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**JoeP** · 01-21-2014, 11:42 AM

We do both traditional pre-tax 401k and post-tax Roth IRA.

The pre-tax 401k gives you the advantage of minimizing your taxable exposure by making your taxable income look less than it really is. The downside is that, generally speaking, it is more difficult to modify contributions as quickly as you might want, since the mechanics of moving the money out of your payroll pre-tax are automated.

The Roth has the advantage of being more "voluntary" if you'd like it to be. So if you're sailing along and end up with a small pile of money (sell a car, get a gift, etc.), you can transfer it or parts of it into the Roth when convenient. You can also have automatic contributions from your post-tax payroll.

Personally, we leave our 401k contributions constant year to year, and allow ourselves to throttle our contributions to the Roths depending upon our current financial situation.

**jIM_Ohio** · 01-21-2014, 11:46 AM

The investment options are one question to focus on

The Roth vs regular 401k is a different question, with a different thought process.

The 8% contribution (and 5% match) is a third different question with a different thought process.

I want to answer the second and third question with a math example.
http://fairmark.com/general-taxation...ate-schedules/

If you make $36,900 or more (single) or $73800 (married), I would strongly focus on the math to answer this question. The answer to 2 and 3 above could be linked, but many here can simplify it down. I think more detail is better.

The numbers above ($36900 and $73800) are the top portions of the 15% tax bracket. Any dollar you earn above these amounts is taxed at 25%. The Roth is GREAT if you are taxed at 15%, it is good to OK if you are taxed at 25%. If you are taxed at 28% or higher, I would strongly swing towards taking a tax deduction now (saves you $2800 for every $10,000 contributed) and also look to increase savings from 8% towards 20% contribution/savings rate levels.

For one example, I am going to assume you are married and your gross income is $90,000 per year. Keep in mind taxable income and gross income are very very different.

If you are contributing 8% of gross pay, you are contributing $7200 per year (pre-tax). This lowers your taxable income to $82,800. Since $82800 is above $73800, the $7200 contribution is saving you 25% in taxes ($1800 per year).

If you do that same math and only earn $75,000 gross pay (with 8% contribution), the math is much different. $75,000 gross, 8% contribution is $6000 total. This means taxable income is lowered to $69,000 and this is below the 15% bracket cap of $73800. The difference between these numbers is about $4000, this means you are saving only 15% of the $4000 in taxes ($600).

I would then take the second example, and split the contribution, the first $2000 should be contributed pre-tax, then the remaining $4000 should be Roth. Because a 401k uses percentages of income, you need to know $2000/$75,000=3% and the remaining 5% should be a Roth contribution.

The goal should be a tax return where you are just under the 15% bracket cap on line 43 of form 1040 you file on April 15. This means you are optimizing the Roth-Traditional 401k choice.

I have both options at work, and I contribute 10% to both traditional 401k and 10% to Roth 401k, and adjust percentage up or down depending on bonuses, my tax return, and the IRS tax brackets changing.

**perdue022** · 01-21-2014, 12:14 PM

Originally posted by jIM_Ohio View Post

The investment options are one question to focus on

The Roth vs regular 401k is a different question, with a different thought process.

The 8% contribution (and 5% match) is a third different question with a different thought process.

I want to answer the second and third question with a math example.

If you make $36,900 or more (single) or $73800 (married), I would strongly focus on the math to answer this question. The answer to 2 and 3 above could be linked, but many here can simplify it down. I think more detail is better.

The numbers above ($36900 and $73800) are the top portions of the 15% tax bracket. Any dollar you earn above these amounts is taxed at 25%. The Roth is GREAT if you are taxed at 15%, it is good to OK if you are taxed at 25%. If you are taxed at 28% or higher, I would strongly swing towards taking a tax deduction now (saves you $2800 for every $10,000 contributed) and also look to increase savings from 8% towards 20% contribution/savings rate levels.

For one example, I am going to assume you are married and your gross income is $90,000 per year. Keep in mind taxable income and gross income are very very different.

If you are contributing 8% of gross pay, you are contributing $7200 per year (pre-tax). This lowers your taxable income to $82,800. Since $82800 is above $73800, the $7200 contribution is saving you 25% in taxes ($1800 per year).

