Author Topic: Help me out here--401k vs. IRA  (Read 9685 times)

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Help me out here--401k vs. IRA
« on: January 16, 2015, 08:40:04 AM »
New job, more pay, etc. I had started a thread on this earlier, but figured that I have more info now so would start a new thread instead.

  • My old job had a 401k that was all in Vanguard; I couldn't max it out so never had an IRA (other than $500 in one that I started just to have, see below)
  • My new 401k is through Principal.
  • There are fees of .25% on top of the fund fees themselves (which are not horrible).
  • I do not get a company match until I have been here a year.
  • 25% tax bracket.


Here is what I am thinking:
  • max out a Roth IRA for 2014 first (I have til March, right?).
  • Then max out a Roth IRA for 2015.
  • After that, try to max out the 401k (probably also all post tax; we do have the Roth option for that as well).


The IRA's would be either Vanguard or funds through my old company that only employees had access to, those are at about .13% cost IIRC. Probably be in Vanguard though. For the purpose of this conversation, assume the performance of the funds is the same across the board.

Now, in my scenario, is there effectively any difference in a 401k vs an IRA? I shouldn't be missing out on any tax advantages this way, right? Or am I? Also keep in mind that I'd likely be removing my contributions to an IRA for a down payment at some point, something I can't really do with a 401k.
« Last Edit: January 16, 2015, 08:42:19 AM by mtn »

frugaliknowit

  • Handlebar Stache
  • *****
  • Posts: 1662
Re: Help me out here--401k vs. IRA
« Reply #1 on: January 16, 2015, 08:52:19 AM »
Your plan to fund IRA's for 2014 and 15 is a winner!  I believe you have until April 15 to fund the 2014.
Many on this blog would argue you should do traditional instead of Roth since you are in the 25% tax bracket (I don't necessarily agree).

Effectively, 401K and IRA are the same.  The differences are subtle.

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--401k vs. IRA
« Reply #2 on: January 16, 2015, 08:56:13 AM »
Re Traditional vs. Roth... I don't see my income going below the 25% bracket, even in early retirement. I also don't trust the federal government to LOWER taxes, and I don't have the fear that they'll say "Just joking! We're taxing the ROTH contributions anyways".

Both have their benefits, but I feel the Roth is right for me right now.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7849
Re: Help me out here--401k vs. IRA
« Reply #3 on: January 16, 2015, 09:06:50 AM »
you're gonna live in the 25% tax bracket once retired.  there are tons of tax benefits to living in the 15% bracket like no LT capital gains tax etc.   whats your spending at right now?

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--401k vs. IRA
« Reply #4 on: January 16, 2015, 10:45:14 AM »
you're gonna live in the 25% tax bracket once retired.  there are tons of tax benefits to living in the 15% bracket like no LT capital gains tax etc.   whats your spending at right now?
What is my spending right now? About 10%. That will change quickly though; right now I'm living with mom and dad and they're paying for just about everything for me (the reasoning is that my siblings and I will get it eventually anyways, they might as well help since they're in a position to do so).

But in a year I'll be married and living in the city of Chicago, planning on kids, and the immediate big one, paying for my own health insurance (right now on my parents since I'm 25 and they have the family plan anyways). I forsee my spending to go up to at least 65%, probably more. As long as I can max out my 401k and IRA, I'm happy.

The bolded portion of your post above--That is my point. It will either be 25%, or higher. I expect higher. I don't want to be making [as a couple] only $74k in retirement; I want a boat or two, a vacation house, a play car, maybe a country club membership (or at least a season pass). 

I'm just not very mustachian in my life style outside of investments and savings, and I don't want to be. I'm probably about halfway between a Boglehead and a Mustachian. I like nice things, but I buy them at estate sales. My cars "need" to be RWD, leather, stickshift, and preferably a convertible--pretty much only a BMW, but I buy it used and keep it for at least 5 years. I like going out to eat, and do it often, but skip the appetizer and dessert. I would like to keep that same level of luxury in retirement. I know much of that is against the sentiment of this board, but I'm content with my life decisions regarding this.

