Am I Investing Wrong?

[RL12]

Hey everybody, I've been lurking on this board for awhile and decided to come on and actually make a post. I'm 28 and my wife is 24, we both contribute 10% to our retirement funds while aggressively paying down student loans, which should be paid off by next February, then we are going to max out our contributions. We make a combined income of around 96k a year. My question is should I continue investing in my Roth and after tax investments or should we switch to pre tax investments? I always thought that the Roth was the best way to go tax wise but after doing some reading on here and other sites I'm beginning to reevaluate my stance. Both of our jobs offer regular 401ks, but again we are using their after tax option along with a Vanguard Roth that I started years ago. If any of you more knowledgeable  investors can help me out I would appreciate it.

[Retired To Win]

You may or may not be able to legally do a traditional/contributory pre-tax IRA if you are covered under a 401k plan.  Or there may be additional limitations on how much you can contribute to a traditional IRA.  Go to irs.gov and search for and around in their Publication 590.  See what you think.

[eyePod]

OK, you should always invest in 401k pre-tax. That's a given. That's your biggest mistake. Unless you think you're going to be making more money at a higher tax rate when you need to withdrawal your money.

But, in the end, it all boils down to this:

WHO THE HELL KNOWS!

We don't know if tax rates will increase or decrease in the future, plus you don't know what your income will be like at that point either.

So, based on that, I personally invest want to max out my 401k (pre-tax) and my Roth-IRA (post tax) to hedge my bets.

[MDM]

RL12, welcome to the forums.

Based on the numbers in your OP you should be ok to contribute (RTW's concern) - see http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits for details.

The "correct" approach to traditional vs. Roth requires that you know the tax rate you will pay when withdrawing funds.  One defensible rule of thumb is "use traditional if you are now in the 25% or higher brackets, and use Roth if you are in the 15% or lower."

E.g., you might contribute to your traditional 401k plans until your taxable (that's AGI minus deductions minus exemptions) income becomes less than $74,900 (see http://www.cffpinfo.com/download/annual_limits/2015_Annual_Limits.pdf for this and other limits), and use Roth for any more that you can invest.

Good luck!

[RL12]

Thanks for the responses everyone. It sounds like I should definitely be switching over to a pre-tax 401k, which is what I will be doing as soon as possible. Once our student loans are paid off we'll start contributing the max to our 401ks and Roth.

Appreciate all the help.

[dunhamjr]

i dont think there is investing wrong unless you are just plain not doing it.

there is always unknown information.
i prefer to max out pre-tax investments first.

and even if you are locked out of roth ira contributions directly, you should still be able to do a non-deductible ira contribution and backdoor transfer into the roth.

[chopper41]

This isn't your exact situation...but have a look at this post. 

http://www.joshuakennon.com/investment-tax-strategy-can-make-two-identical-portfolios-experience-different-outcomes/

[dunhamjr]

This isn't your exact situation...but have a look at this post. 

http://www.joshuakennon.com/investment-tax-strategy-can-make-two-identical-portfolios-experience-different-outcomes/

it kinda fits.  but this is more about what type of assets to hold in which account (asset positioning), which is definitely good information.

if i am reading it right.
hold the higher 'output' assets in the tax free accounts - i take this as things funded post-tax Roth IRA/401k
and the lower output (but maybe higher price appreciation) assets in the taxable accounts. - i take this as things funded pre-tax Trad IRA/401k or brokerage accounts

the article does not approach the topic of asset appreciation, it really ONLY covers where to hold high vs low dividend investments, which can throw off the numbers from the article if/when the taxable accounts continue to grow in overall value.

not a bad place to be though.

i hadnt really ever thought to hold bonds in the taxfree accounts to shelter the dividends, i had always thought it made more sense to hold the higher appreciating assets in the taxfree accounts so that when you investment of $50k, reached $500k... you only ever paid taxes on the $50k.

[RL12]

So after talking with HR I've found out that we have different retirement account options, the one I am currently contributing to is a 401(a) Thrift Savings Plan with the employer match, this only allows after-tax dollars. We also have a Deferred Comp plan that is pre-tax but no employer match. Would it be best to just stick with the TSP and max this out, or if possible contribute up to what my employer matches on the TSP and then max out the Deferred Comp? Don't even know if they allow us to do this.

