Calculating Retirement Contributions Between 401(k) and Roth IRA

Mom987 · June 2014

Hi everyone,

I am working on coming up with my 15% retirement contribution. Our current retirement contributions (which need to increase) are as follows:

Me: 3% 401(k)

Employer: 3% 401(k)

DH: 5% 401(k)

Employer: 4% 401(k)

My Roth IRA: $100/month

I know I need to increase my Roth IRA and DH needs to open one.

Since I'm totaling 6% and he's totaling 9%, then we also do $100/month Roth IRA, what is the best way to come up with the dollar amount to make the 15% total that's needed, since some are pre-tax and others are post-tax. If I'm calculating it correctly, we are putting in about 8.2%, by taking our total dollar amount of the amounts listed above, divided by total gross income.

Thank you so much for reading through this, I am open to all advice!

Xstatic3333 · June 2014

How I do it is for my Roth I take 10% of my after-tax paycheck (employer matches 5%, also after tax) and for H's pretax contributions we look at the percentage of his gross, pretax income. I'm not sure if this is right or not, but it's what we've been doing

Sisugal · June 2014

General rule of thumb is to fund 401K to the employer match and then fully fund your ROTH IRA, then if you still are able, go back and add to your 401K up to max

hoffse · June 2014

I calculate it based on actual dollars being contributed divided by gross income (times 100) to get the percent. I don't worry about pre-tax vs. post-tax when considering overall percentage. That said, I don't count employer contributions unless they have vested. If they have, awesome. If not, exclude them until they do just in case something happens and you lose it.

I think the best way to increase retirement is always going to be through Roth accounts until those are maxed out. The regular 401(k) pre-tax contributions are a bird in the hand now since you get the deduction, but you will be paying for it in a serious way when you hit retirement. When you withdraw money from pre-tax accounts in retirement you have to pay taxes on the gains AND your original contribution. You don't get to avoid the taxes forever. It's better to think of them as being tax-deferred, vs. something that saves you money outright.

Obviously saving is always better than not saving, so if you can only afford to boost your retirement contributions through pre-tax accounts then that's fine. But if you can afford the post-tax options, I think that will probably serve you better in the long run. The tax savings ought to be significant. Plus, once you hit retirement it will sort of be like a pre-paid all-inclusive vacation: the tax bill was paid ages ago, and now you get to enjoy your contributions plus all the gains you earned while working without having to spend anything once you "arrive" in retirement.... whereas those folks who funded retirement primarily through pre-tax means will be sending the IRS a $40K check every year. Just saying.

Of course, the rules could change tomorrow. But until they do, I personally prefer to hedge with Roth accounts.

One other thing - many employers offer Roth 401(k)s. They follow the same rules as a Roth IRA, except the contribution limits are higher ($17,500/year vs. $5,500/year). It's a plan managed by your employer like the pre-tax 401(k). Frequently, employers who match traditional 401(k)s, match the Roth 401(k)s also. Matched funds always go in a tax-deferred account, which is sort of meh... but hell it's free money. I guess I can get over it

For what it's worth, I invest everything in Roth accounts because I believe in them. My H will probably do at least some of his retirement in a pre-tax 401(k) once he starts in September, because he's not convinced that Roth 401(k)s will stick around the way Roth IRAs have. That's fine if he chooses to do that - between us we will be hedging on our taxes both directions.

**None of this is legal advice.

smerka · June 2014

@hoffse - where do you get your figure of $40k to the IRS in retirement? I'm just curious. To OP - I would consider using your taxable wages (Box 1 on your W-2). That number is your earnings minus any pretax deductions like health insurance premiums and 401k contributions. Since you are putting in 3% into a 401k, I would shoot for 12% into a Roth. If that amount is more than $5,500, put what's left over into the 401k.

Mom987 · June 2014

Thank you everyone! We've come up with a plan. My 401(k) is 100% vested and DH's is 80% for a certain amount of time, then 100% (he's been there 5+ years, so I'm not totally sure what the status is). We're going to take 9% of my post-tax paycheck and 6% of his towards our Roth IRA/savings. That plus our 401(k) dollar amounts comes to about 18% of our take home pay or 12% of our gross income, which we're happy with right now.

Mom987 · June 2014

Actually I forgot to include the current $100 we already contribute to Roth IRA, so the percentages are even a bit higher.

hoffse · June 2014

smerka said:

@hoffse - where do you get your figure of $40k to the IRS in retirement? I'm just curious. To OP - I would consider using your taxable wages (Box 1 on your W-2). That number is your earnings minus any pretax deductions like health insurance premiums and 401k contributions. Since you are putting in 3% into a 401k, I would shoot for 12% into a Roth. If that amount is more than $5,500, put what's left over into the 401k.

Oh it's just me giving an example. That's about what my parents will be paying once they fully retire because they used standard 401(k)s as their primary retirement vehicles. My mom has fully retired and my dad is probably retiring in the next two years. He's told me how much he regrets setting it up this way because their tax bill will feel huge, and he resents it. They have plenty of money to pay it, but he's naturally cheap and he just doesn't like how it feels.

Any given person/couple/family might be more or less, especially if tax rates change (I expect they will go up by the time we retire). It just depends on what you make, how much you have saved, and what you withdraw.

My point is that you DO pay those taxes. You can't avoid it if you live long enough - at age 70 1/2 you have to start taking required minimum distributions (RMDs) based on the account balance divided by life expectancy (accounting for spouses too I believe - there are some tables you use to figure it out), so you can't even do a thing where you spend down the Roths first before moving to the pre-tax accounts. That's one reason why people's marginal tax brackets often go UP in retirement - very often they are required to withdraw more from those regular retirement accounts than they actually need to live on to meet the RMD rules. And all that money is included in gross income, whereas money withdrawn from Roth accounts are not. Roth accounts also don't have RMDs, so you can spend it or not - some people use their Roths as inheritance vehicles if they have other sources of income in retirement or if they never fully retire.

My parents happen to have a LOT of money in regular 401(k)s because they did what they thought they were supposed to do their whole lives - saved, invested, prepared for retirement, etc. Their investments have done really well, and my dad has realized that their RMDs are going to be significantly higher than what they spend, but he has to withdraw it anyway.

hoffse · June 2014

**Oh and none of that is legal advice. Obviously. Sigh.

smerka · June 2014

I gotcha. I forgot about the RMDs.

jessica490 · June 2014

RMD's?

hoffse · June 2014

RMD = "required minimum distributions"

jessica490 · June 2014

hoffse said:

RMD = "required minimum distributions"

Thank you!

Calculating Retirement Contributions Between 401(k) and Roth IRA

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