401k versus Roth

[rutgers07]

Looking for some advice about where to be focusing our investing. I've done a lot of reading and it seems to me that we would be better off putting our money in a 401k as we expect our tax bracket to be lower in retirement than it is currently. My salary can be quite variable depending on overtime and how much I make at my 2nd job which bumps up my pay right now even more. Conversely, I see a lot of arguments being made for using a ROTH primarily because we still have 30 years to retirement and that is a lot of time for tax-free growth.

Right now, we're putting 10% into my 401k with a match and 10% into her 403b with company match. Roth contributions are minimal with most money going towards debt.

Thoughts on strategies moving forward? We've made a lot of progress in the last year and looking to keep learning and bettering our financial health.

[MakeAStash]

If you expect your tax rate to be lower upon retirement (and you will hold off withdrawals until then) you should stick with traditional rather than a Roth 401k or Roth IRA.

[james.hendrickson]

Looking for some advice about where to be focusing our investing. I've done a lot of reading and it seems to me that we would be better off putting our money in a 401k as we expect our tax bracket to be lower in retirement than it is currently. My salary can be quite variable depending on overtime and how much I make at my 2nd job which bumps up my pay right now even more. Conversely, I see a lot of arguments being made for using a ROTH primarily because we still have 30 years to retirement and that is a lot of time for tax-free growth.

Right now, we're putting 10% into my 401k with a match and 10% into her 403b with company match. Roth contributions are minimal with most money going towards debt.

Thoughts on strategies moving forward? We've made a lot of progress in the last year and looking to keep learning and bettering our financial health.

Rutgers, sock as much away as you can. Max out the 401ks and 403bs, max out our roth/traditional IRA. Then buy stocks, buy as much equity in quality companies as you can.

[rutgers07]

If you expect your tax rate to be lower upon retirement (and you will hold off withdrawals until then) you should stick with traditional rather than a Roth 401k or Roth IRA.

Don't most people expect their tax rate to be lower in retirement?

[rutgers07]

Rutgers, sock as much away as you can. Max out the 401ks and 403bs, max out our roth/traditional IRA. Then buy stocks, buy as much equity in quality companies as you can.

In that order? We won't really ever be able to max out 401k/403b for each since that alone would mark 30+% of our income (and definitely not now with some debt we need to clear up).

[james.hendrickson]

Rutgers - yes in that order. For the 401ks and 403bs you can contribute up to 18% of your salary, I would do it ASAP. Then put your extra money into the ROTH or IRA. Then if you have any additional cash I would put the money into a brokerage account with low transaction fees and buy high quality common stock or mutual funds.

[rutgers07]

Rutgers - yes in that order. For the 401ks and 403bs you can contribute up to 18% of your salary, I would do it ASAP. Then put your extra money into the ROTH or IRA. Then if you have any additional cash I would put the money into a brokerage account with low transaction fees and buy high quality common stock or mutual funds.

Even with debt? The only debt we are looking to pay off before really ramping up retirement is a 35/36k student loan at 6.6ish percent. Should we up retirement before doing so? Everything I read seems to say either split the difference or don't bother with retirement until debt is paid off.

[StormRichards]

Rutgers - yes in that order. For the 401ks and 403bs you can contribute up to 18% of your salary, I would do it ASAP. Then put your extra money into the ROTH or IRA. Then if you have any additional cash I would put the money into a brokerage account with low transaction fees and buy high quality common stock or mutual funds.

James, the contribution limit is $18,000 not 18% for 2016, not including company contribution. The combined match is $53,000.

[StormRichards]

In that order? We won't really ever be able to max out 401k/403b for each since that alone would mark 30+% of our income (and definitely not now with some debt we need to clear up).

There are millions in the same boat as you are in as I pointed out to sv2007 in another thread related to this topic. Maxing out a 401k is just not possible for many.

Stating that someone should focus on maxing out their 401k prior to other retirement options is bad advice in my opinion.

Below is the order I follow and one that I have seen on multiple retirement websites.

401k up to the company match
Roth up to the annual maximum
Additional contributions in the 401k

I personally have never maxed out my 401k. There is a pretty good chance I will be able to next year, but that is with MUCH MORE than 18% of my salary going into the account.

[Jluke]

mostly agree with storm Richards on order of priority... from bogleheads

1. Contribute to the work-based plan (401(k), 403b,) enough to get the full employer match (the match is like free money, your best possible investment),
2. Pay off high interest debt (a guaranteed high return, the next best thing to free money),
3. Contribute to a Health Savings Account (HSA) if available (unlike many other tax deductions, there are no income restrictions to contribute to an HSA),[1][note 1]
4. Contribute the maximum to an IRA, traditional or Roth, depending on eligibility and personal circumstances,
5. Contribute the remainder of the maximum employee contribution to the work-based plan,
6. Contribute to a taxable investing account or use the backdoor Roth technique,[note 2]
7. Non-deductible IRAs or annuities.

[james.hendrickson]

Well, I am certain that some people on the board here probably disagree with me, but here is my conceptual short hand.

The debt cost you: 6.6% to carry, probably a little bit less after taxes because student loan interest is deductible.

The 401k/403b contributions will get you the long run market average, which is something like 7% return (over the past 40 years), so that's comparable. PLUS, you get the added advantage of reducing your taxable income, so that's big added boost.

Pretty much on the whole you are marginally better off making the retirement contributions.

Plus, having assets gives you flexibility - you can borrow against your retirement in case something happens. You can't do that if you allocate the money towards your debt.

Regarding the student loan debts - don't forget to manage it. You probably have options regarding refinancing, etc. If possible, you could break the larger figure into smaller pieces and attack each piece in turn. That has proved an effective strategy for me.

[james.hendrickson]

James, the contribution limit is $18,000 not 18% for 2016, not including company contribution. The combined match is $53,000.

Oh thank you Storm!!!!!

[MakeAStash]

Don't most people expect their tax rate to be lower in retirement?

I don't have the stats, but most is probably right. Others could be looking at a large pension plus Social Security plus a large amount in an IRA or 401k, all of which might force them into a higher tax bracket once RMDs kick in. The latter group is the one for which Roth can make sense.

[Jluke]

I don't have the stats, but most is probably right. Others could be looking at a large pension plus Social Security plus a large amount in an IRA or 401k, all of which might force them into a higher tax bracket once RMDs kick in. The latter group is the one for which Roth can make sense.

isn't another argument that we don't know what the tax structure will be in the future?

[disneysteve]

isn't another argument that we don't know what the tax structure will be in the future?

That's my thought. I don't think the historically low tax rates we've been enjoying will continue indefinitely. So by the time I retire, my tax bracket may be the same or higher than now if rates go up significantly.

Still, partly by virtue of what my options have been, we have a mix of tax free, tax deferred, and taxable investments.