Author Topic: Promotion triggering re-evaluation of roth vs. traditional 401k/IRA contribution  (Read 7463 times)

vickx038

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I recently received a promotion at work that came with a substantial pay increase, which allowed me to re-adjust my timeline to FIRE and unearthed some lingering questions on my contribution strategy for my 401K and IRA.

I am aiming for FIRE but don't know that I will stop working once I achieve it (similar thoughts to many on the forum). Additionally, my girlfriend makes a similar salary and if we decide to get hitched we would be effectively doubling our income. A couple kids seems likely, which have their own financial (and lifestyle) accommodations.

I currently max out contributions to my company's roth 401K and a roth IRA, and funnel a sizable balance to a discretionary portfolio. Given some of the life considerations mentioned above, are there changes I should consider to my investment approach, especially concerning allocating funds to my 401K/IRA on a traditional or roth basis?

I have read endlessly on this forum and other blogs, and can't seem to answer the fundamental question of 'will your tax rate be lower now or in retirement' that accompanies the roth or traditional decision. Given my relatively young age and relatively low income, it seemed likely up to this point that a married household would make more and be in a higher tax bracket than my current situation, but my recent promotion and raise have caused me to reconsider. I have a business background and my tendency is to want to model all of the possible scenarios to get to some sort of a defensible answer, but the rules seem to change when reading traditional retirement advice vs. FIRE and the more I read the less I feel that I know where to start. All thoughts appreciated!

Fast facts:
Age: 26
New salary (woohoo promotion!): $105k
Investments: $155k (all index funds, Vanguard where available)
-Company roth 401k: $60k (Maxing contribution @ 18K annually)
-Roth IRA: $20k (Maxing contribution @ $5.5k annually)
-Discretionary portfolio: $65k
-Cash: $10k (a bit high, $5.5k directed to IRA on Jan 1)
Assets: None notable (no property/real estate), renting an apartment with roommates, own a cheap compact car



NoStacheOhio

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At that salary, I'd try to max out to tax-deferred accounts anywhere you can, and don't touch the existing Roths.

smalllife

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At that salary, I'd try to max out to tax-deferred accounts anywhere you can, and don't touch the existing Roths.

+1

seattlecyclone

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It's impossible to know exactly what your tax rate will be during retirement, especially if it's more than a decade out. You can try to guess though.

You can expect that your income will be based on how much you will spend during a year in retirement. Make a guess as to how much that would be in current dollars. Let's say $40k for the sake of argument.

Where will your money be coming from? You already have Roth retirement accounts and a taxable brokerage account. Looks like your investments are about 50% Roth, 40% taxable, and 10% cash. Let's assume you maintain this ratio until retirement, and withdraw from each account in equal proportions each year.

That would mean, in this example, you would be withdrawing $20k from your Roth accounts, $16k from your taxable accounts, and $4k from cash. Your Roth withdrawals won't count as income. Your taxable account withdrawals only count as income to the extent that you had capital gains, and the cash wouldn't be taxed either. Even if your taxable shares quadrupled in value since you bought them, that would only be $12k of capital gains income and no regular income. You would also have some dividend income from the taxable account. Even then, it sounds like your tax rate would be pretty low!

What if you started contributing much more to traditional retirement accounts, and this changed your ratio at retirement to 40% traditional, 20% Roth, 40% taxable? Then you would be withdrawing $16k from traditional, $16k from taxable, and $8k from Roth. The $16k of income from your traditional retirement accounts would cover the standard deduction and personal exemption for a single person, and the remainder would be taxed at 10% under the current system. The taxable withdrawals and dividends would have the same income as before, and Roth would still provide no income.

