401k vs Roth 401k

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Grover
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401k vs Roth 401k

Post by Grover » Sun Jan 08, 2017 1:12 pm

1)At what tax rate it would be more beneficial to invest in Roth 401k rather than tax deferred 401k?
2)Should one switch contributions to Roth 401 once tax defferd reaches a certain amount so I can reduce Tax liabilty on distribution in retirement?

Thanks everyone!

MindTheGAAP
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Re: 401k vs Roth 401k

Post by MindTheGAAP » Sun Jan 08, 2017 3:24 pm

Posting to get notified of responses...

I'm currently SE and am trying to decide whether to do my 401k contribution as employee Roth or Traditional while in the 25% marginal bracket. Expect near year to be in the 28% if the bracket exists - may get lowered if Trump/Ryan get their way.
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

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LadyGeek
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Re: 401k vs Roth 401k

Post by LadyGeek » Sun Jan 08, 2017 3:50 pm

MindTheGAAP wrote: Expect near year to be in the 28% if the bracket exists - may get lowered if Trump/Ryan get their way.
As a reminder, speculation about future legislation is prohibited by forum policy, see: Re: Tax exempt muni bond funds & proposed lower rates on taxable investment interest

The important point is to "keep investors from making bad decisions. Proposed regulations change many times between the time they're introduced and signed into law."

The best course of action is to invest under current law, then make a decision when the law changes.
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anoop
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Re: 401k vs Roth 401k

Post by anoop » Sun Jan 08, 2017 4:00 pm

The Roth 401k doesn't have the withdrawal benefits of the Roth IRA. So you would have to wait till 59 1/2 to access the money.

If someone is investing in a Roth 401k they are betting that taxes will be higher when they retire. IMO, unless one has one's life mapped out in terms of earnings, savings, and where one plans to live, this truly is a bet. I can say that if you are in a tax free state and are paying the lowest Federal tax rate, then it almost certainly makes sense to go with the Roth 401K. Any deviation from that and the Roth 401k is no longer a clear winner.

In my case, I'm in CA for which has one of the highest tax rates. I have no idea if I will live till 59 1/2, and I have no idea what my tax rate will be. So for now, my strategy is to take the tax deduction.

MindTheGAAP
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Re: 401k vs Roth 401k

Post by MindTheGAAP » Sun Jan 08, 2017 4:27 pm

anoop wrote:The Roth 401k doesn't have the withdrawal benefits of the Roth IRA. So you would have to wait till 59 1/2 to access the money.

If someone is investing in a Roth 401k they are betting that taxes will be higher when they retire. IMO, unless one has one's life mapped out in terms of earnings, savings, and where one plans to live, this truly is a bet. I can say that if you are in a tax free state and are paying the lowest Federal tax rate, then it almost certainly makes sense to go with the Roth 401K. Any deviation from that and the Roth 401k is no longer a clear winner.

In my case, I'm in CA for which has one of the highest tax rates. I have no idea if I will live till 59 1/2, and I have no idea what my tax rate will be. So for now, my strategy is to take the tax deduction.
So you'd argue that based in TX (no income tax at state level) and in 25% MR, one should take the tax deduction now?
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

anoop
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Re: 401k vs Roth 401k

Post by anoop » Sun Jan 08, 2017 5:00 pm

MindTheGAAP wrote: So you'd argue that based in TX (no income tax at state level) and in 25% MR, one should take the tax deduction now?
That's the bet I'd make.

Yohanson
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Re: 401k vs Roth 401k

Post by Yohanson » Sun Jan 08, 2017 5:02 pm

anoop wrote:The Roth 401k doesn't have the withdrawal benefits of the Roth IRA. So you would have to wait till 59 1/2 to access the money.

If someone is investing in a Roth 401k they are betting that taxes will be higher when they retire. IMO, unless one has one's life mapped out in terms of earnings, savings, and where one plans to live, this truly is a bet. I can say that if you are in a tax free state and are paying the lowest Federal tax rate, then it almost certainly makes sense to go with the Roth 401K. Any deviation from that and the Roth 401k is no longer a clear winner.

In my case, I'm in CA for which has one of the highest tax rates. I have no idea if I will live till 59 1/2, and I have no idea what my tax rate will be. So for now, my strategy is to take the tax deduction.
But a person can take distributions from a Roth 401K tax and penalty free at 55 as long as it's from the company you retired from the year you turned 55 and you started contributing to it at least 5 years previous. At least that's my understanding and why I have been contributing a little to the Roth portion of my 401K.

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Re: 401k vs Roth 401k

Post by KlangFool » Sun Jan 08, 2017 5:19 pm

Grover wrote:1)At what tax rate it would be more beneficial to invest in Roth 401k rather than tax deferred 401k?
2)Should one switch contributions to Roth 401 once tax defferd reaches a certain amount so I can reduce Tax liabilty on distribution in retirement?

Thanks everyone!
Grover,

1) If you have no idea what is the right answer, max up your Trad. 401K and Roth IRA. This is the right answer for 90+% of people.

2) At 15% tax bracket or lower, it might be advantageous to contribute to Roth 401K. But, at that level, you may qualify for tax credit such as EITC and Saver's credit if you contribute to Trad. 401K. It is not a safe answer even at that level.

<< 2)Should one switch contributions to Roth 401 once tax defferd reaches a certain amount so I can reduce Tax liabilty on distribution in retirement? >>

3) Not necessary. If you have plenty of money in taxable and Roth IRA, you could spend money from those accounts without paying tax while doing Roth conversion at a low tax rate for many years.

4) The only kind of person that may have a clear cut answer of Roth 401K is better when they have a guaranteed pension that pays them 100K or more per year.

5) For almost everybody that asked this question, for 99+% of them, the right answer was Trad. 401K.

