Do you get an employer contribution even if you don't contribute, or is it an employer match which you get only if you contribute?

About how much (in dollars) do you believe that you may be able to contribute annually to investing (total, all accounts)?

What is your profession or occupation?

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

About how many months of basic living expenses are currently in your emergency fund?

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.



Proiority.
In general I suggest you contribute enough to your 403bs to get the full employer match. Any money available for investing beyond that should be used to reduce the principal on the 5.81% student debt in my opinion. Paying off 5.81% debt is a good "investment", with a guaranteed return higher than any other investment you could make. (The highest guaranteed return you can get elsewhere is around 2%.)

Even if you can get the rate down to 4.5% my suggestion is the same -- contriubute enough to the 403bs to get the employer match with the rest to paying off the student debt.

Here is a general account funding priority that usually works well for many people:
1) Contribute to the work-based plans (401k, 403b, 457, SIMPLE IRA, TSP, etc.) enough to get the full employer match (the match is like free money, your best possible investment);
2) Pay off high interest debt (a guaranteed high return, the next best thing to free money),
3) Contribute to a Health Savings Account (HSA) if available (unlike many other tax deductions, there are no income restrictions to contribute to an HSA)
4) Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique), depending on eligibility and personal circumstances;
5) Contribute the remainder of the maximum employee contribution to the work-based accounts; and
6) Contribute to a taxable investing account.

"If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA." Please see the wiki article "Prioritizing investments".



traditional versus Roth contributions.
Unless you are eligible for pensions in addition to Social Security, my suggestion is traditional contributions to your 403b plans. For most people traditional 403b 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 contributions will probably be better.

In addition when you withdraw from your 403b in retirement, the income is not all taxed at the 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)." "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

Will you be eligible for a substantial pension? A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

What is your profession or occupation?

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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Re: Coming to the realization that Traditional is probably wiser

Post by jakehefty17 » Mon Sep 23, 2019 3:26 pm

KlangFool wrote:
Sat Sep 21, 2019 1:33 pm
OP,

You are paying 28.8% taxes to contribute to Roth 403B and Roth IRAs. And, paying 5+% interest on your student loan at the same time. The difference is 30+%. Why do that?

You could contribute to Trad. 403B and use the tax savings to pay the student loan instead.

KlangFool
+1
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski

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dratkinson
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Re: Coming to the realization that Traditional is probably wiser

Post by dratkinson » Tue Sep 24, 2019 4:33 pm

GlacierRunner wrote:
Mon Sep 23, 2019 12:58 pm
lakpr wrote:
Sun Sep 22, 2019 6:47 am
$78,950 taxable income + $24,400 standard deduction = $103,350 gross income

You can defer $16k each to Traditional 401k/403b which drops you to $103k Adjusted Gross Income and thus to the 12% bracket. Rest $3k each to Roth 401k/Roth 403b

It might be even less to Traditional 403b/401k if you have medical insurance premiums taken off your pay checks on a pretax basis.
Yes. This. It was our approach until we made too much money to stay below the 25% tax bracket. It took us a while to max all of the various accounts, but we were able to balance several goals at the same time.

I would recommend that you create a spreadsheet* with all of your income for the year. Note the Gross, Taxable, and Net amounts. Make a column for the amount already paid in taxes. Then create a mock tax return which will consider any additional income such as dividends and interest (can be done within the spreadsheet). Then you can play with various numbers and see what makes the most sense to you and your situation. A paycheck calculator might be helpful in running the various numbers.
Excel1040.com. I've often used this spreadsheet tool to play what-ifs with my federal tax return. It's relatively quick to populate and modify. (Most recent investigation was effects of new AMT changes.)
--Enter your last tax return data to create a known baseline of your last fed tax return.
--Modify known baseline with your intended changes.

Excel1040 then handles all of the tax code calculations (earned income tax credit, AMT exposure, SS taxation,...) for you. (It doesn't handle things not in the tax code: health care subsidy, Medicare surcharge,....)

* Any extra spreadsheet work you want to do can be done on an added sheet. This will keep all of your what-if work together in one place: intended changes and associated tax consequence.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

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Wiggums
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Re: Coming to the realization that Traditional is probably wiser

Post by Wiggums » Tue Sep 24, 2019 6:00 pm

jakehefty17 wrote:
Mon Sep 23, 2019 3:26 pm
KlangFool wrote:
Sat Sep 21, 2019 1:33 pm
OP,

You are paying 28.8% taxes to contribute to Roth 403B and Roth IRAs. And, paying 5+% interest on your student loan at the same time. The difference is 30+%. Why do that?