This seems like it would likely be a win compared to your current path, where you're paying 25% (or maybe even 28%) to put money in a Roth account and are not projecting any "regular" (non-dividend/capital gain) income during retirement. Tax rates could go up quite a bit between now and then and you would still come out ahead by having some money in traditional retirement accounts.

sisto

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I used to do traditional 401K because that's all my company allowed. Then they started allowing Roth and or a mix of both. I had been running some retirement calculators and got worried about RMDs so I switched to Roth for a bit and then did a mix for a bit and finally went back to traditional after finding MMM. The math almost always shows traditional to be the best option especially for higher earners. You can engineer your own tax bracket in FIRE.

cincystache

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At that salary, I'd try to max out to tax-deferred accounts anywhere you can, and don't touch the existing Roths.

+1... Once you are FI, you can take a few years off of work or go part time to drop your income and do some roth conversion ladders. Look at the MadFientist's post on this stuff.

Vilgan

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I made the mistake of doing some Roth early on until I really understood the difference between marginal tax bracket and effective tax rate. I was in the 25% tax bracket, so I was paying 25% on a lot of income that I could have instead paid 0% or 15% on later in life when actually withdrawing the money since you have to fill up the lower buckets before paying the full marginal tax rate. I think Roth is only worth considering if you are in a 15% tax bracket early career and expect to be 25% or higher for a large % of your career later.

Scandium

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A single person making twice the average household income is a "relatively low salary"?! Since when? At that rate I think you're crazy for not doing a traditional option. But if you intend to spend even more in retirement I guess a case could be made for Roth..

Sent from my Nexus 5X using Tapatalk
« Last Edit: January 01, 2016, 12:19:51 PM by Scandium »

TomTX

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What if you started contributing much more to traditional retirement accounts, and this changed your ratio at retirement to 40% traditional, 20% Roth, 40% taxable? Then you would be withdrawing $16k from traditional, $16k from taxable, and $8k from Roth. The $16k of income from your traditional retirement accounts would cover the standard deduction and personal exemption for a single person, and the remainder would be taxed at 10% under the current system. The taxable withdrawals and dividends would have the same income as before, and Roth would still provide no income.

Cap gains would be taxed at 0%.

maizeman

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Instead of trying to predict which kind of savings has the best average tax savings (which requires that I make a lot of assumptions about how long I will work, what my future income will be, and how tax law might change in the decades ahead), I consider it as a way of hedging against downside risk in my total lifetime earnings/net worth at retirement.

As a rule of thumb, Roth savings will be most tax efficient if I continue to earn a high and increasing income for many years and accumulate a large net worth before retirement. Which is a long way of saying that I'd have a lot of income in retirement. Traditional savings will be most tax efficient when I have a lower net worth at retirement, and hence a lower total retirement income to pay taxes on.

So if I chose Roth, I save more in taxes in scenarios where I have lots of money, and pay more in taxes in scenarios where I have less money. While, if I chose traditional, I'll pay more in taxes in scenarios where my total lifetime earnings are higher (and could presumably afford to pay more in taxes without hurting my quality of life as much) but save more in the scenarios where, because of misfortune or early retirement, I make a lot less money over the course of my life. And that's the scenario where the savings will be most valuable to me.

seattlecyclone

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What if you started contributing much more to traditional retirement accounts, and this changed your ratio at retirement to 40% traditional, 20% Roth, 40% taxable? Then you would be withdrawing $16k from traditional, $16k from taxable, and $8k from Roth. The $16k of income from your traditional retirement accounts would cover the standard deduction and personal exemption for a single person, and the remainder would be taxed at 10% under the current system. The taxable withdrawals and dividends would have the same income as before, and Roth would still provide no income.

Cap gains would be taxed at 0%.

At current rates, sure. I mostly left tax rates out of it because people like to make their own assumptions about where the rates will go in the future. The 10% rate I mentioned was for the portion of traditional IRA withdrawals that exceed the standard deduction and personal exemption.

seattlecyclone

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As a rule of thumb, Roth savings will be most tax efficient if I continue to earn a high and increasing income for many years and accumulate a large net worth before retirement. Which is a long way of saying that I'd have a lot of income in retirement. Traditional savings will be most tax efficient when I have a lower net worth at retirement, and hence a lower total retirement income to pay taxes on.

