Traditional 401k and Roth 401k Combination?

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Topic Author
schildkrote
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Traditional 401k and Roth 401k Combination?

Post by schildkrote » Sat May 23, 2020 7:09 pm

Hey Bogleheads,

My plan has always been to build a tax deferred account as well as a Roth account so I have two areas to pull from in retirement and give me flexibility to stay in lower tax brackets. However, I've been looking at my earnings for this year and it looks like I'll be able to stay in a lower tax bracket pretty easily (thanks corona virus). I've already maxed my Roth IRA this year and will be able to max my 401k as well. I have been investing in a traditional 401k, but have been considering contributing the rest to a Roth 401k for this year since my employer offers both and I can stay in the lower tax bracket.

Two questions:

1.) Does this make sense to you guys for my situation?

2.) Are there any drawbacks to using a combination of both 401k's that I may not be aware of?

Thanks

retired@50
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Re: Traditional 401k and Roth 401k Combination?

Post by retired@50 » Sat May 23, 2020 7:21 pm

Traditional 401k makes sense for many investors. Read this wiki page to see where you fall.

See link. https://www.bogleheads.org/wiki/Traditional_versus_Roth

Regards,
This is one person's opinion. Nothing more.

aristotelian
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Re: Traditional 401k and Roth 401k Combination?

Post by aristotelian » Sat May 23, 2020 7:41 pm

Depends. What do you expect your marginal tax bracket in retirement to be based on your current portfolio? What is your current tax bracket? If you are going from 35% to 32% and retirement is planned to be 12%, then traditional would still be better. If you are going from 22% to 12% then not so much.

Topic Author
schildkrote
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Re: Traditional 401k and Roth 401k Combination?

Post by schildkrote » Sat May 23, 2020 7:47 pm

Thank you, great link retiredat50 although I don't quite understand all of it and will have to continue to read it and research.
aristotelian wrote:
Sat May 23, 2020 7:41 pm
Depends. What do you expect your marginal tax bracket in retirement to be based on your current portfolio? What is your current tax bracket? If you are going from 35% to 32% and retirement is planned to be 12%, then traditional would still be better. If you are going from 22% to 12% then not so much.
I expect my tax rate to be higher in retirement due to my company pay structure and every other company in my field of work even if I do not stay here. It increases each year and I would be making 3x current pay in about 7-8 years. Currently 210k portfolio, 33 years old, 12% tax bracket. My first thought is that a combination of traditional and Roth 401k would be best for my position, but any input is appreciated.

02nz
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Re: Traditional 401k and Roth 401k Combination?

Post by 02nz » Sat May 23, 2020 7:50 pm

If you're in the 12% bracket now, and can reasonably expect to triple your income in 7-8 years, then by all means make your contributions to Roth 401k instead of traditional. You're one of the relatively few people for whom Roth 401k is more advantageous than traditional. (When you're at a higher income level, re-evaluate as traditional will likely make more sense.)
Last edited by 02nz on Sat May 23, 2020 7:51 pm, edited 1 time in total.

ReadyOrNot
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Re: Traditional 401k and Roth 401k Combination?

Post by ReadyOrNot » Sat May 23, 2020 7:50 pm

Most employers who offer both still have the same maximum total participation or contribution amount. That is, if you max out one kind, that maxes out the total. But if they allow you a greater total max by doing both, then that is likely a good way to increase your retirement savings.

02nz
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Re: Traditional 401k and Roth 401k Combination?

Post by 02nz » Sat May 23, 2020 7:55 pm

ReadyOrNot wrote:
Sat May 23, 2020 7:50 pm
Most employers who offer both still have the same maximum total participation or contribution amount. That is, if you max out one kind, that maxes out the total. But if they allow you a greater total max by doing both, then that is likely a good way to increase your retirement savings.
This is confusingly worded and incorrect as I read it. The limit is not set by the employer but by legislation. For 2020, the employee contribution limit is $19,500 if you're under 50. That's regardless of whether you contribute to traditional or Roth 401k, or some mix of the two. The total CANNOT exceed $19,500, and you cannot contribute "a greater total max by doing both."

A $1 in contribution to a Roth 401k is effectively more than a $1 contribution to a traditional 401k, so maxing a Roth 401k can be seen effective a higher max contribution than contributing the same amount to trad'l. Also note, the employer matching contribution is always traditional.

MrJedi
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Re: Traditional 401k and Roth 401k Combination?

