Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
To Roth IRA, or bump 401K ...
Old 08-23-2010, 11:39 AM   #1
Recycles dryer sheets
 
Join Date: Jan 2008
Posts: 314
To Roth IRA, or bump 401K ...

Due to some changes in the company that I work for, it looks like I'll be able to put another $5,000-$6,000/yr away into retirement.

I paid 2.3% effective Federal taxes last year (I'm in the 25% bracket), and I'm on the line of whether I should just do the Roth IRA (post-tax), or bump my 401K (pre-tax) retirement up. Any suggestion as to how to guide me in which choice to make?
If it helps any, my wife doesn't have a retirement plan in her name as of yet, so I'm leaning in the direction of a Roth IRA for her.
Paying so little Federal taxes is a by-product of having 4 kids and living on a single income.


PS: We're under the IRA income restrictions and haven't hit the 401K cap either. And we wouldn't hit the 401K cap if we put that much away either. The 401K company match is $1/$1 up to 4% ... I'm already putting away 6%.
__________________

__________________
Primary title "chief moron"
myself is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-23-2010, 09:21 PM   #2
Recycles dryer sheets
Mill's Avatar
 
Join Date: Mar 2009
Location: Akron
Posts: 129
Accepted Boglehead rules say to do the following

In order.

1 401(k) to the match
2 Roth IRA to the max
3 401(k) to the max
4 taxable investing


Youve already got step 1 handled, so go with the roth IRA for the wife. If you max that out (5k in 2010...) put more into the 401(k).
__________________

__________________
Mill is offline   Reply With Quote
Old 08-24-2010, 07:10 AM   #3
Recycles dryer sheets
 
Join Date: Jan 2008
Posts: 314
Quote:
Originally Posted by Mill View Post
Accepted Boglehead rules say to do the following

In order.

1 401(k) to the match
2 Roth IRA to the max
3 401(k) to the max
4 taxable investing


Youve already got step 1 handled, so go with the roth IRA for the wife. If you max that out (5k in 2010...) put more into the 401(k).
I would think that the $5k would be doubled for #2. After all, we should in theory max out a Roth for both of us before going back to the 401K.

But I guess the question I was asking was more to where is the "break even" point in the investing timeline. After all, a 401K is pre-tax now, but taxed later. And the Roth is taxed now, but not later. At some point in time they meet so that the 401K may be better for the closer term retirement than the Roth for the farther term retirement to minimize taxes.
__________________
Primary title "chief moron"
myself is offline   Reply With Quote
Old 08-26-2010, 12:24 PM   #4
Full time employment: Posting here.
bow-tie's Avatar
 
Join Date: Mar 2004
Posts: 687
Quote:
Originally Posted by Mill View Post
Accepted Boglehead rules say to do the following

In order.

1 401(k) to the match
2 Roth IRA to the max
3 401(k) to the max
4 taxable investing
Isn't is also a function of the types of investments (fees/types/etc) of the 401k? My current 401k isn't that great fee wise, so I've thought about utilizing a Vanguard IRA instead of using work 401k and Roth IRA we've done in the past....
__________________
Diggin' my way to financial freedom, one buck-at-a-time
bow-tie is offline   Reply With Quote
Old 08-26-2010, 12:31 PM   #5
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by bow-tie View Post
Isn't is also a function of the types of investments (fees/types/etc) of the 401k? My current 401k isn't that great fee wise, so I've thought about utilizing a Vanguard IRA instead of using work 401k and Roth IRA we've done in the past....
Yes, but usually a company match more than overcomes that objection. Of course, if it's a really weak match like 10 cents on the dollar it may not over time, and if there's no match it's an even easier call, but in general even a weak 401K is worth participating in -- to the extent of any employer match.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 08-26-2010, 12:58 PM   #6
Recycles dryer sheets
 
Join Date: Jul 2010
Posts: 255
Quote:
Originally Posted by myself View Post
I would think that the $5k would be doubled for #2. After all, we should in theory max out a Roth for both of us before going back to the 401K.

But I guess the question I was asking was more to where is the "break even" point in the investing timeline. After all, a 401K is pre-tax now, but taxed later. And the Roth is taxed now, but not later. At some point in time they meet so that the 401K may be better for the closer term retirement than the Roth for the farther term retirement to minimize taxes.
I don't think you can calculate a break even point without knowing exactly when you would be taking withdrawals from each account type and your tax bracket at that time.

There are other advantages to Roths that are difficult to add to a calculation such as no RMD and advantageous estate planning characteristics for beneficiaries if that is a goal of yours.

I can envision situations when the 401(k) would be better, but you are in a fairly low tax bracket now, so I would not anticipate being in a much lower bracket in retirement. However, you may have very low expenses and be able to live off of income that will limit you to a lower bracket.
__________________
SunsetSail is offline   Reply With Quote
Old 08-26-2010, 01:40 PM   #7
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Generally I'll go with 401k (beyond the match) if taxes are higher now than I expect in retirement and Roth if taxes are lower now than expected in retirement. That applies for money that will otherwise be taxed if you don't put it in the 401k. If taxes are the same before and after retirement, the tradition and Roth accounts are dead even regardless of timing.

It's a little different if some of the money you are putting into the Roth has already been taxed. In that case you are effectively putting more in the Roth than in the 401k since it is not taxed on withdrawal.

Having some money in both the 401k and Roth accounts may help control taxes in retirement if you can fill up to your lower tax bracket using the 401k and other taxable sources and then use the Roth to fill in the rest of the income you need. If you are positioned in the tax tables at a point where that makes sense.

You will also be able to contribute to the 401k now and convert to Roth later if your income will drop dramatically in early retirement and you have some after-tax funds to pay the conversion taxes. That may favor the 401k again for now.
__________________

__________________
Animorph is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
2011 and 2012 tax planning... Roth IRA and Roth 401k jIMOh FIRE and Money 6 05-02-2010 11:20 AM
Rolling a 401k into another 401k 'OR' Roth IRA? MrTux Young Dreamers 10 07-04-2009 04:30 PM
Questions about limits surrounding ROTH IRA, SEP IRA and ROTH 401k RockSplat FIRE and Money 14 06-08-2009 01:30 PM
401K, Roth IRA, Roth 401K - Need advice please tsturbo FIRE and Money 15 05-10-2009 03:08 PM
Strategy for Roth 401k to Roth IRA conversion and withdrawals sweng85 FIRE and Money 9 04-21-2009 11:28 PM

 

 
All times are GMT -6. The time now is 07:28 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.