I disagree with this rule of thumb. It's all about marginal rates now and during retirement. Period. If you're earning a lot now, your marginal rate now is likely pretty high, so that's a strike against Roth contributions. The more you accumulate in Roth accounts, the less your income will be during retirement for a given withdrawal amount. This is another strike against Roth accounts. You should absolutely consider Roth IRA contributions instead of taxable investing when your income is too high to deduct traditional contributions. When you have a choice, you should generally favor traditional as a high earner.

JLee

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As a rule of thumb, Roth savings will be most tax efficient if I continue to earn a high and increasing income for many years and accumulate a large net worth before retirement. Which is a long way of saying that I'd have a lot of income in retirement. Traditional savings will be most tax efficient when I have a lower net worth at retirement, and hence a lower total retirement income to pay taxes on.

I disagree with this rule of thumb. It's all about marginal rates now and during retirement. Period. If you're earning a lot now, your marginal rate now is likely pretty high, so that's a strike against Roth contributions. The more you accumulate in Roth accounts, the less your income will be during retirement for a given withdrawal amount. This is another strike against Roth accounts. You should absolutely consider Roth IRA contributions instead of taxable investing when your income is too high to deduct traditional contributions. When you have a choice, you should generally favor traditional as a high earner.

http://www.gocurrycracker.com/roth-sucks/

I have a minimal amount in a Roth 401k, then I realized I was far better going with Traditional so I switched over.

Highbeam

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Remember the low income caps for Traditional IRAs. I got screwed by that this year and will need to switch to Roth for my IRAs.

dandarc

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Remember the low income caps for Traditional IRAs. I got screwed by that this year and will need to switch to Roth for my IRAs.
Screwed?  Took me a 5-10 minutes call with Vanguard to do a recharacterization last year, and I'm going to do it again this year.

4alpacas

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As a rule of thumb, Roth savings will be most tax efficient if I continue to earn a high and increasing income for many years and accumulate a large net worth before retirement. Which is a long way of saying that I'd have a lot of income in retirement. Traditional savings will be most tax efficient when I have a lower net worth at retirement, and hence a lower total retirement income to pay taxes on.

I disagree with this rule of thumb. It's all about marginal rates now and during retirement. Period. If you're earning a lot now, your marginal rate now is likely pretty high, so that's a strike against Roth contributions. The more you accumulate in Roth accounts, the less your income will be during retirement for a given withdrawal amount. This is another strike against Roth accounts. You should absolutely consider Roth IRA contributions instead of taxable investing when your income is too high to deduct traditional contributions. When you have a choice, you should generally favor traditional as a high earner.

http://www.gocurrycracker.com/roth-sucks/

I have a minimal amount in a Roth 401k, then I realized I was far better going with Traditional so I switched over.
I also like Mad Fientists breakdown (http://www.madfientist.com/retire-even-earlier/). 

catccc

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Remember the low income caps for Traditional IRAs. I got screwed by that this year and will need to switch to Roth for my IRAs.

Do you mean the income limits to deduct contributions to traditional IRAs?  I keep reading about people preferring traditional IRAs here, but with so many higher income people on the forums, I wonder if many of them can't take the deduction, and should go for a Roth, anyway.  I believe the deduction starts phasing out at only $98K MAGI for MFJ.  That seems low for a lot dual income households, especially those with software engineer salaries...

JLee

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Remember the low income caps for Traditional IRAs. I got screwed by that this year and will need to switch to Roth for my IRAs.

Do you mean the income limits to deduct contributions to traditional IRAs?  I keep reading about people preferring traditional IRAs here, but with so many higher income people on the forums, I wonder if many of them can't take the deduction, and should go for a Roth, anyway.  I believe the deduction starts phasing out at only $98K MAGI for MFJ.  That seems low for a lot dual income households, especially those with software engineer salaries...

