Portfolio Check and Roth/Trad 401k Question

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Topic Author
Cruz
Posts: 203
Joined: Sun Mar 30, 2014 7:16 pm

Portfolio Check and Roth/Trad 401k Question

Post by Cruz »

Age: 30
Debt: None
Tax Filing Status: Single
Fed Tax Rate: 22%
State Tax Rate: 5.05% (MA)
Emergency Fund: 6mo in Capital One MM

Current situation: Stable job, expect to be buying a house and getting married in next 5 years (currently saving for both in Capital One MM)

Current portfolio:
Roth IRA at Vanguard:
Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX) – (8.56% of total portfolio)
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – (28.32% of total portfolio)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) – (10.19% of total portfolio)

Taxable at Vanguard:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – (32.17% of total portfolio)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) – (8.18% of total portfolio)

Trad-401K (Thrift Savings Plan):
F Fund – (12.58% of total portfolio) - Simialir to VBMFX

Looking for a portfolio check up assuming I keep on this 80/20 split. I have been saving away for two large life expenses (marriage, house) but feel comfortable with savings plan so may be able to start contributing to taxable in 2021 again. Plan is to slowly shift my bond allocation to my TSP (401K) from my Roth as I contribute more to my TSP.

I am interested in potentially partially contributing to Roth TSP (401K)....Currently I am contributing to my TSP as Traditional but due to my younger age and salary, I was wondering if I should split my contribution 50/50 (or another ratio) between Roth and Traditional. I am right on the edge of the 12/22% brackets after contributing the max to traditional 401k and subtracting health care premiums. According to the Frugal Progessor's tax calculator (https://frugalprofessor.com/2019-tax-calculator/) my effective tax rate is rises from 12-27% very quickly between $37-38.5K and then drops back down to 22% beyond my salary. So even if I did contribute 50% to Roth TSP it appears my tax rate would not be different...unless I am misunderstanding something.
Last edited by Cruz on Tue Nov 24, 2020 10:26 pm, edited 1 time in total.
User avatar
FiveK
Posts: 10822
Joined: Sun Mar 16, 2014 2:43 pm

Re: Portfolio Check and Roth/Trad 401k Question

Post by FiveK »

When determining your marginal tax rate for traditional TSP contributions, you might find it useful to start with your gross salary and look at subtractions from there.

To judge whether traditional or Roth contributions are likely better for you now requires an estimate of your marginal tax rate when withdrawing.

If you go through that exercise, what do you think?
ExitStageLeft
Posts: 1973
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio Check and Roth/Trad 401k Question

Post by ExitStageLeft »

First off, awesome job having your financial life together at age 30. I was still spending like a drunken sailor at that age.

The decision of traditional versus Roth savings is an easy one when your tax situation places you at either of the extremes. But there is a broad valley between those extremes, and in that no-man's land it becomes all but impossible to discern the best choice.

The most important thing is to keep saving and keep refining your inputs to see whether you should adapt your retirement saving tax strategy. If you are a FERS employee and will be retiring with a FERS pension there is a very good chance that your marginal tax rate will be higher in retirement than it is now.

But there's a lot of time to pass before that happens, with a lot of unknowns in the interim. Incorporating tax diversity into your savings plan should give you greater flexibility when it comes time to enjoy the fruits of these labors.
Topic Author
Cruz
Posts: 203
Joined: Sun Mar 30, 2014 7:16 pm

Re: Portfolio Check and Roth/Trad 401k Question

Post by Cruz »

ExitStageLeft wrote: Mon Nov 23, 2020 12:45 pm First off, awesome job having your financial life together at age 30. I was still spending like a drunken sailor at that age.

The decision of traditional versus Roth savings is an easy one when your tax situation places you at either of the extremes. But there is a broad valley between those extremes, and in that no-man's land it becomes all but impossible to discern the best choice.

The most important thing is to keep saving and keep refining your inputs to see whether you should adapt your retirement saving tax strategy. If you are a FERS employee and will be retiring with a FERS pension there is a very good chance that your marginal tax rate will be higher in retirement than it is now.

But there's a lot of time to pass before that happens, with a lot of unknowns in the interim. Incorporating tax diversity into your savings plan should give you greater flexibility when it comes time to enjoy the fruits of these labors.
Thank you :) I have had a lot of guidance, especially from the BH community.

