I401k Whether to go Roth or not
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I401k Whether to go Roth or not
Hello,
So an I401k allows a maximum of 53k in space. 18k max employee portion, and then for the employer portion you can do 25% of income. For the 18k portion, once can choose to go for a ROTH, paying tax on the income and then benefitting from the tax free gains, or not go with ROTH and benefit from the income reduction benefit. Is there a rule of thumb for which route to go with? My limited knowledge has always led me to believe that Roth is the best way to go whenever possible, as I'm getting tax free gains for 30-35 years (I'm 24 currently). However I've heard some suggestions recently that it may be better not to go the Roth Route for the employer portion. For what its worth, this same questions arises regarding the personal $5500 contribution each year.
Whats the reasoning once uses to make this decision? Is it about how much your income is? How much you expect your income to be in the future? Is it kind of a "no wrong answer" type of thing? Any tips would be appreciated. Thanks
So an I401k allows a maximum of 53k in space. 18k max employee portion, and then for the employer portion you can do 25% of income. For the 18k portion, once can choose to go for a ROTH, paying tax on the income and then benefitting from the tax free gains, or not go with ROTH and benefit from the income reduction benefit. Is there a rule of thumb for which route to go with? My limited knowledge has always led me to believe that Roth is the best way to go whenever possible, as I'm getting tax free gains for 30-35 years (I'm 24 currently). However I've heard some suggestions recently that it may be better not to go the Roth Route for the employer portion. For what its worth, this same questions arises regarding the personal $5500 contribution each year.
Whats the reasoning once uses to make this decision? Is it about how much your income is? How much you expect your income to be in the future? Is it kind of a "no wrong answer" type of thing? Any tips would be appreciated. Thanks
Re: I401k Whether to go Roth or not
There is a rule of thumb, but I don't think you will like it:
Invest in Roth if the tax rate now is lower than the tax rate when you withdraw.
Invest in Traditional if the tax rate now is higher than the tax rate when you withdraw.
One can convert from Traditional to Roth, too.
I found that the tax rate was always higher when I contributed than when I withdrew. That's because the government gives lots of tax breaks to folks who are older and not working. Those folks also tend to vote more than other folks.
Invest in Roth if the tax rate now is lower than the tax rate when you withdraw.
Invest in Traditional if the tax rate now is higher than the tax rate when you withdraw.
One can convert from Traditional to Roth, too.
I found that the tax rate was always higher when I contributed than when I withdrew. That's because the government gives lots of tax breaks to folks who are older and not working. Those folks also tend to vote more than other folks.
Last edited by livesoft on Fri Nov 25, 2016 3:36 pm, edited 1 time in total.
Re: I401k Whether to go Roth or not
Current tax bracket and expected tax bracket in the future are the 2 key variables. I also think it is a good rule that traditional is the better default approach unless you can demonstrate clearly Roth is better for you. You can always opportunistically convert from traditional to Roth, but not vice versa.
Amateur investors are not cool-headed logicians.
Re: I401k Whether to go Roth or not
SpartanBull,SpartanBull wrote: My limited knowledge has always led me to believe that Roth is the best way to go whenever possible, as I'm getting tax free gains for 30-35 years (I'm 24 currently). However I've heard some suggestions recently that it may be better not to go the Roth Route for the employer portion. For what its worth, this same questions arises regarding the personal $5500 contribution each year.
1) Your limited knowledge is wrong. If your marginal tax rate is 25% or higher, it is always better to go with Trad. 401K route. At the 15% or lower range, go with Roth.
2) For most people, you could always contribute to Roth IRA. So, the question is between Roth IRA + Trad. 401K or Roth IRA + Roth 401K.
3) If you have no idea what you are doing, it is always safer to go with Trad. 401K since it is the correct answer for 90+% of people.
<<as I'm getting tax free gains for 30-35 years (I'm 24 currently).>>
4) You get that with Trad. 401K too. Plus, for 90+% people, you pay a lot less tax in the process too.
KlangFool
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Re: I401k Whether to go Roth or not
Interesting that traditional is the better default approach, I didn't know that. Also, I would certainly assume that the tax rate is higher during times of contribution is higher than during times of Withdrawal. Why would one be withdrawing if they were still earning good money? I would think if people are withdrawing from retirement accounts, it means that they've either stopped earning money, or are earning less money--creating the need to withdraw from retirement accounts to replace that income.
By this logic it seems that nobody would ever choose Roth. So who would choose Roth then? Perhaps people early in their career making a relatively low income...but they expect their income to grow substantially? Even then it doesn't really make sense...because even if they become a big earner later on...you'd think they retire before they start to make withdrawals. Maybe somebody could let me know what I'm not missing here.
By this logic it seems that nobody would ever choose Roth. So who would choose Roth then? Perhaps people early in their career making a relatively low income...but they expect their income to grow substantially? Even then it doesn't really make sense...because even if they become a big earner later on...you'd think they retire before they start to make withdrawals. Maybe somebody could let me know what I'm not missing here.
Re: I401k Whether to go Roth or not
At it's simplest if your tax rate on those dollars are higher today than in retirement you are better with traditional, if they are lower you are better with a Roth and if they are the same you are indifferent between them.
What is your marginal tax rate today? My general advice, unless you are expecting a large pension when you first retire, is to do traditional accounts if you are at the 25% marginal rate or higher - though there could be atypical specific circumstances that would impact the advice.
What is your marginal tax rate today? My general advice, unless you are expecting a large pension when you first retire, is to do traditional accounts if you are at the 25% marginal rate or higher - though there could be atypical specific circumstances that would impact the advice.
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Re: I401k Whether to go Roth or not
edited
Last edited by BackOfTheNet on Sat Nov 26, 2016 6:19 pm, edited 1 time in total.
