35 married filing jointly. After a few years of being paycheck to paycheck, we are finally getting to a more comfortable financial situation. Make $150k combined annually and firmly in the 22% bracket. Have $25k in a Roth IRA (VT and chill) that we are now able and going to max going forward. $125k in work 401k (target date) that started offering a Roth 401k about a year ago. I switched my contributions to 100% Roth and contributed $11k last year along with a 4% company match that goes to traditional. Just wondering if I should be doing a portion of my contributions as pre-tax? I figure I’m firmly in the middle of the 22% bracket that pre-tax doesn’t really help me much. Wife will have a pension from the State at retirement and am thinking we will probably fall in the same bracket at retirement. I already have the okay 401k base of $110k in pre-tax from before the Roth option was added, and with the company match going to pre-tax it will continue to grow as well. Mindset was to switch as much as I could to Roth until I get to 50/50 in totals and then re-evaluate. Thoughts or insights appreciated!
Posted by EverestTrees
8 Comments
I think you max Roth 401k contributions sooner than traditional pre-tax 401k, so I like a little of both if you are hitting the max. In principle, I generally assume 30+ years will have a more substantial return and the Roth is better value (until you get closer to retirement), but what do I know
Stay Roth. You have another 15-20 years to grow your income. Even if we assume tax brackets will be the same when you retire, there’s a good chance you’ll be in higher brackets by the end of your career and when you retire.
Switch your 401k to lowest cost sp500 fund. Often times those target dates are too conservative and have sneaky internals.
There’s nothing wrong with Roth. But the hard math says lowering your taxable income is mathematically the best move. Right now by doing 100% Roth you’re basically choosing to overpay your taxes today. Especially as young as you are.
Also get in the habit of doing “something” in taxable.
Often times people only retire with 401k’s and the equity in the home. I don’t care if it’s $50/week in VOO in. Fidelity account. It is a good habit and you should learn it young.
Sell only when you have you have an urgent expense to pay for. Sounds like you will do great, best of luck!!
The higher tax bracket you fall into, generally speaking, the more it becomes better to invest in a tradtional account instead of a roth account. Unless you know for a fact that in retirement you will still be in a higher tax bracket.
At 22% now vs likely 22% later with the pension, Roth contributions are solid. The natural split you’re building (old traditional balance + ongoing match, plus your Roth contributions) is already pretty reasonable diversification.
I wouldn’t overthink the 50/50 target though. If your tax situation stays similar in retirement, leaning heavier Roth gives you more flexibility later – you can pull from traditional first if rates drop, or tap Roth if they go up. Plus your RMDs will be lower down the road.
Keep doing what you’re doing. Maybe just run the numbers every few years if income jumps significantly.
I would be doing traditional 401k so you can afford to max it out
Max both out if possible. Traditional first if you can’t max both. I think the only perfect
Plan is the one you max out and stay with diversified index funds with low ER
if you are sure your wife’s pension is going to put you in the 22% tax bracket throughout retirement then Roth makes sense. If you think you’ll have space in lower brackets in the future then pre-tax makes sense