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Here's the short and quick: I am 35, plan to work for 30 more years. Will most likely stay in 25% tax bracket, even after retirement. I can contribute around $460 per month currently into an IRA. My employer automatically puts 5% of my annual salary into a 403(b). Should I put some into a 403(b) and a Roth (if so, should I split the difference?), all into a 403(b), or all into a Roth?

Please let me know if more elaboration is needed, and thank you in advance for your answers.

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    Note that if your or your employer contributes to your employer retirement plan during the year, you will not be able to deduct Traditional IRA contributions unless your income is very low (and your income is definitely not low enough based on your tax bracket). – user102008 Sep 18 '17 at 20:36
  • @user102008 - not quite. If you work for a company with a 401(k) plan and are eligible, deposit or not, it makes no difference, no IRA deduction for you (above that income limit) – JoeTaxpayer Sep 18 '17 at 21:47
  • What will put you in the 25% bracket while in retirement? Do you have a defined benefit pension? Is the 403(b) invested in annuities? Or stock funds? – JoeTaxpayer Sep 18 '17 at 22:04
  • @JoeTaxpayer: 401(k) and 403(b) are defined contribution plans. You are not considered "covered" for the year unless either you or your company made a contribution to it during the year. – user102008 Sep 18 '17 at 22:07
  • @user102008 - you are right. I am getting old and confusing this with some other quirk of the tax code. Thanks for setting me straight. – JoeTaxpayer Sep 18 '17 at 23:08
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Jeff, there's more to consider than what you spelled out in the question, or by the answer offered so far.

To say "I will be in the 25% bracket at retirement" implies that, for a single person, you have (in 2017 dollars, today's tax code) over $38,000 of taxable income. Only the amount over this will be taxed at 25% or higher. The single gets a $4050 exemption, and $6350 standard deduction. The total is $48,350. It would take $1.21M in pretax accounts to generate the $48K each year (using the 4% rule).

Now, let's say you pay the tax now, at 25%, and live tax-free in retirement. The tax on that $48,350 from a pretax account, would cost you $5226 for a net, $43,124. But if the funds were all post tax, you needed to deposit $58,500 to clear this amount. Huh?

You see, while working, deposits come off the top, a $1000 deposit to a 401(k) or IRA would be at 25%, and 'cost' you $750. But in retirement, you have the zero bracket (what I call the combined exemption and standard deduction) and then the 10 and 15% brackets to work through. If you retire 100% Rothified, you miss that opportunity in retirement.

On the back end, the 25% bracket is pretty deep, from $38K to $92K taxable income. It would take a huge amount of pretax money to push you into the bracket after that, 28%.

References -

A similar question - When should I contribute to my IRA over my 401k?

The 2017 Tax Rates, both single and married

My award winning article The 15% solution which presents the concept of using Roth while one is getting started and likely in a lower bracket, then shifting to pre-tax savings, to minimize one's average tax burden over their lifetime.

NOTE: The comment disclosing that the OP is a couple who will have $84K from a pension changes things dramatically. As a couple, in today's dollars, a gross income over $96,700 puts them in the 25% bracket. In which case, with $13K or so "room" left, I wouldn't want too much going in pre tax. I'd go Roth while at 25% and some pretax when at 28% or higher.