You are right, I will have a FERS-FRAE pension, plus current traditional 401K distributions and theoretically social security. So my tax rate could be equal to or higher than it is now, but that will probably not be the case as my salary increases. So that begs the question, should I shift part of my 401K contribution to Roth. At this point in my career, it seems difficult to estimate my future marginal tax rate given I am early career and so much could change.
User avatar
ruralavalon
Posts: 20127
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Portfolio Check and Roth/Trad 401k Question

Post by ruralavalon »

Cruz wrote: Sun Nov 22, 2020 6:01 pm Age: 30
Debt: None
Tax Filing Status: Single
Fed Tax Rate: 22%
State Tax Rate: 5.05% (MA)
Emergency Fund: 6mo in Capital One MM

Current situation: Stable job, expect to be buying a house and getting married in next 5 years (currently saving for both in Capital One MM)

Current portfolio:
Roth IRA at Vanguard:
Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX) – (8.56% of total portfolio)
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – (28.32% of total portfolio)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) – (10.19% of total portfolio)

Taxable at Vanguard:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – (32.17% of total portfolio)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) – (8.18% of total portfolio)

Trad-401K (Thrift Savings Plan):
F Fund – (12.58% of total portfolio) - Simialir to VBMFX

Looking for a portfolio check up assuming I keep on this 80/20 split. I have been saving away for two large life expenses (marriage, house) but feel comfortable with savings plan so may be able to start contributing to taxable in 2021 again. Plan is to slowly shift my bond allocation to my TSP (401K) from my Roth as I contribute more to my TSP.

Always, I am interested in potentially partially contributing to Roth TSP (401K)....Currently I am contributing to my TSP as Traditional but due to my younger age and salary, I was wondering if I should split my contribution 50/50 (or another ratio) between Roth and Traditional. I am right on the edge of the 12/22% brackets after contributing the max to traditional 401k and subtracting health care premiums. According to the Frugal Progessor's tax calculator (https://frugalprofessor.com/2019-tax-calculator/) my effective tax rate is rises from 12-27% very quickly between $37-38.5K and then drops back down to 22% beyond my salary. So even if I did contribute 50% to Roth TSP it appears my tax rate would not be different...unless I am misunderstanding something.
Will you be eligible for a substantial pension in addition to Social Security? What is your profession or occupation? How much (in dollars) do you currently have in traditional tax-deferred accounts? (I see that just 13% of current portfolio is tax deferred.) For most people traditional deductible 401k contributions will likely be better.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions will probably be better.

Because the tax code is progressive, when you withdraw from your 401k in retirement the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". Because the tax code is progressive, "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

Will you be eligible for a substantial pension in addition to Social Security?A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
User avatar
FiveK
Posts: 10822
Joined: Sun Mar 16, 2014 2:43 pm

Re: Portfolio Check and Roth/Trad 401k Question

Post by FiveK »

Cruz wrote: Tue Nov 24, 2020 2:40 pm ...should I shift part of my 401K contribution to Roth. At this point in my career, it seems difficult to estimate my future marginal tax rate....
To answer the question in the first sentence with anything beyond a flipped coin requires the estimate in the second sentence.

You aren't making a lifetime commitment, only a choice for this year. Make your best back-of-the-envelope estimate and choose for this year accordingly.

Do the same next year, etc.

As years go by, things (tax law, market returns, your individual situation and aspirations, etc.) will become clearer so you can adjust as needed.
User avatar
Kintora
Posts: 73
Joined: Sun Jan 12, 2020 5:21 pm
Location: Fargo, ND

Re: Portfolio Check and Roth/Trad 401k Question

Post by Kintora »

I think it is very difficult to estimate whether you will retire at a higher or lower marginal tax rate given how much can change before you retire.

I would recommend you contribute to your 401k as pre-tax/traditional, at least up to the employer match, and also contribute to Roth IRA. If you can, max out traditional 401k and Roth IRA both. This gives you tax diversity in your buckets (pre-tax, tax free, taxable) which can hopefully benefit you with more withdrawal strategy options in retirement.

You can always re-evaluate and adjust in future years, as FiveK suggested.
User avatar
Kintora
Posts: 73
Joined: Sun Jan 12, 2020 5:21 pm
Location: Fargo, ND

Re: Portfolio Check and Roth/Trad 401k Question

Post by Kintora »

ExitStageLeft wrote: Mon Nov 23, 2020 12:45 pm First off, awesome job having your financial life together at age 30. I was still spending like a drunken sailor at that age.
+1

I wish I had half your financial sense when I was 30.
Topic Author
Cruz
Posts: 203
Joined: Sun Mar 30, 2014 7:16 pm