You could contribute to Trad. 403B and use the tax savings to pay the student loan instead.

KlangFool
+1
I agree.

Also, think you should get rid of the student loan too.

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celia
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Re: Coming to the realization that Traditional is probably wiser

Post by celia » Tue Sep 24, 2019 7:01 pm

KlangFool wrote:
Sat Sep 21, 2019 1:33 pm
You could contribute to Trad. 403B and use the tax savings to pay the student loan instead.
What tax savings? When you contribute to a Traditional IRA or 403B, you are DEFERRING the taxes on that money until later. At withdrawal time, you may pay taxes at a higher tax rate and on a larger amount (since the account value will have grown) compared to now.

When you are early in your careers, the conventional recommendation is to contribute to Roth while your marginal tax rate is low. As you gain more work experience, your salary will tend to go up. When your marginal tax rate is higher for federal income taxes, then consider doing contributions to Traditional (tax-deferred) accounts instead.

We are currently at historically low tax rates which will change in the future. So take advantage of them now by paying some taxes to put more money into your Roth’s.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

KlangFool
Posts: 14194
Joined: Sat Oct 11, 2008 12:35 pm

Re: Coming to the realization that Traditional is probably wiser

Post by KlangFool » Tue Sep 24, 2019 7:15 pm

celia wrote:
Tue Sep 24, 2019 7:01 pm
KlangFool wrote:
Sat Sep 21, 2019 1:33 pm
You could contribute to Trad. 403B and use the tax savings to pay the student loan instead.
What tax savings? When you contribute to a Traditional IRA or 403B, you are DEFERRING the taxes on that money until later. At withdrawal time, you may pay taxes at a higher tax rate and on a larger amount (since the account value will have grown) compared to now.
celia,

If that happened, OP is doing very well at retirement. And, OP had been continuously fully-employed 30+ years until retirement. That is not a problem.

You have to survive in order to succeed. OP has to survive the next few recessions first before he is lucky enough to have this problem.

You had been very lucky to have this problem. Not all of us can count on this kind of luck.

KlangFool

CBL
Posts: 1
Joined: Mon Sep 16, 2019 3:53 pm

Re: Coming to the realization that Traditional is probably wiser

Post by CBL » Tue Sep 24, 2019 9:37 pm

OP,

We just refinanced $52k of my wife’s pharmacy debt down from a 4.7% fixed rate to a 2.59% variable rate for 5 years. May be worthwhile to explore refinancing and pay the same payment per month with more going towards principal.

mptfan
Posts: 5645
Joined: Mon Mar 05, 2007 9:58 am

Re: Coming to the realization that Traditional is probably wiser

Post by mptfan » Tue Sep 24, 2019 10:25 pm

KlangFool wrote:
Tue Sep 24, 2019 7:15 pm
You have to survive in order to succeed. OP has to survive the next few recessions first before he is lucky enough to have this problem.
I agree with KlangFool.

User avatar
celia
Posts: 9858
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Coming to the realization that Traditional is probably wiser

Post by celia » Fri Sep 27, 2019 8:31 am

KlangFool wrote:
Tue Sep 24, 2019 7:15 pm
celia wrote:
Tue Sep 24, 2019 7:01 pm
KlangFool wrote:
Sat Sep 21, 2019 1:33 pm
You could contribute to Trad. 403B and use the tax savings to pay the student loan instead.
What tax savings? When you contribute to a Traditional IRA or 403B, you are DEFERRING the taxes on that money until later. At withdrawal time, you may pay taxes at a higher tax rate and on a larger amount (since the account value will have grown) compared to now.
celia,

If that happened, OP is doing very well at retirement. And, OP had been continuously fully-employed 30+ years until retirement. That is not a problem.

You have to survive in order to succeed. OP has to survive the next few recessions first before he is lucky enough to have this problem.

You had been very lucky to have this problem. Not all of us can count on this kind of luck.

KlangFool
We have been no luckier than anyone else. DH and I were each laid off twice. One time we were both out of work at the same time for a year, had a mortgage, and kids in parochial schools. There were many years we couldn’t afford to put anything into retirement plans. But we each ended up with pensions that made retirement more secure. In addition, our expenses dropped dramatically before we retired (mortgage paid off, kids finished college, don’t need to save any MORE for retirement.

