Analysis Paralysis in regards to Roth/Traditional IRA

[SV19]

Hi folks,

I am new to the board and concept of FI but am so glad I found it. I am trying to maximize my efficiency to be able to set my family (I am recently married, I'm 32, she is 28, no kids yet) up for the future, as well as me personally. I am currently max'ing out my HSA and doing up to my company match on 401k (currently traditional though Roth is also available.)

Which leads me to where I'm at now. I feel like it is 50/50 support out there on whether I should maximize my (and my wife's) Roth or Traditional IRA. On one hand I know it's good to lower my AGI with Traditional, and that's what most of the FIRE blogs seem to suggest. But I'm also trying to be considerate of my wife's situation. She's interested in early retirement but if we maximize these tax vehicles we'll be living on much less than I think she is comfortable doing. Having a Roth there may put her mind to ease in regards to future expenses (we do want to buy a house in the next couple years.)

Here's a snapshot of our situation:

My salary: ~$45k before taxes (I like the company I work for, though am not sure on a timeline to get my salary greatly increased any time soon)

Her salary: ~$60k before taxes (She graduated nursing school and started her first RN job a month ago. She has plans to pursue further education all the way up to becoming an NP)

HSA: Maxed
My 401k: 5% (up to match)
Her 403b: 5% (match)

Rent:
$1378 (suburbs of Chicago)

We do have some student loans and a car loan (4k at 5%) which we are aggressively paying off. I'm reaching out for assistance on what we should do next. I am waiting on starting contributions to our 2016 IRAs until I know for a fact which one I want to go with. Also, I mentioned before that currently I'm contributing 5% to a traditional 401k through my employer but they also offer a Roth 401k, should I switch?

I know this is a beginner's question and I assure you I've done my fair bit of research the last couple months. But when it comes down to it, I'm still hesitant on knowing which is the best option for my wife and I in regards to our future.

Appreciate any feedback.

[seattlecyclone]

In general, a Roth will be better if you expect your tax bracket to be higher during retirement, and a traditional will be better if you expect your tax bracket to be lower during retirement. Keep in mind that the more of your stash you expect to be in Roth accounts, the less you'll be withdrawing from accounts that will give you taxable income, which makes it less likely that your tax bracket will be higher than it is now. For that reason I think the vast majority of early retirees will be better off by maxing out traditional retirement accounts instead of Roth accounts.

However, neither option is really wrong in any sense. The most important thing is to save as much as you can! Where you save it is certainly important, but is a secondary concern.

[SV19]

Thanks, as I mentioned before her education aspirations have her targeting jobs that make anywhere from $150-200k (certain niche positions her family currently do and mentor her with) so I feel like at retirement our income will greatly increase. She loves being a nurse and it's a passion of hers. My job itself is ok, but I do enjoy the company I work for.

I think she likes the idea of being financially independent more than necessarily retiring early. As for myself, I love the idea of being able to retire early and to be frank I may be able to do that anyway if we move to a LCOL and live on her salary alone.

[seattlecyclone]

Ah, gotcha. If you expect your income to go way up before you retire, leaving you with enough saved that you'll spend a bit more during retirement than you earn now, a Roth might not be a bad idea for now. Then once your wife starts earning the big bucks, switch to traditional contributions as much as possible.

[zolotiyeruki]

Don't forget the phase-out on the deduction for tIRA contributions.  Once your MAGI is over $118k, you won't be able to deduct your IRA contribution, which eliminates the main advantage an IRA has over a traditional investment account.

Your retirement income is likely to be significantly less than your current income (and therefore taxed at a lower rate), so a traditional IRA is probably the way to go for you.  You'll need to make sure that your keep your MAGI below $98k, though, so you can deduct the full contribution.  Once you've maxed that out, if you can contribute more, go ahead and stick it in a traditional investment. Long-term capital gains are tax-free, as long as you're in the 10% or 15% brackets, which is likely to be the case when you're retired.

[Jack]

I'd suggest maxing* your traditional 401ks and traditional IRAs, and saving up for a house down payment outside of your tax-advantaged accounts. Although you can withdraw from a Roth to buy your first house, I don't think it's a smart move because you're not allowed to put that money back.

(*$58k before taxes -- that is, what you'd have left after subtracting out $18K 401k contributions + $5.5K IRA contributions for each of you --  should still be plenty to live on.)

[ooeei]

I'd suggest maxing* your traditional 401ks and traditional IRAs, and saving up for a house down payment outside of your tax-advantaged accounts. Although you can withdraw from a Roth to buy your first house, I don't think it's a smart move because you're not allowed to put that money back.

(*$58k before taxes -- that is, what you'd have left after subtracting out $18K 401k contributions + $5.5K IRA contributions for each of you --  should still be plenty to live on.)

This is the ideal solution. 

[ShoulderThingThatGoesUp]

When you come to a fork in the road, take it.

Seriously, both are better than nothing. The tIRA is my preference since it gives an immediate tax savings and I prefer to try not to predict the future.

[Axecleaver]

Having a Roth there may put her mind to ease in regards to future expenses (we do want to buy a house in the next couple years.)

If you are first time homebuyers, you can withdraw up to 10k each from either a traditional or Roth IRA without hitting the 10% penalty: https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Tax-on-Early-Distributions

However, withdrawal from a traditional would make it taxable in the year you withdraw, so using a Roth and paying taxes in the year you earn it may be preferable.

[BrickByBrick]

I constantly debate this for myself as well.  So far I've stuck my contributions in a Roth, one because I have a very small but growing passive income and side business that I intend to keep growing over time, and the other reason is more of a feeling - that as our country moves to a more socialized system we will eventually see income tax brackets jump and/or the government will make some type of IRA change that gives grandfathered Roths an advantage.  I base this on nothing more than a feeling so take it with a grain of salt.

But a lot of FIRE blogs and other people smarter than me go the traditional route, which makes me doubt myself.

I guess my only advice would be to think long and hard about how much your income tax bracket might drop when you "retire".  It's hard to think that far into the future with much accuracy, but if you don't think it would dip much (or at all), then perhaps a Roth is the way to go - so long as you're starting early (which it sounds like you are).

 

[Jack]

the other reason is more of a feeling - that as our country moves to a more socialized system we will eventually see income tax brackets jump and/or the government will make some type of IRA change that gives grandfathered Roths an advantage.  I base this on nothing more than a feeling so take it with a grain of salt.

But a lot of FIRE blogs and other people smarter than me go the traditional route, which makes me doubt myself.

Given zero knowledge of the future, I think assuming the status-quo will continue is safer than trying to predict which of the myriad ways it could change.

Moreover, if you're on a 10-year FIRE plan and starting a Roth pipeline thereafter, the time window in which you could be screwed by changing policy re: Roth vs. traditional isn't necessarily all that long anyway.

[Sibley]

Well, you say you're worried your wife may not be comfortable living on less. What do your expenses look like? You may be able to optimize so that lifestyle doesn't change but you've got more disposable income. Try to live on one income alone and save the other.

[SV19]

That's what we're planning on doing (once we've taken care of the debt, that's priority #1.) As of now we were thinking of living on her income and using mine to save and invest.