Roth 403B versus Traditional 403B

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helloeveryone
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Joined: Sun Sep 04, 2016 5:16 pm

Roth 403B versus Traditional 403B

Post by helloeveryone »

I apologize ahead as I know there are MANY threads on roth versus traditional. I've read a number of them, I've even asked specific questions. Yet I'd like to check once more since the new tax brackets generate more second guessing.

Since this year's tax brackets put me in the 24% tax bracket. And I think that in early retirement (hoping to be retired at age ~55-60'ish) I will file "married filing jointly" and best guess is that we will have need for ~ "$80,000". I realize tax brackets are uncertain at that point so everything is "best guess".

Right now more than 80% of our retirement savings are in traditional 403b and 401k accounts and the other 20% is in the roth 403b

At my work place I have a 401k with a match, and the option to put more money in the 403b. The 403b has both a traditional and roth version.

For this year and any subsequent years where I'm in the 24% married filing jointly bracket should I go ahead and put money in the roth403b so that when I am retirement age I have choices in how to withdraw money to fund retirement in the most tax efficient manner?

As far as the tax savings today it's seems like this tax year and next year it's a toss up so the tiebreaker is having options in the future.
Please let me know if you agree that it's better today to fund a roth versus I'm completely missing something important.

Thank you!


(2018 brackets below for reference)
Rate Married Filing Jointly
12% $19,051 to $77,400
22% $77,401 to $165,000
24% $165,001 to $315,000
32% $315,001 to $400,000
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Roth 403B versus Traditional 403B

Post by KlangFool »

OP,

Unless you have a very good pension, you will need about 25 X 200K = 5 million in your tax-deferred account in order to generate 200K of taxable income. Then, you will be in 24% tax bracket at retirement.

You are paying more taxes if you contribute to Roth 401K/Roth 403B.

KlangFool
Topic Author
helloeveryone
Posts: 589
Joined: Sun Sep 04, 2016 5:16 pm

Re: Roth 403B versus Traditional 403B

Post by helloeveryone »

KlangFool wrote: Fri Nov 23, 2018 4:46 pm OP,

Unless you have a very good pension, you will need about 25 X 200K = 5 million in your tax-deferred account in order to generate 200K of taxable income. Then, you will be in 24% tax bracket at retirement.

You are paying more taxes if you contribute to Roth 401K/Roth 403B.

KlangFool
No pension, we’ll be relying on retirement savings. I get what you are saying.... basically I’m deferring 24% in taxes now by investing in traditional. Unless I anticipate >$5 million in tax deferred savings and pulling out 4% per year best strategy at this point in time is keep doing tax-deferred retirement savings.

Thank you for that...you responded on my prior post and it was the same conclusion. I listened then and will listen again.
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Roth 403B versus Traditional 403B

Post by KlangFool »

helloeveryone wrote: Fri Nov 23, 2018 6:03 pm
KlangFool wrote: Fri Nov 23, 2018 4:46 pm OP,

Unless you have a very good pension, you will need about 25 X 200K = 5 million in your tax-deferred account in order to generate 200K of taxable income. Then, you will be in 24% tax bracket at retirement.

You are paying more taxes if you contribute to Roth 401K/Roth 403B.

KlangFool
No pension, we’ll be relying on retirement savings. I get what you are saying.... basically I’m deferring 24% in taxes now by investing in traditional. Unless I anticipate >$5 million in tax deferred savings and pulling out 4% per year best strategy at this point in time is keep doing tax-deferred retirement savings.

Thank you for that...you responded on my prior post and it was the same conclusion. I listened then and will listen again.
helloeveryone,

Thanks. Glad that it is useful for you. Hopefully, it will save you some taxes and put more of your money into your own pocket.

