Employer Contributions 401k/roth 401k/ Vanguard IRA confused

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FatPuma
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Joined: Sat Jun 10, 2017 3:32 pm

Employer Contributions 401k/roth 401k/ Vanguard IRA confused

Post by FatPuma » Thu Oct 11, 2018 8:56 am

Hi Everyone,

I need some advice on how to maximize my contributions and hopefully returns. I am 33 years old married and have 1 year old child
I currently have 401k with my employer(3% match at 100 and 5% match at 50) and Roth IRA which i contribute 5,500 every year.

My employer recently added 2 more options which are matched the same way as the 401k
Roth 401k (3% match at 100 and 5% match at 50) - (after tax)
After-Tax (3% match at 100 and 5% match at 50) - (after tax)


What do you think is the optimal solution and why?

Option A (Current Scenario):
-Try to max out my 401k (currently contributing 19% of my salary)
-and contribute to Vanguard ROTH IRA $5,500

Option B:
8% in 401k (before tax)
8% in ROTH 401k (after tax)
8% After-Tax (after tax)
Continue to contribute $5,500 to Vanguard ROTH IRA (after tax)

Option C:
?

Cheers and appreciate the input! :sharebeer

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FiveK
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Re: Employer Contributions 401k/roth 401k/ Vanguard IRA confused

Post by FiveK » Thu Oct 11, 2018 11:28 am

How do you expect your marginal tax rate for withdrawals from traditional accounts to compare with the marginal tax saving rate you get for traditional contributions today?

See Traditional versus Roth - Bogleheads.

FatPuma
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Joined: Sat Jun 10, 2017 3:32 pm

Re: Employer Contributions 401k/roth 401k/ Vanguard IRA confused

Post by FatPuma » Thu Oct 11, 2018 4:08 pm

Don't even know how to reply to your question ;/ I did the reading but i'am quite confused. Neither one of is thinking about how much we will get taxed in our 60's since that could change and I guess we will get taxed a little more on the couple of thousand dollars I could be putting into the ROTH 401k.

The total household income is 140 before tax. Both my wife and i contribute 19% into out 401Ks that leaves us with 114 to be taxed at 22%.

megabad
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Joined: Fri Jun 01, 2018 4:00 pm

Re: Employer Contributions 401k/roth 401k/ Vanguard IRA confused

Post by megabad » Thu Oct 11, 2018 4:27 pm

What is your goal with Option B? Do you have significant retirement savings already? Are they Roth or Traditional? Are your 401k options good and low expense? Does 401k plan allow inservice rollovers? Without knowing anything else, I would probably go for Option A. My reason for this is that most folks will not have enough to fill up the lower tax brackets in retirement with RMDs and SS so I lean toward deferring taxes. Once you hit 18500 traditional 401k contribution each you can start adding in the after tax contributions.

retiredjg
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Re: Employer Contributions 401k/roth 401k/ Vanguard IRA confused

Post by retiredjg » Thu Oct 11, 2018 5:30 pm

In your situation I suggest that you contribute to each traditional 401k enough to get the full match from each employer. The match is essentially free money and you should not miss that.

Once you have met the match(es), decide if you want to put more into traditional 401k or Roth IRA. Roth IRA has the benefit of complete flexibility in what you invest in, maybe more choices than the 401k and it gives you some "tax-diversification". If you have great choices in your 401k (i.e. very low expense ratios), you might prefer to put more in the 401k. If you have a poor or just OK 401k, you should put more money into Roth IRA.

I would try to have somewhere between 1/4th and 1/2 of your annual contributions put in Roth IRA. Some people would say to completely fill both 401ks before considering Roth IRA - I think that is going a little too far. I think having some of each is valuable if you can't fill all 4 accounts. Filling both accounts would mean saving $48k a year for retirement. That's a lot when you are young.

Once you can fill 2 401k plans and 2 Roth IRAs, you can start using the after-tax account (not Roth 401k) in the 401k to get even more into Roth IRA each year. Until then, just stick with the basics of traditional 401k and Roth IRA at a ratio that you feel comfortable with.

mnnice
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Re: Employer Contributions 401k/roth 401k/ Vanguard IRA confused

Post by mnnice » Thu Oct 11, 2018 5:51 pm

My understanding is that a employer match is always traditionally (its an IRS requirement?) . I would be very surprised if your plan really works as you describe. I suspect that you have a choice between all three options (and any combo you want but the match is just on the first 8% and what type trad., Roth, or after tax is irrelevant.

At your current tax rate I would be inclined to just stick with traditional, but you could add some Roth in the mix too.