Re: I401k Whether to go Roth or not
Roth is good for high earners who will work well beyond normal retirement age and/or until they die. Their heirs get a nice Roth account.SpartanBull wrote: By this logic it seems that nobody would ever choose Roth. So who would choose Roth then?
Re: I401k Whether to go Roth or not
OP,
If you have the means, you should do this:
1. Contribute $18k to the pre-tax 401k
2. Contribute $5.5k to Roth IRA (backdoor Roth if your income is above the Roth IRA limits)
3. Contribute $3.4k (for single) to HSA, if you have an HDHP plan (contributions are pre-tax, and withdrawals are tax-free for medical expenses anytime in your life)
4. Contribute whatever is allowed into the after-tax of the 401k if allowed, and if an in-service rollover to a Roth IRA or Roth 401k is allowed
4. Any remaining amount in an taxable Brokerage account at Vanguard, Fidelity, etc.
This way, you are building amounts in all different tax-type buckets. This tax diversification will help you in managing the withdrawals when you need to during retirement.
If you have the means, you should do this:
1. Contribute $18k to the pre-tax 401k
2. Contribute $5.5k to Roth IRA (backdoor Roth if your income is above the Roth IRA limits)
3. Contribute $3.4k (for single) to HSA, if you have an HDHP plan (contributions are pre-tax, and withdrawals are tax-free for medical expenses anytime in your life)
4. Contribute whatever is allowed into the after-tax of the 401k if allowed, and if an in-service rollover to a Roth IRA or Roth 401k is allowed
4. Any remaining amount in an taxable Brokerage account at Vanguard, Fidelity, etc.
This way, you are building amounts in all different tax-type buckets. This tax diversification will help you in managing the withdrawals when you need to during retirement.
Re: I401k Whether to go Roth or not
SpartanBull,SpartanBull wrote: By this logic it seems that nobody would ever choose Roth.
Not everyone is in the 25% or higher tax bracket.
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Re: I401k Whether to go Roth or not
BackOfTheNet,BackOfTheNet wrote:I think about it this way:SpartanBull wrote:Hello,
My limited knowledge has always led me to believe that Roth is the best way to go whenever possible, as I'm getting tax free gains for 30-35 years (I'm 24 currently).
Lets say you have a %20 tax rate.
Traditional:
Contribute $100k now, grows 10x to $1,000,000. Pay $200,000 taxes. End result is $800,000
Roth:
Contribute $80K now, grows 10x to $800,000. No taxes. End result is $800,000.
1) There is no 20% tax bracket.
<< Traditional:
Contribute $100k now, grows 10x to $1,000,000. Pay $200,000 taxes. End result is $800,000>>
2) This does not happen for 90+% of people.
3) Do you do your own tax?
KlangFool
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Re: I401k Whether to go Roth or not
One thing I don't understand between the Roth and traditional IRA debate is that with a traditional the entire account, your contributions and earnings, are taxed where in a Roth only your contributions are taxed.
Wouldn't it make more sense to do the Roth then even if you are in a little higher tax bracket when you contributed then when you withdrew? You are taxing all your earnings that wouldn't have been taxed under a Roth.
Wouldn't it make more sense to do the Roth then even if you are in a little higher tax bracket when you contributed then when you withdrew? You are taxing all your earnings that wouldn't have been taxed under a Roth.
Re: I401k Whether to go Roth or not
gullit18,gullit18 wrote:One thing I don't understand between the Roth and traditional IRA debate is that with a traditional the entire account, your contributions and earnings, are taxed where in a Roth only your contributions are taxed.
Wouldn't it make more sense to do the Roth then even if you are in a little higher tax bracket when you contributed then when you withdrew? You are taxing all your earnings that wouldn't have been taxed under a Roth.
http://taxfoundation.org/article/2016-tax-brackets
Do you do your own tax? If you do, you probably know the answer to this question.
A) When you put money into Trad. 401K, you are deferring the money from paying 25% or higher tax.
B) When you are withdrawing money from the Trad. 401K, for a single person, you are paying
0% for the first 10K (Standard deduction + Personal exemption)
10% for the next 9K
15% for the next 28K
25% for the next 54K
And, you do not withdraw the whole Trad. 401K amount over one year. You do not have to. So, how would you pay 25% tax for the whole Trad. 401K when you withdraw?
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Re: I401k Whether to go Roth or not
In theory, yes.gullit18 wrote:One thing I don't understand between the Roth and traditional IRA debate is that with a traditional the entire account, your contributions and earnings, are taxed where in a Roth only your contributions are taxed.
Wouldn't it make more sense to do the Roth then even if you are in a little higher tax bracket when you contributed then when you withdrew? You are taxing all your earnings that wouldn't have been taxed under a Roth.
But, what you are not considering are 2 things:
1. To compare apples - to - apples, if you contribute to a traditional, pre-tax IRA (or 401k) - then you take the taxes (that you would have paid if you had gone the Roth route), and invest that in a taxable account.
2. The taxes that you pay when contributing to Roth now are at your marginal (max) tax rates. The taxes you pay when withdrawing (if you plan it properly) could be at the lower end of your tax bracket.
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Re: I401k Whether to go Roth or not
Spartan bull
For clarification. With solo 401k, the employer contribution is always and only pre-tax. Only the employee contribution can be Roth (if the plan allows Roth contributions).
For clarification. With solo 401k, the employer contribution is always and only pre-tax. Only the employee contribution can be Roth (if the plan allows Roth contributions).
Re: I401k Whether to go Roth or not
No, in theory no. This is simple math.ved wrote:In theory, yes.gullit18 wrote:One thing I don't understand between the Roth and traditional IRA debate is that with a traditional the entire account, your contributions and earnings, are taxed where in a Roth only your contributions are taxed.
Wouldn't it make more sense to do the Roth then even if you are in a little higher tax bracket when you contributed then when you withdrew? You are taxing all your earnings that wouldn't have been taxed under a Roth.