$61k for single...which isn't all that high either.

dandarc

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Remember the low income caps for Traditional IRAs. I got screwed by that this year and will need to switch to Roth for my IRAs.

Do you mean the income limits to deduct contributions to traditional IRAs?  I keep reading about people preferring traditional IRAs here, but with so many higher income people on the forums, I wonder if many of them can't take the deduction, and should go for a Roth, anyway.  I believe the deduction starts phasing out at only $98K MAGI for MFJ.  That seems low for a lot dual income households, especially those with software engineer salaries...
If you're fully utilizing workplace retirement, your gross can be quite a lot higher than MAGI - as an example, our gross is around 184K and we're landing in the phase-out range again.  In our case, accomplished with nothing more than a 457B, 3% to the mandatory retirement system, and a solo 401K.  Recharacterization call to Vanguard going in as soon as all of our forms are in and I am sure I've got the amount we want to go traditional with right.

seattlecyclone

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Remember the low income caps for Traditional IRAs. I got screwed by that this year and will need to switch to Roth for my IRAs.

Do you mean the income limits to deduct contributions to traditional IRAs?  I keep reading about people preferring traditional IRAs here, but with so many higher income people on the forums, I wonder if many of them can't take the deduction, and should go for a Roth, anyway.  I believe the deduction starts phasing out at only $98K MAGI for MFJ.  That seems low for a lot dual income households, especially those with software engineer salaries...

Indeed. If you earn too much to deduct traditional contributions, Roth is the next best thing. If you earn too much for those, go with the backdoor Roth. When you have a choice between traditional and Roth (as is typically the case for 401(k) plans regardless of income), traditional is very often the best choice. If the choice is between Roth and taxable, I'd go with Roth.

catccc

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For dual earners where only one spouse is covered by a workplace retirement plan, it looks like MFJ can go to 183K MAGI for the full deduction.  Not bad.  Am I reading this right?

https://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-NOT-Covered-by-a-Retirement-Plan-at-Work

dandarc

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For dual earners where only one spouse is covered by a workplace retirement plan, it looks like MFJ can go to 183K MAGI for the full deduction.  Not bad.  Am I reading this right?

https://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-NOT-Covered-by-a-Retirement-Plan-at-Work
Only for the non-workplace-retirement spouse.  One of those fun calculations where  you compute MAGI, and it is the same for both of you, but the limit you compare it to is different for each spouse.

JLee

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Remember the low income caps for Traditional IRAs. I got screwed by that this year and will need to switch to Roth for my IRAs.

Do you mean the income limits to deduct contributions to traditional IRAs?  I keep reading about people preferring traditional IRAs here, but with so many higher income people on the forums, I wonder if many of them can't take the deduction, and should go for a Roth, anyway.  I believe the deduction starts phasing out at only $98K MAGI for MFJ.  That seems low for a lot dual income households, especially those with software engineer salaries...
If you're fully utilizing workplace retirement, your gross can be quite a lot higher than MAGI - as an example, our gross is around 184K and we're landing in the phase-out range again.  In our case, accomplished with nothing more than a 457B, 3% to the mandatory retirement system, and a solo 401K.  Recharacterization call to Vanguard going in as soon as all of our forms are in and I am sure I've got the amount we want to go traditional with right.

Most workplace retirement is just 401k. Having access to 457B, 401k, and another retirement program is fairly rare (at least not a situation I have ever encountered myself).

catccc

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If you're fully utilizing workplace retirement, your gross can be quite a lot higher than MAGI - as an example, our gross is around 184K and we're landing in the phase-out range again.  In our case, accomplished with nothing more than a 457B, 3% to the mandatory retirement system, and a solo 401K.  Recharacterization call to Vanguard going in as soon as all of our forms are in and I am sure I've got the amount we want to go traditional with right.

Most workplace retirement is just 401k. Having access to 457B, 401k, and another retirement program is fairly rare (at least not a situation I have ever encountered myself).

