Author Topic: 457 or 401k Roth or before tax?  (Read 1295 times)

Frugalman19

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457 or 401k Roth or before tax?
« on: December 08, 2015, 08:42:17 AM »
Wife just got a job with the state, and we live comfortably on my salary alone, she will be making around $40k, she can do up to $36k in a combination of 401k or 457, Roth or Before tax contributions. Should we just all to before tax, or half and half, or half in before tax 457 and have in Roth 457? So many choices, I know that if we plan to take the money out pre 55 457 is the way to go. But Roth or traditional?

dandarc

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Re: 457 or 401k Roth or before tax?
« Reply #1 on: December 08, 2015, 08:50:16 AM »
As with everything tax related - it depends.  Roth is a slam dunk if you're not paying income tax already.  Are you filing jointly?  What is your marginal tax bracket?  Total Income?  State income tax situation?  Other deductions / credits?  All these things matter for this decision.

Basically, if putting money into traditional won't save you anything, go Roth.  If you're in the 10% or higher federal tax brackets, it gets murky - a lot of people draw the line between 15% and 25% - traditional down to the 15% bracket, then Roth, but that isn't necessarily the best choice for you right now.

Play around with TaxCaster or MDM's spreadsheet in the post at the top of the 'Ask a Mustachian' forum to get a feel for how these things affect your tax bill.

Frugalman19

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Re: 457 or 401k Roth or before tax?
« Reply #2 on: December 08, 2015, 10:08:05 AM »
As with everything tax related - it depends.  Roth is a slam dunk if you're not paying income tax already.  Are you filing jointly?  What is your marginal tax bracket?  Total Income?  State income tax situation?  Other deductions / credits?  All these things matter for this decision.

Basically, if putting money into traditional won't save you anything, go Roth.  If you're in the 10% or higher federal tax brackets, it gets murky - a lot of people draw the line between 15% and 25% - traditional down to the 15% bracket, then Roth, but that isn't necessarily the best choice for you right now.

Play around with TaxCaster or MDM's spreadsheet in the post at the top of the 'Ask a Mustachian' forum to get a feel for how these things affect your tax bill.

Awesome thanks!

seattlecyclone

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Re: 457 or 401k Roth or before tax?
« Reply #3 on: December 08, 2015, 10:55:31 AM »
It really comes down to how your marginal tax rate now compares to your expected marginal tax rate in retirement.

The 15% bracket is a common dividing line because few of us plan to spend enough in retirement to have a tax rate higher than this, given current tax bracket cutoffs. Keep in mind that the more you have in Roth accounts, the lower your taxable income will be during retirement since your Roth withdrawals will not generate taxable income. Thus as your total Roth balance increases, you may want to consider pushing the dividing line from 15% down to 10% or lower.