If you pay the tax up front as in a Roth (x=contribution, y=tax rate, z=growth)
(x-x*y)*z = (x*z) - (x*y)*z
If you pay tax later as with a Traditional:
(x*z)-(x*z)*y
See, if x, y and z are the same the equations are exactly equal. That is, if the marginal tax rate is same when you withdraw as when you contribute a Roth and traditional account will result in the same exact value.
Re: I401k Whether to go Roth or not
Pensions + social security and required minimum distributions - with traditional accounts there comes a time when you cannot choose not to withdraw even if you have other income that covers your expenses.SpartanBull wrote: Also, I would certainly assume that the tax rate is higher during times of contribution is higher than during times of Withdrawal. Why would one be withdrawing if they were still earning good money?
Re: I401k Whether to go Roth or not
Please noted that RMD kicked in at 70 1/2 years old. A person has to survive that long before it is a problem.avalpert wrote:Pensions + social security and required minimum distributions - with traditional accounts there comes a time when you cannot choose not to withdraw even if you have other income that covers your expenses.SpartanBull wrote: Also, I would certainly assume that the tax rate is higher during times of contribution is higher than during times of Withdrawal. Why would one be withdrawing if they were still earning good money?
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Re: I401k Whether to go Roth or not
SpartanBull, if you're self employed and unlikely to receive a generous defined benefit pension, I think you may be better served to contribute to Traditional 401k for the employee salary deferral and use the tax savings to invest in taxable accounts and Roth IRA. Taxable accounts can be very tax efficient due to preferential tax treatment of Qualified Dividend Income (QDI) and Long Term Capital Gains (LTCG). Return of capital is tax free. Having some assets in taxable will allow you to meet expenses in retirement and reduce the need to start social security benefits or withdrawals from retirement plans. Living off assets in taxable can be so tax efficient that you may have little or no tax liability. This in turn may allow you to convert Traditional assets to Roth IRA to take advantage of the 0% and other low tax brackets. Rinse and repeat every year before social security starts.
YMMV. If you have a pension or other source of substantial ordinary income, this would reduce your ability to convert to Roth for low tax cost.
IMO, the decision to use Roth 401k and Roth IRA are different. Roth IRA is after tax just like Roth 401k but for Roth IRA you're not necessarily giving up a tax deduction for it as your coverage by employer plan and income may disallow the Traditional IRA deduction. If ineligible for TIRA deduction, Roth IRA is a no-brainer even if you need to use the backdoor into Roth IRA. Roth 401k contributions divert money away from Traditional 401k so you're always giving up a tax break to use it.
YMMV. If you have a pension or other source of substantial ordinary income, this would reduce your ability to convert to Roth for low tax cost.
IMO, the decision to use Roth 401k and Roth IRA are different. Roth IRA is after tax just like Roth 401k but for Roth IRA you're not necessarily giving up a tax deduction for it as your coverage by employer plan and income may disallow the Traditional IRA deduction. If ineligible for TIRA deduction, Roth IRA is a no-brainer even if you need to use the backdoor into Roth IRA. Roth 401k contributions divert money away from Traditional 401k so you're always giving up a tax break to use it.
Re: I401k Whether to go Roth or not
Your math is fine - as I said, theoretically.avalpert wrote:No, in theory no. This is simple math.ved wrote:In theory, yes.gullit18 wrote:One thing I don't understand between the Roth and traditional IRA debate is that with a traditional the entire account, your contributions and earnings, are taxed where in a Roth only your contributions are taxed.
Wouldn't it make more sense to do the Roth then even if you are in a little higher tax bracket when you contributed then when you withdrew? You are taxing all your earnings that wouldn't have been taxed under a Roth.
If you pay the tax up front as in a Roth (x=contribution, y=tax rate, z=growth)
(x-x*y)*z = (x*z) - (x*y)*z
If you pay tax later as with a Traditional:
(x*z)-(x*z)*y
See, if x, y and z are the same the equations are exactly equal. That is, if the marginal tax rate is same when you withdraw as when you contribute a Roth and traditional account will result in the same exact value.
In practice, there are a lot of variables.
when contributing, you need to consider the marginal (i.e., your highest tax bracket). When withdrawing, you consider your effective tax rate.
For example, OP could retire at 59.5 years, and start withdrawing the traditional IRA for his retirement expenses. Let's say that (s)he needs $100k - with the progressive tax system, not all 100k will be taxed at "y" rate. In fact, his effective rate will be much less than "y" (probably half of y).
So, for 10 years (until he reached 70.5), he could be withdrawing from his traditional IRA @ a rate much less than y. Assuming $100k @ 10 years = $1 million he will be paying at much less than y.
That's why it makes sense to invest in traditional and not Roth.
Now, if the OP is in a very low tax bracket (say 15%) now, then (s)he probably is justified in going for Roth because (s)he might (cannot be sure though) be in a higher tax bracket in retirement.
Re: I401k Whether to go Roth or not
http://www.timevalue.com/products/tcalc ... lator.aspx
I found this ira/roth calculator, does anyone know what the maximum IRA sheltered contribution category stands for?
I found this ira/roth calculator, does anyone know what the maximum IRA sheltered contribution category stands for?
Re: I401k Whether to go Roth or not
Not really. You need to consider the marginal rate when withdrawing too - the trick is you need to consider the marginal rate for each dollar in the withdrawal and the first dollar's marginal rate may not be the same as the last.ved wrote:Your math is fine - as I said, theoretically.avalpert wrote:No, in theory no. This is simple math.ved wrote:In theory, yes.gullit18 wrote:One thing I don't understand between the Roth and traditional IRA debate is that with a traditional the entire account, your contributions and earnings, are taxed where in a Roth only your contributions are taxed.
