403b Roth or Pre-tax Decision and Marginal Rate

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bgf
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403b Roth or Pre-tax Decision and Marginal Rate

Post by bgf » Wed Aug 08, 2018 10:05 am

I am trying to calculate the amount of space my wife and I have left at our marginal tax rate of 28% (22% federal and 6% state) for additional tax deferred contributions.

Assume wages of $127,000.
- $24,000 standard deduction
- $12,500 Simple IRA contribution
- $5,000 Dependent Care Account
- $1,500 403b Pre-tax contribution

= $84,000 taxable wages
-$77,401 for married filing jointly
= $6,599 in space left for tax-deferred contributions at our 28% marginal rate.

We are currently contributing an additional $200 per month to the 403b as a Roth contribution, which is why it is not included above. (We're also maxing both Roth IRAs, but I dont think that has anything to do with this calculation). I am thinking about changing that $200 Roth contribution to tax deferred as well as contributing an additional $200 per month tax deferred. So that would be an additional $4,800 in tax-deferred contributions to the 403b per year. As $4,800 < $6,599, all of that will come off the 28% marginal rate, right?

Is this correct? Am I missing anything?
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Silk McCue
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by Silk McCue » Wed Aug 08, 2018 10:53 am

If you could please clarify. You are contributing to a Dependent Care Account but don't reference any dependents which, if you did would affect this analysis. Having your state of residence would also make it very easy to pop this into an online tax calculator (not that this can't be analyzed without it).

Cheers

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FiveK
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by FiveK » Wed Aug 08, 2018 11:28 am

Questions like this can be answered (if you have even a little Excel knowledge) with the personal finance toolbox spreadsheet. Other tools can also be used, but don't show the picture that spreadsheet does.

Ron Ronnerson
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by Ron Ronnerson » Wed Aug 08, 2018 12:16 pm

Do you or your spouse have any of the following?
Pension contributions
Medical premiums taken from your paycheck
Dental premiums taken from your paycheck
HSA or FSA for health
Pretax contributions to retirement accounts such as a 401k, 457b, traditional IRA, etc. other than what you've listed
Educator expenses

If you have any of these, they would reduce your taxable income (there are probably other things that reduce your taxable income also but these came to mind right away).

If you don’t have any of these, I think you’re on the right track in terms of the changes you're thinking of making. Personally, I would increase contributions to a retirement account (or something else like an HSA) until I just reached the 12% federal bracket. After that, Roth contributions are fine.

bgf
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by bgf » Wed Aug 08, 2018 12:40 pm

Ron Ronnerson wrote:
Wed Aug 08, 2018 12:16 pm
Do you or your spouse have any of the following?
Pension contributions
Medical premiums taken from your paycheck
Dental premiums taken from your paycheck
HSA or FSA for health
Pretax contributions to retirement accounts such as a 401k, 457b, traditional IRA, etc. other than what you've listed
Educator expenses

If you have any of these, they would reduce your taxable income (there are probably other things that reduce your taxable income also but these came to mind right away).

If you don’t have any of these, I think you’re on the right track in terms of the changes you're thinking of making. Personally, I would increase contributions to a retirement account (or something else like an HSA) until I just reached the 12% federal bracket. After that, Roth contributions are fine.
i appreciate the responses and feedback. i was hoping to avoid any calculator or anything that does this automatically because i'd like to know how to calculate/estimate it myself. i'll just understand it better that way.

we have one child in day care. we live in georgia.

we do not have any pension contributions. looking at my pay stub, i see that $8 is taken out per month for vision, but there are no other voluntary deductions in addition to vision and my Simple IRA. i will have to check my wife's pay stub, but i think she does have some medical premiums taken out... i'll take these into account when i confirm what they are.

we do not have any HSA or FSA.

based on the responses, it looks like i am approaching this question correctly, and I just need to look at my wife's pay stub to see if any of the above are taken out in addition to what i've already discussed.
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bgf
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by bgf » Wed Aug 08, 2018 12:57 pm

ok wow, a LOT more is taken out of my wife's paycheck than i thought... to update.

