‘I understand that Roth makes the most sense if you anticipate being in a higher tax bracket in retirement’: I’m making $135k/year – how should I balance Roth vs traditional 401k contributions for optimal tax advantage in retirement?

Hi Money Minder,

Got a fat raise and need your help figuring out when I should switch from Roth contributions to traditional.

Here’s the scoop:

Life:

40M

No kids, no spouse

Modest house, no credit card debt

$32k student loans

Income:

$135k main job

$6-20k second job (varies by year)

Current Retirement Savings:

$26k in traditional

$122k in Roth

$12k in 2nd income 403b (Traditional)

When I was making $75-80k, I was all about that Roth 401k life, with only employer match going into Traditional.

I get that Roth is ideal if you think you’ll be in a higher tax bracket in retirement compared to now.

Now I’m making $135k and currently doing 6% Roth, 6% Traditional, plus 3% employer match.

How should I juggle these to maximize tax benefits? I’m thinking I’ll need around $50k a year in today’s money during retirement (aiming for 2045-2050) – maybe less if I decide to move back to a lower cost of living area near family.

Farewell until next time!

Response from THE MONEY MINDER:

Hello There,

Congratulations on the substantial raise! It’s great that you’re already thinking about how to optimize your retirement contributions given your new income. It’s clear that you’ve done your homework on Roth vs. Traditional contributions, so let’s break down a practical approach for you.

Given your income level and retirement goals, it makes sense to consider a mix of Roth and Traditional contributions to diversify your tax strategy. Since you anticipate needing around $50k per year in retirement, it may still be advantageous to contribute to a Roth account, especially if you believe you’ll be in a higher tax bracket during retirement.

One approach could be to continue contributing to both Roth and Traditional accounts, like you’re currently doing with your 6% Roth, 6% Traditional, and employer match setup. As your income increases, you may lean more towards increasing your Traditional contributions to lower your current taxable income. However, keep in mind that having a mix of account types can provide flexibility in retirement to manage tax implications.

Since your retirement target is around 2045-2050, you have time on your side to adjust your contributions as needed based on changing circumstances. As you consider potentially moving to a lower cost-of-living area, remember to factor in how that may impact your retirement income needs and tax situation.

Overall, a balanced approach to Roth and Traditional contributions, coupled with monitoring your financial goals and tax implications, will help you stay on track for a tax-advantaged retirement. If you’re unsure about specific contribution amounts or tax implications, consulting with a financial advisor can provide personalized guidance tailored to your situation.

Best of luck navigating this transition and optimizing your retirement savings strategy!

Farewell from THE MONEY MINDER.