Retirment Savings - Roth vs. Traditional contributions

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ronin
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Retirment Savings - Roth vs. Traditional contributions

Post by ronin » Wed Apr 22, 2009 9:42 pm

First off, I'm excited to be a new member of this community, as it does seem to stand apart from many other sources out there.

A bit about myself... I'm married and my wife and I are in our mid 30s. Currently no kids but some day hope to have a family. I contribute to my traditional 401k at work, while my wife (public school teacher) has a state defined benefit/contribution combo plan. Additionally, we contribute the max to our own Roth IRAs. About 50% of our income is subject to state income tax (9% marginal) on top of federal (currently 25% marginal) tax. I anticipate not being subject to state income tax once in retirement.

I know this topic has been batted around before, however I never found closure (assuming this is possible) on the age old arguments for directing retirement savings into Roth versus traditional accounts. I've seen strong, but contradictory arguments for using both.

Arguments for going traditional include the concept of recognizing the difference between taking a deduction (at the marginal tax rate fed and state) versus paying taxes on the income in the future at a lower, effective rate. That is, you fill in dollars at lower brackets. Others have said that this is an oversimplified view and that everything should be viewed at the margin to make the options comparable (apples to apples).

Bottom line is I'm trying to determine if my mix of traditional and Roth contributions make sense, or should I skip the Roth altogether, or on the contrary increase (by way of taking advantage of Roth 401k option through my employer).

Any guidance would be most appreciated. Please let me know if my post was missing any important facts about myself that may be important to consider.

Thanks!

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tfb
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Re: Retirment Savings - Roth vs. Traditional contributions

Post by tfb » Wed Apr 22, 2009 9:46 pm

ronin wrote:I know this topic has been batted around before, however I never found closure (assuming this is possible) on the age old arguments for directing retirement savings into Roth versus traditional accounts. I've seen strong, but contradictory arguments for using both.
You want us to rehash it one more time? :D
Harry Sit, taking a break from the forums.

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Taylor Larimore
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What type IRA?

Post by Taylor Larimore » Wed Apr 22, 2009 10:04 pm

Ronin:

Welcome to the Bogleheads Forum!
I'm trying to determine if my mix of traditional and Roth contributions make sense, or should I skip the Roth altogether, or on the contrary increase (by way of taking advantage of Roth 401k option through my employer). -- Any guidance would be most appreciated.
You will probably not find a definitive answer because your decision must include many unknown variables.

Fortunately it is hard to go seriously wrong with either a Traditional or Roth 401K IRA. Try using this Morningstar IRA calculator tool for guidance:

IRA Calculators
"Simplicity is the master key to financial success." -- Jack Bogle

will23
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Re: What type IRA?

Post by will23 » Wed Apr 22, 2009 10:35 pm

Taylor Larimore wrote:Ronin:

Welcome to the Bogleheads Forum!
I'm trying to determine if my mix of traditional and Roth contributions make sense, or should I skip the Roth altogether, or on the contrary increase (by way of taking advantage of Roth 401k option through my employer). -- Any guidance would be most appreciated.
You will probably not find a definitive answer because your decision must include many unknown variables.

Fortunately it is hard to go seriously wrong with either a Traditional or Roth 401K IRA. Try using this Morningstar IRA calculator tool for guidance:

IRA Calculators
The "correct" answer depends on the future tax rate as well as future investment returns. Good luck figuring that out in advance! A little diversification couldn't hurt.

Early in my career I maxed out my Roth with the hopes that I would contribute more to a 401(k) later and that I eventually wouldn't be eligible for a a Roth. My goal was to maximize tax diversification. If you expect to make an income that is higher than the Roth limits in the future or contribute significant amounts to a deductible account, I would definitely contribute to the Roth now. Otherwise, I would balance Roth and deductible about equal. Good luck.

HornedToad
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Re: Retirment Savings - Roth vs. Traditional contributions

Post by HornedToad » Wed Apr 22, 2009 11:58 pm

ronin wrote: About 50% of our income is subject to state income tax (9% marginal) on top of federal (currently 25% marginal) tax. I anticipate not being subject to state income tax once in retirement.
I'm in a similiar situation, although I am not positive I won't retire in a state with a state income tax, but in my case I chose to emphasize the Traditional 401k since 25% fed + 9% state = 34% marginal. So if you truly do move to a state with no income tax, and the various rules remain the same, then as long as your tax rate doesn't go up by ~9%(possibly less due to state income tax deduction on tax returns right now with Roth) then you win with the traditional.

ronin
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Joined: Wed Apr 22, 2009 9:17 pm

Post by ronin » Thu Apr 23, 2009 8:25 am

Thanks all for your thoughts and suggestions! I'll be looking into this further.

tibbitts
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consideration

Post by tibbitts » Thu Apr 23, 2009 11:26 am

ronin wrote:Thanks all for your thoughts and suggestions! I'll be looking into this further.
What can affect your decision is being at certain tax breakpoints, such as for the saver's credit. You may not know that until after the end of a calendar year, so unless you want the hassle of recharacterizing your contribution, hold off on contributing until you know for sure which IRA works best for any given year.

Paul

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