However the trade off you mention is certainly true. Any other factors that should be considered in this decision? After maxing out a 401K, should I then max out an traditional or Roth IRA? Very informative. In any self-directed defined contribution plan like a 403(b) or 401(k) you get to choose the investment, but you may be limited to the choices they offer, depending on the plan. My wife and I have been going back and forth on this issue. I was also kind of struggling with traditional vs Roth Dilemma. However, if I put 1000$ in Roth IRA, it would also grow to 4000$ but tax I pay would be 280$ now – again 7% of 4000$. We might just retire in a state that does. I don’t think my salary is going to go up too much over the years but it could. It almost feels like leaving money on the table if you max but not in the Roth, doesn’t it? 1) I’m not quite clear on what your plan is. I did not think this way before and was more in favor of Traditional 401K earlier. Although individual circumstances vary, most will want to delay their Social Security to age 70, so this effect won't be seen in earlier retirement years. Contribution Limits. Find out how much you can save for retirement. We both contribute max to our 403b/401k and have been doing backdoor ROTHs for several years. I think there’s even a match now. For example, let’s say that you are maxing out your 401(k) contribution at $18,500 per year. The only pitfall to this conversion strategy is that you cannot choose what money in your traditional IRA you convert. Once the IRA or Roth IRA is inherited (Stretch IRA), RMDs start based on the age of the heir, but if the heir is very young, the account is likely to continue to grow if only the RMDs are withdrawn. If so, what is the maximum? Because maxing out a Roth 401(k) places more total dollars into a tax-deferred account than maxing out a traditional 401(k). Do you / are you able to do both backdoor roth IRA personal / spousal, and designate full 17.5k of 52k in 401(k) as Roth? – Many of such people think of passing money to their Heirs for which Roth is handy. Sounds like a great start…except for that student loan. I definitely understand the case for tax arbitrage with a Traditional pre-tax contributions; however, if one has a long enough time horizon and is hoping for good appreciation of assets, would Roth contributions not make more sense? If you make over 130K, you can’t add to your roth IRA? For example, you can only shelter $5500 per year from taxes by maxing out an IRA so if you choose a Roth, you pay the government $1000 (or whatever) and you have $5500 sheltered from taxes in a Roth or you can shelter $5500 sheltered in a Traditional and you can use that $1000 you would have paid in tax to invest in your taxable account. I therefore actually come to conclude that at least next 10 years or so, I should rather invest in Roth IRA rather than TIRA, ( to have more time for compounding), maybe later on I could change to TIRA when I am closer to retirement.. I like citing this chart when illustrating a point to my friends, colleagues, etc. You missed something important. But you can do a backdoor Roth. So for instance, a higher income person may contribute to a traditional IRA but it is not deductible if you have an existing retirement plan (as you’ve mentioned to JS in your reply above). In reality, probably Roth IRA would compound even more than 25 years ( I am 32) and hopefully more than 5%, in which case my effective tax rate may be more like 4-5%. And for you super savers, here are other ways to save for retirement. I am also a fan, a co-worker suggested your website to me. But it’s complicated and there are a lot of factors in play. James- Can you break down your $81k of tax protected space per year? So I have a SEP IRA, a 401k and a roth IRA. Even if the money is still given to the heir, it will be a smaller amount without the tax-deferred growth available in the retirement account. The Roth benefits the beneficiaries not just because it doesn’t require minimum distributions, but also because it gets a step up in tax basis at the time of death. A tax-free Stretch Roth IRA has the potential to grow to an even larger sum of completely tax-free money (since it can grow tax-free for an additional 10 years after death before withdrawals are made). He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool.". How is rolling over from a 403b different from rolling over from a traditional IRA? Q1. Why or why not? You may find it tricky to keep the Roth that high since most retirement space is generally tax deferred. I’ll look at the code and see if I can fix it. You can do Roth conversions in later years when your income may be lower. There is also an episode on Reveal on this: https://www.revealnews.org/episodes/whos-getting-rich-off-your-student-debt/. Sorry for the rambling post. For 2021, you can contribute up to $6,000 to a Roth IRA, or $7,000 if you’re age 50 or older. I would add something to the estate component. So if no arbitrage or account limits, then it’s exactly the same thing whether it goes into a tax-deferred account or a Roth account. Thoughts would be greatly appreciated. Keep in mind that Roth contributions are limited to $19,500 even if your profit-sharing plan otherwise allows you to contribute $58,000 (so you could do $19,500 into the Roth 401(k) and $38,500 into the traditional 401(k)). Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more. I think what you are trying to allude is the 280$ I save now ( on investing 1000$ Trad IRA) may be invested in another vehicle like Taxable account which may provide additional savings !! If you plan to move to a state without an income tax in retirement, tax-deferred contributions now will be that much better. If I understand correctly, it seems that my marginal tax rate in retirement would certainly be less than my marginal tax rate during the peak of my career (i don’t plan on replacing $400K of income annually in retirement- so unless I generate other sources of income such as real estate, my primary means of income would be retirement accounts). Then you can max out your annual Roth IRA contribution. It’s aimed at docs, but it applies to most high income professionals and many low income folks as well. Then 100% traditional starting next year. A really easy one is the Life Strategy Moderate Growth Fund. An heir is not required to take Roth distributions. I use the spreadsheet Future Value function to do stuff like this. Try to teach a 4-year-old to snorkel. If you plan to return to New York or California from your job in Florida or Nevada, however, you may wish to pay those taxes up front! As to the unfunded liability comment from earlier, the current debt per citizen is around $61,345 and per taxpayer around $166,770. If you stay in and get a pension, that Roth TSP will be nice given that military pension is all taxable. If you’re in your first 6 months out of residency, I’d go 100% Roth. I used to think that the Roth was appropriate for all investors up to age 50 unless they planned to retire in a much lower income tax state (TX, WY, WA, NV, NH, TN, FL, et al). I will be in a minimum of 8 years, so considering staying in for 20 years for the pension is definitely a consideration, and potentially changes the floor for my yearly income in retirement. Then the next chunk is at 10%. Traditional and Roth IRA contribution limit will stay the same at $6,000 in 2021 as in 2020. I’d start with these: http://astore.amazon.com/whicoainv-20?_encoding=UTF8&node=64. 3) There are some docs who have large traditional IRAs (cost prohibitive to convert the whole thing) and no 401(k) to roll them into who do not do backdoor Roth IRAs for this reason. Saving money in a Roth is good. Wondering if you had any thoughts on this? Your conclusion is that if you invest more money you’ll have more money later. Not very hip to financial lingo. Click to learn more! I saw the entry detailing yours, I know some places (like my work) have Targeted funds based on your age, but don’t know if Vanguard has this or what not…. Also available on Audible! One of the best arguments against pre-paying your taxes by making Roth 401(k) contributions is that you don't know what the future holds. Starting in 2016 we will be making about 400k a year between the two of us. If … Q3. If you can maximize both an IRA and a 401k, then you should read this article to help decide how to invest after maxing out your retirement accounts . Great website indeed.. Your ability to contribute to a Roth IRA is not contingent on your contributions to a 401(k) plan, but other Roth IRA contribution criteria might cause you trouble. Notify me of followup comments via e-mail. Now, my paychecks are larger because those automatic deductions are no longer happening. Many people hold strong views about future political and economic possibilities that influence their choice of Roth or traditional 401(k). However, given that the federal debt obligation plus unfunded liabilities translates to about $20,000 per year for each taxpayer in America (that’s a 40% tax rate vs. median income), income tax increases are inevitable and each investor who has access to a Roth, should maximize at least until age 60 and probably until they retire. This is a mathematical guarantee. So let’s first consider the first 6 years of the period, when you are putting in $5500+$18K =$23.5K per year. Your employer may contribute another $34,500 (up to $52K, the 2014 limit). Is there some sort of guide for this? I currently make $160K, and the lockstep salary/bonus increases in BigLaw slowly take you to around $350K in the next eight years. Until April 15, 2014, you can make 2013 contributions if you’d like. If someone is collecting mandatory payments (defined benefits, social security) and passive income to boot (never a bad idea) then the marginal effect of traditional IRA/401K withdrawals will be higher. You’ll probably be surprised. With 