Post by MrJedi » Sat May 23, 2020 7:58 pm

Have you looked into whether your plan offers after tax 401k and the megabackdoor Roth? That would allow you to continue maxing the Traditional 401k while allowing additional savings into Roth.

SS Rambo
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Re: Traditional 401k and Roth 401k Combination?

Post by SS Rambo » Sat May 23, 2020 7:58 pm

If you’re in your 30s, and expect exponential growth of your income, you should probably be doing as much Roth conversions as possible in addition to Roth contributions. While staying in the 12%/22% bracket.

ReadyOrNot
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Re: Traditional 401k and Roth 401k Combination?

Post by ReadyOrNot » Sat May 23, 2020 8:00 pm

OK, 02nz sounds right. I just thought that if the OP had already maxed out this year, then OP might not be able to do any Roth and should be aware.

Also some employers set a lower limit than the 19,500 government limit, because they need to keep the participation by higher-paid employees vs. lower-paid employees within guidelines.
Last edited by ReadyOrNot on Sat May 23, 2020 8:13 pm, edited 1 time in total.

lakpr
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Re: Traditional 401k and Roth 401k Combination?

Post by lakpr » Sat May 23, 2020 8:04 pm

MrJedi wrote:
Sat May 23, 2020 7:58 pm
Have you looked into whether your plan offers after tax 401k and the megabackdoor Roth? That would allow you to continue maxing the Traditional 401k while allowing additional savings into Roth.
Even if it does (offer Mega Backdoor Roth), it still makes sense for the OP to max Roth 401k first. The OP is expected to triple his salary in about 7 years, so there will be plenty of future opportunities to (in fact, will even be compelled to) use Traditional 401k in the future. For now, Roth 401k all the way.

MrJedi
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Re: Traditional 401k and Roth 401k Combination?

Post by MrJedi » Sat May 23, 2020 8:17 pm

I don't think higher income in the near future changes the answer too much. Higher earning years in the future doesn't necessarily mean higher taxable income in retirement, especially if the goal is to retire early at all.

I will say that I do think 12% is a favorable tax rate to pay though. I don't think it's a bad move to go ahead and favor Roth to the point of being within 12% federal tax.

aristotelian
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Re: Traditional 401k and Roth 401k Combination?

Post by aristotelian » Sat May 23, 2020 8:19 pm

schildkrote wrote:
Sat May 23, 2020 7:47 pm
Thank you, great link retiredat50 although I don't quite understand all of it and will have to continue to read it and research.
aristotelian wrote:
Sat May 23, 2020 7:41 pm
Depends. What do you expect your marginal tax bracket in retirement to be based on your current portfolio? What is your current tax bracket? If you are going from 35% to 32% and retirement is planned to be 12%, then traditional would still be better. If you are going from 22% to 12% then not so much.
I expect my tax rate to be higher in retirement due to my company pay structure and every other company in my field of work even if I do not stay here. It increases each year and I would be making 3x current pay in about 7-8 years. Currently 210k portfolio, 33 years old, 12% tax bracket. My first thought is that a combination of traditional and Roth 401k would be best for my position, but any input is appreciated.
I am confused. Do you plan to work in retirement?

Have you seen this thread? An extreme example but not that extreme. Once you are not working, you have a lot more control over your taxable income and you be wealthy and even high spending with paying much tax.viewtopic.php?t=87471
Last edited by aristotelian on Sat May 23, 2020 8:23 pm, edited 1 time in total.

Topic Author
schildkrote
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Re: Traditional 401k and Roth 401k Combination?

Post by schildkrote » Sat May 23, 2020 8:23 pm

Thank you all for your quick responses. The way I understand this is that it's best for me to be full Roth while I am still in the 12% bracket, probably a combination of traditional and roth in the 22-24% brackets, and then full traditional 32% and above.

aristotelian
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Re: Traditional 401k and Roth 401k Combination?

Post by aristotelian » Sat May 23, 2020 8:24 pm

schildkrote wrote:
Sat May 23, 2020 8:23 pm
Thank you all for your quick responses. The way I understand this is that it's best for me to be full Roth while I am still in the 12% bracket, probably a combination of traditional and roth in the 22-24% brackets, and then full traditional 32% and above.
Yes, in that case, Roth makes sense now. I would likely do traditional in the 22% bracket and above.

Topic Author
schildkrote
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Re: Traditional 401k and Roth 401k Combination?