KlangFool
aristotelian
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Joined: Wed Jan 11, 2017 8:05 pm

Re: Roth 403B versus Traditional 403B

Post by aristotelian »

+1, pretax is a no brainier for you. Run the numbers for yourself, but I doubt there is any way you will be in the 24% bracket in retirement. There is a very good chance you can pay zero tax in retirement.
bdpb
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Re: Roth 403B versus Traditional 403B

Post by bdpb »

Today you would be saving 24% on the next dollar.

Based on your projected needs you may likely be at today's 22% rate. In less than ten years this 22% rate is expected to be 25%. In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.

What is your state tax rate and retirement location plans? If you pay no (high) state tax today and expect to pay high (no) state taxes in the future then this could tip your decision.

Based on your current state and whether your have a tIRA you may have better options than straight Roth contributions. For example, one may be able to contribute to IRA/401k/403b state tax free and yet convert a tIRA to Roth state tax free, too.
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Roth 403B versus Traditional 403B

Post by KlangFool »

bdpb wrote: Sat Nov 24, 2018 12:49 pm Today you would be saving 24% on the next dollar.

Based on your projected needs you may likely be at today's 22% rate. In less than ten years this 22% rate is expected to be 25%. In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.

What is your state tax rate and retirement location plans? If you pay no (high) state tax today and expect to pay high (no) state taxes in the future then this could tip your decision.

Based on your current state and whether your have a tIRA you may have better options than straight Roth contributions. For example, one may be able to contribute to IRA/401k/403b state tax free and yet convert a tIRA to Roth state tax free, too.
bdpb,

<<In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.>>

That is mathematically not possible. If you disagree, show us the math.

KlangFool
bdpb
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Re: Roth 403B versus Traditional 403B

Post by bdpb »

KlangFool wrote: Sat Nov 24, 2018 1:53 pm
bdpb wrote: Sat Nov 24, 2018 12:49 pm Today you would be saving 24% on the next dollar.

Based on your projected needs you may likely be at today's 22% rate. In less than ten years this 22% rate is expected to be 25%. In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.

What is your state tax rate and retirement location plans? If you pay no (high) state tax today and expect to pay high (no) state taxes in the future then this could tip your decision.

Based on your current state and whether your have a tIRA you may have better options than straight Roth contributions. For example, one may be able to contribute to IRA/401k/403b state tax free and yet convert a tIRA to Roth state tax free, too.
bdpb,

<<In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.>>

That is mathematically not possible. If you disagree, show us the math.

KlangFool
Not sure what math you're looking for? Here's the math:

"Today you would be saving 24% on the next dollar.

Based on your projected needs you may likely be at today's 22% rate. In less than ten years this 22% rate is expected to be 25%."

Maybe you're hung up on the "either way" part. Surely, you wouldn't disagree that two different solutions can produce the same result. My point is that the OP's numbers are so close that whichever choice they make could produce the same probability of a right or wrong decision, so they could go either way on their decision.
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FiveK
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Re: Roth 403B versus Traditional 403B

Post by FiveK »

bdpb wrote: Sat Nov 24, 2018 12:49 pm Today you would be saving 24% on the next dollar.

Based on your projected needs you may likely be at today's 22% rate.
It takes ~$87,200 gross to have $80K post-tax spendable (assuming only federal tax and all income from tIRA withdrawals). After the $24K standard deduction, the $63,200 taxable would be well within the 12% bracket.

Taxation of Social Security benefits could be an issue, but not enough information given.
bdpb
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Re: Roth 403B versus Traditional 403B

Post by bdpb »

FiveK wrote: Sat Nov 24, 2018 5:48 pm
bdpb wrote: Sat Nov 24, 2018 12:49 pm Today you would be saving 24% on the next dollar.

Based on your projected needs you may likely be at today's 22% rate.
It takes ~$87,200 gross to have $80K post-tax spendable (assuming only federal tax and all income from tIRA withdrawals). After the $24K standard deduction, the $63,200 taxable would be well within the 12% bracket.

