Author Topic: Roth vs regular 401K  (Read 1409 times)

jr1029

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Roth vs regular 401K
« on: December 25, 2017, 06:13:34 PM »
So I have a 401K plan through my employer. I get a 5% match and I contribute the max.

New this year, we can do this with pre or post tax money - so a Roth or a standard (until now has been only pre-tax).

I also contribute the max to a separate Roth IRA. ($5500)

My gross income is about $100k from my main job and ~$15k from a side gig (hard to know until the end of the year - I make a lot of that over the holidays). I'm single, not a homeowner, no access to HSA, no kids. Sooo I pay a lot in taxes. Standard deduction. Oh yeah, and I'm in a high-tax state so losing out on the SALT deduction sucks.

Should I switch to taking the 403B money post-tax? Would increase my tax bill now but maybe save me money later. Hypothetically. Maybe. Depending on what our government decides to do.

Thanks for any input!
« Last Edit: December 25, 2017, 06:16:11 PM by jr1029 »

AccidentalMiser

  • Pencil Stache
  • ****
  • Posts: 659
  • Age: 51
  • Location: SE Tenn
Re: Roth vs regular 401K
« Reply #1 on: December 25, 2017, 07:09:48 PM »
What tax bracket do you project that you will be in when you retire?  My numbers are about double yours and I'm married.  I have always gone regular 401 due to the upfront tax break.  Will convert the money to Roth post-retirement.  Have you read GoCurryCracker's never pay taxes again post and the stuff from mad fientist?  That should help you.

jr1029

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Roth vs regular 401K
« Reply #2 on: December 25, 2017, 07:48:13 PM »
How would I possibly know what tax bracket I'll be in when I retire? (25 years from now, probably... I don't want to retire particularly early but I DO want to move to part time work in the next 10-15 years... I like what I do but I'd LOVE it if I only did it 20 hours a week instead of 40!). This predicting-the-future thing is mysterious to me!

matchewed

  • Magnum Stache
  • ******
  • Posts: 4319
  • Location: CT
Re: Roth vs regular 401K
« Reply #3 on: December 26, 2017, 07:42:10 AM »
How would I possibly know what tax bracket I'll be in when I retire? (25 years from now, probably... I don't want to retire particularly early but I DO want to move to part time work in the next 10-15 years... I like what I do but I'd LOVE it if I only did it 20 hours a week instead of 40!). This predicting-the-future thing is mysterious to me!

You throw reasonable numbers at it. Like if you worked half time you'd make half as much money. Use tax brackets as they are now and review as things change.

KungfuRabbit

  • Stubble
  • **
  • Posts: 244
Re: Roth vs regular 401K
« Reply #4 on: December 26, 2017, 08:32:33 AM »
I love trying to predict the future....

A few crazy variables:

-if you are in a high tax state now are you staying there?  If you move to a low tax state you are probably better off with traditional 401k to avoid that taxes completely.

-taxes are really low right now. No matter what republicans try to tell you, historically and globally current US tax rates are really low - if you want proof check out the debt. They will likely go up at some point.

-401k deductions come under attack often. Obama considered lowering the cap and the recent republican tax plan considered lowering the cap. The reality is simple, people that can afford to save $18,000 per year don't need tax breaks relative to people who can't afford health care.  If they dropped the limit to closer to $5,000 a very small percentage of the population would even notice.

-there is a limit to value on a 401k, if it's more than $1,000,000 (today's dollars) you'll end up being in the higher tax brackets when you retire anyhow, might as well pay tax now to have more flexibility oF ROTH. It sounds like a lot, but if you start young (and combine a working spouse) it's an easy target.

So there's a few reasons to go either direction. Load up 401k while you can, but load up ROTH while taxes are low. Deciding what is more likely will make you go mad. 
How would I possibly know what tax bracket I'll be in when I retire? (25 years from now, probably... I don't want to retire particularly early but I DO want to move to part time work in the next 10-15 years... I like what I do but I'd LOVE it if I only did it 20 hours a week instead of 40!). This predicting-the-future thing is mysterious to me!

You throw reasonable numbers at it. Like if you worked half time you'd make half as much money. Use tax brackets as they are now and review as things change.

JLee

  • Walrus Stache
  • *******
  • Posts: 5498
Re: Roth vs regular 401K
« Reply #5 on: December 26, 2017, 10:24:10 AM »
I love trying to predict the future....

A few crazy variables:

-if you are in a high tax state now are you staying there?  If you move to a low tax state you are probably better off with traditional 401k to avoid that taxes completely.

-taxes are really low right now. No matter what republicans try to tell you, historically and globally current US tax rates are really low - if you want proof check out the debt. They will likely go up at some point.

-401k deductions come under attack often. Obama considered lowering the cap and the recent republican tax plan considered lowering the cap. The reality is simple, people that can afford to save $18,000 per year don't need tax breaks relative to people who can't afford health care.  If they dropped the limit to closer to $5,000 a very small percentage of the population would even notice.

-there is a limit to value on a 401k, if it's more than $1,000,000 (today's dollars) you'll end up being in the higher tax brackets when you retire anyhow, might as well pay tax now to have more flexibility oF ROTH. It sounds like a lot, but if you start young (and combine a working spouse) it's an easy target.

So there's a few reasons to go either direction. Load up 401k while you can, but load up ROTH while taxes are low. Deciding what is more likely will make you go mad.

Taxes on a 115k / single income aren't all that low.  Previous way-high tax rates were on super high incomes.  It's the people with multiple kids who are able to pay basically no taxes on $100k+.

This is fairly rough math, but:



For 2012, the exemption/standard deduction combined = $9,750.

Per this site, here's $95,924 in taxable income:



Now let's contrast someone in the $1mil/year ballpark:



Higher, but still not even close to the top! Let's go to $10mil/year!



There we go. Now that's showing some low taxes today...

Or you could...oh, retire early with a reasonable budget and not worry about paying 20%+ tax rates in retirement. :)
« Last Edit: December 26, 2017, 10:26:27 AM by JLee »

MDM

  • Walrus Stache
  • *******
  • Posts: 9413
Re: Roth vs regular 401K
« Reply #6 on: December 26, 2017, 12:09:56 PM »
How would I possibly know what tax bracket I'll be in when I retire? (25 years from now, probably... I don't want to retire particularly early but I DO want to move to part time work in the next 10-15 years... I like what I do but I'd LOVE it if I only did it 20 hours a week instead of 40!). This predicting-the-future thing is mysterious to me!
This post in 401k Roth v 401k (new tax changes) - Bogleheads.org has a decent summary.  I've saved a link for future reference.

AccidentalMiser

  • Pencil Stache
  • ****
  • Posts: 659
  • Age: 51
  • Location: SE Tenn
Re: Roth vs regular 401K
« Reply #7 on: December 26, 2017, 04:10:04 PM »
How would I possibly know what tax bracket I'll be in when I retire? (25 years from now, probably... I don't want to retire particularly early but I DO want to move to part time work in the next 10-15 years... I like what I do but I'd LOVE it if I only did it 20 hours a week instead of 40!). This predicting-the-future thing is mysterious to me!

What kind of lifestyle and income do you have now?  Do you plan to save like an insane miser with a relatively high income (we save about 60 percent) and intend to continue living a low spend life in retirement?  If so, save taxes now and save the money now.