This.  Between DH and I, we have access to a single 401K.  That's it.  I still think we'll get under $98K and I'll end up doing a recharacterization, but it's not like I can keep close to $100K out of taxable income.  Unfortunately.

Ftao93

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I recently received a promotion at work that came with a substantial pay increase, which allowed me to re-adjust my timeline to FIRE and unearthed some lingering questions on my contribution strategy for my 401K and IRA.

Fast facts:
Age: 26
New salary (woohoo promotion!): $105k
Investments: $155k (all index funds, Vanguard where available)
-Company roth 401k: $60k (Maxing contribution @ 18K annually)
-Roth IRA: $20k (Maxing contribution @ $5.5k annually)
-Discretionary portfolio: $65k
-Cash: $10k (a bit high, $5.5k directed to IRA on Jan 1)
Assets: None notable (no property/real estate), renting an apartment with roommates, own a cheap compact car

I hate you....:P

I mean, congrats on your success!  That's a REALLY nice spot to be in.  Depending on the age of your other half, even if you have kids, if you keep expenses low, you'd be rocking the MMM lifestyle.

dandarc

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If you're fully utilizing workplace retirement, your gross can be quite a lot higher than MAGI - as an example, our gross is around 184K and we're landing in the phase-out range again.  In our case, accomplished with nothing more than a 457B, 3% to the mandatory retirement system, and a solo 401K.  Recharacterization call to Vanguard going in as soon as all of our forms are in and I am sure I've got the amount we want to go traditional with right.

Most workplace retirement is just 401k. Having access to 457B, 401k, and another retirement program is fairly rare (at least not a situation I have ever encountered myself).

This.  Between DH and I, we have access to a single 401K.  That's it.  I still think we'll get under $98K and I'll end up doing a recharacterization, but it's not like I can keep close to $100K out of taxable income.  Unfortunately.
Well, keep it in mind the next time you're evaluating a job offer. 

You could take $4500 or so less in salary if you're in the 25% bracket and come out even just by picking up and deferring another 18K bucket for the year.  $9K to go from 'no retirement offering' to a government or university job with a 403B and 457B available.  Assuming you want to and would max out those accounts, given the opportunity.

fattest_foot

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Remember the low income caps for Traditional IRAs. I got screwed by that this year and will need to switch to Roth for my IRAs.

Do you mean the income limits to deduct contributions to traditional IRAs?  I keep reading about people preferring traditional IRAs here, but with so many higher income people on the forums, I wonder if many of them can't take the deduction, and should go for a Roth, anyway.  I believe the deduction starts phasing out at only $98K MAGI for MFJ.  That seems low for a lot dual income households, especially those with software engineer salaries...

I was thinking the same thing. Traditional is great if you're able to deduct it, but more than likely at the income we're talking, he'll end up without a tax break. So he should just dump it into Roth until he hits that income limit as well.

beltim

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If you're fully utilizing workplace retirement, your gross can be quite a lot higher than MAGI - as an example, our gross is around 184K and we're landing in the phase-out range again.  In our case, accomplished with nothing more than a 457B, 3% to the mandatory retirement system, and a solo 401K.  Recharacterization call to Vanguard going in as soon as all of our forms are in and I am sure I've got the amount we want to go traditional with right.

Most workplace retirement is just 401k. Having access to 457B, 401k, and another retirement program is fairly rare (at least not a situation I have ever encountered myself).

This.  Between DH and I, we have access to a single 401K.  That's it.  I still think we'll get under $98K and I'll end up doing a recharacterization, but it's not like I can keep close to $100K out of taxable income.  Unfortunately.
Well, keep it in mind the next time you're evaluating a job offer. 

You could take $4500 or so less in salary if you're in the 25% bracket and come out even just by picking up and deferring another 18K bucket for the year.  $9K to go from 'no retirement offering' to a government or university job with a 403B and 457B available.  Assuming you want to and would max out those accounts, given the opportunity.

