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FYI I have started updating the FAQ message starter with new or updated links and some refreshed content.

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Hi all,
I'm 42 years old, currently maxing out my Roth 401(k) and one Roth IRA each year. My wife doesn't work, so I was contemplating on maxing out another Roth IRA in her name. Our AGI is around 165K. I'm also maxing out our HSA each year and not spending any of it as another tax advantaged investment account. I'm currently investing any extra $ in a low turnover % index fund, but wondering if there's anything better to invest non-retirement moneys into. Also, living in Texas where we have no state-income tax - is it still typically advantageous to go with the ROTH, assuming i'm going to live on 80% of my retirement salary? Also am planning on retiring at 57 years old and don't know if i'll be in a higher or lower tax bracket. Does going 100% ROTH IRA and 401k still typically make sense in my scenario over pre-tax?

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russrimm said:   Hi all,
I'm 42 years old, currently maxing out my Roth 401(k) and one Roth IRA each year. My wife doesn't work, so I was contemplating on maxing out another Roth IRA in her name. Our AGI is around 165K. I'm also maxing out our HSA each year and not spending any of it as another tax advantaged investment account. I'm currently investing any extra $ in a low turnover % index fund, but wondering if there's anything better to invest non-retirement moneys into. Also, living in Texas where we have no state-income tax - is it still typically advantageous to go with the ROTH, assuming i'm going to live on 80% of my retirement salary? Also am planning on retiring at 57 years old and don't know if i'll be in a higher or lower tax bracket. Does going 100% ROTH IRA and 401k still typically make sense in my scenario over pre-tax?

 I dont see having everything in Roth as being the best option tax-wise.
Do you at all have anything in traditional IRA/401k accounts? What kind of taxable income do you expect to have at age 57 when you retire? You could live on 80% of (pre)retirement salary but if all that is going to come from a Roth account, you will have zero taxable income. That is far from optimal.

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Yes I have 225K in a rollover IRA, 56K in another rollver IRA, 90K in a traditional IRA, 107K in a 401k plan (all roth), 67K in a Roth IRA.  I'm maxing 17500 in roth 401k and 5500 in roth IRA and 6500 in HSA.  I'm investing some of the emergency fund which is a little over 100K into low fee index funds with low turnover %.

What should I be doing differently?

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russrimm said:   Yes I have 225K in a rollover IRA, 56K in another rollver IRA, 90K in a traditional IRA, 107K in a 401k plan (all roth), 67K in a Roth IRA.  I'm maxing 17500 in roth 401k and 5500 in roth IRA and 6500 in HSA.  I'm investing some of the emergency fund which is a little over 100K into low fee index funds with low turnover %.

What should I be doing differently?

  
With that kind of savings I would say you are in the 25%+ tax bracket currently.  With having everything in a Roth you will have zero (or near zero if you have some savings outside of retirement accounts earning interest in retirement) taxable income in retirement.  So right now you are paying 25% + the earning power to invest in a retirement account.  If you were to take some of those funds and put them in a normal 401k or IRA, then you would be able to take out just enough in retirement to stay in the 10-15% tax bracket.  Then take any additional money you need out of your ROTH accounts.  Currently the tax brackets are at 15% up to 36k single, and 72k married.  So on that amount of money you are currently losing between 10-15%+gains by putting it all in a roth. 

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russrimm said:   Yes I have 225K in a rollover IRA, 56K in another rollver IRA, 90K in a traditional IRA, 107K in a 401k plan (all roth), 67K in a Roth IRA.  I'm maxing 17500 in roth 401k and 5500 in roth IRA and 6500 in HSA.  I'm investing some of the emergency fund which is a little over 100K into low fee index funds with low turnover %.

What should I be doing differently?

  Age, gross income, marital status, kids?

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42 years old, agi is 165k, married, no kids but have 2 on the way (due December), wife doesn't work and won't for at least 5-6 years.

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I'm confused (sorry, a bit of a noob on this stuff)- why is having zero taxable income bad? If I (theoretically) had 100% of my money in a Roth at retirement time, wouldn't I pay 0 tax on the money I took out from it since it's already been taxed?

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russrimm said:   I'm confused (sorry, a bit of a noob on this stuff)- why is having zero taxable income bad? If I (theoretically) had 100% of my money in a Roth at retirement time, wouldn't I pay 0 tax on the money I took out from it since it's already been taxed?
There's a certain amount of income you can have and pay no taxes.  So, at a minimum you want to have that much income (there could be good justification for having more).  If that comes from a Trad IRA, you will have never paid tax on that money.  Of course all your Roth distributions were taxed in the year you put the monies into Roth.

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russrimm said:   I'm confused (sorry, a bit of a noob on this stuff)- why is having zero taxable income bad? If I (theoretically) had 100% of my money in a Roth at retirement time, wouldn't I pay 0 tax on the money I took out from it since it's already been taxed?
 

  It is not so much that it is bad to pay zero tax (at retirement); it is more of at what cost now are you getting it. By going with a Roth instead of a trad. 401k, you are foregoing the tax deduction you can get now --- perhaps 25% marginal. If you had at least some invested in trad. 401k and took that out during retirement, you get some deduction now as well as pay a zero or a smaller tax rate at the time of retirement.

To give you an idea, in 2014, only the taxable income above 73,800 is taxed at a rate of 25% (or higher) --- married filing jointly. Adding personal exemption and standard deduction, you can have an AGI of 94,100 and still pay less than 25% marginal tax.  In short, make traditional 401k contributions at least to the extent of generating about 95k of retirement income before going with Roth. Of course, this assumes the brackets and rates today, which could very well be different during your retirement.

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So is it safe to say it would be more ideal to diversify my 17,500 contributions up into a 60/40, 80/20 (something other than 100/0) post/pre tax, and keep the 5500 going into the Roth IRA?

It's currently broken up as 226k in a pre-tax rollover ira, 91k in a traditional ira, 43k in a pre-tax 401k, 68k in a roth 401k, & 66k in a roth ira.

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russrimm said:   So is it safe to say it would be more ideal to diversify my 17,500 contributions up into a 60/40, 80/20 (something other than 100/0) post/pre tax, and keep the 5500 going into the Roth IRA?

It's currently broken up as 226k in a pre-tax rollover ira, 91k in a traditional ira, 43k in a pre-tax 401k, 68k in a roth 401k, & 66k in a roth ira.

  Yes, and no. You have to factor in yearly income, marginal tax rates, state marginal tax rate (and deductability), and future marginal tax rates.

In lower income years, you'd might be better to do 100% Roth contributions while in higher income years you might be better to do 100% traditional. In years where your income will be right above a marginal tax bracket breakpoint, you might do traditional until you fall back into the lower bracket for your marginal tax rate, and then do the rest Roth.

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Good thread! Bump!

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It's worth noting that employer matches in your 401(k) are pre-tax, even if they are matching Roth 401(k) contributions.

Also, if you plan to make a large lump-sum distribution during retirement (e.g. buying a retirement home in cash), taking that distribution from Roth funds instead of pre-tax would allow you to avoid a large tax bill for one year.

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