If you do that same math and only earn $75,000 gross pay (with 8% contribution), the math is much different. $75,000 gross, 8% contribution is $6000 total. This means taxable income is lowered to $69,000 and this is below the 15% bracket cap of $73800. The difference between these numbers is about $4000, this means you are saving only 15% of the $4000 in taxes ($600).

I would then take the second example, and split the contribution, the first $2000 should be contributed pre-tax, then the remaining $4000 should be Roth. Because a 401k uses percentages of income, you need to know $2000/$75,000=3% and the remaining 5% should be a Roth contribution.

The goal should be a tax return where you are just under the 15% bracket cap on line 43 of form 1040 you file on April 15. This means you are optimizing the Roth-Traditional 401k choice.

I have both options at work, and I contribute 10% to both traditional 401k and 10% to Roth 401k, and adjust percentage up or down depending on bonuses, my tax return, and the IRS tax brackets changing.

Very good information, yet somewhat confusing information for a rookie like myself! It is just going to take a little to soak it HAHA! I am just going to put it out there. I am single and I am in the 15% tax bracket. I am currently part time and make between 27,000 to 30,000 salary, depending on bonus's. With that being said where would you take your contributions from there? Again I do appreciate your input

Corey

**jIM_Ohio** · 01-21-2014, 12:58 PM

Originally posted by perdue022 View Post

Originally Posted by jIM_Ohio View Post
The investment options are one question to focus on

The Roth vs regular 401k is a different question, with a different thought process.

The 8% contribution (and 5% match) is a third different question with a different thought process.

I want to answer the second and third question with a math example.

If you make $36,900 or more (single) or $73800 (married), I would strongly focus on the math to answer this question. The answer to 2 and 3 above could be linked, but many here can simplify it down. I think more detail is better.

The numbers above ($36900 and $73800) are the top portions of the 15% tax bracket. Any dollar you earn above these amounts is taxed at 25%. The Roth is GREAT if you are taxed at 15%, it is good to OK if you are taxed at 25%. If you are taxed at 28% or higher, I would strongly swing towards taking a tax deduction now (saves you $2800 for every $10,000 contributed) and also look to increase savings from 8% towards 20% contribution/savings rate levels.

For one example, I am going to assume you are married and your gross income is $90,000 per year. Keep in mind taxable income and gross income are very very different.

If you are contributing 8% of gross pay, you are contributing $7200 per year (pre-tax). This lowers your taxable income to $82,800. Since $82800 is above $73800, the $7200 contribution is saving you 25% in taxes ($1800 per year).

If you do that same math and only earn $75,000 gross pay (with 8% contribution), the math is much different. $75,000 gross, 8% contribution is $6000 total. This means taxable income is lowered to $69,000 and this is below the 15% bracket cap of $73800. The difference between these numbers is about $4000, this means you are saving only 15% of the $4000 in taxes ($600).

I would then take the second example, and split the contribution, the first $2000 should be contributed pre-tax, then the remaining $4000 should be Roth. Because a 401k uses percentages of income, you need to know $2000/$75,000=3% and the remaining 5% should be a Roth contribution.

The goal should be a tax return where you are just under the 15% bracket cap on line 43 of form 1040 you file on April 15. This means you are optimizing the Roth-Traditional 401k choice.

I have both options at work, and I contribute 10% to both traditional 401k and 10% to Roth 401k, and adjust percentage up or down depending on bonuses, my tax return, and the IRS tax brackets changing.

Very good information, yet somewhat confusing information for a rookie like myself! It is just going to take a little to soak it HAHA! I am just going to put it out there. I am single and I am in the 15% tax bracket. I am currently part time and make between 27,000 to 30,000 salary, depending on bonus's. With that being said where would you take your contributions from there? Again I do appreciate your input

Corey

Your answers are in green/bold above.

Your income is likely in 10% or 15% tax bracket. The Roth for you now is a great move.
You are young and not paying much in taxes now, so paying tax before contributing makes sense, as you earn more (and get more taxes) you might benefit from the traditional 401k option. I would put all 8% into the Roth, and realize this will reduce your take home pay. I think over year you will see take home reduce by about $500. Not sure what your state taxes are, so that number could go up.

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