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Roth vs Traditional 401k/403b

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  • Roth vs Traditional 401k/403b

    Have access to 403b and spouse 401k. Have Roth IRAs.

    Transitioning in the next few years from employee to partner pay, spouse also expecting increase in pay. Anticipate the following income for the next few years:

    2021 - 188k
    2022 - 290k
    2023 and beyond- 500+k (“peak earnings years”)

    Question for the forum- should 2022 contributions be traditional contributions in the 401k/403b, or stick with Roth? (We will be over income limits for Roth IRA, but will attempt Backdoor Roth if still available.)

    My thoughts - This is a big jump in income for us in 2022 and we are worried that keeping our retirement accounts as Roth 401k/403b is a mistake. We do not expect to be pulling this amount (290k) in retirement as taxable income, even if we aren’t quite yet in the peak earnings years.

    Thank you for your guidance!



  • #2
    What will matter is your MFJ AGI and what tax bracket that places you in. Then it is a matter of circumstances and personal choice. I'm a big fan of having a minimum of 20% of your portfolio be in Roth assets prior to the start of Medicare and 25% prior to the start of RMDs.

    If I was in the 24% or lower tax bracket without pre-tax deferrals and your projected future income level, I would definitely continue Roth for 2022.

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    • #3
      what is your current state income tax rate? Will that change due to a move in 2023? In your scenario I'd probably do roth 403b and roth 401k in 2022, and that will be the last year to do this.

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      • #4
        Since you’re solidly in the MFJ 24% bracket I would favor one more year of Roth contributions. Assuming lucrative high income careers for 2023 and beyond, further Roth contributions probably won’t make sense beyond this year until your income declines. I doubt many get close to retirement and say they have too much Roth savings.

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        • #5
          It may make sense to keep Roth 401k as part of your strategy even longer. The longer your time horizon, and the more you expect to accrue outside of tax deferred, the more benefit of investing in the Roth account now.

          if one can avoid withdrawing from Roth until later in retirement you may come out ahead.
          in this calculator it takes about 20-25 years for Roth 401k to come out ahead, depending on your inputs for return and the tax rate while earning vs retirement.

          https://www.bankrate.com/retirement/...ra-calculator/

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          • #6
            Roth it is - thank you all for your thoughtful input.

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            • #7
              It really depends on how much income you expect to need in retirement. I've just subtracted the standard deduction and looked at federal income tax only for 2022. Which state you work and retire may also play a factor. If you make $290k, your marginal tax rate is 24%. In order to reach an effective tax rate of 24%, you'd need to withdraw somewhere a little over $550k in retirement. So if you think you'll live on less than $550k, go with traditional, more than $550k go with Roth.

              Click image for larger version  Name:	Effective Tax Rates.jpg Views:	0 Size:	136.8 KB ID:	309273
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