Time to Start Saving in a Roth 401K? (income, deduction, investment)

[MadManofBethesda]

Originally Posted by NJBest

Contribute enough in your 401k to drop you down to a lower tax bracket, then max out your ROTH IRA.

Originally Posted by NJBest

That's my point. Thus if the OP has an AGI of $80K, he should put $10k into the 401k and then contribute to ROTH IRA. Since on that top $10k, he is paying 25%.

No, you're wrong.

With an AGI of $80k he is already safely within the 15% bracket. Contributing $10k to a 401(k) won't change his tax bracket at all.

You seem to be confusing gross income with taxable income. Just by taking the standard deduction of $11,600 and two personal exemptions totaling $7,400, his $80k AGI becomes $61k for tax purposes. Again, well within the 15% bracket.

Keep in mind that I am not suggesting that the OP not invest in his 401(k), only that any such investment won't change his tax bracket.

[NJBest]

Originally Posted by MadManofBethesda

No, you're wrong.

With an AGI of $80k he is already safely within the 15% bracket. Contributing $10k to a 401(k) won't change his tax bracket at all.

You seem to be confusing gross income with taxable income. Just by taking the standard deduction of $11,600 and two personal exemptions totaling $7,400, his $80k AGI becomes $61k for tax purposes. Again, well within the 15% bracket.

Keep in mind that I am not suggesting that the OP not invest in his 401(k), only that any such investment won't change his tax bracket.

My brackets were wrong (I was just using the bracket as suggested by the previous poster)... but the concept is still correct. It doesn't apply to the OP, but at the time of posting my suggestion, he had not mentioned his income yet.

For someone with a higher income, it remains a good strategy in most cases.

[MadManofBethesda]

Originally Posted by NJBest

For someone with a higher income, it remains a good strategy in most cases.

Not to be pedantic, but I have to quibble with your contention that it's a good strategy in most cases. For example, the 25% bracket for a married couple filing jointly runs from a taxable income of $69k all the way to $139k. A $10k investment in a 401(k) would have no effect whatsoever on the tax bracket of a couple whose taxable income was anywhere from $80k all the way up to $139k, a full 85% of the bracket. So you're basically talking about a strategy for a small minority of people in the 25% bracket.

[golfgal]

Originally Posted by MadManofBethesda

Not to be pedantic, but I have to quibble with your contention that it's a good strategy in most cases. For example, the 25% bracket for a married couple filing jointly runs from a taxable income of $69k all the way to $139k. A $10k investment in a 401(k) would have no effect whatsoever on the tax bracket of a couple whose taxable income was anywhere from $80k all the way up to $139k, a full 85% of the bracket. So you're basically talking about a strategy for a small minority of people in the 25% bracket.

Ok, wait a minute here....tax bracket really has nothing to do with this, your taxable income is what is at issue here. If someone has whatever income to start but has deductions to get them to a taxable income of say $70,000, married filing jointly they tax liability is $9765 according to the 2011 1040 tax table. If they have the same income to start but only have deductions to get them to say $95,000, they have a tax liability of $16,006 according to the same table. It isn't what your starting salary is so much as what your taxable income ends up being. If putting $10,000 into your 401K drops your taxable income by that much, you are talking several thousand in savings, not a couple hundred. In this example, put the money into a 401K then take $5000 out of the difference in tax savings and put that into your Roth.

[mathjak107]

after giving this some thought a 401k can not not lower your tax brackets on your bottom line taxable income with all deductions ,exemptions and credits figured before you figure in the amount you would contribute..

ask yourself what are my taxes with all my deductions,exemptions and credits but leave the amount you would contribute or not out of the equation for now. thats going to be your tax bracket if you contribute. its the same whether you contribute. nothing else gets subtracted out, you just wont pay additional tax on what you contributed.

[mathjak107]

im still trying to explain this so its easy to see.

i guess think of it this way , figure your income taxes except leave out the amount of your 401k contribution. figure all deductions,credits,exemptions,etc ..

thats your amount due ..... now figure the amount of your contribution back in as additional income . well since its not taxable then your amount you already owe hasnt changed has it? nope.

if you had decided not to contribute then the additional income added back in will just have you paying additional taxes on to the amount you already owe..

see how it works, contributing didnt lower what you already owe 1 penny, that amount stayed the same ....... but if you didnt contribute you would have to add that amount back in as taxable income and add that difference to what you already owe.

[NJBest]

Originally Posted by mathjak107

if you decide not to contribute thenn the income will just have you paying additional taxes on the amount you didnt contribute and is now income but that gets added to what you already owe without effecting that amount at all.

It doesn't effect the amount you would owe on the income after contribution.

But, you save taxes on whatever you already contributed.

My recommendation in the original post was to skim off the top tax rate for your traditional 401k, then contribute to the ROTH IRA from the next lower tax bracket. I didn't see a point of contributing to ROTH IRA, money that is taxed at 25%. But that's just my opinion.

Your strategy for determining how much to contribute seems like a good one.

[mathjak107]

correct ,the point is the contribution doesnt drop the taxes due already it only saves you taxes on the amount your contributing. .

it all boils down to only do i pay taxes on the amount i contributed or dont i. whatever else you owe is seperate , this only gets added to it or it stays the same if a contribution.. .

[MadManofBethesda]

Originally Posted by golfgal

Ok, wait a minute here....tax bracket really has nothing to do with this, your taxable income is what is at issue here...

It isn't what your starting salary is so much as what your taxable income ends up being.

Yes, I know that it is all about taxable income. In fact, that's the exact point I made in my first post. However, your first sentence above that tax bracket has nothing to do with this is illogical. Your tax bracket is determined by your taxable income, so of course it is relevant to the discussion. Perhaps you meant to say that your gross income has nothing to do with your tax bracket.

Originally Posted by golfgal

If putting $10,000 into your 401K drops your taxable income by that much, you are talking several thousand in savings, not a couple hundred.

Now, wait a minute yourself. How are you coming up with several thousand? With an $80k AGI, the OP's taxable income places him well within the 15% bracket before any deduction for a 401(k); ergo, a $10k investment in his 401(k) will reduce his tax liability by exactly $1,500.

[golfgal]

Originally Posted by MadManofBethesda

Yes, I know that it is all about taxable income. In fact, that's the exact point I made in my first post. However, your first sentence above that tax bracket has nothing to do with this is illogical. Your tax bracket is determined by your taxable income, so of course it is relevant to the discussion. Perhaps you meant to say that your gross income has nothing to do with your tax bracket.




Now, wait a minute yourself. How are you coming up with several thousand? With an $80k AGI, the OP's taxable income places him well within the 15% bracket before any deduction for a 401(k); ergo, a $10k investment in his 401(k) will reduce his tax liability by exactly $1,500.

Like I said in my original post, look at the 1040 tax tables and get the numbers. It's over a $6000 tax liability difference between 70K and 95K. The difference between 70K and 80K is 9756 for 70K and 12,256 for 80K which is $2500.

Again, it's all about the taxable income, not so much where you start....