6) Do you do your own tax?

KlangFool

Topic Author
Grover
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Re: 401k vs Roth 401k

Post by Grover » Sun Jan 08, 2017 5:35 pm

Thanks everyone. I think my best bet for me is to go with traditional 401k. I am on the top tax bracket at this time but thought that if I accumulated good tax deferred and went part time may be I should consider Roth 401k option. I am also working on rolling over my IRA so I can do back door Roth.

Topic Author
Grover
Posts: 76
Joined: Sun Apr 19, 2015 3:22 pm

Re: 401k vs Roth 401k

Post by Grover » Sun Jan 08, 2017 5:41 pm

KlangFool wrote:
Grover wrote:1)At what tax rate it would be more beneficial to invest in Roth 401k rather than tax deferred 401k?
2)Should one switch contributions to Roth 401 once tax defferd reaches a certain amount so I can reduce Tax liabilty on distribution in retirement?

Thanks everyone!
Grover,

1) If you have no idea what is the right answer, max up your Trad. 401K and Roth IRA. This is the right answer for 90+% of people.

2) At 15% tax bracket or lower, it might be advantageous to contribute to Roth 401K. But, at that level, you may qualify for tax credit such as EITC and Saver's credit if you contribute to Trad. 401K. It is not a safe answer even at that level.

<< 2)Should one switch contributions to Roth 401 once tax defferd reaches a certain amount so I can reduce Tax liabilty on distribution in retirement? >>

3) Not necessary. If you have plenty of money in taxable and Roth IRA, you could spend money from those accounts without paying tax while doing Roth conversion at a low tax rate for many years.

4) The only kind of person that may have a clear cut answer of Roth 401K is better when they have a guaranteed pension that pays them 100K or more per year.

5) For almost everybody that asked this question, for 99+% of them, the right answer was Trad. 401K.

6) Do you do your own tax?

KlangFool
KlangFool,

Thanks for replying! I don't do my own taxes but I am familiar with the tax system. I think my best option is to do traditional then convert later to Roth.

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pokebowl
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Re: 401k vs Roth 401k

Post by pokebowl » Sun Jan 08, 2017 9:45 pm

Grover wrote:1)At what tax rate it would be more beneficial to invest in Roth 401k rather than tax deferred 401k?
2)Should one switch contributions to Roth 401 once tax defferd reaches a certain amount so I can reduce Tax liabilty on distribution in retirement?

Thanks everyone!
1. The best time to utilize a Roth 401k is if you know you are in a low tax bracket currently and expect to be in a higher bracket in retirement (for example you have a pension or know other streams of income will be subsidizing your retirement). Another example is a recent high-school graduate or college graduate who is just starting out around the 15% or less tax brackets.

Where a roth 401k doesn't make sense is if you are in a high cost of living area, plus state, plus federal. Why? Well most high income earners during their working years are either in the 25-28% tax bracket at the federal level, the state level can be 6-11%, and do not forget social security and other misc taxes. We have a marginal tax system where your first portion of income go into the 0-10% buckets, then the 15-25% bucks etc until all your income is taxed. When you are in your working years your deductions into a 401k are taxed at the very end of these marginal rates or the highest. Where as when you retire you may only be in the 10-15% tax brackets due to the progressive system and not having to withdrawal as much as you needed during your working years. This is the case for 90+% of people. So it doesn't make sense to get taxed ~30+% in your prime in taxes if you know you will be in a lower tax bracket in retirement. You contribute to a Traditional take the tax break now, and enjoy less tax in the future.


2. Most high income earners who are looking to be financially independent or retire early, tend to select a traditional 401k, then when that is maxed out, they go to a roth 401k, then to any taxable accounts. I would suggest if you fall into this category, once maxing out a 401k traditional to max out a roth IRA. This will offer you a good hedge for your future with a good mix of both tax sheltered assets.
Nullius in verba.

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pokebowl
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Re: 401k vs Roth 401k

Post by pokebowl » Sun Jan 08, 2017 9:46 pm

pokebowl wrote:
Grover wrote:1)At what tax rate it would be more beneficial to invest in Roth 401k rather than tax deferred 401k?
2)Should one switch contributions to Roth 401 once tax defferd reaches a certain amount so I can reduce Tax liabilty on distribution in retirement?

Thanks everyone!
1. The best time to utilize a Roth 401k is if you know you are in a low tax bracket currently and expect to be in a higher bracket in retirement (for example you have a pension or know other streams of income will be subsidizing your retirement). Another example is a recent high-school graduate or college graduate who is just starting out around the 15% or less tax brackets.

Where a Roth 401k doesn't make sense is if you are in a high cost of living area, plus state, plus federal. Why? Well most high income earners during their working years are either in the 25-28% tax bracket at the federal level, the state level can be 6-11%, and do not forget social security and other misc taxes. We have a marginal tax system where your first portion of income go into the 0-10% buckets, then the 15-25% buckets etc until all your income is taxed. When you are in your working years your deductions into a 401k are taxed at the very end of these marginal rates or the highest. Where as when you retire you may only be in the 10-15% tax brackets due to the progressive system and not having to withdrawal as much as you needed during your working years. This is the case for 90+% of people. So it doesn't make sense to get taxed ~30+% in your prime in taxes if you know you will be in a lower tax bracket in retirement and only owe 10-15% on the same amount of money. You contribute to a Traditional take the tax break now, and enjoy less tax in the future.


2. Most high income earners who are looking to be financially independent or retire early, tend to select a traditional 401k, then when that is maxed out, they go to a Roth IRA, then to any taxable accounts. I would suggest if you fall into this category, once maxing out a 401k traditional to max out a Roth IRA. This will offer you a good hedge for your future with a good mix of both tax sheltered assets.
Nullius in verba.

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