Wouldn't it make more sense to do the Roth then even if you are in a little higher tax bracket when you contributed then when you withdrew? You are taxing all your earnings that wouldn't have been taxed under a Roth.
If you pay the tax up front as in a Roth (x=contribution, y=tax rate, z=growth)
(x-x*y)*z = (x*z) - (x*y)*z
If you pay tax later as with a Traditional:
(x*z)-(x*z)*y
See, if x, y and z are the same the equations are exactly equal. That is, if the marginal tax rate is same when you withdraw as when you contribute a Roth and traditional account will result in the same exact value.
In practice, there are a lot of variables.
when contributing, you need to consider the marginal (i.e., your highest tax bracket). When withdrawing, you consider your effective tax rate.
This may not equal the effective tax rate (it won't if you have any other income sources at all) and as noted on another thread recently, becomes very relevant when considering the impact of the next dollar contributed to already large tax-deferred accounts (when it is more likely to be withdrawn at a high marginal rate since it comes on top of earlier contributed dollars).
Re: I401k Whether to go Roth or not
gullit18,gullit18 wrote:http://www.timevalue.com/products/tcalc ... lator.aspx
I found this ira/roth calculator, does anyone know what the maximum IRA sheltered contribution category stands for?
It is easy to prove and show that the calculator is wrong. The calculator does not take into account of the investment of tax savings by Trad. 401K.
1) For most people, the correct comparison is between
A) Roth 401K
B) Trad. 401K and the tax savings into Roth IRA.
2) Even if the tax rate is the same, aka 25% in both cases, Trad. 401K still win for the simple reason of you cannot get the money back from IRS via Roth 401K. Meanwhile, you have the option of paying tax to IRS whenever it is advantageous to you for Trad. 401K via Roth conversion.
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Re: I401k Whether to go Roth or not
It's like investing, you should be diversified in pre-tax, Roth, and after tax accounts. It gives you more buckets and maneuverability to withdraw from to reduce taxes in retirement. If you can survive on your take home pay if you maxed out just Roth then I would do at least 60/40 Roth/401 but no more then 90/10.
Re: I401k Whether to go Roth or not
Except, it isn't just like investing and diversification for diversification sake may be a sure way to lose money.basspond wrote:It's like investing, you should be diversified in pre-tax, Roth, and after tax accounts. It gives you more buckets and maneuverability to withdraw from to reduce taxes in retirement. If you can survive on your take home pay if you maxed out just Roth then I would do at least 60/40 Roth/401 but no more then 90/10.
Take for example someone in the 0% tax bracket - it is obvious all options should go in Roth accounts. In the 39.6% bracket it is almost as obvious that all options should go traditional (there is a theoretical chance of a higher marginal rate in the future, but not one that you should give much weight to and if you were to end up in it not one that is likely to impact your financial well being). Sure, it gets fuzzier between the extremes but not throw our hands in the air fuzzy.
For most circumstances there are better and worse choices for which vehicle to use and it is worth thinking about which is the better option for any individuals given circumstance.
Re: I401k Whether to go Roth or not
SpartanBull wrote:...Roth is the best way to go whenever possible, as I'm getting tax free gains for 30-35 years....
Those are two of the most common misconceptions in the traditional vs. Roth field.ved wrote:When withdrawing, you consider your effective tax rate.
If the explanations by other posters in this thread, or the Traditional versus Roth wiki, aren't sufficient to help you understand why
1) Roth and traditional are equivalent for equal tax rates, due to the commutative property of multiplication, and
2) Marginal vs. marginal is the correct comparison,
let us know what remains unclear. As noted, many people don't get this, so whatever helps you will likely help others.
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Re: I401k Whether to go Roth or not
Sorry to Hijack the thread but....I have to ask
Currently I'm in the 25% tax bracket and due to my salary being capped as a federal employee I probably will stay close to this throughout my career. The issue i have is my fixed pension with the federal government will be in the range of 85K. I'm maxing Traditional TSP and two ROTH IRAs. Is this the best option or should i be maxing roth tsp as well. The main concern is being in the same tax bracket when i retire due to my pension or in a higher tax because taxes could be higher when i retire in 24 years.
Thanks
Currently I'm in the 25% tax bracket and due to my salary being capped as a federal employee I probably will stay close to this throughout my career. The issue i have is my fixed pension with the federal government will be in the range of 85K. I'm maxing Traditional TSP and two ROTH IRAs. Is this the best option or should i be maxing roth tsp as well. The main concern is being in the same tax bracket when i retire due to my pension or in a higher tax because taxes could be higher when i retire in 24 years.
Thanks
Re: I401k Whether to go Roth or not
See Most TSP Participants Should Switch To the Roth TSP for some thoughts on your situation.Offshorebound wrote:Sorry to Hijack the thread but....
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Re: I401k Whether to go Roth or not
I should have clarified that I was making an oversimplification to illustrate that Roth is not always better. But I do agree with you that such an oversimplification is probably not helpful and deleted the post.KlangFool wrote: BackOfTheNet,
1) There is no 20% tax bracket.
2) This does not happen for 90+% of people.
3) Do you do your own tax?
KlangFool
Re: I401k Whether to go Roth or not
There are a few more considerations with a Roth fund.
First, you can withdraw from a Roth without fines, etc. for the money you put in. This makes it a nice stash for a safety net account. Why not build up like $50K in such an account? Lots of peace of mind.
Second, paying the tax now is a gamble that the tax in the future will be lower. But here are some conditions (like big stock market gains) where you'll be glad for your Roth account.
It is good to have options. If your tax rate is not crazy high I'd go for the Roth.
First, you can withdraw from a Roth without fines, etc. for the money you put in. This makes it a nice stash for a safety net account. Why not build up like $50K in such an account? Lots of peace of mind.
Second, paying the tax now is a gamble that the tax in the future will be lower. But here are some conditions (like big stock market gains) where you'll be glad for your Roth account.