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--401k vs. IRA
« Reply #5 on: January 16, 2015, 10:48:47 AM »
Oh, also, even if I max out my 401k and IRA, both with traditional contributions, I'll still be in 25% now.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3440
  • Age: 36
Re: Help me out here--401k vs. IRA
« Reply #6 on: January 16, 2015, 10:56:33 AM »
One key consideration in Roth vs. Traditional - you are saving at your MARGINAL tax rate of 25%.  On withdrawal, you'll be drawing out at your EFFECTIVE tax rate.  So some would be at 0%, some at 10%, some at 15%, the rest at 25% (assuming tax brackets remain the same). 

So by going Roth, you're betting that either you will spend a lot more than you do today in retirement, or that the lower-bracket tax rates will go up enough to outweigh the progressive nature of our tax system.

One other thing - if you're getting married this year, have you projected your taxes on your combined income as married filing jointly?  If  you get married by Decemer 31st, you are married for all of 2015 as far as the IRS is concerned, I believe.  May find you are not in the 25% bracket anyway, which might add some clarity to the whole decision.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3440
  • Age: 36
Re: Help me out here--401k vs. IRA
« Reply #7 on: January 16, 2015, 10:57:06 AM »
Oh, also, even if I max out my 401k and IRA, both with traditional contributions, I'll still be in 25% now.
All the more reason to go traditional, at least in my opinion.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3440
  • Age: 36
Re: Help me out here--401k vs. IRA
« Reply #8 on: January 16, 2015, 11:00:50 AM »
Also - are you eligible to deduct traditional contributions?  If not then, for sure Roth is the better choice.

One thing - how recently did your income go up?  You might well find that for 2014, Roth is better if you've only recently gotten the bump in pay.  In 2015, you might conclude Traditional is better.

I missed out on a lot of Traditional space years ago, and I am currently regretting that decision.  Not sure it would have helped that much though - my bigger issues were with spending, but knowing what I know now the plan would've been to spend less and put more in traditional.

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--401k vs. IRA
« Reply #9 on: January 16, 2015, 12:20:41 PM »
New job was this year. So definitely better to go with Roth for 2014.

Using this calculator, as long as I assume that I'll be in a 25% tax bracket, Roth almost always wins (for MY numbers). Using some "long shot" numbers, for me, I can get traditional to win, but not by more than $10,000 (on a total portfolio of over $700k)

http://www.bankrate.com/calculators/retirement/401-k-or-roth-ira-calculator.aspx

dandarc

  • Magnum Stache
  • ******
  • Posts: 3440
  • Age: 36
Re: Help me out here--401k vs. IRA
« Reply #10 on: January 16, 2015, 01:39:33 PM »
Calculator is somewhat misleading due to being overly-simple.  Confusing marginal with effective tax rates.

Ex.  Individual, makes 90K - clearly in the 25% bracket for the marginal rate as the last dollars are in the 25% bracket and .

Effective rate, assuming no retirement contributions is computed as follows:
90K = Income
6300 = Standard Deduction
4000 = Personal Exemption
Taxable Income = $79700
Income tax = 15718.75 http://www.forbes.com/sites/kellyphillipserb/2014/09/17/2015-tax-rates-brackets-exemption-amounts-may-save-taxpayers-money/
Effective tax rate = 15718.75 / 90000 =  17.5%

So if this person went traditional today, they would be saving 25% on taxes, and if drawing the same 90K pay 17.5% - saving taxes on the net, at least until RMD's kick in at 70.5.  But the situation is actually better than that.  This person can save 18,000 after tax, hence the Roth vs. Traditional decision on a 401K.  So clearly they can actually live on a take-home pay of 56,281.25 or less.  In ER, it would be foolish to create an after-tax income of greater than 56K without a really good reason - so you wouldn't draw out 90K, it would be more like $65,000, on which taxes are 9468.75 or 14.6%.  In actuality, you'd probably pay even less tax than that, particularly if you can save beyond the 401K and IRAs and so have multiple sources to draw from http://www.gocurrycracker.com/never-pay-taxes-again/

Point is, do your own math - don't take an oversimplified online calculator's word for it - or some random internet stranger's either.  Neither Roth nor Traditional is really a bad move (unless you are not paying any income taxes already - then Roth is clearly the right decision) - just make an educated decision.