Taxation of Social Security benefits could be an issue, but not enough information given.
Thanks FiveK, you well may be closer on the numbers than I was, I know you provide a lot of valuable input on this topic. I estimated the taxes a little higher but that was assuming some nominal state taxes, too. I also interpreted "need" to be the minimum amount for withdrawals.

Part of the point of my post was that technically we can't look at today's numbers. I got the impression that retirement for the OP was still a few years away and that would likely occur after tax law reverts back to 15%/25% and around 4k less for standard deduction/exemption.
Topic Author
helloeveryone
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Re: Roth 403B versus Traditional 403B

Post by helloeveryone »

aristotelian wrote: Fri Nov 23, 2018 10:33 pm +1, pretax is a no brainier for you. Run the numbers for yourself, but I doubt there is any way you will be in the 24% bracket in retirement. There is a very good chance you can pay zero tax in retirement.

thank you...retirement is in 15-20 years so the brackets are up in the air. There was such a big difference between this year and last year. pretax seems to be the consistent winner. Roth has some arguments for being equivocal at this moment in time which I see those points as well.


2017 data
Married Filing Jointly or Qualifying Widow(er)
Taxable Income Tax Rate
$0 - $18,650 10%
$18,651 - $75,900 $1,865 plus 15% of the amount over $18,650
$75,901 - $153,100 $10,452.50 plus 25% of the amount over $75,900
$153,101 - $233,350 $29,752.50 plus 28% of the amount over $153,100
$233,351 - $416,700 $52,222.50 plus 33% of the amount over $233,350
$416,701 - $470,700 $112,728 plus 35% of the amount over $416,700
$470,701 or more $131,628 plus 39.6% of the amount over $470,700
Topic Author
helloeveryone
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Re: Roth 403B versus Traditional 403B

Post by helloeveryone »

bdpb wrote: Sat Nov 24, 2018 8:44 pm
FiveK wrote: Sat Nov 24, 2018 5:48 pm
bdpb wrote: Sat Nov 24, 2018 12:49 pm Today you would be saving 24% on the next dollar.

Based on your projected needs you may likely be at today's 22% rate.
It takes ~$87,200 gross to have $80K post-tax spendable (assuming only federal tax and all income from tIRA withdrawals). After the $24K standard deduction, the $63,200 taxable would be well within the 12% bracket.

Taxation of Social Security benefits could be an issue, but not enough information given.
Thanks FiveK, you well may be closer on the numbers than I was, I know you provide a lot of valuable input on this topic. I estimated the taxes a little higher but that was assuming some nominal state taxes, too. I also interpreted "need" to be the minimum amount for withdrawals.

Part of the point of my post was that technically we can't look at today's numbers. I got the impression that retirement for the OP was still a few years away and that would likely occur after tax law reverts back to 15%/25% and around 4k less for standard deduction/exemption.
I am 15-20 years away so getting a grasp on withdrawals/what to do in retirement is a concept I'm trying to learn here. The $80,000 is a rough estimate of what I think we'll need in retirement but it is definitely not a concrete answer. I've just done a rough guesstimate of our budget, and what expenses will disappear versus what expenses come up. Reading the different viewpoints helps a lot as it shows me how much I still have to learn. Thanks for the response!
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FiveK
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Re: Roth 403B versus Traditional 403B

Post by FiveK »

bdpb wrote: Sat Nov 24, 2018 8:44 pm I estimated the taxes a little higher but that was assuming some nominal state taxes, too. I also interpreted "need" to be the minimum amount for withdrawals.

Part of the point of my post was that technically we can't look at today's numbers. I got the impression that retirement for the OP was still a few years away and that would likely occur after tax law reverts back to 15%/25% and around 4k less for standard deduction/exemption.
There certainly could be state taxes, and that would require more withdrawals. There could be dividends and capital gains that would require fewer withdrawals. That's up to the OP to evaluate.

