403b and IRA for family with 4 kids. Roth or Trad

[CurledMoss]

Posting this for my sister. She's 40 years old with 4 kids and just got a job. First job really. Combined they make 120k a year and have a residence in 0% income tax state. I ran some quick numbers with 120k income and 4 kids. There taxes owed would be like $2,500...

She wants to max out her 403b, I just messaged her to see if she can do post tax contributions. She had planned on doing pre tax. But jesus I'm looking at her income taxed owed seems like she should be doing post tax??

She also wants to do an IRA. Seems to make sense to do a roth/post tax on that as well?

I can't wrap my head around this because I'm a single guy and always owe a ton in taxes.

[terran]

It doesn't really matter how much her taxes are, it matters what her marginal tax bracket is. Run her taxes again with income lowered by the amount of contributions she plans to make and see what the taxes are then. Subtract from $2500 and divide by the amount of the contributions for the marginal rate. She might even get money back if some of the reason her tax bracket is so low are refundable tax credits, which I think the child tax credit might be. It would at least be good to have enough in tax deferred to fill the standard deduction in retirement.

[CurledMoss]

So I wrapped my head around this a bit better. If they file married jointly they are close to the top of the 12% bracket. The 10% bracket is extremely low. Not getting there. I believe they get 2k for each child as a tax credit. This doesn't effect their marginal rates. That being said I recommended my sister to max out her 403b (Post Tax), and Roth IRA, as long as she can swing the extra $3,200 in taxes. (23k+7Kx12%). It just makes sense especially because now they are in a 0% income tax state. In retirement who knows they might be in a state with income tax or the state currently in charges tax.

I told her to keep an eye on her income. If they happen to get above the 12% into 22% towards end of the year she could switch contributions to Pre-Tax to bump back down to 12%.

[blueberrybushes]

CurledMoss,

Your assessment is right on, IMO.  When the Government set up these pre-tax accounts, they knew that people would be glad to pay less in taxes today and not consider what happens in 30-40 years.

I did pre-tax in the 80s when these started, but only for a few years.  In my late 30s, DW and I switched to post-tax contributions and so glad we did.  If we had stayed with pre-tax, we would be looking at $85K in RMDs instead of $16K.  And, we'll do QCD to off-set the RMDs to eliminate any tax liability.  No Roth conversions to calculate.  No paying tax on all of our SS benefits.  Still have some IRS paperwork each year as the Traditional IRAs draw down.  Having ~60% of our assets in a ROTH is nice for alot of reasons.

[CurledMoss]

CurledMoss,

Your assessment is right on, IMO.  When the Government set up these pre-tax accounts, they knew that people would be glad to pay less in taxes today and not consider what happens in 30-40 years.

I did pre-tax in the 80s when these started, but only for a few years.  In my late 30s, DW and I switched to post-tax contributions and so glad we did.  If we had stayed with pre-tax, we would be looking at $85K in RMDs instead of $16K.  And, we'll do QCD to off-set the RMDs to eliminate any tax liability.  No Roth conversions to calculate.  No paying tax on all of our SS benefits.  Still have some IRS paperwork each year as the Traditional IRAs draw down.  Having ~60% of our assets in a ROTH is nice for alot of reasons.

You make excellent points. I forgot about the RMDs which could also effect ACA and other low income programs too. I'll pass this info along to her.

[uniwelder]

CurledMoss,

Your assessment is right on, IMO.  When the Government set up these pre-tax accounts, they knew that people would be glad to pay less in taxes today and not consider what happens in 30-40 years.

I did pre-tax in the 80s when these started, but only for a few years.  In my late 30s, DW and I switched to post-tax contributions and so glad we did.  If we had stayed with pre-tax, we would be looking at $85K in RMDs instead of $16K.  And, we'll do QCD to off-set the RMDs to eliminate any tax liability.  No Roth conversions to calculate.  No paying tax on all of our SS benefits.  Still have some IRS paperwork each year as the Traditional IRAs draw down.  Having ~60% of our assets in a ROTH is nice for alot of reasons.

You make excellent points. I forgot about the RMDs which could also effect ACA and other low income programs too. I'll pass this info along to her.

OP's sister wouldn't need to take RMD's until she is 75, so she'd probably be using Medicare.  From the little I know, retirement income needs to be pretty high before you need to pay more for the service. 

In general, isn't the fear of RMD's caused by saving way too much prior to retirement?  For most people following a 3-4% withdrawal strategy, wouldn't RMD's just be a normal part of the process?

[MDM]

And, we'll do QCD to off-set the RMDs to eliminate any tax liability.

For those expecting to use QCDs for their tIRA distributions, using traditional contributions instead of Roth may be better: a tax deduction on the contribution, and no tax on the QCD.

[CurledMoss]

CurledMoss,

Your assessment is right on, IMO.  When the Government set up these pre-tax accounts, they knew that people would be glad to pay less in taxes today and not consider what happens in 30-40 years.

I did pre-tax in the 80s when these started, but only for a few years.  In my late 30s, DW and I switched to post-tax contributions and so glad we did.  If we had stayed with pre-tax, we would be looking at $85K in RMDs instead of $16K.  And, we'll do QCD to off-set the RMDs to eliminate any tax liability.  No Roth conversions to calculate.  No paying tax on all of our SS benefits.  Still have some IRS paperwork each year as the Traditional IRAs draw down.  Having ~60% of our assets in a ROTH is nice for alot of reasons.

You make excellent points. I forgot about the RMDs which could also effect ACA and other low income programs too. I'll pass this info along to her.

OP's sister wouldn't need to take RMD's until she is 75, so she'd probably be using Medicare.  From the little I know, retirement income needs to be pretty high before you need to pay more for the service. 

In general, isn't the fear of RMD's caused by saving way too much prior to retirement?  For most people following a 3-4% withdrawal strategy, wouldn't RMD's just be a normal part of the process?

That's probably true. She's not going to have millions in there by 75 so that shouldn't matter. Could be some low income programs available though if they are just collecting off 2 modest social securities... They also plan, as of now, to live in Thailand and other countries in retirement. Having roth might be a benefit for that?