The 401K roth vs. traditional is just a decision - for any IRA savings, keep in mind your deduction on traditional may be limited due to your income any way, so keep that in mind as well http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

MrMoogle

  • Handlebar Stache
  • *****
  • Posts: 1113
  • Age: 34
  • Location: Huntsville, AL
Re: Help me out here--401k vs. IRA
« Reply #11 on: January 16, 2015, 02:04:33 PM »
http://www.madfientist.com/retire-even-earlier/
Typically, in the long run, tradition is better while you work, and Roth is better once you retire.  If you don't qualify for the tax benefits of a tIRA, then a Roth IRA is the way to go.  But for 401k, traditional is almost always better for people in the 25% bracket.

I say typically and almost, but I haven't seen anything in your post that makes you an exception. 

boarder42

  • Walrus Stache
  • *******
  • Posts: 7849
Re: Help me out here--401k vs. IRA
« Reply #12 on: January 16, 2015, 02:24:37 PM »
he's going to own mansions and multiple boats and cars.  and drink krystal in retirement.   i feel he fits more on the bogleheads site than this one.  his goal is to live on 2x his salary now in retirement not cut expenses and retire earlier.

i'm the first to say i'm not 100% mustachian but my goal is to retire before 40 and live in the 15% tax bracket.

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--401k vs. IRA
« Reply #13 on: January 16, 2015, 02:39:29 PM »
he's going to own mansions and multiple boats and cars.  and drink krystal in retirement.   i feel he fits more on the bogleheads site than this one.  his goal is to live on 2x his salary now in retirement not cut expenses and retire earlier.

i'm the first to say i'm not 100% mustachian but my goal is to retire before 40 and live in the 15% tax bracket.

Seriously? That was uncalled for. I'll be drinking Woodford Reserve.

I probably do fit in better at Bogleheads, but I like this site better--I want multiple houses, not mansions, a sailboat and a fishing boat, not a yacht... I also want to do like my dad is doing and like his dad did, and be able to fully fund my kids college, as well as continue to be generous with charity and the rest of the family.

MrMoogle and dandarc certainly have me re-calculating everything though. Now the only thing I know is that my 2014 IRA will be a Roth; 2015 and my 401k I'm not sure at all anymore.

MrMoogle

  • Handlebar Stache
  • *****
  • Posts: 1113
  • Age: 34
  • Location: Huntsville, AL
Re: Help me out here--401k vs. IRA
« Reply #14 on: January 16, 2015, 03:30:36 PM »
The devil is in the details.  And the details aren't simple.  I like a lot of mad fientist's articles because he does a lot of details on cases in the ballpark to mine.

Since you are "asking a Mustachian," we do give face punches to people who spend more than needed.  For me, it's more about getting out of the rat race earlier than most people.  But even basic retirement planning is more than most people do, so even if you aren't Mustachian, you're doing better than most, asking questions, taking interest.

So stay, and learn, and maybe one of us will convert you :P

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3714
  • Age: 41
  • Location: USA
Re: Help me out here--401k vs. IRA
« Reply #15 on: January 16, 2015, 03:45:06 PM »
mtn, I welcome high spenders with open arms, as long as they are mindful about it. It doesn't bother me.

Here's the thing no one has said yet (although they've said some great things, and you should listen):

If you want to spend $125K/year in retirement (or $200K or whatever) you won't have taxable income of $125K. Any principal you save in checking, savings, and non-tax advantaged space like Vanguard will be tax free, you will only pay tax on the gains.

So you can pull out $40K/year from Vanguard taxable account, $10K/year from a CD ladder, $40K/year from your Roth, and $35K/year from Traditional. This will result in a very low tax, much lower than 25%.

If I'm you, I begin maxing out Traditional 401k and maxing out Roth IRA each and every year. Then put everything else in an after tax brokerage account. This will give you a big tax deduction now saving you 25%, and it will give you a lot of options to manipulate your taxable income after you're done working.

And congrats on the huge income right out of the gates!

MrMoogle

  • Handlebar Stache
  • *****
  • Posts: 1113
  • Age: 34
  • Location: Huntsville, AL
Re: Help me out here--401k vs. IRA
« Reply #16 on: January 16, 2015, 04:46:46 PM »
If you want to spend $125K/year in retirement (or $200K or whatever) you won't have taxable income of $125K. Any principal you save in checking, savings, and non-tax advantaged space like Vanguard will be tax free, you will only pay tax on the gains.

So you can pull out $40K/year from Vanguard taxable account, $10K/year from a CD ladder, $40K/year from your Roth, and $35K/year from Traditional. This will result in a very low tax, much lower than 25%.