Assume wages of $127,000.
- $24,000 standard deduction
- $12,500 Simple IRA contribution
- $5,000 Dependent Care Account
- $1,500 403b Pre-tax contribution
- $100 Vision
- $540 Dental
- $3885 Health Ins.
- $50 Cafeteria

= $79,425 taxable wages
-$77,401 for married filing jointly
= $2,024 in space left for tax-deferred contributions at our 28% marginal rate.

So I guess my plan would have $2,024 of my new contributions at a 28% marginal rate with $2,776 at 18%... If I make them all tax-deferred.

Hmm. Looks like I might just make the new $200 contribution tax-deferred, which would use up the rest of the 28% space, and then keep the current amount going into the 403b Roth the same.
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FiveK
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by FiveK » Wed Aug 08, 2018 1:24 pm

bgf wrote:
Wed Aug 08, 2018 12:57 pm
So I guess my plan would have $2,024 of my new contributions at a 28% marginal rate with $2,776 at 18%... If I make them all tax-deferred.
Numbers look good (marginal rates include 6% GA state tax).

One can make reasonable arguments for either traditional or Roth on the amount that would save 12% federal - depends on your expected retirement situation.

Ron Ronnerson
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by Ron Ronnerson » Wed Aug 08, 2018 1:26 pm

I think you’ve come up with a good plan.

bgf
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by bgf » Wed Aug 08, 2018 2:08 pm

great, thank you for all the help! :sharebeer
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Silk McCue
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by Silk McCue » Wed Aug 08, 2018 3:34 pm

bgf wrote:
Wed Aug 08, 2018 12:57 pm
ok wow, a LOT more is taken out of my wife's paycheck than i thought... to update.

Assume wages of $127,000.
- $24,000 standard deduction
- $12,500 Simple IRA contribution
- $5,000 Dependent Care Account
- $1,500 403b Pre-tax contribution
- $100 Vision
- $540 Dental
- $3885 Health Ins.
- $50 Cafeteria

= $79,425 taxable wages
-$77,401 for married filing jointly
= $2,024 in space left for tax-deferred contributions at our 28% marginal rate.

So I guess my plan would have $2,024 of my new contributions at a 28% marginal rate with $2,776 at 18%... If I make them all tax-deferred.

Hmm. Looks like I might just make the new $200 contribution tax-deferred, which would use up the rest of the 28% space, and then keep the current amount going into the 403b Roth the same.
I may be confused or am missing something but I don't see that you are factoring in the $2000 tax credit for your child? How does that affect your analysis? I show with that with that credit your Fed tax burden would be $7352. The top of the 12% bracket would be $8907. I calculated this using the link I provided earlier.


Cheers

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FiveK
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by FiveK » Wed Aug 08, 2018 7:30 pm

Silk McCue wrote:
Wed Aug 08, 2018 3:34 pm
I may be confused or am missing something but I don't see that you are factoring in the $2000 tax credit for your child? How does that affect your analysis? I show with that with that credit your Fed tax burden would be $7352. The top of the 12% bracket would be $8907. I calculated this using the link I provided earlier.
Yes, that's the federal tax. But the OP is interested in the marginal rate for more pre-tax contributions, which looks like
Image

Silk McCue
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by Silk McCue » Wed Aug 08, 2018 7:50 pm

FiveK wrote:
Wed Aug 08, 2018 7:30 pm
Silk McCue wrote:
Wed Aug 08, 2018 3:34 pm
I may be confused or am missing something but I don't see that you are factoring in the $2000 tax credit for your child? How does that affect your analysis? I show with that with that credit your Fed tax burden would be $7352. The top of the 12% bracket would be $8907. I calculated this using the link I provided earlier.
Yes, that's the federal tax. But the OP is interested in the marginal rate for more pre-tax contributions, which looks like
It appeared to me that they wanted to find the edge for the 28% deductions so they could stop there and then contribute to the Roth 401k. Not properly calculating their taxes including a child tax credit would through that analysis off.

