how much traditional/Roth/Taxable?

[Kzulon]

Hello Jeremy,

First, I'd like to say how much I appreciate the time and effort you put into this blog. It has been an amazing resource. I was hoping you or any other followers could provide me with some advice on what my be my best plan to reach FIRE.

My current situation
Age: 26
State: FL
Gross Income: 37,550. 12% tax bracket
Occupation: Fitness trainer at NASA Kennedy Space Center

Current Asset Allocation: 90/10, 3 fund boglehead portfolio, 70/30 US/International. I currently hold the three fund portfolio in all accounts for simplicity

Current retirement assets:
HSA: $2,657.80
401K: $221.37 + 659.73 (match)
Roth401k: $1,580.81
Roth IRA: $8,501.63
Taxable: $103.95
Work plan & HSA is at Fidelity expense ratios are the underlying index funds and Roth/taxable at vanguard

Current set contributions:
HSA: 2,600, employer contributes the rest
401k: 10% with a 5% employer match (3% full dollar, 2% 50 cents to the dollar)
Roth 401k: 10%
Roth IRA: MAX 6k
Taxable account: plan to put 6k here. Putting money in quarterly when dividends are payed out into money market fund

Girlfriend
Age: 24
Gross Income: 41,000
Occupation: Contract specialist at a Private University research department
Current asset allocation: 90/10

Current retirement assets:
403B: $184.70 plus $461.76 (match)
Roth403B: $615.70
Roth IRA: $403.03

Expense ratios underlying funds plus .20% AUM for the 403b account with Lincoln, she holds just the S&P 500 index .04% here only. Roth at Fidelity 3 fund portfolio

Current Contributions:
403b: 10% (plus 6% employer match)
Roth403b: 10%
Roth IRA: $100 a month. Planned to max this out once student loans were payed off.


Our current expenses are really cheap being that we just recently graduated from college. We will be moving into a 3 bedroom apartment with roommates and paying $500 total for rent, Girlfriends student loans 10k @4% interest $100/month, and her car payment $250 a month 5 year loan @ $13,441.80. I currently pay car insurance and food related expenses.
Currently we still live at home with parents so current expenses are really low but as we transition into the apartment in July we hope to still have a minimal expenses.

Our goal is to reach FIRE by ~40-45 years old. With a portfolio that could supply 40k per year as our current target, or more if we do a good job saving

Initially we were going 100% Roth in both our 401s and IRAs due to the traditional rule of thumb of being low income earners but then after reading some of your blog posts about taxes and early retirement, I thought that maybe we shouldn't neglect some tax savings today.  So I added 10% traditional to both of our contribution plans at work, if my calculations were correct could get our AGI low enough for the saver's credit. I also didn't realize until reading your information how powerful a taxable account can be for someone in our tax bracket for long term cap gains and dividends.

I don't see myself having much of a pay increase in my profession unless I move up to a management role somewhere and could potentially get close to 50k a year. My GF has more potential for pay increase in the future if things workout over time.

I was hoping if you could provide some insight on what might be an appropriate split between traditional/roth/taxable for low income earners such as us?

Sorry for the novel, thank you for your time!

[Kzulon]

One more important detail I forgot to add is we currently live in Florida so we pay no state income tax!

[gocurrycracker]

Hey Kzulon

Sounds like you have a great grasp on this. Planning for early retirement 15-20 years in advance is commendable.

There is no right answer to the perfect pre-tax/post-tax/taxable split. You need to make an educated guess about your future tax rates and then try to find a balance. Tax law can change, health insurance law can change, etc...

12% tax is a pretty low tax rate to pay, especially when all future growth is tax-free as with a Roth. But if you can pay 0% or 10% later, then why pay 12% now?

An example of finding the balance is in this (and the following 2 or 3) posts:
https://www.gocurrycracker.com/going-back-to-cali/


The following is just a quick mental dump:

If we look at this with the goal of early retirement, then in 20 years you are spending $40k/year from investments.
If those funds come 100% from 72t withdrawals from a Traditional IRA, assuming no changes in tax law then you will pay about $1500 in federal tax (MFJ.) That is a marginal rate of 10% and an effective rate of ~4$. Both are less than 12%. Traditional is better.
https://www.gocurrycracker.com/federal-income-tax-calculator/

However, you would also presumably be paying for health insurance. Maybe that is via the ACA, in which case your income from 138% FPL to $40k is "taxed" at 15% (about $17k * 15% = ~$2,500.) Now you have a marginal rate of 25% and an effective rate of 10%.

That is still better than 12%, so no harm done, but you are paying 25% tax rates instead of the 12% you saved years earlier. Roth is better.


If you put 100% of retirement savings into Roth now, at 10% and 12% tax rates, then you have no/minimal income in retirement and pay zero tax. But that also means you lose any benefit of the standard deduction and will not have qualifying income to get ACA subsidies at 138% FPL (so will be on Medicaid, probably.)...


So the right balance is probably to have enough in Traditional accounts so you can have income of at least 138% FPL, enough in Roth and/or taxable long-term gains to have spending power without going over 400% FPL (or better 250% FPL.) Pay some tax at 10-12% now to avoid 25%+ later. Some Roth, some Traditional, some taxable.

[Kzulon]

Jeremy,

Thank you for the detailed response and link to the article! I really appreciate the feedback, it makes me feel more confident in my current plan

I will continue to put enough in traditional to get some tax savings today and with the goal of filling the bottom of the brackets at retirement to take advantage of the standard deduction and qualify for the ACA subsidies in the future. The health insurance planning can make things tricky but doable, wonder what health insurance may look like in 20 years ! 

I'm gonna stick to the plan, some Roth, some traditional, and some taxable to have that flexibility.

Thanks again for the response and the great content you provide. Have a nice day and stay safe.