If I'm you, I begin maxing out Traditional 401k and maxing out Roth IRA each and every year. Then put everything else in an after tax brokerage account. This will give you a big tax deduction now saving you 25%, and it will give you a lot of options to manipulate your taxable income after you're done working.

This is a good point.  To take it to the extreme:  If you don't go "balanced" and end up with 100% in Roth, you will end up with no taxes in retirement.  Which would mean there would be a huge benefit for having a Traditional 401k, you'd get tax benefits now, and pay no taxes later. 

When you retire, it's nice to have all your money in a Roth, but it limits how much you can save now. 

Ccube19

  • 5 O'Clock Shadow
  • *
  • Posts: 14
Re: Help me out here--401k vs. IRA
« Reply #17 on: January 17, 2015, 03:42:52 PM »
One more vote for tratitional 401k. The one thing roth might do for you is force a little more savings if you max out. Since with traditional you have to have the disipline to put the tax savings in a brokerage account.

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--401k vs. IRA
« Reply #18 on: January 17, 2015, 04:41:25 PM »
FYI--for now I still have a lot more math to do. It doesn't really matter since I do know that I'm better off in the Roth IRA for 2014, and it will take me about a month or two to max that out. After that I can figure out what I'm doing.

frugaldrummer

  • Pencil Stache
  • ****
  • Posts: 653
Re: Help me out here--401k vs. IRA
« Reply #19 on: January 18, 2015, 10:25:53 AM »
I'm interested in your luxury car addiction, as I've recently been thinking about this.
I've always driven Hondas (have a Toyota right now). Great gas mileage, cheap to operate, run a long time.

But in helping a couple of my kids look for used cars lately, I've noticed something. At the low end of the market (3-5k) people mostly want those cheap-to-operate cars. As a result, you actually can get pretty great deals on luxury cars if you're willing to accept the lower gas mileage and higher repair costs. My one son bought a beautiful jaguar with 105k miles for $3800. He has a very short commute so gas costs have not been much of an issue. Eventually he will need to decide whether to spend $3,k on repairs and have a bitchin ride for a long time, or trade it in on a more mustachian ride.

My boyfriend who has champagne tastes bought a used BMW wagon and spent a few thousand buffing it up. He has a luxury ride for about 8k. (Note we live on the west coast so salt damage is not an issue).

Not saying it's the most mustachian choice, or one that I would make. But if you really want a luxury car, the old ones go for a song.

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--401k vs. IRA
« Reply #20 on: January 18, 2015, 07:51:09 PM »
I'm interested in your luxury car addiction, as I've recently been thinking about this.
I've always driven Hondas (have a Toyota right now). Great gas mileage, cheap to operate, run a long time.

But in helping a couple of my kids look for used cars lately, I've noticed something. At the low end of the market (3-5k) people mostly want those cheap-to-operate cars. As a result, you actually can get pretty great deals on luxury cars if you're willing to accept the lower gas mileage and higher repair costs. My one son bought a beautiful jaguar with 105k miles for $3800. He has a very short commute so gas costs have not been much of an issue. Eventually he will need to decide whether to spend $3,k on repairs and have a bitchin ride for a long time, or trade it in on a more mustachian ride.

My boyfriend who has champagne tastes bought a used BMW wagon and spent a few thousand buffing it up. He has a luxury ride for about 8k. (Note we live on the west coast so salt damage is not an issue).

Not saying it's the most mustachian choice, or one that I would make. But if you really want a luxury car, the old ones go for a song.

High end cars depreciate faster than any other vehicles. Now, there are some I won't touch--Jags are at the top of that list, followed by Audi's. But you can generally get a very nice car for not much money. Top Gear did an episode where they compared two cars for about 13,000--a brand new Nissan and a 20 year old Rolls Royce. Interesting take on both the extremes.

Honestly, it isn't the luxury or the image. It is the car itself underneath; the performance and the feel. I like RWD better. No real reason, just my preference. I like something to be good handling and nimble. If my Miata was bigger, I'd probably not be looking for a new car right now. But when you put in some of my restrictions, it ends up being only BMW's that fit my requirements--and aren't that much to maintain if you go to the right places. Mazda was really close with the RX-8, but they put that rotary in which is unreliable. Infiniti was really close with the G25, but they didn't put a stick in it. G35's seem to be holding their value too much, same with Lexus IS250's. I don't like Mustangs, don' t know why. After that, we've just about run out of RWD stick shift vehicles.

