Question about Roth VS Traditional

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Cappy361
Posts: 66
Joined: Sat Jul 24, 2010 9:08 am

Question about Roth VS Traditional

Post by Cappy361 »

I need some help on what to do. I thought I was satisfied with my current setup but the more I read the more questions I have(The Finance Buff - Traditional vs Roth). We are both in our early stages of our careers and hopefully to continue to make more money and be in a higher tax bracket in a few years. Please help...

His - 40k Annual Pay

Company 401K Roth - Max allowable contribution of 20 percent about 8k (plenty of low cost options) Additional 8% Match

Roth IRA - Max Annual Contribution 5k @ Vanguard



Hers - 60k Annual Pay

Company Traditional 401K - 4k Annual Contribution (Low expense ratio offered) Addtional 10% Match

Roth IRA - Max Annual Contribution 5k @ Vanguard

Federal Tax Rate @ 25% and no state income tax

Should I put all our money in traditonal 401k and IRA?

Is the tax benefit taken now outweighs the Roth benefits? How much money would we see from going with traditional for all account?

Any other things I should consider?
Last edited by Cappy361 on Tue May 10, 2011 5:07 pm, edited 2 times in total.
wilked
Posts: 2441
Joined: Thu Mar 24, 2011 1:50 pm

Post by wilked »

1. 401k up to employer match
2. Roth IRA to maximum
3. 401k to maximum

You are doing exactly what I would do...
chaz
Posts: 13604
Joined: Tue Feb 27, 2007 1:44 pm

Post by chaz »

A good plan.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
Topic Author
Cappy361
Posts: 66
Joined: Sat Jul 24, 2010 9:08 am

Post by Cappy361 »

I'm sorry but I phrased the question wrong. I wanted to know if it be a good idea for me to contribute everything into traditional 401k and IRA.
letsgobobby
Posts: 12073
Joined: Fri Sep 18, 2009 1:10 am

Post by letsgobobby »

are you eligible to make deductible contributions to IRAs? There are eligibility phaseout rules depending on having an employer-sponsored plans, but I have no idea what those rules are.
Topic Author
Cappy361
Posts: 66
Joined: Sat Jul 24, 2010 9:08 am

Post by Cappy361 »

I think I am eligible. Due to my company policy on allowing max contributions of 20% of your pay. I am unable to contribute the max contributions of 16,500. I currently contribute about 10k per year with company match.
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Post by DSInvestor »

Since you both participate in a 401(k) you are covered by an employer plan. IRS Pub 590 covers Traditional and Roth IRAs and there is a section regarding taking the tax deduction for Traditional IRA contributions. See Limit if covered by an employer plan and pay attention to table 1-2:
http://www.irs.gov/publications/p590/ch ... 1000230467

For 2010, married filing jointly when both spouses are covered by employer plans, no deduction for TradIRA contributions is permitted if MAGI exceeds 109K.

If you're not eligible for tax deductible TradIRA contributions but are eligible for direct Roth IRA contributions, you should go with Roth IRA contributions.
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Post by abuss368 »

What about taxable accounts?
Topic Author
Cappy361
Posts: 66
Joined: Sat Jul 24, 2010 9:08 am

Post by Cappy361 »

No taxable accounts. I looked into the her 401k rules and it allows contributions up to 16,500 so we are still able about 5,500 left. I'm thinking about scrapping one of our roth IRA and making extra contributions to her 401k.
Bob's not my name
Posts: 7417
Joined: Sun Nov 15, 2009 8:24 am

Post by Bob's not my name »

For 2011 the deductible TIRA AGI phaseout for MFJ is $90,000-$110,000. Your gross is $100k, so your 401k contributions should make you fully eligible for deductible TIRAs. If you contribute $8k and she $16,500, and you have some pre-tax health insurance premiums and are making use of an FSA, your AGI might be down around $72k. However, note that an AGI of $72k will put your taxable income down near $53k, which gives you $16,000 of headroom in the 15% federal bracket, and I don't think there are any AGI-based phaseouts that would make your effective tax rate higher.

So, I think it makes sense to contribute at least $12,000 to a pre-tax 401k (your $9k total employer matches are outstanding, by the way). That could be all just her 401k. That should put you in the 15% bracket. Check these numbers against your own 2010 tax return to make sure my assumptions are correct. After that, Roth is probably a reasonable choice, but it depends upon a lot of assumptions you have to make about your future.

