Author Topic: Traditional vs Roth when unable to max retirement accounts?  (Read 1557 times)

Pooperman

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Traditional vs Roth when unable to max retirement accounts?
« on: October 10, 2014, 04:19:05 AM »
I make 60k now, so obviously some traditional to drop my income into the 15% bracket. If I were to max everything next year (approx 28k), I would end up with about $200/mo buffer given my projected expenses after moving. I am not certain if SO and I can meet that level of spending (27k/yr for us). I feel like 200/mo is cutting it too close for a projection. This maxing is traditional 100% to reduce my tax bill enough to max everything. However, I am going to be in the 15% bracket, and am early in my career so this is as low as my tax bracket will go. This means favouring Roth for every $ inside the 15% bracket. This also means that I cannot max out the accounts and still have enough money to live on. For accounts I have access to: HSA (taxed in my state, but a deduction in the higher tax state I work in), IRA (vanguard funds, taxed in my state, a deduction in the state I work in), 401k (best exp ratio I could do was 0.32%).

So the question is what do I do:
A) max accounts (all traditional)
B) put just enough traditional into 401k to hit 15% then put what I can in as Roth (IRA, 401k) even though they won't be maxed
C) something else

DK

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Re: Traditional vs Roth when unable to max retirement accounts?
« Reply #1 on: October 10, 2014, 07:13:27 AM »
B.

MDM

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Re: Traditional vs Roth when unable to max retirement accounts?
« Reply #2 on: October 10, 2014, 02:57:29 PM »
I am going to be in the 15% bracket, and am early in my career so this is as low as my tax bracket will go. This means favouring Roth for every $ inside the 15% bracket.

Maybe.

It depends on how much other income you will have when you start withdrawing from your retirement account.  Let's look at the extremes:
1) No other income.  In this case you pay 0% tax on the first (deductions + allowances) amount, then 10% on some amount, then 15%, etc.  So your effective tax rate will be less (maybe much less) than your marginal tax rate.  See http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/ for a real-life case.
2) A huge amount of other income.  In this case you can indeed look at your retirement account withdrawals as if your marginal rate would apply.

The closer you are to #1, the more you should favor traditional accounts now.  The closer to #2, the more you should favor Roth accounts now.  So gaze into your crystal ball (hope yours is clearer than mine) and make your best guess.  If the crystal ball isn't helpful, pick either - you'll still be better off than if you do neither.

Pooperman

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Re: Traditional vs Roth when unable to max retirement accounts?
« Reply #3 on: October 10, 2014, 03:21:37 PM »
Thanks MDM. I foresee having to use traditional exclusively to keep my income lower starting in 2-3 years. If I'm going to get any Roth it's now. I plan to work while retired at least part time doing something. So probably closer to #2 than #1. I'll need some kind of Roth and taxable accounts to get me started initially in ER. However, not maxing feels like I'm leaving something on the table even though I know that investing in a Roth is worth more dollar for dollar compared to traditional. 27k is the least I can do for 2 people in this area, so I'll aim for that, save the rest. Traditional enough to be in the 15% bracket, Roth the rest. Favor 401k for the traditional because of state tax structure. 2015 will be interesting to see what I am able to do! Again, thanks to the responders!