This is only true if you would pay no tax on income in retirement, which would mean withdrawals from traditional 401k/403b/457b of less than ~$20k per year for a married couple.  Otherwise, the difference in salary would be less by the tax bracket the withdrawals will be in retirement.

Highbeam

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Remember the low income caps for Traditional IRAs. I got screwed by that this year and will need to switch to Roth for my IRAs.
Screwed?  Took me a 5-10 minutes call with Vanguard to do a recharacterization last year, and I'm going to do it again this year.

Yes, it took me 40 minutes to talk to a real person at vanguard and then recharacterize my roths to TIRA. I knew it would be close but I am now over the income threshold so I need to re - re -characterize back into Roths later this year before tax time. Your interpretation of the word screwed may be different than mine but for the OP, know the limits as they can come back to haunt you.

Highbeam

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Remember the low income caps for Traditional IRAs. I got screwed by that this year and will need to switch to Roth for my IRAs.

Do you mean the income limits to deduct contributions to traditional IRAs?  I keep reading about people preferring traditional IRAs here, but with so many higher income people on the forums, I wonder if many of them can't take the deduction, and should go for a Roth, anyway.  I believe the deduction starts phasing out at only $98K MAGI for MFJ.  That seems low for a lot dual income households, especially those with software engineer salaries...

Exactly. It is very low. I was surprised and made a mistake.

Roothy

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So gocurrycracker says that even for those who have maxed out pre-tax space (401k/457b/403b), Roths may be inferior to taxable accounts.  His analysis is so convincing I've not opened a Roth myself.  It's here: http://www.gocurrycracker.com/roth-sucks/ , esp. the part about "Mr. and Ms. 90%."  Do those of you advocating Roths (only) after having maxed out pretaxed, disagree with him?  I'm genuinely torn on this.

beltim

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So gocurrycracker says that even for those who have maxed out pre-tax space (401k/457b/403b), Roths may be inferior to taxable accounts.  His analysis is so convincing I've not opened a Roth myself.  It's here: http://www.gocurrycracker.com/roth-sucks/ , esp. the part about "Mr. and Ms. 90%."  Do those of you advocating Roths (only) after having maxed out pretaxed, disagree with him?  I'm genuinely torn on this.

Yes.  Have you read the comments to that article?  They provide an important balance to the thesis of the article.  In particular, most people are subject to state income taxes, which favor Roth accounts.  Also, current long-term capital gains and qualified dividends tax rates are at unusually low rates historically, and these rates can and do change.

fattest_foot

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I'm also not sure his addendum scenario is all that realistic for the FIRE community due to the limitation of account types (tIRA, Roth, and brokerage if I read it correctly).

If I end up above the tIRA phase out, he's correct that the Roth principal would be the only thing I could draw. But I could also roll over my 401k into a tIRA and then do a Roth conversion ladder and use those funds to get me to 59.5. For the general population that's probably unlikely (and also unnecessary), but for most of us I feel like there would be enough other accounts to draw from. Your Roth portfolio would then likely become significantly more valuable once you hit 59.5.

I'm also not going to check the numbers, but it seems like a slim population that would be subject to the tIRA phase out but also able to still remain in the 15% tax bracket. I want to say both numbers are somewhere in the $90k's for a married couple (with the standard deduction anyway).

And I apologize if that was covered in the GCC comments section.



Edit: I couldn't help myself. The phase out starts at $98k and the 25% bracket starts at $96k (assuming standard deduction and 2 exemptions). Which means the brokerage account scenario wouldn't come into play for the hypothetical married couple (they are already at the 25% tax bracket prior to reaching the tIRA phase out - so the tIRA would always make sense). If that couple were to use a brokerage account, they'd end up paying capital gains. Itemizing or having kids and additional exemptions would "raise" the threshold for the 25% bracket starting. But the phase out ends at $118k, and through most of my calculations it ALWAYS is worthwhile to do a tIRA within the phase out zone. So that's a requirement to have $22k in additional exemptions to be able to make the brokerage worthwhile. I'd imagine that this applies to almost no one.