36k tax-deferred between RSP and 457 and another 11k backdoor Roth IRA, does it make sense to do the Roth 403(b) to have a more equal allocation between taxed and tax-deferred retirement accounts knowing that the tax-deferred savings won’t be invested now? It’s true. If I estimate it myself, do I just estimate my joint tax bracket, and use that to withhold that amount? The Roth IRA, of course. I budget that we should be able to max out my TSP and her 401(k) contributions plus both max-out backdoor Roth IRAs. There is no doubt that if you don't plan on spending the money in your retirement accounts and plan to give it to your heirs instead, that Roth contributions are very useful. So the same amount of after-tax money contributed to a Roth 401(k) instead of a traditional 401(k) lowers your expected family contribution. There may be something unique about you that you should do something different, but probably not. I might even try to convert some or all of the tax-deferred stuff you already have this year. Hope that helped. I think your data on the federal debt obligation is way too low. Why are the comments on this page all italicized? We are easily going to be in the 33% Federal and 3% State tax bracket this year and was hoping maybe this one last question will help answer our conundrum: Facts: I could do $17.5K as Roth, but I don’t. As for the heirs, a spouse does not have RMDs if a Roth is inherited but they do have RMDs if a traditional IRA or 401K is inherited. If you are going for PSLF, you are likely trying to keep your IDR payments low to maximize the amount forgiven. If you were in my shoes, what would you do? Her Roth IRA: $5,500 These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm. If you can't keep the same dollar-for-dollar … It is a good general rule that in your peak earnings years you should favor tax-deferred accounts. Continue to max out our Roth IRAs ( as I have done since starting residency) and contribute what I can budget to the Roth TSP? In 2010, the IRS removed all income restrictions on who could convert money to a Roth IRA. Politicians faced with that reality and the reality of growing deficits and interest payments will do and can do only one thing – raise taxes. Need a new challenge? But it’s reasonable to do tax-deferred given your higher bracket because you’ll likely get it out at a lower bracket. Thank you for this post. Correct for that factor before running your numbers. If you are already maxing out your available retirement accounts, you may lean a little more toward making Roth contributions so you can get more money (on an after-tax basis) into retirement accounts where it will enjoy preferential tax and asset protection treatment. You can request they withhold some money, but you don’t want to do that. In October, I maxed out my 401k and Roth IRA contributions for the year. If you put it into a post-tax account, and it triples, you’ll end up with that same $22,500. So does this mean that once you start building traditional accounts that you don’t wish to convert to Roth accounts, you can no longer grow you Roth accounts with additional contribution? Q2. Along the same lines, you may wish to do Roth conversions of your tax-deferred accounts. Visit performance for information about the performance numbers displayed above. I still have money saved in Taxable which makes me wonder if I shd do roth instead. As of now, I’ve been told by some people to do 100% roth 403b contributions and from others to do 100% traditional so I am doing about a 50:50 split and maxing out this account. It's much better to do a Roth conversion at 10-22% than to make Roth contributions paying tax at 28% or more. The most important consideration in the Roth vs Traditional 401(k) debate is your tax rate and how it will change when you retire. The most recent figure I heard was $130K per taxpayer! I suspect 50/50 Roth will mean you’ve overpaid taxes during your peak earnings years. I am a fan of your retirement philosophy and have learnt a lot from your blog..Thanks indeed !! You would want as much money in the account with tax-free withdrawals (Roth IRA) and as little money in the account that will tax withdrawals as ordinary income (401(k)). I’m not sure what the shift is. Keep reading and you’ll figure it out. NYSE and AMEX data is at least 20 minutes delayed. Some plans also offer a brokerage window where you can buy any publicly traded security, but I’d say those are the minority of plans. If the business only earned $17.5K, she could only contribute $17.5K. Stepwise it would look something like this: 1) Max out 401k yearly. problem. For example, if your marginal tax rate is 37%, putting $19.5K into a traditional 401(k) is the equivalent of $12,285 after-tax. If you’re actually maxing out the account (so your extra savings with tax-deferred would be in taxable) the break even is actually at a slightly lower marginal tax rate at withdrawal due to the effect that the Roth option has