Similarly, one may assume current tax rates, or current tax law, or anything reasonable for future taxes - and then take whatever action that assumption makes best. You pays your money and you takes your chances. ;)
Topic Author
helloeveryone
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Joined: Sun Sep 04, 2016 5:16 pm

Re: Roth 403B versus Traditional 403B

Post by helloeveryone »

bdpb wrote: Sat Nov 24, 2018 12:49 pm Today you would be saving 24% on the next dollar.

Based on your projected needs you may likely be at today's 22% rate. In less than ten years this 22% rate is expected to be 25%. In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.

What is your state tax rate and retirement location plans? If you pay no (high) state tax today and expect to pay high (no) state taxes in the future then this could tip your decision.

Based on your current state and whether your have a tIRA you may have better options than straight Roth contributions. For example, one may be able to contribute to IRA/401k/403b state tax free and yet convert a tIRA to Roth state tax free, too.

No state taxes (+ property taxes though but our home is reasonable relative to income, debt etc...) and planning on retirement in current state. Retirement is ~15-20 years away. Reading other posts here and on other threads this year I'll stick with Traditional 403B.
PFInterest
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Joined: Sun Jan 08, 2017 12:25 pm

Re: Roth 403B versus Traditional 403B

Post by PFInterest »

No question trad.
Are you not doing rIRAs?
fennewaldaj
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Re: Roth 403B versus Traditional 403B

Post by fennewaldaj »

KlangFool wrote: Sat Nov 24, 2018 1:53 pm
bdpb wrote: Sat Nov 24, 2018 12:49 pm Today you would be saving 24% on the next dollar.

Based on your projected needs you may likely be at today's 22% rate. In less than ten years this 22% rate is expected to be 25%. In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.

What is your state tax rate and retirement location plans? If you pay no (high) state tax today and expect to pay high (no) state taxes in the future then this could tip your decision.

Based on your current state and whether your have a tIRA you may have better options than straight Roth contributions. For example, one may be able to contribute to IRA/401k/403b state tax free and yet convert a tIRA to Roth state tax free, too.
bdpb,

<<In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.>>

That is mathematically not possible. If you disagree, show us the math.

KlangFool
Well it is mathematically impossible if all rates are known. The thing is future rates are not known. If it is at all close assuming current rates there is some value in the tax diversification.
KlangFool
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Re: Roth 403B versus Traditional 403B

Post by KlangFool »

fennewaldaj wrote: Sat Nov 24, 2018 10:41 pm
KlangFool wrote: Sat Nov 24, 2018 1:53 pm
bdpb wrote: Sat Nov 24, 2018 12:49 pm Today you would be saving 24% on the next dollar.

Based on your projected needs you may likely be at today's 22% rate. In less than ten years this 22% rate is expected to be 25%. In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.

What is your state tax rate and retirement location plans? If you pay no (high) state tax today and expect to pay high (no) state taxes in the future then this could tip your decision.

Based on your current state and whether your have a tIRA you may have better options than straight Roth contributions. For example, one may be able to contribute to IRA/401k/403b state tax free and yet convert a tIRA to Roth state tax free, too.
bdpb,

<<In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.>>

That is mathematically not possible. If you disagree, show us the math.

KlangFool
Well it is mathematically impossible if all rates are known. The thing is future rates are not known. If it is at all close assuming current rates there is some value in the tax diversification.
fennewaldaj,

1) We are recommending tax diversification: Trad. 403B with Roth IRAs.

2) It is those folks that recommending Roth 403B with Roth IRAs has no tax diversification.

<<The thing is future rates are not known. >>

3) In those cases, the most reasonable assumption is to assume that it stays the same.

4) And, go with tax diversification. Aka, Trad. 403B with Roth IRA.

Are you arguing that Roth 403B with Roth IRA has better tax diversification than Trad 403B with Roth IRAs?

