Author Topic: Traditional (Pre-tax) 403(b) vs. Roth 403(b)  (Read 971 times)

pr_cool_j

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Traditional (Pre-tax) 403(b) vs. Roth 403(b)
« on: September 19, 2017, 11:40:27 AM »
Hello fellow Mustachians,

I recently got a job that offers the options of either a Traditional (pre-tax) 403(b) or Roth 403(b) or a mixture of the two. What would be best for me to choose in my situation?

I'm 22 years old, and I'm blessed with a salary of $92,872 per year right out of college. I'm single and have no children. I'm in the process of refinancing my student loans, which will be $97,300 at %5.625. I also have a total of $28,338.67 of federal loans at an average rate of %4.05 and one more student loan of $8,000 at %3.99.

Should I choose the Traditional or the Roth while I pay off my debt and then choose the other option once my debt is paid off? Or stick with one until retirement? Or a percentage mixture of the two?

Thanks!

Raenia

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Re: Traditional (Pre-tax) 403(b) vs. Roth 403(b)
« Reply #1 on: September 19, 2017, 11:48:54 AM »
At your high income level, I think the traditional pre-tax will almost certainly be the better choice, both now and after your loans are paid off.  The basic rule of thumb is, use the traditional if you expect your income to be lower in retirement than it is now, use the Roth if the reverse is true. 

In your circumstance, what I'd do is max the trad 403b, build a small emergency fund if you don't have one already, then direct your excess savings toward the 5.6% loan.  With your income and no family to support, you should be able to pay off all the loans in a few years, all while saving for retirement.  Good luck!

MDM

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Re: Traditional (Pre-tax) 403(b) vs. Roth 403(b)
« Reply #2 on: September 19, 2017, 01:02:52 PM »
At your high income level, I think the traditional pre-tax will almost certainly be the better choice, both now and after your loans are paid off.  The basic rule of thumb is, use the traditional if you expect your income to be lower in retirement than it is now, use the Roth if the reverse is true. 

In your circumstance, what I'd do is max the trad 403b, build a small emergency fund if you don't have one already, then direct your excess savings toward the 5.6% loan.  With your income and no family to support, you should be able to pay off all the loans in a few years, all while saving for retirement.  Good luck!
+1, with a qualifier that if you just started work this fall your 2017 income might be low enough that Roth will be better this year.

See Investment Order, including links in there regarding traditional vs. Roth, for more.

pr_cool_j

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Re: Traditional (Pre-tax) 403(b) vs. Roth 403(b)
« Reply #3 on: September 21, 2017, 11:37:33 AM »
Thank you both so much for your insight! Super helpful. I'm planning on going with the Roth 403(b) for just the remainder of this year, since my marginal tax rate is 15% this year. And then I will switch to the Traditional 403(b) next year, since my marginal tax rate will go up to 25%.