These might be useful:

http://www.bogleheads.org/forum/viewtop ... highlight=

http://www.bogleheads.org/forum/viewtopic.php?p=846733
Topic Author
Cappy361
Posts: 66
Joined: Sat Jul 24, 2010 9:08 am

Post by Cappy361 »

New plan

His - 40k Annual Pay

Company 401K Traditional - Max allowable contribution of 20 percent about 8k (plenty of low cost options) Additional 8% Match - total 11,200

Roth IRA - Max Annual Contribution 5k @ Vanguard



Hers - 60k Annual Pay

Company Traditional 401K - 4k Annual Contribution (Low expense ratio offered) Addtional 10% Match - total 15k

Roth IRA - Contribute the previous 5000 and redirect into hers 401k.
Bob's not my name
Posts: 7417
Joined: Sun Nov 15, 2009 8:24 am

Post by Bob's not my name »

Cappy361 wrote:New plan

His - 40k Annual Pay

Company 401K Traditional - Max allowable contribution of 20 percent about 8k (plenty of low cost options) Additional 8% Match - total 11,200

Roth IRA - Max Annual Contribution 5k @ Vanguard



Hers - 60k Annual Pay

Company Traditional 401K - 4k Annual Contribution (Low expense ratio offered) Addtional 10% Match - total 15k

Roth IRA - Contribute the previous 5000 and redirect into hers 401k.
Your new plan is fine, but I have two suggestions:
1. If you are switching $5k from her Roth contribution to her Traditional 401k contribution, that would be about $6k -- you avoid paying about $1,000 in tax on the Roth contribution (15% or 25% tax rate, so around 20%).
2. If you're going to go traditional on that, I suggest you consider a TIRA instead of putting it all in the 401k, since you'll have greater investment choices in the TIRA and you'll have slightly different emergency withdrawal flexibility, per my linked post. Considering point 1, that would mean $1k more in her 401k and $5k in her TIRA.
Topic Author
Cappy361
Posts: 66
Joined: Sat Jul 24, 2010 9:08 am

Post by Cappy361 »

I'm expecting a bonus of 10k this month. Will that affect the amount of deduction I'll be able to take. I was trying to figure it out through the IRS website but that just confused me more.
Bob's not my name
Posts: 7417
Joined: Sun Nov 15, 2009 8:24 am

Post by Bob's not my name »

You are fully eligible for two $5,000 TIRA contributions if your AGI is below $90,000. You are fully eligible for two $16,500 traditional 401k contributions, but your company limits yours to 20% = $10,000. So you can contribute up to $26,500 combined to your 401ks. Basically:

AGI = gross salaries + any investment income from taxable accounts - 401k contributions - pre-tax health and dental premiums - FSA contributions - TIRA contributions

MAGI formula varies by tax break. For Roth IRA eligibility, for example, you have to add back the TIRA contributions.

Taxable income = AGI - ($3,700 x number of people in your family) - ($11,600 standard deduction or itemized deductions)

15% bracket tops out at $69,000 taxable income. Assuming you take the standard deduction and have no kids, that's equivalent to an AGI of $88,000.

If your $10,000 bonus makes your gross income total $110,000, and if your pre-tax health and dental premiums are, say, $2,000, and you contribute $1,000 to a FSA, that's $107,000 before 401k contributions. So to get your MAGI down to $90,000 you have to contribute $17,000 to the 401k's, say $10k to yours (the max) and $7k to hers. If you're worried about being a little above the $90,000 MAGI threshold for full TIRA eligibility, you can either contribute more to her 401k so you have margin, or you can just wait until early 2012 to do your tax return before contributing to her TIRA. Or you can blow off the TIRA altogether and just contribute more to her 401k.
Topic Author
Cappy361
Posts: 66
Joined: Sat Jul 24, 2010 9:08 am

Post by Cappy361 »

I think it will be easier for me to put the money into her 401k. She got one index fund option that charges .05% expense ratio. Only bad thing is the fund does not have a ticker symbol and has an usually high 7% holding in Citi.
Topic Author
Cappy361
Posts: 66
Joined: Sat Jul 24, 2010 9:08 am

Post by Cappy361 »

any further advice?
Post Reply