Post by schildkrote » Sat May 23, 2020 8:25 pm

aristotelian wrote:
Sat May 23, 2020 8:19 pm
schildkrote wrote:
Sat May 23, 2020 7:47 pm
Thank you, great link retiredat50 although I don't quite understand all of it and will have to continue to read it and research.
aristotelian wrote:
Sat May 23, 2020 7:41 pm
Depends. What do you expect your marginal tax bracket in retirement to be based on your current portfolio? What is your current tax bracket? If you are going from 35% to 32% and retirement is planned to be 12%, then traditional would still be better. If you are going from 22% to 12% then not so much.
I expect my tax rate to be higher in retirement due to my company pay structure and every other company in my field of work even if I do not stay here. It increases each year and I would be making 3x current pay in about 7-8 years. Currently 210k portfolio, 33 years old, 12% tax bracket. My first thought is that a combination of traditional and Roth 401k would be best for my position, but any input is appreciated.
I am confused. Do you plan to work in retirement?

Have you seen this thread? An extreme example but not that extreme. Once you are not working, you have a lot more control over your taxable income and you be wealthy and even high spending with paying much tax.viewtopic.php?t=87471
No, if I was working that wouldn't be retirement. Maybe better wording would have been "I expect my tax bracket to be higher in retirement" since its almost as low as it can get right now anyway.

aristotelian
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Re: Traditional 401k and Roth 401k Combination?

Post by aristotelian » Sat May 23, 2020 8:40 pm

schildkrote wrote:
Sat May 23, 2020 8:25 pm
No, if I was working that wouldn't be retirement. Maybe better wording would have been "I expect my tax bracket to be higher in retirement" since its almost as low as it can get right now anyway.
That makes sense. Do read that thread I linked. Roth makes sense now but I think traditional will make sense for you sooner than you think. Once you are no longer working, you have much more control over your taxable income.

Topic Author
schildkrote
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Re: Traditional 401k and Roth 401k Combination?

Post by schildkrote » Sat May 23, 2020 8:45 pm

aristotelian wrote:
Sat May 23, 2020 8:40 pm
schildkrote wrote:
Sat May 23, 2020 8:25 pm
No, if I was working that wouldn't be retirement. Maybe better wording would have been "I expect my tax bracket to be higher in retirement" since its almost as low as it can get right now anyway.
That makes sense. Do read that thread I linked. Roth makes sense now but I think traditional will make sense for you sooner than you think. Once you are no longer working, you have much more control over your taxable income.

Alright, thank you much for your input and advise. That's what I'm going to plan on doing then because that makes sense to me as well.

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grabiner
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Re: Traditional 401k and Roth 401k Combination?

Post by grabiner » Sat May 23, 2020 10:03 pm

Having a combination of traditional and Roth balances makes sense in retirement, so that you can pull from one or the other according to your tax situation. However, you don't need to contribute to both every year. It is common to contribute to a traditional 401(k) and a Roth IRA (because you are over the limit for a deductible traditional IRA); this already gives you some tax diversification. And it does make sense to switch to a Roth 401(k) when you are in an unusually low tax bracket for a year, and conversely to go all-traditional when you are in a high tax bracket for a year.
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FiveK
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Re: Traditional 401k and Roth 401k Combination?

Post by FiveK » Sun May 24, 2020 3:05 pm

schildkrote wrote:
Sat May 23, 2020 7:47 pm
Thank you, great link retiredat50 although I don't quite understand all of it and will have to continue to read it and research.
If you post the part(s) you find confusing, someone can probably explain - and then, depending on circumstances, the wiki itself might get modified to help future readers.

retiredjg
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Re: Traditional 401k and Roth 401k Combination?

Post by retiredjg » Sun May 24, 2020 3:23 pm

schildkrote wrote:
Sat May 23, 2020 7:47 pm
I expect my tax rate to be higher in retirement due to my company pay structure and every other company in my field of work even if I do not stay here. It increases each year and I would be making 3x current pay in about 7-8 years.
Having a lot of money is not the same thing as being in a high tax bracket in retirement. Tax rates are the result of the income you have, not the amount of money you have. It is very common for a couple in retirement to be in the current 12% bracket, even many of those who are very wealthy.

Currently 210k portfolio, 33 years old, 12% tax bracket.
If you can be in the 12% tax bracket without making any contributions to tax-deferred accounts, you should do all Roth 401k contributions because it is unlikely you will ever be taxed at a lower rate. But you might need to double check on that 12%. That would be taxable income (after deductions) of about 40K for a single and about $80k for a couple.

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