Author Topic: 401k vs roth when at 15% marginal  (Read 2128 times)

detailoriented

  • 5 O'Clock Shadow
  • *
  • Posts: 27
401k vs roth when at 15% marginal
« on: December 27, 2015, 09:27:46 PM »
So I am preparing for 2016 and find myself questioning if my normal rachet up of the 401k should instead go to a rIRA.

This post is actual two questions.
1)  Am I overlooking something in my assumptions?
2)  what vehicle would you recommend?

My wife and I file jointly on 92k income.   We have 3 kids.   Our taxable incomeAGI last year was 73k.   I expect us to have a marginal tax rate of 15% due to no state income tax.  We are above the saver credit by $12k.  We are not near any phase outs as far as I can tell. 

If my assumption of our marginal tax rate is correct and assume a similar lifestyle in retirement I beleive it might be best for our next increase to go in a rIRA.   This will diversify our tax options in the future.  Unfortunately, my present self is having trouble accepting taxes on those dollars while not having the 401k maxxed. 

All thought are appreciated,

DO

Edit:  corrected "taxable income" to AGI
« Last Edit: December 27, 2015, 09:56:15 PM by detailoriented »

Joel

  • Pencil Stache
  • ****
  • Posts: 895
  • Location: California
Re: 401k vs roth when at 15% marginal
« Reply #1 on: December 27, 2015, 09:59:54 PM »
Assuming no other ordinary income at retirement, it will take approx. $976k in tax-deferred assets to produce enough income to reach the 15% marginal tax rate. It will take approx. $2,387k to move from the 15% marginal tax rate into the 25% marginal tax rate. This calculation is made by using 25x the marginal tax limit plus MFJ standard deduction and two exemptions to just serve as a rough guide for myself.

That to me makes it clear to contribute to traditional tax-deferred accounts when in the 25% marginal tax bracket. In the 15% marginal tax bracket, I personally contribute to a Roth, but I don't think it would be a bad idea to contribute those dollars to traditional tax-deferred accounts, as I think a $1m nest egg in today's dollars is close to what I would actually need. This is definitely the case if I'm not able to take advantage of all the tax-advantaged space in my 401k.

MDM

  • Senior Mustachian
  • ********
  • Posts: 11634
Re: 401k vs roth when at 15% marginal
« Reply #2 on: December 27, 2015, 10:19:01 PM »
There is some reasonably detailed discussion of exactly this question in http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/.

In short, there is no one-size-fits-all answer.  Depends on how much and what type (e.g., pension vs. SS) of other income one might have in retirement, the size of the traditional 401k/IRA, .....