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Comment by sikim | Hacker News Reader

I wonder what percentage of 401k contributors has an IRA. General rule of thumb is to contribute enough to 401k to get maximum company matching and max out your Roth IRA contribution first. IRA is generally preferred because you can choose your own fund (e.g. Vanguard) and has more flexibility in certain situations. By having both pre-tax (401k) and post-tax (Roth IRA), you would be also diversifying your tax liability in your retirement.

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One problem with the Roth IRA is the income phase out limits. If you're single, if you AGI is >117K, you can only contribute some percentage of the $5000 allowed for the Roth. If you're >132K, you can't contribute anything. For a married couple, those limits are 184K/194K. Granted, you can reduce your AGI by contributing to a 401K first, which allows you to take $18K off the top.

I know this doesn't affect many, but for the high-paid tech crowd, these limits right around the point in your career where you want to be pumping in money.

It's true that many tech workers are eventually affected by the contribution limit, but my understanding is that it's essentially always smart to contribute to tax-advantaged accounts while possible.

You can get around this by contributing to a traditional IRA and then converting it to a Roth. This is easy to do (until law changes) unless you have an existing traditional IRA where you can take a tax hit.

... And you can roll your trad IRA into your company 401K before doing the backdoor Roth, thus avoiding the tax hit.

No - no you can't. Someone has given you some odd and confusing advice.

I have personally done so.

https://www.nerdwallet.com/blog/investing/rollover-ira-to-40...

http://www.kiplinger.com/article/retirement/T047-C000-S004-m...

Those are still pretty high limits, well above the median tech salary even in the Bay Area. If you're in "income phase out" territory you're probably not worried about your retirement.

The thing I don't like about Roth is that you're contributing with post-tax money during your prime working years--the time when your taxes are probably as high as they will ever be. Especially true as a tech worker where your salary plateaus in your 20s. I'd rather save pre-tax now, and then pay taxes later when I'm 60 and back in the lowest tax bracket.

My issue with the Roth is that I don't trust the rules to remain the same in the future. I pay taxes now, before the money goes in, with the promise of tax-free withdrawals. I fully expect that money to become taxable on the back-end at some future time. It might be a lower rate (like capital gains today) or be income-based, but that pot of $ will be too tempting to ignore, I fear.

So worst case scenario is that you wind up paying the taxes you'd have paid if you didn't use the Roth? Not really a reason to not use one when it's only a possibility and not a certainty.

If things get dicey enough that they start taxing Roths, you can bet that they'll tax traditional accounts enough to claw back the original tax deduction plus interest.

Just curious, what are the median Bay Area salaries? I'd think most married couples in bay area tech are above the contribution limit.

According to PayScale[1] and Glassdoor[2], average/median salary for software engineer in the Bay Area is around $110K. Caveat: Self-reported data and base salary only.

1: http://www.payscale.com/research/US/Job=Software_Engineer/Sa...

2: https://www.glassdoor.com/Salaries/san-francisco-software-en...

Adjusted gross income includes things like bonus and RSUs vested during the tax year, no? If that is the case then anyone starting straight out of college at a large tech company (Google, Facebook, Apple, etc.) will likely be above the phase out limits.

EDIT: Specify vested RSUs per reply below.

> Adjusted gross income includes things like bonus and RSUs, no?

It doesn't include RSUs while they're only in paper - they get counted when you actually sell the stock and can spend the money.

As far as I know, you're not taxed when the shares are granted, but they are taxed as income when they vest, and then later as capital gains if you sell for more than the price when they vested.

It's not quite that simple, it really depends on what you suspect your tax rates are going to be. Roth contributions are essentially taxed at your marginal rate right now, but traditional 401k withdrawals are taxed like income when you make the withdrawal.

There are lots of situations where you would want to lower your tax burden now instead of go for the Roth.

Note that you can also have a Roth 401k or a traditional IRA.

Worth noting that the limits are different between Roth IRAs and Traditional IRAs, though, if you have a retirement plan at work. A married couple making between 119k and 186k wouldn't get any deduction for the trad IRA, so might as well go with the Roth even if they think their income will be much lower in the future.

The Roth also lets you pull out contributions later without penalty, which is a nice worry-free safety net in case the emergency fund runs out.

One caveat. A married couple where the other person doesn't work can still contribute to a traditional IRA and the couple gets to deduct it on their taxes. The limit for this is 186k and it is called a spousal IRA.

Thanks, didn't know about that one!

> By having both pre-tax (401k) and post-tax (Roth IRA), you would be also diversifying your tax liability in your retirement.

The way your comment is written, it implies that 401(k)s are necessarily pre-tax and IRAs are necessarily post-tax. Both 401(k)s and IRAs come in Traditional and Roth forms, so you could also use pre-tax money for contributing to your IRA, and post-tax money for contributing to your 401(k), or any combination thereof.

You can also split contributions - ie, contribute to all four accounts in the same year - as long as your total contributions are within the limits.

Yes, that is correct. I generally prefer to have my 401k all pre-tax (traditional) and my IRA post-tax (roth) to make it easier to manage. Also, this would open doors for backdoor roth IRA contribution once you go over the government's income limit for contributing to IRA, but this is a whole different topic.

There is also the mega-backdoor Roth, but your 401k plan needs to support it.

Everyone here is commenting on the Roth income limits. Look up what a backdoor Roth contribution is. Basically avoid having a tIRA by keeping all your pre-tax money in a 401k and then you can contribute to a Roth IRA every year. The only problem with this is if your 401k has horrible funds. I'm luckily in that my company recently added Vanguard funds to our 401k funds and I switched nearly all of my money to those.

How often would one need to use a backdoor Roth contribution? Seems like something you would need to execute every year.

Yep, you do it every year.

yea, you do it every year. its maybe ten more minutes of work than contributing to a just a tIRA, which you're doing every year anyway if you contribute to IRAs. like the above said, the only downside is hiding rolled over money in an expensive 401k or having to pay taxes on it

I do it through Vanguard and it takes roughly 10 minutes. The process is nothing more than clicking buttons to put money into a tIRA, transfer to a Roth IRA, and purchase shares. Although it is suggested to leave the money in the tIRA for some amount of time (some say others, other weeks) before doing the transfer.

You have a yearly contribution limit of $5500 and you're correct in that you would do this process every year.

That's a very interesting point about diversifying your tax liability. Is it a fairly common tactic to contribute evenly across pre-tax and post-tax buckets? I've mostly stuck to contributing to one bucket but spreading out contributions across buckets makes a lot of sense. If you have any sources about the pros/cons of diversifying tax liability in this way, I'd be very interested.

There's no one-size-fits-all type of advice because everyone's situation is very different. There are some great resources available online to get started though. This one [1] is for physicians but could also apply to everyone. The bogleheads [2] and their wiki page are also great resources for these topics.

[1] http://whitecoatinvestor.com/the-proper-ratio-for-retirement... [2] https://www.bogleheads.org/

Note that Roth IRA has an Income Limit. Ex. You can't contribute at all as a single filer if you make more than $131k.

https://en.wikipedia.org/wiki/Roth_IRA#Income_limits

If your employer 401k plan allows it, you can roll over after-tax 401k contributions to a Roth IRA (a.k.a. mega-backdoor Roth IRA).

By having both pre-tax (401k) and post-tax (Roth IRA), you would be also diversifying your tax liability in your retirement.

What about Traditional IRAs and Roth 401ks?

Tax deferral strategy (Roth v Traditional) is orthogonal to the plan type (IRA v 401k).

This also makes sense if you do not have access or have limited access to low cost funds (i.e. Vanguard) in your 401k/403b portfolio.

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