How should I divide up my retirement contributions?

Re: How should I divide up my retirement contributions?

• Wulfgar member

  

  December 2014

  If you like what you are doing then stick with it.  For me, I don't have a Roth IRA and I am not sure if I will get one.
  
  Others tend to contribute up to what their employer will match then fully max out their Roth IRAs before upping their 401k if they have the excess income.
  

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• Xstatic3333 member

  

  December 2014

  I think these types of questions get complicated and really depend on your tax bracket.  For us, since we are in a lower tax bracket we don't usually owe very much and it makes sense to use Roth accounts.  However, we do my H's retirement pretax, even without an employer match, because if it is not automatic it won't happen.  I contribute to a Roth each paycheck (usually).  My understand is that at higher income levels, there does come a point where contributing pretax money makes sense.  

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• hoffse member

  

  December 2014

  Xstatic3333 said:

  I think these types of questions get complicated and really depend on your tax bracket.  For us, since we are in a lower tax bracket we don't usually owe very much and it makes sense to use Roth accounts.  However, we do my H's retirement pretax, even without an employer match, because if it is not automatic it won't happen.  I contribute to a Roth each paycheck (usually).  My understand is that at higher income levels, there does come a point where contributing pretax money makes sense.  

  
  

  
  

  ***Stuck in the box********

  
  

  Yes, this is true.  It's hard to know where the tipping-point is, though.  The idea is you really want to be making pre-tax contributions at the height of your lifelong income and post-tax contributions when you are in a lower income bracket than you will be in retirement.  Younger people are usually in lower income brackets than they will be when they retire, so that's one reason why Roths are so heavily encouraged for younger folks.  You can't predict the future, though, so you have to go with whatever your gut is telling you.

  
  

  H and I only contribute to Roth accounts.  It doesn't help us out at tax-time, but I know we can afford to pay the taxes now, and I think we will be in a higher bracket in retirement if we both stay in private practice.

  
  

  I've said this before, but I sort of view Roths in the same way I view pre-paid, all-inclusive vacations.  Even if it would be cheaper to pay as you go on vacation, there's a lot to be said for the mental peace and happiness you experience when a vacation is prepaid.  I think paying the taxes now vs. waiting to pay them in retirement is sort of similar.  Once those taxes are paid, you never have to worry about them again.

  
  

  Keep in mind that traditional 401(k)s also have some rules that people tend to lose track of when they are younger.  Specifically, any money you take out in retirement will be taxed at ordinary income rates.  Both your contributions AND your gains will be taxed at ordinary rates. Those rates are a lot higher than capital gains rates (15% for most people).  With Roth accounts, you pay taxes only on your contributions, and then the money grows tax free - you aren't even subject to the 15% capital gains rates.

  
  

  The other thing is that once you reach a certain age, you are required to take money out of a traditional 401(k).  You can't just leave it there and live off of other income to avoid the taxes.  My parents are about to face this problem - they have large 401(k)s and are getting to the age where they will have to take money out of them, even though they can both live off of my dad's income (he hasn't retired yet, but he will receive a pension when he does) and my mom's pension from the state.  They don't need the money in their 401(k)s, but they will have to withdraw some portion of it anyway, and that will probably pop them up to a higher tax bracket than if they were able stick to the pensions only.

  
  

  So I'm a fan of Roths.  But it does vary from person to person.

  

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• hoffse member

  

  December 2014

  By the way, kudos to your employer for the 12% automatic contribution!  That's HUGE.  As in... I would try to stay employed with them as long as possible huge...

  

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