It is good to have options. If your tax rate is not crazy high I'd go for the Roth.
Re: I401k Whether to go Roth or not
Most people contribute to the traditional. They're often in the 25% or 28% bracket (or higher) when they're working, and the 15% bracket in retirement. They're often in a higher state income tax bracket when they're working than in retirement. They often don't have enough money available to fully fund Roth 401(k) contributions. The traditional carries with it the option to convert to a Roth later on, whereas (with a limited exception for recharacterizations) you can't switch from a Roth to a traditional. Many people have a window between retirement and age 70 when they're in a low bracket, and can do Roth conversions in a low bracket.SpartanBull wrote:Interesting that traditional is the better default approach, I didn't know that. Also, I would certainly assume that the tax rate is higher during times of contribution is higher than during times of Withdrawal. Why would one be withdrawing if they were still earning good money? I would think if people are withdrawing from retirement accounts, it means that they've either stopped earning money, or are earning less money--creating the need to withdraw from retirement accounts to replace that income.
By this logic it seems that nobody would ever choose Roth. So who would choose Roth then? Perhaps people early in their career making a relatively low income...but they expect their income to grow substantially? Even then it doesn't really make sense...because even if they become a big earner later on...you'd think they retire before they start to make withdrawals. Maybe somebody could let me know what I'm not missing here.
However, there are a few factors that favor the Roth. In some cases they can be enough to make the Roth the better choice:
1. People just starting out may be in a low bracket now but may be in a high bracket later, such as someone finishing school in the middle of the year and starting a high paying job, or doctors in residencies or fellowships. (While they might retire when they've accumulated enough money, many professionals enjoy working and retire at a later age than others.)
2. For someone who can afford to maximize his/her contributions, the Roth is effectively larger. If you're in a 25% bracket, contributing $18,000 to a Roth 401(k) is equivalent to contributing $24,000 to a traditional 401(k). However, except for the catch-up, you can't contribute $24,000 to a traditional 401(k). That has a significant effect over a long period of time, especially for a young person.
3. Some people may never be in a low bracket. They may have pensions, they may have large balances in traditional retirement plans (that may happen in your example if there's a $35,000 a year employer contribution for many years).
3. There are no required distributions from a Roth after 70 1/2 (assuming, in the case of a Roth 401(k), that you roll it over into a Roth IRA before that point). If you or your spouse lives a long time, that provides a substantial benefit for those who don't need to take distributions. Of course, you can obtain that benefit by contributing to a traditional and converting to a Roth later on.
4. There's an income tax deduction for the Federal estate tax on traditional retirement plans and IRAs. That's intended to put your beneficiaries in about the same position they would have been if you withdrew the money and paid tax on it during your lifetime. However, this deduction only covers the Federal estate tax, but not the state estate tax. This provides a significant benefit for the Roth in states that have a state estate tax. We've had at least three people do deathbed Roth conversions for this reason.
5. For those with estates in excess of the GST exemption (presently $5,450,000), a Roth is a more valuable asset for a GST exempt disposition (to or in trust for a grandchild, or in trust for a child) than a traditional. (Again, you can obtain that benefit by contributing to a traditional and converting to a Roth later on.)
Re: I401k Whether to go Roth or not
McCharley,McCharley wrote:There are a few more considerations with a Roth fund.
First, you can withdraw from a Roth without fines, etc. for the money you put in. This makes it a nice stash for a safety net account. Why not build up like $50K in such an account? Lots of peace of mind.
Second, paying the tax now is a gamble that the tax in the future will be lower. But here are some conditions (like big stock market gains) where you'll be glad for your Roth account.
It is good to have options. If your tax rate is not crazy high I'd go for the Roth.
Which Roth do you refer to? Roth 401K or Roth IRA?
<<First, you can withdraw from a Roth without fines, etc. for the money you put in. >>
For most people, they could only contribute to Roth IRA with their tax savings if they contribute to Trad. 401K.
<<It is good to have options. If your tax rate is not crazy high I'd go for the Roth.>>
You only have options if you contribute to Trad. 401K. Then, you have both: Trad. 401K and Roth IRA.
So, is 25% tax = high or not? That is the common recommendation to do Trad. 401K.
KlangFool
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Re: I401k Whether to go Roth or not
bsteiner,bsteiner wrote:
2. For someone who can afford to maximize his/her contributions, the Roth is effectively larger. If you're in a 25% bracket, contributing $18,000 to a Roth 401(k) is equivalent to contributing $24,000 to a traditional 401(k). However, except for the catch-up, you can't contribute $24,000 to a traditional 401(k). That has a significant effect over a long period of time, especially for a young person.
1) Why should a person pay more tax? This kind of person could retire early and do Roth conversion at 15% or lower for many years.
2) The tax savings could be invested in Roth IRA and taxable account. Then, the likelihood of early retirement and Roth conversion went up
3) Why keep money in one tax bucket when you can do it in 3 buckets: Roth, Trad. 401K,and Taxable?
KlangFool
P.S.: I maxed up my 401K whenever I am employed. Now, I am 45/45/10 ( Trad. 401k/Taxable/Roth).
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Re: I401k Whether to go Roth or not
1. If you expect to be in a 15% bracket later, you would contribute to a traditional, and convert (or withdraw) at 15%. That's the case for most people. However, some people expect to always be in a high bracket. That may be the case here if the original poster gets a $35,000 a year employer contribution for many years.KlangFool wrote:bsteiner,bsteiner wrote:
2. For someone who can afford to maximize his/her contributions, the Roth is effectively larger. If you're in a 25% bracket, contributing $18,000 to a Roth 401(k) is equivalent to contributing $24,000 to a traditional 401(k). However, except for the catch-up, you can't contribute $24,000 to a traditional 401(k). That has a significant effect over a long period of time, especially for a young person.