The other part of this is that even after my 30%-70% savings rate, I still have disposable income. Now is the time to enjoy a car like this, because when kids come I'll be much more worried about safety and how hard it is to put a kid in a car-seat.

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--401k vs. IRA
« Reply #21 on: January 20, 2015, 09:29:30 AM »
Back to the 401k vs. IRA and Roth vs. Traditional:

Since I cannot predict the future, I'm not sure which one is better. There are simply too many unknowns--income in retirement, future tax rates, future capital tax rates, the possibility of the government taxing Roth contributions later, etc. I've run the math about 6 different ways, and can't come up with a consistently good answer.

Because of this, I have decided for now that I will be doing the following to hedge my bets:
Max out my 2014 ROTH IRA as soon as I can (projected around March, will sell some individual stocks to get this quicker)
Max out my 2015 Traditional IRA as soon as I can (projected around May)
After both of those are maxed out, start contributing to my 401k at X% to Roth, and (X-3)% to traditional. Reason for (X-3)% is that the company match goes into the traditional 401k. When I start to get a company match, both will get equal contributions.

The $5,500 to the IRA will reduce my taxable income so that most is still in the 15% range, the (X-3)% even further, and if my original assumptions prove correctly, I'll still have X% in the Roth 401k. I expect that within 5 years, I'll move the funds entirely to the traditional portion of the fund.

This probably isn't the best strategy, but with all the unknowns it is in my opinion the safest. I will not be able to max out my 401k this year due to my funding of 2 years of IRA's, but in the future shouldn't have any issue.
« Last Edit: January 20, 2015, 09:33:21 AM by mtn »

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3714
  • Age: 41
  • Location: USA
Re: Help me out here--401k vs. IRA
« Reply #22 on: January 20, 2015, 09:47:06 AM »
I see two potential issues:

1) Make sure you get 100% of all possible employer match. Waiting until May might limit employer contributions, as some will match only up to a certain amount each paycheck. Double check how they fund it, and ask HR to be sure you wouldn't be missing out on something by waiting.

2) You make a lot of money right? Maybe too much to be able to deduct a T.IRA contribution? The cutoff is around $95-115K if you're married. Because of this, it would make more sense to leave the IRA as Roth moving into 2015, and move more of the 401K into Traditional. That way you will get a full deduction for anything you contribute to traditional. There is no income limit for deducting traditional 401k contributions since they come out pre-tax.

Hedging the bet with about 50/50 is a strategy others have used as well. There is no right or wrong here, but it's not what I'd do. But you'll be fine, the high income will be able to smooth out any rough edges you have in your plans. Good luck!

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--401k vs. IRA
« Reply #23 on: January 20, 2015, 09:52:31 AM »
I'm only making about 60-65k (55k salary, bonus of up to 10%, side job that is highly variable).

Also, I won't be getting the employer match until 2016. So that isn't a worry right now.

Want to re-think your potential issues? (Not being snarky, just saying that this information will likely change your thoughts at least somewhat)


EDIT: Not sure where that 90k income came from, unless that was just what was in the calculator automatically that I linked above. Also, I'm only 25--still trying to learn all of this, and the tax code is just insane IMHO. This shouldn't be this hard.
« Last Edit: January 20, 2015, 10:01:32 AM by mtn »

dandarc

  • Magnum Stache
  • ******
  • Posts: 3440
  • Age: 36
Re: Help me out here--401k vs. IRA
« Reply #24 on: January 20, 2015, 10:03:32 AM »
Oh, also, even if I max out my 401k and IRA, both with traditional contributions, I'll still be in 25% now.
I, for one, thought your income was somewhat higher due to this statement.  At 60-65K, you would not be in the 25% bracket if you max out the 401K and tIRA - standard deduction, exemption, 401K, tIRA would put your taxable income at no more than 31,200 - squarely in the 15% bracket.

Many in your scenario might go traditional until you hit the 15% bracket, then go Roth.  Others might go 100% Traditional or Roth.  Sounds like you have a well reasoned plan.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3440
  • Age: 36
Re: Help me out here--401k vs. IRA
« Reply #25 on: January 20, 2015, 10:05:30 AM »
I picked 90K just as an example in the earlier post as your income was not stated earlier - sorry if this caused any confusion.