But once Roths started, we took advantage of them instead of Traditional. You would probably think it isn’t very smart to contribute to Roth when in your highest tax bracket. But even that was part of the plan to shrink the TIRAs in favor of growing Roths. I’m glad we did that and would do it again if working.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

KlangFool
Posts: 14194
Joined: Sat Oct 11, 2008 12:35 pm

Re: Coming to the realization that Traditional is probably wiser

Post by KlangFool » Fri Sep 27, 2019 8:44 am

celia wrote:
Fri Sep 27, 2019 8:31 am
KlangFool wrote:
Tue Sep 24, 2019 7:15 pm
celia wrote:
Tue Sep 24, 2019 7:01 pm
KlangFool wrote:
Sat Sep 21, 2019 1:33 pm
You could contribute to Trad. 403B and use the tax savings to pay the student loan instead.
What tax savings? When you contribute to a Traditional IRA or 403B, you are DEFERRING the taxes on that money until later. At withdrawal time, you may pay taxes at a higher tax rate and on a larger amount (since the account value will have grown) compared to now.
celia,

If that happened, OP is doing very well at retirement. And, OP had been continuously fully-employed 30+ years until retirement. That is not a problem.

You have to survive in order to succeed. OP has to survive the next few recessions first before he is lucky enough to have this problem.

You had been very lucky to have this problem. Not all of us can count on this kind of luck.

KlangFool
We have been no luckier than anyone else. DH and I were each laid off twice. One time we were both out of work at the same time for a year, had a mortgage, and kids in parochial schools. There were many years we couldn’t afford to put anything into retirement plans. But we each ended up with pensions that made retirement more secure. In addition, our expenses dropped dramatically before we retired (mortgage paid off, kids finished college, don’t need to save any MORE for retirement.

But once Roths started, we took advantage of them instead of Traditional. You would probably think it isn’t very smart to contribute to Roth when in your highest tax bracket. But even that was part of the plan to shrink the TIRAs in favor of growing Roths. I’m glad we did that and would do it again if working.
celia,

<<DH and I were each laid off twice. One time we were both out of work at the same time for a year, had a mortgage, and kids in parochial schools. >>

You survived the short-term unemployment financially with a pension. Many of my peers did not.

I was unemployed for more than one year while my son started college and my daughter started college the following year. And, I had cataract eye surgeries that year. I know that I was lucky. If the unemployment lasted much longer, it would have been disastrous for me. This is for a person with one year of the emergency fund.

KlangFool

GlacierRunner
Posts: 53
Joined: Mon Apr 16, 2018 5:29 pm

Re: Coming to the realization that Traditional is probably wiser

Post by GlacierRunner » Thu Oct 03, 2019 1:09 pm

dratkinson wrote:
Tue Sep 24, 2019 4:33 pm
GlacierRunner wrote:
Mon Sep 23, 2019 12:58 pm
lakpr wrote:
Sun Sep 22, 2019 6:47 am
$78,950 taxable income + $24,400 standard deduction = $103,350 gross income

You can defer $16k each to Traditional 401k/403b which drops you to $103k Adjusted Gross Income and thus to the 12% bracket. Rest $3k each to Roth 401k/Roth 403b

It might be even less to Traditional 403b/401k if you have medical insurance premiums taken off your pay checks on a pretax basis.
Yes. This. It was our approach until we made too much money to stay below the 25% tax bracket. It took us a while to max all of the various accounts, but we were able to balance several goals at the same time.

I would recommend that you create a spreadsheet* with all of your income for the year. Note the Gross, Taxable, and Net amounts. Make a column for the amount already paid in taxes. Then create a mock tax return which will consider any additional income such as dividends and interest (can be done within the spreadsheet). Then you can play with various numbers and see what makes the most sense to you and your situation. A paycheck calculator might be helpful in running the various numbers.
Excel1040.com. I've often used this spreadsheet tool to play what-ifs with my federal tax return. It's relatively quick to populate and modify. (Most recent investigation was effects of new AMT changes.)
--Enter your last tax return data to create a known baseline of your last fed tax return.
--Modify known baseline with your intended changes.

Excel1040 then handles all of the tax code calculations (earned income tax credit, AMT exposure, SS taxation,...) for you. (It doesn't handle things not in the tax code: health care subsidy, Medicare surcharge,....)

* Any extra spreadsheet work you want to do can be done on an added sheet. This will keep all of your what-if work together in one place: intended changes and associated tax consequence.
Thank you for this recommendation. It doesn't fully address or break out all the information I want to keep "at a glance" so I'll keep the spreadsheet I've created along with the link to this great resource.

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