Again thanks for all the advice. It has been very helpful.

[dandarc]

So after talking with HR I've found out that we have different retirement account options, the one I am currently contributing to is a 401(a) Thrift Savings Plan with the employer match, this only allows after-tax dollars. We also have a Deferred Comp plan that is pre-tax but no employer match. Would it be best to just stick with the TSP and max this out, or if possible contribute up to what my employer matches on the TSP and then max out the Deferred Comp? Don't even know if they allow us to do this.

Again thanks for all the advice. It has been very helpful.

Is deferred comp code for "government 457"?  Government part is key.  Because if so I'd go:

TSP up to match.
Max the 457.
IRA (Roth / Traditional - however you decide).

government 457's are awesome for early retirement - tax deferred now, and no 10% early withdrawal penalty once you separate from your employer.

[RL12]

So after talking with HR I've found out that we have different retirement account options, the one I am currently contributing to is a 401(a) Thrift Savings Plan with the employer match, this only allows after-tax dollars. We also have a Deferred Comp plan that is pre-tax but no employer match. Would it be best to just stick with the TSP and max this out, or if possible contribute up to what my employer matches on the TSP and then max out the Deferred Comp? Don't even know if they allow us to do this.

Again thanks for all the advice. It has been very helpful.

Is deferred comp code for "government 457"?  Government part is key.  Because if so I'd go:

TSP up to match.
Max the 457.
IRA (Roth / Traditional - however you decide).

government 457's are awesome for early retirement - tax deferred now, and no 10% early withdrawal penalty once you separate from your employer.

Dandarc, I looked it up and yes the deferred comp is a 457 plan. I also talked with HR again and I can contribute to both the TSP and the 457, max is 25% for each. While I can't max out either one right now since the wife and I are trying to pay off student loans asap, I will contribute what I can to the 457 starting immediately and hopefully by next March I'll be maxing it out.

Thanks for the info on 457 plans, I haven't ever read anything on them and wasn't aware that they didn't have a 10% early withdrawal penalty.

[Dexterous]

Sorry to diverge from the question at hand, but I noticed you make a combined income of 96k per year and are investing 10% until your student loan is "aggressively" paid off in February 2016?  You must have a substantial student loan or big expenses!  Depending on the loan amount and interest rate, you may be better paying that off quicker and investing later.

With that thought out of the way and thinking about the investment aspect alone, I would do the same as dandarc mentioned (with the TSP traditional option to lower taxes now).

[RL12]

Sorry to diverge from the question at hand, but I noticed you make a combined income of 96k per year and are investing 10% until your student loan is "aggressively" paid off in February 2016?  You must have a substantial student loan or big expenses!  Depending on the loan amount and interest rate, you may be better paying that off quicker and investing later.

With that thought out of the way and thinking about the investment aspect alone, I would do the same as dandarc mentioned (with the TSP traditional option to lower taxes now).

To answer your question we have ~37k left in student loans that we are on pace to have paid off in 13 months. So yes, we are dedicating a lot of our income to that. At the same time, we are also contributing 10% to our savings until we get that up to 10k then we will start putting everything toward the loans.

For the interest rate, we did have fairly high interest rates but my grandparents made us a very generous offer to pay off our student loans and we pay them back at 3% interest. I realize most people would advise to not worry much about paying off loans as soon as possible if the interest rate is as low as ours but my main priority is paying my grandparents back.

Edit... I misread your comment the first time. My grandparents wanted to make sure that we would still be contributing towards our retirement accounts while we repaid them so that's why we are still putting in 10%.

[Dexterous]

You have great grandparents, and it seems like everything is figured out... now you'll just have to stick to the plan.  When you get excited about paying off debt and having more money to invest, it will seem like an eternity... but hang in there!  :)

[RL12]

You have great grandparents, and it seems like everything is figured out... now you'll just have to stick to the plan.  When you get excited about paying off debt and having more money to invest, it will seem like an eternity... but hang in there!  :)

Yes they are amazing grandparents and I am extremely blessed to have them. No joke on it seeming like an eternity, we only started getting serious about paying our SL off last year and it already has seemed like forever. I can't wait to get these paid off! Thanks for the advice.