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3714
  • Age: 41
  • Location: USA
Re: Help me out here--401k vs. IRA
« Reply #26 on: January 20, 2015, 10:08:32 AM »
Well I did call them potential issues, right?

I agree with dandarc that I thought your income was much higher based on the OP, so some Roth makes sense IMO at 15% tax rate.

Weird that you wouldn't get employer matches right away, but forget about that issue.

For the second issue:
Married, or single in 2015? On 12/31/2015?

If single, the Traditional IRA deduction phases out between $61K-71K. http://www.paychex.com/a/d/accounting/CCH_Fed_Facts_and_Figures_2015.pdf

If married you have to add in your spouses' wages as well and go with the married amounts for phase-outs.

Another thing worth thinking about is that whatever you put into your IRA you have full control over, meaning you can invest it in whatever you want. Your 401k choices will be limited to a certain number of funds. Maybe you want all your Roth money to have access to riskier investments since you will never pay taxes on the gains. Stuff like small cap growth funds, or emerging market international funds. Or whatever. Just another thing to think about when deciding Roth/Traditional between a 401k/IRA.

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--401k vs. IRA
« Reply #27 on: January 20, 2015, 10:09:19 AM »
Oh, also, even if I max out my 401k and IRA, both with traditional contributions, I'll still be in 25% now.
I, for one, thought your income was somewhat higher due to this statement.  At 60-65K, you would not be in the 25% bracket if you max out the 401K and tIRA - standard deduction, exemption, 401K, tIRA would put your taxable income at no more than 31,200 - squarely in the 15% bracket.

Many in your scenario might go traditional until you hit the 15% bracket, then go Roth.  Others might go 100% Traditional or Roth.  Sounds like you have a well reasoned plan.

I'm confused now... 65,000-18,000-5,500=41,500... Right? The least it would be is 60,000-18,000-5,500=36,500 which is barely out of the 25% bracket.

What is the standard deduction and exemption?

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--401k vs. IRA
« Reply #28 on: January 20, 2015, 10:12:23 AM »
Well I did call them potential issues, right?

I agree with dandarc that I thought your income was much higher based on the OP, so some Roth makes sense IMO at 15% tax rate.

Weird that you wouldn't get employer matches right away, but forget about that issue.

For the second issue:
Married, or single in 2015? On 12/31/2015?

If single, the Traditional IRA deduction phases out between $61K-71K. http://www.paychex.com/a/d/accounting/CCH_Fed_Facts_and_Figures_2015.pdf

If married you have to add in your spouses' wages as well and go with the married amounts for phase-outs.

Another thing worth thinking about is that whatever you put into your IRA you have full control over, meaning you can invest it in whatever you want. Your 401k choices will be limited to a certain number of funds. Maybe you want all your Roth money to have access to riskier investments since you will never pay taxes on the gains. Stuff like small cap growth funds, or emerging market international funds. Or whatever. Just another thing to think about when deciding Roth/Traditional between a 401k/IRA.

Married by 12/31/2015. Her income currently is 42k, but she has student loans that are being paid off at about 4k a year. Just to make things more complicated :)

dandarc

  • Magnum Stache
  • ******
  • Posts: 3440
  • Age: 36
Re: Help me out here--401k vs. IRA
« Reply #29 on: January 20, 2015, 10:17:26 AM »
Oh, also, even if I max out my 401k and IRA, both with traditional contributions, I'll still be in 25% now.
I, for one, thought your income was somewhat higher due to this statement.  At 60-65K, you would not be in the 25% bracket if you max out the 401K and tIRA - standard deduction, exemption, 401K, tIRA would put your taxable income at no more than 31,200 - squarely in the 15% bracket.

Many in your scenario might go traditional until you hit the 15% bracket, then go Roth.  Others might go 100% Traditional or Roth.  Sounds like you have a well reasoned plan.

I'm confused now... 65,000-18,000-5,500=41,500... Right? The least it would be is 60,000-18,000-5,500=36,500 which is barely out of the 25% bracket.

