Does NY specific tax law make funding a 403b better than a Roth?

[cdgreg]

I work in the New York State public school sector and for about 7 years have had my 403b on auto pilot not really understanding what it all meant.  I am 35 and my wife is 31.  We spent the last couple years completely getting out of debt except for our house and now I am really beginning to learn about investing.  At this point, I am looking to temporarily pause the 403b contributions, open up a Roth, and then in roughly a year double retirement contributions so that we will be fully funding 2x Roth IRAs and putting money into our 403bs.  I e-mailed our financial planner, shared this vision, and asked him for his guidance on next steps, he sent this to me today via e-mail:

"I digested this and think it’s a great start and only may need a couple of small tweeks.  Also, some food for thought.  As you know, it’s not what you make, it’s what you keep.  So there is a section in the NYS tax code, Page 13 of Publication 36, that allows you to withdraw up to $20,000 per year, per spouse, FREE of NYS Income Taxes. So what that means is if you contribute to a 403(b) and took out only $40,000 each year, you’d save roughly 6% or $2,400 in NYS Taxes, paying only Federal taxes on the distribution.  Contrast this to a Roth IRA, you earn the money, pay NYS tax and then invest those dollars.  You don’t get to avoid NYS taxes with a Roth.  $2,400 over 30 years is $72,000…real money.  Bring in the time value of money on that being invested and it’s even more."

I have watched the Boglehead introduction videos, been reading Common sense mutual funds, the intelligent investor, MMM, and J Collins Simple Path to Wealth.  I am actually pretty darn close to just cutting ties with the investor pro (their performance is not above the market average to the point of offsetting mgt fees), pausing 403b, saving up $3000 and opening a vanguard Roth IRA with VASGX until I have built up an appropriate amount in the Roth to diversify myself with VTSMX, VGTSX, VBMFX, and VTIBX. 

In short, is the advisor right that based on NYS tax law I should prioritize pre-tax retirement plans as compared to Roth?  Or is he just trying to keep me in a "bucket" I already have open with him? 

Thanks,
Greg

[MDM]

The main question in any "traditional vs Roth" analysis is "what is your marginal tax saving rate now, and what will your marginal withdrawal tax rate be?"

See Traditional versus Roth - Bogleheads for more.

[cdgreg]

Thank you.  I have read that article probably 20 times, and it is still clear as mud to me.  I searched the forums for Roth v. Traditional, read quite a few posts, and I believe the correct answer is prioritizing the 403(b) over the Roth.  Here are some more details if it helps:
- Current combine income $140,000 (me, 35 years old: 93k, DW 31 years old: 48k), I expect my wife's salary will rise 3% annually, and mine will jump 20-30k in a few years and rise steadily 3% from there. 
- We should each retire with a Teacher Retirement System pension of 62.5% of our Final average salary
- We do not have a goal at this time of early retirement
- Married filing jointly I believe we are in the 25% bracket not too far from 28%
- There is no match from either of our school 403(b)'s

So, I believe the correct answer is because we are in a 25% tax bracket now, we should be investing as much as possible in tax deferred 403(b) as we are not eligible for tax deduction with a traditional IRA based on our income?

Thanks again

[NoStacheOhio]

Assuming it's low-fee, max out your 403b before you do anything else.

Also, how much are you paying to have a financial planner?

http://jlcollinsnh.com/stock-series/

[Errol Flynn]

The main question in any "traditional vs Roth" analysis is "what is your marginal tax saving rate now, and what will your marginal withdrawal tax rate be?"

See Traditional versus Roth - Bogleheads for more.

Your marginal rate now appears to be 31% (25% fed + 6% state) and your future marginal rate will be 25% (25% fed + 0% state), so I would prioritize the 403b.

[dandarc]

So, I believe the correct answer is because we are in a 25% tax bracket now, we should be investing as much as possible in tax deferred 403(b) as we are not eligible for tax deduction with a traditional IRA based on our income?

Thanks again

That's what I'd do - however, at 140K gross, if you both max the 403B's ($18K each), your traditional IRA will be fully deductible.  Then if you've got a 403(B), maybe you've also got a 457(B) available - that's another $18K each you could defer.

This is where keeping the lifestyle in check can save you a boatload on taxes - you might be able to defer as much as $83,000 every year (2017 figures - increases with inflation), but not if you need more than maybe $40K or so to pay for everything you need after-tax money for.