Very curious on this 401K advice from two of you now. Maybe something I don't know about?
I have no existing IRA's. . . . .
We keep our finances separate but we file taxes together. Can he open a Roth in his name with the lower income? I figured that wasn't an option because we file joint taxes. I pay all the bills so no we aren't worried about that stuff.
1. He can't open a Roth directly because of your combined income. But he can do the same backdoor Roth you can as long as he has the earned income to do so.
2. Roth vs. traditional: this is tax bracket arbitrage. Right now, you guys are in the, what, 25-28% tax bracket? That means that first you pay federal and state taxes on your income, *then* that money goes into the Roth. So, like RWD says, you are taking probably $25K of your gross income in order to invest $18K of it.
So, first, investing in a tIRA will lower your reported AGI. For many people, that means that right now, your marginal tax rate is lower -- maybe it goes from 28% to 25%. So, for ex., the 28% bracket currently starts at $151,900. If you make $210K, but both of you max your t401(k)(so $36K), that brings your reported income down to $184K; if your other deductions bring that down below $151,900, then you pay no taxes at 28%. But, second, even if your marginal rate stays at 28%,
you're still avoiding paying 28% federal tax (and whatever in state/local tax) on $36K of income. That is $10K more in your pocket every year (just from the federal taxes) that you can invest in something else.
This is where the arbitrage comes in: when you retire, do you think you will still be in the 28% tax bracket -- i.e., are you going to have so much money invested that your future AGI is going to be above $151,900 (in today's dollars)? Not many people plan on that -- especially here (remember also that capital gains are taxed at a lower rate, and you can sell any post-tax asset at a loss or no gain and not owe any taxes on that withdrawal, so an AGI above $150K is going to mean pension + SS + investments, or a shit-ton of investments and capital gains). In fact, most people here plan on retiring on closer to $50-75K -- which would put you firmly in the 15% bracket.
So in other words, you are currently paying 28% federal tax (+ whatever for the state) on that $18K you put it into a Roth. If you put that money into a traditional 401(k) instead, you will more likely be paying 15% federal tax (+ likely lower for the state as well) when you take it out. So choosing the Roth now is costing you 13 percentage points in federal tax right now.
The time when the Roth 401(k) math works is when you think your retirement tax bracket will be
higher than your current tax bracket -- so, for ex., if you are a medical resident making $40K/yr, but you are about to take a $500K/yr job, and your target retirement income is $200K/yr, you would likely be better off in a Roth until you start making those big bucks.