Re: Portfolio Check and Roth/Trad 401k Question

Post by Cruz »

ruralavalon wrote: Tue Nov 24, 2020 2:46 pm
Cruz wrote: Sun Nov 22, 2020 6:01 pm Age: 30
Debt: None
Tax Filing Status: Single
Fed Tax Rate: 22%
State Tax Rate: 5.05% (MA)
Emergency Fund: 6mo in Capital One MM

Current situation: Stable job, expect to be buying a house and getting married in next 5 years (currently saving for both in Capital One MM)

Current portfolio:
Roth IRA at Vanguard:
Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX) – (8.56% of total portfolio)
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – (28.32% of total portfolio)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) – (10.19% of total portfolio)

Taxable at Vanguard:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – (32.17% of total portfolio)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) – (8.18% of total portfolio)

Trad-401K (Thrift Savings Plan):
F Fund – (12.58% of total portfolio) - Simialir to VBMFX

Looking for a portfolio check up assuming I keep on this 80/20 split. I have been saving away for two large life expenses (marriage, house) but feel comfortable with savings plan so may be able to start contributing to taxable in 2021 again. Plan is to slowly shift my bond allocation to my TSP (401K) from my Roth as I contribute more to my TSP.

Always, I am interested in potentially partially contributing to Roth TSP (401K)....Currently I am contributing to my TSP as Traditional but due to my younger age and salary, I was wondering if I should split my contribution 50/50 (or another ratio) between Roth and Traditional. I am right on the edge of the 12/22% brackets after contributing the max to traditional 401k and subtracting health care premiums. According to the Frugal Progessor's tax calculator (https://frugalprofessor.com/2019-tax-calculator/) my effective tax rate is rises from 12-27% very quickly between $37-38.5K and then drops back down to 22% beyond my salary. So even if I did contribute 50% to Roth TSP it appears my tax rate would not be different...unless I am misunderstanding something.
Will you be eligible for a substantial pension in addition to Social Security? What is your profession or occupation? How much (in dollars) do you currently have in traditional tax-deferred accounts? (I see that just 13% of current portfolio is tax deferred.) For most people traditional deductible 401k contributions will likely be better.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions will probably be better.

Because the tax code is progressive, when you withdraw from your 401k in retirement the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". Because the tax code is progressive, "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

Will you be eligible for a substantial pension in addition to Social Security?A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
I am not sure what is considered substantial but my expected pension (federal pension) would likely put me in the 12%, maybeeee 22% tax bracket without factoring in my 401k distributions, social security...etc. I believe I will be between the 12-22% federal brackets for years to come (salary should increase but not enough to push me out of the 22% in the near future (5.05% state tax currently).

From the articles you shared it seems like I could be a good candidate to contribute to my Roth 401k for a few years given that my pension will theoretically fill up the lower tax brackets in retirement (at least would be even to my tax rate now) and at retirement, withdrawals from the TSP will be taxed at the marginal rate, on top of the pension and social security. One aspect that gives me some pause is state tax rates, mine is currently 5.05%, I very likely could live and work in another state in 5-10 years and/or retire in a different state.
FiveK wrote: Tue Nov 24, 2020 3:06 pm
Cruz wrote: Tue Nov 24, 2020 2:40 pm ...should I shift part of my 401K contribution to Roth. At this point in my career, it seems difficult to estimate my future marginal tax rate....
To answer the question in the first sentence with anything beyond a flipped coin requires the estimate in the second sentence.

You aren't making a lifetime commitment, only a choice for this year. Make your best back-of-the-envelope estimate and choose for this year accordingly.

Do the same next year, etc.

As years go by, things (tax law, market returns, your individual situation and aspirations, etc.) will become clearer so you can adjust as needed.
My quick calculation shows that my marginal tax rate would be 12% maybe 22% but that is just considering what my pension could be. If anyone has any tips on estimating future marginal tax rates please share!
User avatar
FiveK
Posts: 10822
Joined: Sun Mar 16, 2014 2:43 pm

Re: Portfolio Check and Roth/Trad 401k Question

Post by FiveK »

Cruz wrote: Sat Dec 12, 2020 9:19 pmIf anyone has any tips on estimating future marginal tax rates please share!
Try the second link in this post. ;)
Topic Author
Cruz
Posts: 203
Joined: Sun Mar 30, 2014 7:16 pm

Re: Portfolio Check and Roth/Trad 401k Question

Post by Cruz »

FiveK wrote: Sat Dec 12, 2020 9:41 pm
Cruz wrote: Sat Dec 12, 2020 9:19 pmIf anyone has any tips on estimating future marginal tax rates please share!
Try the second link in this post. ;)
sorry, not sure how I missed those :oops:
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