1) Why should a person pay more tax? This kind of person could retire early and do Roth conversion at 15% or lower for many years.
2) The tax savings could be invested in Roth IRA and taxable account. Then, the likelihood of early retirement and Roth conversion went up
3) Why keep money in one tax bucket when you can do it in 3 buckets: Roth, Trad. 401K,and Taxable?
KlangFool
P.S.: I maxed up my 401K whenever I am employed. Now, I am 45/45/10 ( Trad. 401k/Taxable/Roth).
2. You are correct that someone who retires early may have a longer window when he/she will be in a lower bracket and will be able to convert in a lower bracket.
3. The original poster will have a large traditional bucket as a result of the $35,000 a year employer contribution.
You are correct that for most people it makes sense to maximize contributions to a traditional 401(k) with a view toward doing conversions in lower brackets in retirement, especially between retirement and age 70 if they retire before age 70. However, for some people, particularly younger people who expect to remain in relatively high tax brackets, Roth contributions may make sense, and are at least worth exploring.
Re: I401k Whether to go Roth or not
bsteiner,bsteiner wrote:
You are correct that for most people it makes sense to maximize contributions to a traditional 401(k) with a view toward doing conversions in lower brackets in retirement, especially between retirement and age 70 if they retire before age 70. However, for some people, particularly younger people who expect to remain in relatively high tax brackets, Roth contributions may make sense, and are at least worth exploring.
The question should be is their expectation correct? The answer should be no for most people. How likely is it for a person to be fully-employed at high-income bracket all the way up to the 60s and 70s? The answer should be it is not normal.
It is either
A) The person got lucky and he/she early retired. For example, my older brother and sister. They early retired at 49 years old.
B) The person was unlucky and he/she was unemployed and / or under-employed at the 40s and 50s. Aka, many of my peers in the 40s and 50s.
We are old enough to advise the younger folks to set their expectation correctly.
KlangFool
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Re: I401k Whether to go Roth or not
With 2017 being upon us, It is time to again decide whether to go Roth (or not) on the employee portion of the I401k. From the responses in this thread, it seems that If I make more now then I will at time of withdrawal, go traditional. If I'll be making more in those later years, then go Roth.
So heres why I'm thinking the decision might not be so simple. I'm a small business owner operating a service based business that is still growing, both geographically and in terms of different ways that we earn revenue. I'm in my middle 20's. That being said, I very much feel that in my 30's the business will have grown in various ways and my income will be higher. Same in my 40's. Same in 50's. My thought is that as I progress in age, by business and/or business interests will earn more than they do now, even if my role is lesser during that time. Is that a reason to consider Roth? If I think that theres a chance I could be earning good money in my 60's?
Last year I went Roth with the Employee portion, and feared after reading this thread that it may have been the wrong decision. I'm hoping to get it right this time. Thanks in advance for any suggestions.
So heres why I'm thinking the decision might not be so simple. I'm a small business owner operating a service based business that is still growing, both geographically and in terms of different ways that we earn revenue. I'm in my middle 20's. That being said, I very much feel that in my 30's the business will have grown in various ways and my income will be higher. Same in my 40's. Same in 50's. My thought is that as I progress in age, by business and/or business interests will earn more than they do now, even if my role is lesser during that time. Is that a reason to consider Roth? If I think that theres a chance I could be earning good money in my 60's?
Last year I went Roth with the Employee portion, and feared after reading this thread that it may have been the wrong decision. I'm hoping to get it right this time. Thanks in advance for any suggestions.
Re: I401k Whether to go Roth or not
SpartanBull,SpartanBull wrote:With 2017 being upon us, It is time to again decide whether to go Roth (or not) on the employee portion of the I401k. From the responses in this thread, it seems that If I make more now then I will at time of withdrawal, go traditional. If I'll be making more in those later years, then go Roth.
So heres why I'm thinking the decision might not be so simple. I'm a small business owner operating a service based business that is still growing, both geographically and in terms of different ways that we earn revenue. I'm in my middle 20's. That being said, I very much feel that in my 30's the business will have grown in various ways and my income will be higher. Same in my 40's. Same in 50's. My thought is that as I progress in age, by business and/or business interests will earn more than they do now, even if my role is lesser during that time. Is that a reason to consider Roth? If I think that theres a chance I could be earning good money in my 60's?
Last year I went Roth with the Employee portion, and feared after reading this thread that it may have been the wrong decision. I'm hoping to get it right this time. Thanks in advance for any suggestions.
<< I very much feel that in my 30's the business will have grown in various ways and my income will be higher. Same in my 40's. Same in 50's. My thought is that as I progress in age, by business and/or business interests will earn more than they do now, even if my role is lesser during that time. >>
So what? It still does not change the fact that Trad. 401K is a better deal. You still do not get it. There is a substantially difference between earning income from your job/salary versus investment.
Let's assume that you are married filed jointly. And, you are at 25% tax bracket. In order to generate 100K worth of income at retirement and reach 25% tax bracket, your investment needs to be at least 25 times larger aka 2.5 million.
http://taxfoundation.org/article/2017-tax-brackets
To be at 28% tax bracket, your investment needs to generate at least 170K worth of income. Hence, your investment need to be 25 X 170K = 4.25 million.
You can calculate the rest. But, if you are doing that well, you will be early retired.