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FiveK
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Re: Employer Contributions 401k/roth 401k/ Vanguard IRA confused

Post by FiveK » Thu Oct 11, 2018 6:21 pm

FiveK wrote:
Thu Oct 11, 2018 11:28 am
How do you expect your marginal tax rate for withdrawals from traditional accounts to compare with the marginal tax saving rate you get for traditional contributions today?

See Traditional versus Roth - Bogleheads.
FatPuma wrote:
Thu Oct 11, 2018 4:08 pm
Don't even know how to reply to your question ;/ I did the reading but i'am quite confused. Neither one of is thinking about how much we will get taxed in our 60's since that could change and I guess we will get taxed a little more on the couple of thousand dollars I could be putting into the ROTH 401k.

The total household income is 140 before tax. Both my wife and i contribute 19% into out 401Ks that leaves us with 114 to be taxed at 22%.
If you have no pensions, and assume a 4% withdrawal rate from your traditional balance is your only income, it requires ~$2.5 million for that balance before you will start paying 22% on those withdrawals.

Given that, taking as much in traditional deductions as you can is probably your best course now, and until you project your traditional retirement balance will reach that $2.5 million. You can review this back-of-the-envelope strategy anew each year, as your current balance and tax laws change.

See also Investment Order.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Employer Contributions 401k/roth 401k/ Vanguard IRA confused

Post by retiredjg » Thu Oct 11, 2018 6:26 pm

The match always goes into the traditional (tax-deferred) 401k account. The plan can apply their match to whatever type of contribution/account they want.

It seems to always apply to traditional 401k contributions and Roth 401k contributions. Whether an after-tax contribution gets matched seems to vary from plan to plan from what we've heard.

viz
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Joined: Fri May 04, 2018 11:22 pm

Re: Employer Contributions 401k/roth 401k/ Vanguard IRA confused

Post by viz » Thu Oct 11, 2018 6:38 pm

mnnice wrote:
Thu Oct 11, 2018 5:51 pm
My understanding is that a employer match is always traditionally (its an IRS requirement?) . I would be very surprised if your plan really works as you describe. I suspect that you have a choice between all three options (and any combo you want but the match is just on the first 8% and what type trad., Roth, or after tax is irrelevant.

At your current tax rate I would be inclined to just stick with traditional, but you could add some Roth in the mix too.
I believe the match will always be tax deferred in traditional 401k irrespective of the contribution is Roth or not. The match is only tax deferred up to 18.5k. I don't know if employer can match more than that limit.

FatPuma
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Joined: Sat Jun 10, 2017 3:32 pm

Re: Employer Contributions 401k/roth 401k/ Vanguard IRA confused

Post by FatPuma » Thu Oct 11, 2018 9:09 pm

viz wrote:
Thu Oct 11, 2018 6:38 pm
mnnice wrote:
Thu Oct 11, 2018 5:51 pm
My understanding is that a employer match is always traditionally (its an IRS requirement?) . I would be very surprised if your plan really works as you describe. I suspect that you have a choice between all three options (and any combo you want but the match is just on the first 8% and what type trad., Roth, or after tax is irrelevant.

At your current tax rate I would be inclined to just stick with traditional, but you could add some Roth in the mix too.
I believe the match will always be tax deferred in traditional 401k irrespective of the contribution is Roth or not. The match is only tax deferred up to 18.5k. I don't know if employer can match more than that limit.
Correct. Employer will match up to 18500 but i can also contribute to all 3 options and get 3% on 100 and 5 on 50% match. My 401k doesnt have too many great options to choose from.

FreemanB
Posts: 263
Joined: Thu May 22, 2014 5:55 am

Re: Employer Contributions 401k/roth 401k/ Vanguard IRA confused

Post by FreemanB » Fri Oct 12, 2018 10:15 am

FatPuma wrote:
Thu Oct 11, 2018 9:09 pm
Correct. Employer will match up to 18500 but i can also contribute to all 3 options and get 3% on 100 and 5 on 50% match. My 401k doesnt have too many great options to choose from.
Just to be clear, are you saying that your employer will match your contributions to each option separately, because that is unheard of. What is more likely is that they match that amount(100% of the first 3% of salary, 50% on the next 5%) of total contributions, regardless of which option you are contributing to. So it wouldn't matter if you did 8% in Trad only versus 8% in Trad and 8% in Roth, the company match would still be exactly the same. That may be the way you understand it, but I wasn't sure from the wording.

In your situation, I would just continue to max out the traditional 401k and contribute to the Roth IRA.

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