Traditional vs Roth 401k

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Topic Author
Bigt3142
Posts: 179
Joined: Thu Jul 11, 2019 9:09 am

Traditional vs Roth 401k

Post by Bigt3142 »

I've read through the wiki and tried to understand how to evaluate wither to use the traditional 401k vs using the Roth 401k. It's way above my current understanding so I fell a little lost. Can you please review my thought process and let me know if my understanding is correct.

Last year I made $88,000 of taxable income filing taxes as single
This year I expect to make around $90,000 and my new wife will make about $14,000
Total taxable income $104,000 married filing jointly.
This will put me in the 22% tax bracket for any amount over $81,051
I believe I will be in the 12% tax bracket in retirement (or whatever the equivalent is in the future).
I am going to max out my 401k this year.
My wife does not have a retirement account available.
I have fully funded my ROTH IRA this year. My wife has not yet.

I think I should contribute all to my traditional 401k to minimize the amount I will be paying in the 22% tax bracket.
My gross taxable income would then be $84,500 leaving only $3,449 taxed at 22%.

What am I missing in my thought process?
Thanks in advance
Travis
go2run
Posts: 159
Joined: Wed Mar 08, 2017 12:34 pm

Re: Traditional vs Roth 401k

Post by go2run »

Your thought process is sound. The debate between Roth and Traditional comes down to what your tax bracket is now vs in the future. Based on what information you provided, it makes sense for you to stick with the traditional 401k for now. Continue to fund yours and your spouse's Roth IRA's. Do you have any additional taxable income (dividends/capital gains) that could impact your current tax rate?

As a side note on when it's appropriate to consider a Roth 401k, people either will have a large portfolio that drives up RMD's as well as other retirement income (pension, SS, etc.). In those cases, the likely future tax will be higher than what the individual is paying now. Hard to say though as the decision is highly personal and dependent on an evaluation of each situation.
Last edited by go2run on Wed Jun 16, 2021 12:30 pm, edited 1 time in total.
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retiredjg
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Joined: Thu Jan 10, 2008 11:56 am

Re: Traditional vs Roth 401k

Post by retiredjg »

Bigt3142 wrote: Wed Jun 16, 2021 12:04 pm I've read through the wiki and tried to understand how to evaluate wither to use the traditional 401k vs using the Roth 401k. It's way above my current understanding so I fell a little lost. Can you please review my thought process and let me know if my understanding is correct.

Last year I made $88,000 of taxable income filing taxes as single
This year I expect to make around $90,000 and my new wife will make about $14,000
Total taxable income $104,000 married filing jointly.
This will put me in the 22% tax bracket for any amount over $81,051
I don't think so.

The "taxable income" that is used to determine tax brackets is income after deductions. With $104k in salary, subtracting the standard deduction gives you a taxable income of $78,900 which is in the 12% tax bracket.

In the 12% bracket, many people use Roth 401k because they may never be in a bracket lower than 12%.

Others might use traditional 401k to see if they can get their income low enough for the saver's credit or the earned income credit.
redmaw
Posts: 355
Joined: Mon Apr 22, 2019 7:20 am

Re: Traditional vs Roth 401k

Post by redmaw »

You seem to be mixing terms gross and taxable. You take gross (as reported on your w-2), subtract out deductions, and get taxable. It is not clear if you have accounted for that. If you actually have 88+14 taxable that's about right since the single deductions are 1/2 the married its already accounted for. If those are gross numbers, take the 25k standard deduction off, and you are actually still in the 12% bracket, which is set to revert to 15% in the future. In which case Roth may be better.
sjt
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Location: NC

Re: Traditional vs Roth 401k

Post by sjt »

Income will be around $104k
MFJ Standard deduction is $25.1k, bringing you to about $79k which is in the 12% bracket. Any contributions to your 401k are tax deferred, lowering your taxable income further - if the above is accurate, you should be able to fund your Roth 401k at a 12% rate.
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale
02nz
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Joined: Wed Feb 21, 2018 2:17 pm

Re: Traditional vs Roth 401k

Post by 02nz »

With $104K of total income, you're in the 12% bracket after the standard deduction for MFJ. I'd say the Roth 401k is a no-brainer there. If and when your income rises, I'd contribute enough to the traditional 401k to avoid the next higher tax bracket, currently 22%.
Topic Author
Bigt3142
Posts: 179
Joined: Thu Jul 11, 2019 9:09 am

Re: Traditional vs Roth 401k

Post by Bigt3142 »

Thank you all for catching that. Yes that is my adjusted gross income before the standard deduction putting me in the 12% tax bracket after that deduction. I'll switch it to ROTH 401k.

Once I get above the 12% tax bracket in taxable income I would use traditional up to the lower tax bracket and put the remainder in ROTH, as mentioned above. :sharebeer
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