KlangFool
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Re: I401k Whether to go Roth or not
Why wouldn't the Roth be a better deal in that case? Let's take an extreme case. You're broke now and make very little money, so let's say you pay $0 in taxes. You put money into a Roth. Then you start a company as its CEO and it grows to be a massive multinational corporation generating billions in profit. Your annual compensation is in the tens of millions, plus you own tens of billions of dollars in equity. Regardless of whether or not you continue as CEO by the time RMDs come around, you are likely going to pay through the nose in taxes. In that case, your Roth account, having grown tax-free all those years, would be a very welcome relief from taxes upon withdrawal, compared to a traditional 401k which would not have even given you any tax benefits in your old tax bracket at the time of contribution. So his example of his company growing substantially over time would be a perfectly good example of why a Roth 401k might be better in his situation. Of course, it's still a gamble, and so he should take into account the possibility that he might go out of business, or just not grow as much as he would have liked. But not everyone plans to live modestly in early retirement. I've seen many posts from people trying to get around RMDs because they want to work late in life and let their investments grow more.
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Re: I401k Whether to go Roth or not
Klangfool,
I am gathering that The only reason a Roth would make sense would be if I am making an Outrageously higher salary at time of withdrawal vs now. If I'm doing better better, but not absurdly better, then the Traditional makes sense. It seems like traditional might be a safer bet...and I'm thinking I'm going to go that route.
Also, in I401k form, can it be converted to Roth at a later time? Thanks.
I am gathering that The only reason a Roth would make sense would be if I am making an Outrageously higher salary at time of withdrawal vs now. If I'm doing better better, but not absurdly better, then the Traditional makes sense. It seems like traditional might be a safer bet...and I'm thinking I'm going to go that route.
Also, in I401k form, can it be converted to Roth at a later time? Thanks.
Re: I401k Whether to go Roth or not
There's an implicit assumption that I don't understand: why would you be withdrawing at the same time you are earning a salary?SpartanBull wrote:...making an Outrageously higher salary at time of withdrawal vs now.
The more usual case is for the salary to stop before the withdrawals begin.
Re: I401k Whether to go Roth or not
You can stop there and be correct. The only exception could be if a traditional contribution would provide a significant refundable credit, e.g., Earned Income.dboeger1 wrote:You're broke now and make very little money, so let's say you pay $0 in taxes. You put money into a Roth.
Re: I401k Whether to go Roth or not
Do most people have an either/or choice regarding traditional or Roth for their 401K? I can do traditional, Roth, or after tax in any combination up to 35% of pay. I currently do 16% traditional and 2% Roth. I do the Roth because I figure I can withdraw that tax free if I need to after I retire at 55+. I also figure there might be enough in the Roth 401K that I can withdraw enough to keep me in the 15% tax bracket for a while. Anyone see anything wrong with my thinking? FYI, I'm 52, gainfully employed with a pension and a tiny Roth IRA and no after tax investments? I'm in the 25-28% tax bracket currently.SpartanBull wrote:With 2017 being upon us, It is time to again decide whether to go Roth (or not) on the employee portion of the I401k. From the responses in this thread, it seems that If I make more now then I will at time of withdrawal, go traditional. If I'll be making more in those later years, then go Roth.
Re: I401k Whether to go Roth or not
Yohanson,Yohanson wrote:Do most people have an either/or choice regarding traditional or Roth for their 401K? I can do traditional, Roth, or after tax in any combination up to 35% of pay. I currently do 16% traditional and 2% Roth. I do the Roth because I figure I can withdraw that tax free if I need to after I retire at 55+. I also figure there might be enough in the Roth 401K that I can withdraw enough to keep me in the 15% tax bracket for a while. Anyone see anything wrong with my thinking? FYI, I'm 52, gainfully employed with a pension and a tiny Roth IRA and no after tax investments? I'm in the 25-28% tax bracket currently.SpartanBull wrote:With 2017 being upon us, It is time to again decide whether to go Roth (or not) on the employee portion of the I401k. From the responses in this thread, it seems that If I make more now then I will at time of withdrawal, go traditional. If I'll be making more in those later years, then go Roth.
1) You could achieve the same goal with Roth IRA. The difference is you save more tax. You could withdraw the Roth IRA contribution any time. You do not have to wait until 55 years.
2) At 25% /28% tax rate, you could save more tax by contributing to Trad. 401K and then contribute the tax savings to Roth IRA.
3) Between 52 and 55 years old, the growth is minimal. Hence, you will be mostly withdrawing the principal amount of the Roth contribution. There is no difference between Roth IRA and Roth 401K in your case.
KlangFool
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Re: I401k Whether to go Roth or not
I'm already maxing out my Roth IRA at $6500/year. I've only had it since 2015. I started contributing to the Roth 401K portion of my 401K in 2012. I plan on retiring at about 58 so the Roth IRA can't be touched except for the contributions. I'd rather leave that alone because as of right now, my Roth IRA is about 1/40th of my portfolio. I only have about $13,000 in it right now.KlangFool wrote:Yohanson,Yohanson wrote:Do most people have an either/or choice regarding traditional or Roth for their 401K? I can do traditional, Roth, or after tax in any combination up to 35% of pay. I currently do 16% traditional and 2% Roth. I do the Roth because I figure I can withdraw that tax free if I need to after I retire at 55+. I also figure there might be enough in the Roth 401K that I can withdraw enough to keep me in the 15% tax bracket for a while. Anyone see anything wrong with my thinking? FYI, I'm 52, gainfully employed with a pension and a tiny Roth IRA and no after tax investments? I'm in the 25-28% tax bracket currently.SpartanBull wrote:With 2017 being upon us, It is time to again decide whether to go Roth (or not) on the employee portion of the I401k. From the responses in this thread, it seems that If I make more now then I will at time of withdrawal, go traditional. If I'll be making more in those later years, then go Roth.
1) You could achieve the same goal with Roth IRA. The difference is you save more tax. You could withdraw the Roth IRA contribution any time. You do not have to wait until 55 years.
2) At 25% /28% tax rate, you could save more tax by contributing to Trad. 401K and then contribute the tax savings to Roth IRA.
3) Between 52 and 55 years old, the growth is minimal. Hence, you will be mostly withdrawing the principal amount of the Roth contribution. There is no difference between Roth IRA and Roth 401K in your case.
