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Contributions get a deduction at your top marginal tax rate and get withdrawn at your EFFECTIVE tax rate in retirement.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!

 

[kevinb5]

@saawariya39 This is hard as this is a debate I have had basically when to claim social.

I don't know you whole situation but if you need to lower income so you qualify for whatever Roth is great.
You are behind and my gut says all 401k pretax and only Roth if over.

And I admire you optimism of working till 70. For many that is sooner and not by choice.

No matter what you do keep saving.

 

[saawariya39]

@kevinb5 My sperm donor retired at 72, so I have “family” history to rely on. My sperm donor’s sister also retired in her 70s, so again, there’s that as well.

So for me, it’s not optimism, it’s just that all of us work(ed) in careers we are passionate about and excel in, so that helps with being able to work longer than most.

 

[stevefuller]

@saawariya39 Best one I've read is that you add you fed marginal rate and your state tax. If the percentage from the addition is less than 32% you do roth. If it's higher than 32% you do traditional.

Closer or around 32% is a toss up

Tldr :

State + Fed > 32% Traditional

State + Fed == 32% or close Toss up

 

[yendor911]

@stevefuller I have to strongly disagree with this math because it's one size fits all in terms of income. The decision for each individual really comes down to whether the funds will be taxed higher or lower in retirement than while working. Given that OP's savings is quite low at a higher age, it's very unlikely that OP will have enough taxable income in retirement to hit an effective tax rate of 24%, let alone 32%. OP is almost certainly better off using "traditional" type accounts.

 

[saawariya39]

@stevefuller I’m in the Seattle area, so no state tax…but I think there needs to be at least SOME tax mitigation in my federal tax bracket. I don’t want to stay in this tax bracket when I retire!

 

[stevefuller]

@saawariya39 So you should do Roth then until your income fed tax bracket goes to the mid 30s.

Your tax mitigation for the fed is vanilla i.e standard deduction, real estate, HSA./FSA, 529s, Capital Losses. Not much left over for W2 earners.

If you have a familiy plan with HSA plus tge standard deduction you'll be able to shelter ~ 37k. You'llpay fed taxes on the rest.

 

[autocat]

@saawariya39 I’ve heard when your federal + state taxes go above 30% is when you should consider pretax contributions to retirement in order to drop your current taxable income.

Being that you are also doing catch up contributions that is a huge chunk of pretax money to lose out on to max your Roth 401k. Think ~40k income to get ~30k in Roth contributions.
So I’d say it depends mostly on what you can comfortably contribute while also doing your Roth IRA and HSA.
I’m interested to see what others respond with as I’m in a similar boat. (Doing pretax 401k to get maximum employer match and discretionary match and then maxing my Roth IRA with post tax, ofc.) I personally can’t afford the extra “lost” money to go all Roth in my 401k and still max