KlangFool
jmanter
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Re: Roth 403B versus Traditional 403B

Post by jmanter »

I've had a similar question. Both my wife and I will retire in about 20-25 years, each with a very good state-funded pension. We should be able to live on the pensions quite easily. My thought is to use as much Roth space as possible for additional investments, given that the majority of the money will go to my daughter after I die. It seems to me that this plan will give her the most flexibility with her inheritance. Does that make sense?

We're not talking about millions here. Maybe in the range of $1M when I retire.
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FiveK
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Re: Roth 403B versus Traditional 403B

Post by FiveK »

jmanter wrote: Sat Nov 24, 2018 11:53 pm I've had a similar question. Both my wife and I will retire in about 20-25 years, each with a very good state-funded pension. We should be able to live on the pensions quite easily. My thought is to use as much Roth space as possible for additional investments, given that the majority of the money will go to my daughter after I die. It seems to me that this plan will give her the most flexibility with her inheritance. Does that make sense?
It does if her marginal rate on extra income would be higher than (or perhaps equal to) what it costs you to forego the traditional deduction now.

Similarly, your expected (but perhaps not guaranteed) pensions may tilt the scales toward Roth, but it still comes down to your marginal tax saving rate now vs. what your marginal tax on traditional withdrawals would be.

Do you know your current marginal saving rate for traditional contributions? Note that it may or may not be the same as your nominal bracket.

What does a back of the envelope calculation say your marginal tax on traditional withdrawals would be?
aristotelian
Posts: 8083
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Re: Roth 403B versus Traditional 403B

Post by aristotelian »

helloeveryone wrote: Sat Nov 24, 2018 10:24 pm
aristotelian wrote: Fri Nov 23, 2018 10:33 pm +1, pretax is a no brainier for you. Run the numbers for yourself, but I doubt there is any way you will be in the 24% bracket in retirement. There is a very good chance you can pay zero tax in retirement.

thank you...retirement is in 15-20 years so the brackets are up in the air. There was such a big difference between this year and last year. pretax seems to be the consistent winner. Roth has some arguments for being equivocal at this moment in time which I see those points as well.


2017 data
Married Filing Jointly or Qualifying Widow(er)
Taxable Income Tax Rate
$0 - $18,650 10%
$18,651 - $75,900 $1,865 plus 15% of the amount over $18,650
$75,901 - $153,100 $10,452.50 plus 25% of the amount over $75,900
$153,101 - $233,350 $29,752.50 plus 28% of the amount over $153,100
$233,351 - $416,700 $52,222.50 plus 33% of the amount over $233,350
$416,701 - $470,700 $112,728 plus 35% of the amount over $416,700
$470,701 or more $131,628 plus 39.6% of the amount over $470,700
You can do Roth on the IRA side to hedge, but like I said, traditional is a no brainer. Check out this thread, you can get your tax very low in retirement, especially if you already have a lot of Roth funds.

viewtopic.php?t=87471
foo.c
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Re: Roth 403B versus Traditional 403B

Post by foo.c »

fennewaldaj wrote: Sat Nov 24, 2018 10:41 pm
KlangFool wrote: Sat Nov 24, 2018 1:53 pm

<<In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.>>

That is mathematically not possible. If you disagree, show us the math.

KlangFool
Well it is mathematically impossible if all rates are known. The thing is future rates are not known. If it is at all close assuming current rates there is some value in the tax diversification.
It also ignores the possibility that you may need (or want, or be forced) to withdraw more in a given year.

Tax rates are unknown, investment returns are unknown, and withdrawals are unknown.
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Roth 403B versus Traditional 403B

Post by KlangFool »

foo.c wrote: Sun Nov 25, 2018 8:49 am
fennewaldaj wrote: Sat Nov 24, 2018 10:41 pm
KlangFool wrote: Sat Nov 24, 2018 1:53 pm

<<In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.>>

That is mathematically not possible. If you disagree, show us the math.

