Is there a rule of thumb for % of retirement contributions going towards traditional vs Roth in 22% tax bracket?

[saawariya39]

I’m a 52F planning to retire at 70 so I can take the maximum social security when it’s time.

Since I’m in the 22% tax bracket, I want to make sure that I’m mitigating my tax risk. Currently, my retirement contributions are as follows:

15% into a traditional 401(k), employer matches 50% of 4.25% and also contributes a lump sum of 3% each year. Amounts of matching and lump sum go up to 6% and 5% respectively in two years (pre-tax). Current balance: 99k

Max (roughly 7% of gross pay) into a Roth IRA, including catch-up contribution. Current balance: 16k

Max into HSA to start building investments for medical costs in retirement: current investment account balance: $1550, cash balance of $3k to cover maximum out of pocket expenses for the year

I also have access to a Roth 401(k) via my employer and have a current balance in that one of about $30k, since that’s how I started on my retirement contributions with my current employer when I started working there.

I became a lot more aggressive with my savings a few years ago, so that I can catch up and be ready when I’m 70.

So does this look reasonable to keep my tax bill reasonable both now and when I retire?

 

[randomallocation1]

@saawariya39 The choice between Roth or traditional depends on your marginal tax rate. Since you don’t have a lot of savings, you should probably be doing traditional since it’s unlikely that your income will be higher in retirement than currently.

 

[saawariya39]

@randomallocation1 I’m not talking about one or the other, since I want to mitigate some of my tax burden now as well as when I retire (RMDs are a drag). I’m trying to figure out the balance between the two different types of retirement investment vehicles in order to hit that sweet spot of tax risk mitigation.

 

[randomallocation1]

@saawariya39 Yeah I don’t think you are getting the difference between the two. It’s not even necessary to balance the two. Most people are better off 100% traditional since they don’t have a ton saved for retirement. That is your case.

It’s pretty simple: What is your tax bracket now? What is your effective tax rate in retirement?

Contributions get a deduction at your top marginal tax rate and get withdrawn at your EFFECTIVE tax rate in retirement. So you fill up the 10% bucket first then 12% then standard deduction before you starting paying 22% on any of your withdrawals.

If you make more money now and therefore have a higher tax bracket, go 100% traditional. You will deduct at the 22% bracket and withdraw at your effective rate which will be lower than 22%.

Lots of people try to create balance of the two when they don’t know their future tax bracket. In your case, if you don’t have a ton saved for retirement, 100% traditional is going to be better for you since you know you will make less in retirement than currently (and therefore will withdraw at a lower EFFECTIVE tax rate).

For instance, I am barely in the 24% marginal tax bracket currently and my effective federal tax rate was closer to 17% last year because of those lower buckets being filled first.

 

[saawariya39]

@randomallocation1 No, YOU don’t get it.

And if you’re so daft that you can’t grasp the concept of wanting to mitigate tax risk both while saving for retirement and while in retirement, you shouldn’t be advising anyone, honestly.

 

[randomallocation1]

@saawariya39 Well we tried to help. Good luck!