Author Topic: Good to contribute to Roth and Traditional simultaneously?  (Read 1037 times)

deek

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Good to contribute to Roth and Traditional simultaneously?
« on: September 25, 2018, 02:09:18 PM »
What are pros or cons of putting money in both at the same time?

I currently have a vanguard account with old 401k funds that I will likely put in a traditional IRA. I also have a simple IRA with a 3% match at work.

No Roth yet, but I want to start one.

seattlecyclone

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Re: Good to contribute to Roth and Traditional simultaneously?
« Reply #1 on: September 25, 2018, 02:13:15 PM »
It all depends.

You should try to make an educated guess about whether your tax rate will be higher or lower during retirement than it is now. If there's a pretty clear answer there, then you should probably prefer all one or the other. If not, there's little harm in hedging your bets and putting a little bit in each.

Also if your income is high enough that you can't deduct traditional IRA contributions, or if you have access to a mega backdoor Roth at work, you might be forced to put some portion of your savings in Roth even if you might prefer to put the whole sum in traditional.

deek

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Re: Good to contribute to Roth and Traditional simultaneously?
« Reply #2 on: September 25, 2018, 02:22:21 PM »
It all depends.

You should try to make an educated guess about whether your tax rate will be higher or lower during retirement than it is now. If there's a pretty clear answer there, then you should probably prefer all one or the other. If not, there's little harm in hedging your bets and putting a little bit in each.

Also if your income is high enough that you can't deduct traditional IRA contributions, or if you have access to a mega backdoor Roth at work, you might be forced to put some portion of your savings in Roth even if you might prefer to put the whole sum in traditional.

Current income is 38k. I have a job I enjoy for the most part and see myself being here for awhile. I have a 6-month review coming up and am hoping for a slight increase. Then another review for my 1-year.

MDM

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Re: Good to contribute to Roth and Traditional simultaneously?
« Reply #3 on: September 25, 2018, 03:53:52 PM »
What are pros or cons of putting money in both at the same time?
If you do a 50/50 split, you can't be more than half wrong.

But if you'd like to take a chance on being 100% correct, calculate your current and estimate your future marginal tax rates.  Then invest accordingly.  See Traditional versus Roth - Bogleheads for details.

FatFI2025

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Re: Good to contribute to Roth and Traditional simultaneously?
« Reply #4 on: September 26, 2018, 08:53:37 PM »
Generally to FIRE you have to be high earner, low spender. So if you RE early and do a Roth ladder, for example, you're probably better off weighing traditional. If you're like my parents, with a big fat pension and SS, it might make sense to do 25% Roth to provide some flexibility in retirement years with large capital gains. There are other exceptions I can think of like if you are working overseas and eligible for FEIE, military with only some of income taxed, or you can take advantage of the TCJA 20% deduction for passthroughs. But for the most part traditional is probably favored over Roth.

AccidentalMiser

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Re: Good to contribute to Roth and Traditional simultaneously?
« Reply #5 on: September 26, 2018, 09:04:15 PM »
How much will you make in 10 years on your current career path? 

This topic is a lot deeper than it seems on the surface.  You are trying to optimize your taxes across your whole working life so you have to have a clear picture of how much you make now, how fast your income will grow, what you plan to do about family, housing, etc. and when you plan to stop working.

You CAN just split it 50/50 or 25/75 or whatever but if you'll take the time to map out your overall strategy, it will pay dividends every year. 

Best of luck to you!

teen persuasion

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Re: Good to contribute to Roth and Traditional simultaneously?
« Reply #6 on: September 27, 2018, 07:55:39 AM »
Also depends on other details - like married with kids and eligible for EITC?

I found that contributing to traditional 401k (but not tIRA) increased our refundable EITC as well as saving state and federal income tax.  Even better, our state partially matches EITC, so a further advantage.

Then I used the refundable credits to fund our Roth IRAs - there was no further advantage to traditional contributions (hit zero federal tax).  Free going in, free coming out in FIRE!

Use different strategies at different periods of your life.  EITC and CTC are useful in the window when you have kids; CTC drops when they hit age 17, EITC when they are no longer your dependents.  AOTC when a child is in undergrad. Roth conversions are to be avoided when filing FAFSA for college students.  Etc.

talltexan

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Re: Good to contribute to Roth and Traditional simultaneously?
« Reply #7 on: September 27, 2018, 08:53:01 AM »
If your marginal tax rate is below 20%, use the Roth.

Catbert

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Re: Good to contribute to Roth and Traditional simultaneously?
« Reply #8 on: September 27, 2018, 11:51:19 AM »
How much will you make in 10 years on your current career path? 

This topic is a lot deeper than it seems on the surface.  You are trying to optimize your taxes across your whole working life so you have to have a clear picture of how much you make now, how fast your income will grow, what you plan to do about family, housing, etc. and when you plan to stop working.

You CAN just split it 50/50 or 25/75 or whatever but if you'll take the time to map out your overall strategy, it will pay dividends every year. 

Best of luck to you!

Accidental Miser makes a good point. 

I'll add that when you do retire it's good to have money in different tax categories.  Some non-taxable money (e.g., Roth IRA/401k, muni bonds), some subject to income tax (e.g., SS, traditional IRA/401k) and some subject to capital gains (e.g., mutual funds, sale of real estate).  This variety will enable you to fund life while you do a Roth conversion ladder and fine tune your "income" if you need to for ACA or other reasons.

Penn42

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Re: Good to contribute to Roth and Traditional simultaneously?
« Reply #9 on: September 28, 2018, 05:20:00 PM »
Several years ago at my first job out of college I started a 403(b).  I had no idea what I was doing so I split my contributions 50/50.  I thought I had them going into a target date fund, but they were actually sitting in a money market account.  I didn't find that out until 18 months ago when I found MMM and actually started learning about investment, doh! 

To date those are the only Roth contributions I've made anywhere.  Whether or not I've made the absolute best choice for my own situation I'm unsure because I haven't sat down and figured it out perfectly.  Now it's a moot point because I'm starting to make enough that the general recommendation is to forget about Roth in favor of the tax break. 

Besides, if I understand correctly, the only reason this is really a debate is because of those pesky 5 years (or 4 years and 1 month) it takes to get the conversion ladder set up.  If you didn't have to worry about those implications it would more often be advantageous to shelter more money.  I know not having to pay taxes on any Roth gains once you're 59 1/2 is another consideration, but since early retirees are not looking to access any roth gains it seems rather trivial to this debate.

I've been brainstorming potential ways to bridge that 49 month gap when the time comes (it's still a ways off for me) and these are some of the ideas I've had.

1. If someone's spouse is still working/still wants to work the two could file separately and the FIRE-ee could supplement their spouses income with taxable retirement funds up to the point they hit the first LTCG tax bracket.

2. Have your expenses low enough you could do a Roth conversion with half of $38,600 (the upper limit for 0% LTCG tax for a single filer) and live of your taxable account(s) with the other half. 

3. Sell all your shit and go WWOOF (or something similar) for 49 months while your ladder gets going. 

Are there any huge holes that would make any of those options unfeasible?  At this point it's not looking like I'll have much Roth money when I hit FI.  Even if I throw all future IRA contributions into Roth I won't have enough to bridge the gap based on my FIRE timeline anyway.