KlangFool
Well it is mathematically impossible if all rates are known. The thing is future rates are not known. If it is at all close assuming current rates there is some value in the tax diversification.
It also ignores the possibility that you may need (or want, or be forced) to withdraw more in a given year.

Tax rates are unknown, investment returns are unknown, and withdrawals are unknown.
foo.c,

<< It also ignores the possibility that you may need (or want, or be forced) to withdraw more in a given year.>>

Please explain how is that relevant in the context of Trad. 403B with Roth IRAs.

After 10 to 20 years of Trad. 403B with Roth IRAs. the person would have 55K to 110K of Roth IRA's contribution for that kind of situation without tax penalty.

<<Tax rates are unknown, >>

Do not put all the money into the Roth bucket. The future income tax rate is unknown. It is possible that it may go up. It may go down too and substitute with the consumption/VAT/GST/Sales tax.

<<investment returns are unknown, and withdrawals are unknown.>>

Then, the person investing with a bigger pile of money by tax-deferring their income has a better chance of succeeding.

It is simple math. You could invest

A) X

or

B) X + 22%/24%.

every year.

Who is more likely to end up with a bigger pile of money? Especially folks in (B) has money in both tax-deferred (Trad. 401K/Trad 403B) and Roth IRA.

Ultimately, the answer is very simple.

A) Folks that tax-deferred their income may pay more taxes in their retirement. But, this is not a bad thing. It meant that they have a lot of money in retirement.

B) People that pay their taxes now may not have enough money at retirement. They cannot get their money back from IRS. This is very bad. They may not survive at retirement.

Why would you choose (B)?

KlangFool
fennewaldaj
Posts: 959
Joined: Sun Oct 22, 2017 11:30 pm

Re: Roth 403B versus Traditional 403B

Post by fennewaldaj »

KlangFool wrote: Sat Nov 24, 2018 11:37 pm
fennewaldaj wrote: Sat Nov 24, 2018 10:41 pm
KlangFool wrote: Sat Nov 24, 2018 1:53 pm
bdpb wrote: Sat Nov 24, 2018 12:49 pm Today you would be saving 24% on the next dollar.

Based on your projected needs you may likely be at today's 22% rate. In less than ten years this 22% rate is expected to be 25%. In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.

What is your state tax rate and retirement location plans? If you pay no (high) state tax today and expect to pay high (no) state taxes in the future then this could tip your decision.

Based on your current state and whether your have a tIRA you may have better options than straight Roth contributions. For example, one may be able to contribute to IRA/401k/403b state tax free and yet convert a tIRA to Roth state tax free, too.
bdpb,

<<In retirement there seem to be a lot of higher marginal rate cliffs and bumps to be worried about. It's looks like you could go either way.>>

That is mathematically not possible. If you disagree, show us the math.

KlangFool
Well it is mathematically impossible if all rates are known. The thing is future rates are not known. If it is at all close assuming current rates there is some value in the tax diversification.
fennewaldaj,

1) We are recommending tax diversification: Trad. 403B with Roth IRAs.

2) It is those folks that recommending Roth 403B with Roth IRAs has no tax diversification.

<<The thing is future rates are not known. >>

3) In those cases, the most reasonable assumption is to assume that it stays the same.

4) And, go with tax diversification. Aka, Trad. 403B with Roth IRA.

Are you arguing that Roth 403B with Roth IRA has better tax diversification than Trad 403B with Roth IRAs?

KlangFool
I would never advise someone go 100% Roth (except maybe someone like a medical resident). Usually with Roth 403b, 401k ect you are allowed to do part traditional part Roth. For myself I am ~1/3 Roth total of all accounts. If I just did IRAs as Roth I would be ~20% Roth. I ran the numbers and determined that tax rates would have to go up about 7% for Roth to be better than Trad. That was enough for me to want more traditional than Roth but low enough that I preferred having more than 20% Roth. It is hard to be super precise with these things due to all the unknowns involved but that is the split that made sense to me.
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