KlangFool
Re: I401k Whether to go Roth or not
Yohanson,Yohanson wrote:I'm already maxing out my Roth IRA at $6500/year. I've only had it since 2015. I started contributing to the Roth 401K portion of my 401K in 2012. I plan on retiring at about 58 so the Roth IRA can't be touched except for the contributions. I'd rather leave that alone because as of right now, my Roth IRA is about 1/40th of my portfolio. I only have about $13,000 in it right now.KlangFool wrote:Yohanson,Yohanson wrote:Do most people have an either/or choice regarding traditional or Roth for their 401K? I can do traditional, Roth, or after tax in any combination up to 35% of pay. I currently do 16% traditional and 2% Roth. I do the Roth because I figure I can withdraw that tax free if I need to after I retire at 55+. I also figure there might be enough in the Roth 401K that I can withdraw enough to keep me in the 15% tax bracket for a while. Anyone see anything wrong with my thinking? FYI, I'm 52, gainfully employed with a pension and a tiny Roth IRA and no after tax investments? I'm in the 25-28% tax bracket currently.SpartanBull wrote:With 2017 being upon us, It is time to again decide whether to go Roth (or not) on the employee portion of the I401k. From the responses in this thread, it seems that If I make more now then I will at time of withdrawal, go traditional. If I'll be making more in those later years, then go Roth.
1) You could achieve the same goal with Roth IRA. The difference is you save more tax. You could withdraw the Roth IRA contribution any time. You do not have to wait until 55 years.
2) At 25% /28% tax rate, you could save more tax by contributing to Trad. 401K and then contribute the tax savings to Roth IRA.
3) Between 52 and 55 years old, the growth is minimal. Hence, you will be mostly withdrawing the principal amount of the Roth contribution. There is no difference between Roth IRA and Roth 401K in your case.
KlangFool
1) If you are married, you could contribute another $6,500 to spousal Roth IRA.
2) If you plan to retire on 58, why won't you max up your Trad. 401K and save 25%/28% tax?
3) You could invest your tax savings in the taxable account.
Why pay 25% /28% tax when you could pay 15% or less? This does not make any sense to me.
KlangFool
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Re: I401k Whether to go Roth or not
Ok, fair enough. Where should I invest a taxable account? I don't have one right now but I'm pretty sure I need one.KlangFool wrote:Yohanson,Yohanson wrote:I'm already maxing out my Roth IRA at $6500/year. I've only had it since 2015. I started contributing to the Roth 401K portion of my 401K in 2012. I plan on retiring at about 58 so the Roth IRA can't be touched except for the contributions. I'd rather leave that alone because as of right now, my Roth IRA is about 1/40th of my portfolio. I only have about $13,000 in it right now.KlangFool wrote:Yohanson,Yohanson wrote:Do most people have an either/or choice regarding traditional or Roth for their 401K? I can do traditional, Roth, or after tax in any combination up to 35% of pay. I currently do 16% traditional and 2% Roth. I do the Roth because I figure I can withdraw that tax free if I need to after I retire at 55+. I also figure there might be enough in the Roth 401K that I can withdraw enough to keep me in the 15% tax bracket for a while. Anyone see anything wrong with my thinking? FYI, I'm 52, gainfully employed with a pension and a tiny Roth IRA and no after tax investments? I'm in the 25-28% tax bracket currently.SpartanBull wrote:With 2017 being upon us, It is time to again decide whether to go Roth (or not) on the employee portion of the I401k. From the responses in this thread, it seems that If I make more now then I will at time of withdrawal, go traditional. If I'll be making more in those later years, then go Roth.
1) You could achieve the same goal with Roth IRA. The difference is you save more tax. You could withdraw the Roth IRA contribution any time. You do not have to wait until 55 years.
2) At 25% /28% tax rate, you could save more tax by contributing to Trad. 401K and then contribute the tax savings to Roth IRA.
3) Between 52 and 55 years old, the growth is minimal. Hence, you will be mostly withdrawing the principal amount of the Roth contribution. There is no difference between Roth IRA and Roth 401K in your case.
KlangFool
1) If you are married, you could contribute another $6,500 to spousal Roth IRA.
2) If you plan to retire on 58, why won't you max up your Trad. 401K and save 25%/28% tax?
3) You could invest your tax savings in the taxable account.
Why pay 25% /28% tax when you could pay 15% or less? This does not make any sense to me.
KlangFool
Re: I401k Whether to go Roth or not
Fidelity, Schwab, Vanguard...take your pick.Yohanson wrote:Ok, fair enough. Where should I invest a taxable account? I don't have one right now but I'm pretty sure I need one.
See Tax-efficient fund placement for some thoughts on what assets you might want in which account.
See also How to withdraw funds from your IRA and 401k without penalty before age 59.5 for thoughts on why you might want some amount in Roth and/or taxable accounts to "tide you over" while you convert your traditional accounts to Roth at low marginal rates.
Re: I401k Whether to go Roth or not
I was talking about investments, not accounts. Thanks for the other links. I'l read through them and figure out an after tax strategy.FiveK wrote:Fidelity, Schwab, Vanguard...take your pick.Yohanson wrote:Ok, fair enough. Where should I invest a taxable account? I don't have one right now but I'm pretty sure I need one.
See Tax-efficient fund placement for some thoughts on what assets you might want in which account.
See also How to withdraw funds from your IRA and 401k without penalty before age 59.5 for thoughts on why you might want some amount in Roth and/or taxable accounts to "tide you over" while you convert your traditional accounts to Roth at low marginal rates.
Re: I401k Whether to go Roth or not
See Three-fund portfolio - Bogleheads for some thoughts on that.Yohanson wrote:I was talking about investments, not accounts. Thanks for the other links. I'l read through them and figure out an after tax strategy.