Cheers

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FiveK
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by FiveK » Wed Aug 08, 2018 8:22 pm

Silk McCue wrote:
Wed Aug 08, 2018 7:50 pm
It appeared to me that they wanted to find the edge for the 28% deductions so they could stop there and then contribute to the Roth 401k. Not properly calculating their taxes including a child tax credit would through that analysis off.
Yes, it could. But the calculation is correct, and includes the CTC.

bgf
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by bgf » Thu Aug 09, 2018 2:30 pm

delete as duplicate
Last edited by bgf on Thu Aug 09, 2018 2:31 pm, edited 1 time in total.
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bgf
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by bgf » Thu Aug 09, 2018 2:30 pm

FiveK wrote:
Wed Aug 08, 2018 8:22 pm
Silk McCue wrote:
Wed Aug 08, 2018 7:50 pm
It appeared to me that they wanted to find the edge for the 28% deductions so they could stop there and then contribute to the Roth 401k. Not properly calculating their taxes including a child tax credit would through that analysis off.
Yes, it could. But the calculation is correct, and includes the CTC.
Ok, just saw these additional posts about the child tax credit. So yes, I do think I got the child tax credit last year, but I don't think we received the full $2,000. I think it phased down quite a bit for us. maybe to like $600?

I was under the impression that the tax credit would reduce my federal tax burden but that it would not change the calculation of my taxable wages, which is the number used to determine my marginal tax rate for tax-deferred contributions.

:confused
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FiveK
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by FiveK » Thu Aug 09, 2018 2:42 pm

bgf wrote:
Thu Aug 09, 2018 2:30 pm
FiveK wrote:
Wed Aug 08, 2018 8:22 pm
Silk McCue wrote:
Wed Aug 08, 2018 7:50 pm
It appeared to me that they wanted to find the edge for the 28% deductions so they could stop there and then contribute to the Roth 401k. Not properly calculating their taxes including a child tax credit would through that analysis off.
Yes, it could. But the calculation is correct, and includes the CTC.
Ok, just saw these additional posts about the child tax credit. So yes, I do think I got the child tax credit last year, but I don't think we received the full $2,000. I think it phased down quite a bit for us. maybe to like $600?

I was under the impression that the tax credit would reduce my federal tax burden but that it would not change the calculation of my taxable wages, which is the number used to determine my marginal tax rate for tax-deferred contributions.

:confused
Rules for the CTC have changed significantly between 2017 and 2018. It's more favorable for you in 2018.

Because your CTC amount will not change over the income range of interest to you here, it has not effect on your marginal rate. Thus your impression is correct.

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Peter Foley
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by Peter Foley » Thu Aug 09, 2018 3:15 pm

Maybe it is just the way your are wording all of this when you use the combined federal and state tax rates. I find it confusing.

For 2018 MFJ
2018 Federal Tax Brackets and Rates
Rate For Unmarried Individuals, Taxable Income Over For Married Individuals Filing Joint Returns, Taxable Income Over
10% $0 $0
12% $9,525 $19,050
22% $38,700 $77,400
24% $82,500 $165,000
32% $157,500 $315,000
35% $200,000 $400,000
37% $500,000 $600,000

So the 28% bracket is the 22% federal plus 6% state. The 22% bracket runs from $77,400 in taxable income to $165,000 for MFJ. So $165,000 in taxable income would "fill" the 22% bracket.

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FiveK
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Re: 403b Roth or Pre-tax Decision and Marginal Rate

Post by FiveK » Thu Aug 09, 2018 4:45 pm

Peter Foley wrote:
Thu Aug 09, 2018 3:15 pm
Maybe it is just the way your are wording all of this when you use the combined federal and state tax rates. I find it confusing.

For 2018 MFJ
2018 Federal Tax Brackets and Rates
Rate For Unmarried Individuals, Taxable Income Over For Married Individuals Filing Joint Returns, Taxable Income Over
10% $0 $0
12% $9,525 $19,050
22% $38,700 $77,400
24% $82,500 $165,000
32% $157,500 $315,000
35% $200,000 $400,000
37% $500,000 $600,000

So the 28% bracket is the 22% federal plus 6% state. The 22% bracket runs from $77,400 in taxable income to $165,000 for MFJ. So $165,000 in taxable income would "fill" the 22% bracket.
OP is going in the other direction: increasing 401k (or similar) contributions that decrease taxable income. That's why the greater the contribution, the lower the marginal rate (see chart in a previous post).

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