  • Thank you for the response. I'm married and my wife's pension will contribute around (estimated) $7000/month (before tax). So, since her money is her's I will need to draw from my own retirement account. But, since the incomes are combined (we file joint), wouldn't this put us in the 25% bracket? If so, does it make more sense to put a little in the Roth (around 20% as another use posted) and the rest into a 403(b) or more into the Roth and less into a 403(b), or all in one and none in the other (until I can max it out)? I also checked and I will jump to 28% in 10-12 years. Does this matter? – jeff Sep 18 '17 at 23:33
  • To be a bit more specific. I have around $460 after-tax dollars to save per month currently. We are in the 25% bracket now, and will be so for 10 years until bumping up to 28%. My goal is to save as much as possible, without finding loopholes and whatnot (I'm not smart enough to do this). Would it be better (most likely) to put say $475 pre-tax into a 403(b) and $92 into a Roth per month? Then, as my salary increases, keep increasing both contributions while keeping the same ratios? – jeff Sep 18 '17 at 23:44
  • Sorry for more updates, but my wife is contributing around $650/month for her pension. So the total pension is not subject to taxation, correct? If so then we'd probably be well in the middle of the lower bracket (15% I think), right? Does this mean that I should favor the pre-tax plan? – jeff Sep 19 '17 at 0:35
  • The typical pension is taxable, but it really depends on the details. The exact type of plan . – JoeTaxpayer Sep 19 '17 at 1:15
  • Ok. So, assuming everything goes as stated, it would be better to put towards the Roth (eventually maxing it out) before putting towards the 403(b), correct? Thank you for all your help. – jeff Sep 19 '17 at 2:20
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The advantage of a Roth account is that it is already taxed money, and all the gains are tax free. This is to your advantage if you a) pay less taxes now than in the future, or b) expect a lot of gains because of the long time. With a long duration coming still up in your example, b) is the case.

However, there is another important point c) to make for Roth accounts: imagine you are -old- retired, and live from your 401(k) income, pay moderate taxes, and just get along well. If there is an unplanned significant expense (like Irma blows your roof off or your car falls apart unexpectedly), you need to take a larger chunk out of the 401(k). At that time, your tax rate goes up, and - you need to take another chunk out of your 401(k) to pay those extra taxes. And yes, you might need to take some more out to pay the higher taxes for the extra you took out to pay the higher taxes.

This is where a Roth comes in nicely: live from the 401k, pay moderate taxes, and pay 'unplanned significant expenses' from the Roth - that keeps your tax rate constant.

For c) you should have enough in the Roth to cover such things for your whole retirement. My personal guess is maybe 1/3 to 1/4 of your total retirement savings.

The recommendation from this is to put continuously about 20% of the saved money into Roth, and - ! - during your work life, when there are unexpected years with low tax rates, use the chance to move ('convert') an extra chunk of the pre-tax 401(k) into the Roth.

There are many other things to consider in your retirement planning, but this is a basic piece to know.

  • So, are you saying that I should match/add to my employers 403(b) plan all of the $460 minus 20% that I put into the Roth? – jeff Sep 18 '17 at 20:15
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    @Aganju: It doesn't matter how much time or how much gains. It will be the same percentage gain for Traditional or Roth. – user102008 Sep 18 '17 at 20:56
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    @Aganju (Stop writing it that way, please? "Roth" is a name, not an acronym. The accounts were named after the senator who was involved in changing the laws about such accounts. kthx) – Chris W. Rea Sep 18 '17 at 21:12
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    @ChrisW.Rea , thanks, I really thought its an acronym. Can't edit the comments anymore, but will change future writes. – Aganju Sep 18 '17 at 21:14
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    @Aganju: No, it doesn't make a difference, because multiplication is commutative. If you take a pre-tax amount, multiply a percentage you will be left with after taxes first, and then multiply a certain percentage of gains, you will be guaranteed to get the same number as if you multiple the same percentage of gains first and then multiply the same percentage you will be left with after taxes. The order you multiply does not matter; it's basic math. You must get the same result if you have the same flat tax rate in both cases. – user102008 Sep 18 '17 at 21:25
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The $5,500 limit for IRA contributions includes both your Roth and Traditional contributions. That is, the sum of your traditional and Roth contributions may not exceed $5,500. Since you are already contributing the max to your traditional IRA, you do not have the option to contribute to a Roth unless there is some information not included in your post (like if will be your spouse's Roth).

According to the information in your question, your only option if you wish to save more for retirement is to contribute more to your 403(b).

Sorry to be the bearer of (kind of) bad news.

  • That limit applies if you have a personal IRA. If the contribution is through your employer, the limits are 18000. – Aganju Sep 20 '17 at 21:53
  • @Aganju The OP is asking whether to contribute to a 403b or a Roth (or both). The context clearly indicates that "Roth" means "Personal Roth IRA." If the OP had a Roth option in his/her 403b, the wording would have been very different. – farnsy Sep 20 '17 at 22:29

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