The question then becomes for a couple with $142,000-$183,000 in income who have 401k's maxed out (which puts them above $118k in MAGI), does it make more sense to do a tIRA or Roth IRA? The only reason I can come up with to do the tIRA is that you can do a Roth conversion to access the money before 59.5. Otherwise it seems like the Roth is hands down better.
« Last Edit: January 05, 2016, 03:53:30 PM by fattest_foot »

seattlecyclone

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So gocurrycracker says that even for those who have maxed out pre-tax space (401k/457b/403b), Roths may be inferior to taxable accounts.  His analysis is so convincing I've not opened a Roth myself.  It's here: http://www.gocurrycracker.com/roth-sucks/ , esp. the part about "Mr. and Ms. 90%."  Do those of you advocating Roths (only) after having maxed out pretaxed, disagree with him?  I'm genuinely torn on this.

Yes.  Have you read the comments to that article?  They provide an important balance to the thesis of the article.  In particular, most people are subject to state income taxes, which favor Roth accounts.  Also, current long-term capital gains and qualified dividends tax rates are at unusually low rates historically, and these rates can and do change.

I also disagree with that post. If you're in the 15% or lower tax bracket for the entire time you have your taxable account and if Congress doesn't increase the capital gains rate from 0% (which 0% rate had never existed prior to 2008) and if you aren't planning to buy ACA health insurance with subsidies that would be affected by untaxed dividend/capital gains income and if you don't have any state taxes on dividends and capital gains, a taxable account is better than Roth. If any of those qualifiers are false in your situation, the situation is more nuanced and you'll probably be better off with Roth unless you expect to need to withdraw the earnings from the Roth account prior to age 59.

vickx038

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I'm trying to get my arms around the full breadth of the awesome feedback provided - If I'm understanding correctly, the consensus is that my best option is to utilize a traditional 401k and a traditional IRA due to my currently high income and therefore high tax rate. With respect to the IRA, a few people have mentioned (as quoted below), that there are income limits for tIRAs, my understanding was that I am over that income limit, which was part of my original reason for going roth. Does this mean that if I contribute to a tIRA, I won't be able to lower my MAGI? If I'm not able to lower my MAGI, is the idea that it's still better to do the traditional as I likely won't be paying 25-28% in retirement (as gocurrycracker mentions in roth sucks article), and have the option to do a roth conversion ladder (as madfientist mentions in articles that have been linked on this thread)?

Link to IRS overview for income limits for IRAs (for my situation, with access to retirement account at work) here: https://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

Remember the low income caps for Traditional IRAs. I got screwed by that this year and will need to switch to Roth for my IRAs.

Do you mean the income limits to deduct contributions to traditional IRAs?  I keep reading about people preferring traditional IRAs here, but with so many higher income people on the forums, I wonder if many of them can't take the deduction, and should go for a Roth, anyway.  I believe the deduction starts phasing out at only $98K MAGI for MFJ.  That seems low for a lot dual income households, especially those with software engineer salaries...

Exactly. It is very low. I was surprised and made a mistake.

catccc

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So, I'm no expert, but...

Assuming your are filing single with that income, I believe your best bet is to max a Traditional 401k at work.  This will lower your AGI, which is the amount that is measured to determine eligibility to contribute to a Roth.  And of course, it will reduce your taxable income.  And then after that, max a Roth IRA.  Because you are over the income limit to get a traditional IRA deduction, so the next best thing is the Roth.

If you went with the traditional, you'd put in after tax money now, and still have to pay taxes on it later, because you are over the limit to deduct it.  If you go with the roth, for which I believe you are still eligible, you'll pay taxes now, but not later.

In 2015, your income MAGI needs to be under $61K to deduct a traditional IRA contribution.  You are over by a lot.  But you need to have AGI under $116K to contribute to a Roth, which you are under.  And if you max out a traditional 401K, you can keep your income (which at $105 is quickly approaching the $116K limit) down by $18K.