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ROth 401K

Posted: Thu Feb 02, 2017 11:52 pm
by meccos
I currently put money 35k a year into a tax deferred retirement saving program and also 18k into a roth 401k. We are currently in a high tax bracket. I expect my retirement income to be also fairly high. It may not be as high as my income now, but likely will be something close. Based on this information, would it make sense to put money into a roth 401K or just a normal tax deferred 401k? Is there additional information one would need to make a better informed decision here?

Thanks for the advice in advance.

Re: ROth 401K

Posted: Fri Feb 03, 2017 12:06 am
by MorningstarFan
Hi,

Just as clarification, are you contributing 18K each year to Roth 401k and 35K in "tax deferred" programs? Not quite sure what you mean by the $35k there. :happy

However, here is another thought that many people ignore. Any contribution to traditional retirement accounts decrease your tax at the highest bracket. As you retire, any distribution is taxed starting from the minimum tax bracket. If you can limit how much you distribute after you retire, then you have decreased your tax bill evenly throughout your life. Does that make sense?

Also, you can always do a mix of Roth/Traditional contribution each year as well. I consider this as diversification to tax treatment (or future tax laws).

Re: ROth 401K

Posted: Fri Feb 03, 2017 12:21 am
by meccos
MorningstarFan wrote:Hi,

Just as clarification, are you contributing 18K each year to Roth 401k and 35K in "tax deferred" programs? Not quite sure what you mean by the $35k there. :happy

However, here is another thought that many people ignore. Any contribution to traditional retirement accounts decrease your tax at the highest bracket. As you retire, any distribution is taxed starting from the minimum tax bracket. If you can limit how much you distribute after you retire, then you have decreased your tax bill evenly throughout your life. Does that make sense?

Also, you can always do a mix of Roth/Traditional contribution each year as well. I consider this as diversification to tax treatment (or future tax laws).
I contribute 35K to a tax deferred program and in addition to that another 18K to a roth 401k. Thus total investments are 53k a year. I realize that I will be paying more taxes now, but I wanted to get as much money into a roth account so that I do not have to worry about RMD when I retire. I also plan to give most of this money to my children. I suppose I can achieve the same thing by going with a traditional 401k now and rolling that money into a roth IRA after I retire (when my income is low) so that I pay less taxes??? On further thought, it seems maybe this latter plan is the most tax efficient. Again would love any advice...

Re: ROth 401K

Posted: Fri Feb 03, 2017 5:56 pm
by FiveK
MorningstarFan wrote: Any contribution to traditional retirement accounts decrease your tax at the highest bracket. As you retire, any distribution is taxed starting from the minimum tax bracket. If you can limit how much you distribute after you retire, then you have decreased your tax bill evenly throughout your life. Does that make sense?
Unfortunately, it doesn't. If it did, using traditional accounts would be overwhelmingly better for virtually everyone. In reality, traditional accounts are somewhat better for most.

Only the distributions you take from your very first traditional contribution (and, assuming further that you have no retirement income other than traditional distributions) are taxed starting from 0.

Subsequent contributions are withdrawn at increasing rates. One should compare current marginal rates to expected marginal withdrawal rates to make the traditional vs. Roth decision.

Re: ROth 401K

Posted: Fri Feb 03, 2017 5:57 pm
by FiveK
meccos wrote:...going with a traditional 401k now and rolling that money into a roth IRA after I retire (when my income is low) so that I pay less taxes??? On further thought, it seems maybe this latter plan is the most tax efficient. Again would love any advice...
Yes, that can be a very effective plan.

Re: ROth 401K

Posted: Fri Feb 03, 2017 6:10 pm
by furwut
The Wiki covers the subject ...

Traditional versus Roth

Re: ROth 401K

Posted: Fri Feb 03, 2017 7:02 pm
by LadyGeek
This thread is now in the Investing - Help with Personal Investments forum (portfolio help).

Re: ROth 401K

Posted: Fri Feb 03, 2017 7:15 pm
by patrick013
If you max out the 401k, then put dollars into the Roth 401k. Your
plan is one of the few I've seen with a $53,000 limit.

A Roth is a fine plan with a great cash balance at retirement date.
The tax deferred 401k is actually better as it commits more funds
into investment opportunities, the discounted return is higher even
if tax rates during working and retirement years are close, but would
encourage equal withdrawals in retirement to stay in a lower tax rate.
With a Roth or a taxable account in very low income retirement years
you could realize substantial 0 tax cap gains and be done with taxes, etc..

It's very hard not to recommend a traditional tax deferred plan over a Roth
plan but it's nice there's usually opportunity to put money in both.