Roth 401K vs Pre-Tax 401K

[Mrs. Green]

I am trying to determine if I should put money into my company's Roth 401K or Pre-Tax 401K.

My  husband and I make $85 combined.  Our "only" debt is $60K in student loans and $160K in mortgage.

I assume we'll have a low income at retirement due to our low expenses.  Am wondering if I should move Roth 401k (Vanguard 500 ETF), to the pre-tax 401K.

Thoughts? Reasoning?

[Rufus.T.Firefly]

Personally, I go pre-tax accounts to try to get my taxable income into the 15% bracket and then after that, I stick with the Roth. My reasoning is that the Roth will grow tax-free from here on out and I'll likely have to pay 15% income tax on the backdoor Roth conversion later anyway.

Also, I want to be tax diversified in case the laws change and the current tax treatment of the backdoor Roth conversion goes away.

This counters a lot of the advice others will give on here, which is to max pre-tax accounts.

[yachi]

If I were you, I'd put at least 10k into a Pre-Tax 401(k).  That way you'll drop from the 25% tax bracket to the 15% tax bracket.  I think the standard deduction already took you down to the 15% bracket.

I would say keep putting it away in the Roth account, especially if you're maxing out your tax advantaged accounts.  Because the taxes have already been paid in Roth accounts, it's as if they have a higher contribution limit.

[MDM]

I assume we'll have a low income at retirement....
Thoughts? Reasoning?

Check your assumption.  By that I mean do at least a ballpark estimate, noting the difference between traditional vs. Roth contributions on that retirement income. 

Note the possibility of self-defeating predictions: predict high taxable income > contribute to Roth > get low taxable income; predict low taxable income > contribute to traditional > get high taxable income

1) Include any pension amount that you can't defer in return for higher payments when you do start
2) Take current traditional balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 4% of that value as an annual withdrawal.
3) Take current taxable balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 2% of that value as qualified dividends.
4a) Decide whether SS income should be considered, or whether you will be able to do enough traditional->Roth conversions before taking SS.
4b) Include SS income projections (using today's dollars) if needed from step 4a.
5) Calculate marginal rate using today's tax law on the numbers from step 1-4.
6) Make your traditional vs. Roth decision for this year's contribution
7) Repeat steps 1-6 every year until retirement

[Laura33]

Personally, I switched to the Roth 401(k) option as soon as my employer opened it up.  This was based on my specific situation, which includes the following considerations:

1. Significant doubt that my post-retirement income will be in a substantially lower tax bracket.  This is due in part to a personal belief/concern that rates at some point are going to have to go up (having lived through the '70s, I see today's rates as low.  Yes, I said that.)  If you think differently, follow your own thoughts, not mine.

2. I already have a significant sum saved in a traditional 401(k), and in fact my employer's profit-sharing contribution contines to go toward my traditional 401(k).  I like the idea of the Roth for a little tax diversication.

3. I like the idea that the Roth option effectively allows me to shelter more, because the $18K limit is the same for both Roth and regular 401(k), but the Roth is with post-tax $ vs. pre-tax, which means it's really more like being able to put $22-25K away to grow tax-free (actually, more for us, since we are in the over-50 $24K realm).*  Since we currently bring in substantially more income than we require for our expenses, it is worth it to me to take the up-front tax hit to be able to get the tax-free growth on more "effective" dollars -- I mean, that's almost $50K/yr that will grow without taxes, ever!

4. I don't have to argue with DH about upping our Vanguard contributions.  DH thinks we already save enough outside of the 401(k)s and doesn't like it when I increase our monthly Vanguard transfers.  By switching to the Roth, I get to save more effective dollars now, all the while avoiding the argument entirely.  (Yes, taxes are higher, but he is going to curse those regardless).  I even convinced him to switch his 401(k) to a Roth, too.  Heh heh heh. 

*Yes, I realize that I could do a traditional 401(k), save several grand in taxes, and put that several grand away post-tax into Vanguard, and that I might come out better in the end doing it that way given the low capital gains tax rates I'd pay on the Vanguard funds.  No, I have not run the numbers, because this is where points 1, 2, and 4 come in.  I have significant traditional 401(k) investments, which are great if my RE tax rate is lower; I have some regular post-tax Vanguard index funds, which are great if capital gains taxes remain lower than regular income tax rates; and now I have the Roth money, in case we go back to the 1970s and tax rates jack up and capital gains are taxed the same as ordinary income.  IOW, I see it as more of a defensive or risk management measure, with a side of marital argument avoidance as the cherry on top.

YMMV.  Many, many smart people here disagree with my approach.

[MDM]

1. Significant doubt that my post-retirement income will be in a substantially lower tax bracket.  This is due in part to a personal belief/concern that rates at some point are going to have to go up (having lived through the '70s, I see today's rates as low.  Yes, I said that.)  If you think differently, follow your own thoughts, not mine.

One can not unreasonably assume all tax rates will go up, thus favoring Roth.  One can not unreasonably assume a Value Added Tax replaces the Income Tax, or only the rates very highest brackets increase, etc., thus favoring traditional.  Conclusions follow assumptions.

2. I already have a significant sum saved in a traditional 401(k), and in fact my employer's profit-sharing contribution contines to go toward my traditional 401(k).  I like the idea of the Roth for a little tax diversication.

A high, existing, traditional balance can favor a Roth.  E.g., if a couple filing MFJ has $2.4MM in traditional accounts, a 4% withdrawal ratio gets them into the 25% bracket.

3. I like the idea that the Roth option effectively allows me to shelter more, because the $18K limit is the same for both Roth and regular 401(k), but the Roth is with post-tax $ vs. pre-tax, which means it's really more like being able to put $22-25K away to grow tax-free (actually, more for us, since we are in the over-50 $24K realm).*  Since we currently bring in substantially more income than we require for our expenses, it is worth it to me to take the up-front tax hit to be able to get the tax-free growth on more "effective" dollars -- I mean, that's almost $50K/yr that will grow without taxes, ever!
*Yes, I realize that I could do a traditional 401(k), save several grand in taxes, and put that several grand away post-tax into Vanguard, and that I might come out better in the end doing it that way given the low capital gains tax rates I'd pay on the Vanguard funds.  No, I have not run the numbers, because this is where points 1, 2, and 4 come in.

Yes, if one contributes the maximum then a Roth can be better even for equal contribution and withdrawal tax rates.  See Traditional versus Roth - Bogleheads, or the "Roth vs. Traditional" calculation on the 'Misc. calcs' tab in the case study spreadsheet to see "how much" better.

4. I don't have to argue with DH about upping our Vanguard contributions.  DH thinks we already save enough outside of the 401(k)s and doesn't like it when I increase our monthly Vanguard transfers.  By switching to the Roth, I get to save more effective dollars now, all the while avoiding the argument entirely.  (Yes, taxes are higher, but he is going to curse those regardless).  I even convinced him to switch his 401(k) to a Roth, too.  Heh heh heh. 

I have significant traditional 401(k) investments, which are great if my RE tax rate is lower; I have some regular post-tax Vanguard index funds, which are great if capital gains taxes remain lower than regular income tax rates; and now I have the Roth money, in case we go back to the 1970s and tax rates jack up and capital gains are taxed the same as ordinary income.  IOW, I see it as more of a defensive or risk management measure, with a side of marital argument avoidance as the cherry on top.

YMMV.  Many, many smart people here disagree with my approach.

Your approach seems fine.  In other words, you have analyzed your own situation and applied your own assumptions, rather than follow an overly generic rule of thumb.  Seems a good example for anyone to follow, no matter whether they conclude traditional or Roth is "better".