What is the standard deduction and exemption?
-6300 (standard deduction) - 4000 (exemption)

Subtract another 10,300 - everyone forgets those 2 things when doing this.  Also, subtract your health insurance premiums (if any), FSA/HSA contributions, itemized deductions, to the extent they exceed the standard deduction, student loan interest (this is above the line, right Cheddar?), etc..  So if you're maxing a 401K and a tIRA, and you're single and not being claimed as someone else's dependent (would be hard to make this case if you're making 65K, I would think), and grossing 65K, your taxable income is no more than $31,200 for 2015 - could be less.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3440
  • Age: 36
Re: Help me out here--401k vs. IRA
« Reply #30 on: January 20, 2015, 10:27:20 AM »
Married by 12/31/2015. Her income currently is 42k, but she has student loans that are being paid off at about 4k a year. Just to make things more complicated :)
So for 2015, you'll be married - you can choose to file jointly or separately.  Usually joint is the better choice - check out your Roth IRA contribution limit if you file separately for exmaple.  You'll want to look at minimum student loan payments for her once married.

At 107K gross, your taxable income should be no more than:
$107,000 -
$12,600 (standard deduction) -
$8,000 (2X personal exemptions)

=$86,400

That is only about 12K into the 25% bracket for analysis purposes - and you'll have at least 18K + 11K = 29K of 401K / IRA space to play with.  Possibly more - does your spouse have a 401K plan at work too?

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--401k vs. IRA
« Reply #31 on: January 20, 2015, 10:31:31 AM »
What is the personal exemption exactly? My tax knowledge is everything necessary to fill out turbotax; I have gotten a refund the past two years due to my business expenses from my side gig that I will not be getting this year (will definitely owe).

And yes she does have a 401k, but has only been getting the company match and the rest of her "savings" has been going to the student loans.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3440
  • Age: 36
Re: Help me out here--401k vs. IRA
« Reply #32 on: January 20, 2015, 10:39:49 AM »
Log into turbo tax, and really look at your 1040 - you'll see things added and subtracted.  Personal Exemption is one of the subtracted items.  As far as what it is - wikipedia article does as good a job as any:

http://en.wikipedia.org/wiki/Personal_exemption_(United_States)

boarder42

  • Walrus Stache
  • *******
  • Posts: 7849
Re: Help me out here--401k vs. IRA
« Reply #33 on: January 20, 2015, 10:48:47 AM »
mtn unless you're backdooring your roth contributions by contributing to a TIRA and then rolling over to an RIRA you will not be able to write off the 5500 on you taxes Roth contributions are taxable income. 

many of the unknowns you state are and have been discussed in length on these forums.  Most fall back to the general consensus of we dont know what will happen with tax code.  so the best bet you have is to just contribute based on what current tax code is.  because that is known and can be calculated to build wealth faster than not. 

what if the US govt goes to an all sales tax based society this essentailly taxes your roth money and your deferred monies equally... what if the world blows up tomorrow... i mean there are a million what ifs you can come up with to justify a system that you want to use.  I can say the collective consensus on this forum has from my experience fallen on the pay taxes later side of the coin.  B/c it makes sense with todays tax code.  Something that has basis and we can build off of.

mtn

  • Handlebar Stache
  • *****
  • Posts: 1277
Re: Help me out here--401k vs. IRA
« Reply #34 on: January 20, 2015, 11:00:19 AM »
mtn unless you're backdooring your roth contributions by contributing to a TIRA and then rolling over to an RIRA you will not be able to write off the 5500 on you taxes Roth contributions are taxable income. 



Roth contributions are, but TIRA are not and can be written off... correct?

Might have had some less than clear writing in there, but I believe I am on the same page with this.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3440
  • Age: 36
Re: Help me out here--401k vs. IRA
« Reply #35 on: January 20, 2015, 11:08:05 AM »
mtn unless you're backdooring your roth contributions by contributing to a TIRA and then rolling over to an RIRA you will not be able to write off the 5500 on you taxes Roth contributions are taxable income. 



Roth contributions are, but TIRA are not and can be written off... correct?

Might have had some less than clear writing in there, but I believe I am on the same page with this.
http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

If your gross (once married) is 107K, you'll want to be sure to get your MAGI down under 98K, if a traditional IRA is on the table.  Traditional 401K contributions are a good way to do this (as are HSAs, FSAs, health insurance premiums)

http://fairmark.com/retirement/roth-accounts/contributions-to-roth-accounts/modified-adjusted-gross-income/

Luckily, the IRS allows you to fix a mistake - if you find you're above the income limit to deduct traditional IRA contributions, you can recharacterize before your tax-filing deadline without penalty.