Here's the short and quick: I am 35, plan to work for 30 more years. Will most likely stay in 25% tax bracket, even after retirement. I can contribute around $460 per month currently into an IRA. My employer automatically puts 5% of my annual salary into a 403(b). Should I put some into a 403(b) and a Roth (if so, should I split the difference?), all into a 403(b), or all into a Roth?
Please let me know if more elaboration is needed, and thank you in advance for your answers.
Jeff, there's more to consider than what you spelled out in the question, or by the answer offered so far.
To say "I will be in the 25% bracket at retirement" implies that, for a single person, you have (in 2017 dollars, today's tax code) over $38,000 of taxable income. Only the amount over this will be taxed at 25% or higher. The single gets a $4050 exemption, and $6350 standard deduction. The total is $48,350. It would take $1.21M in pretax accounts to generate the $48K each year (using the 4% rule).
Now, let's say you pay the tax now, at 25%, and live tax-free in retirement. The tax on that $48,350 from a pretax account, would cost you $5226 for a net, $43,124. But if the funds were all post tax, you needed to deposit $58,500 to clear this amount. Huh?
You see, while working, deposits come off the top, a $1000 deposit to a 401(k) or IRA would be at 25%, and 'cost' you $750. But in retirement, you have the zero bracket (what I call the combined exemption and standard deduction) and then the 10 and 15% brackets to work through. If you retire 100% Rothified, you miss that opportunity in retirement.
On the back end, the 25% bracket is pretty deep, from $38K to $92K taxable income. It would take a huge amount of pretax money to push you into the bracket after that, 28%.
References -
A similar question - When should I contribute to my IRA over my 401k?
The 2017 Tax Rates, both single and married
My award winning article The 15% solution which presents the concept of using Roth while one is getting started and likely in a lower bracket, then shifting to pre-tax savings, to minimize one's average tax burden over their lifetime.
NOTE: The comment disclosing that the OP is a couple who will have $84K from a pension changes things dramatically. As a couple, in today's dollars, a gross income over $96,700 puts them in the 25% bracket. In which case, with $13K or so "room" left, I wouldn't want too much going in pre tax. I'd go Roth while at 25% and some pretax when at 28% or higher.
The advantage of a Roth account is that it is already taxed money, and all the gains are tax free. This is to your advantage if you a) pay less taxes now than in the future, or b) expect a lot of gains because of the long time. With a long duration coming still up in your example, b) is the case.
However, there is another important point c) to make for Roth accounts: imagine you are -old- retired, and live from your 401(k) income, pay moderate taxes, and just get along well. If there is an unplanned significant expense (like Irma blows your roof off or your car falls apart unexpectedly), you need to take a larger chunk out of the 401(k). At that time, your tax rate goes up, and - you need to take another chunk out of your 401(k) to pay those extra taxes. And yes, you might need to take some more out to pay the higher taxes for the extra you took out to pay the higher taxes.
This is where a Roth comes in nicely: live from the 401k, pay moderate taxes, and pay 'unplanned significant expenses' from the Roth - that keeps your tax rate constant.
For c) you should have enough in the Roth to cover such things for your whole retirement. My personal guess is maybe 1/3 to 1/4 of your total retirement savings.
The recommendation from this is to put continuously about 20% of the saved money into Roth, and - ! - during your work life, when there are unexpected years with low tax rates, use the chance to move ('convert') an extra chunk of the pre-tax 401(k) into the Roth.
There are many other things to consider in your retirement planning, but this is a basic piece to know.
The $5,500 limit for IRA contributions includes both your Roth and Traditional contributions. That is, the sum of your traditional and Roth contributions may not exceed $5,500. Since you are already contributing the max to your traditional IRA, you do not have the option to contribute to a Roth unless there is some information not included in your post (like if will be your spouse's Roth).
According to the information in your question, your only option if you wish to save more for retirement is to contribute more to your 403(b).
Sorry to be the bearer of (kind of) bad news.