everything in a tax protected account. Is it a quick process to open? If you’re married, doing two is a 22% savings rate. Going from 403b to Roth IRA whether directly or via a traditional IRA has the same effect, but it is a taxable conversion. Look at it all together, unless you’re planning a divorce soon. I think there is no clear cut answer for high income generators and high savors. Your blog has been super helpful. The age 50 catch-up limit is fixed by law at $1,000 in all years. Your plan is just fine and a reasonable option. The whole blog is great. Both 401(k) plans and Roth IRAs offer tax-sheltered growth. Exactly. No cost other than the ongoing cost of the funds called an expense ratio, which for Vanguard index funds, approaches zero. Also I compared this way because 401k ( most common investment option) limits the total amount invested ( 17500 total in either Trad vs Roth). After maxing out my 401k our budget has room for another $10k to $15k in retirement contributions and I'm trying to decide between butting it in our 2 Roth IRAs and my wife's roth solo 401k or putting it all in my wife's traditional solo 401k. Whereas pretty much every dollar I put in tax-deferred accounts this year was saved at 33, 35, or 39.6% Federal. It’s late. Good luck investing. The Roth TSP is the best thing that ever happened to military folks. -401k will be matched to max out contribution $53k-Horrible investment choices (ERs all >1% with 12b-1 fees of >0.5%) My instinct is to contribute to the traditional account. I am a pediatrician just out of residency and making decent money. They may just inflate it all away instead of raising taxes. Unfortunately, it isn't that easy. Sorry your 401(k) sucks, but the choices on the Roth side are probably exactly the same. One year we didn’t make it. But bear in mind just maxing out a Roth IRA is an 11% savings rate for a resident. It is impossible for me to recommend a fund for you. What’s that, $84,500? Although let's be honest, the children of most physicians won't qualify for any financial aid anyway. I was wondering if you can give me advice on how to allocate my retirement savinngs. This is where I get a bit stuck, as I don’t have a complete grasp yet on all the ins and outs of how to retire “right”. As people are retiring later and later, I’m not sure which will be higher. If you put it into a pre-tax account, and it triples, then when you pull it out you’ll have $30K, and you’ll pay $7500 in tax, leaving $22,500. I will be maximizing each of the following: Both IRAs, 403(b), 457 (all tax-deferred), and a program where I work called the RSP (retirement savings plan, which is also tax-deferred and matched up to a total contribution for the year of 18k). Individuals over age 50 can contribute an additional $1,000 per year. I opened a Vanguard IRA & a Roth IRA! I thought the max is $5500 (x2 if you contribute for your spouse). Or paying tax at 28% now, when you could have pulled it out in 30 years at 15%. I was considering doing Teaditional to ensure I have enough salary left to use, but maybe if I’m going to be maxing, I should just make the Roth max work. I wanted your opinion on my approach / calculation.. Is there any flaw or point I am missing in my calculations. Just bought your book on Amazon and really looking forward to reading it. Ahhh. As for the guarantee I mentioned, as long as the Fed has an explicit duty to maintain the value of the dollar and prevent situations like Zimbabwe or the Weimar Republic, I don’t see how our debt is going to be inflated away. Also, no state tax where I live, no AMT considerations, no applicable phaseouts. $52K this year for 401K/Profit-sharing plan. The book summarizes the most important information on the blog and contains material not found on the site at all. But $160K is still not a “low” salary, so I can’t tell if that’s a terrible idea. This should total 56,000 401k+ 6,000 roth IRA, which I assume is decent for first full year out of residency. Review the IRS limits for 2021. In the intro to your post, you mention the Bogleheads wiki post about this issue (namely that dollars contributed to a tax deferred account now are contributed at a person’s current marginal tax rate, but are withdrawn at that person’s average tax rate, making a case that it is optimal to contribute dollars to a non-Roth account while in higher tax brackets). I kind of agree but wanted to clarify my own calculation !! Very good point. However, there are reasonable asset allocations and unreasonable ones. Some may plan on early retirement for instance, This seems like a shift in your thinking. But you shouldn’t yet have concluded anything about the traditional vs Roth dilemma. Here is a list of reasonable ones: https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/. If the rates are equal, max out your Roth contribution in preference to converting, but convert in preference to maxing out your 401(k). 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