401k & Roth Order of Contribution Clarification Q

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TexasEng
Posts: 7
Joined: Thu Dec 03, 2015 8:23 am

401k & Roth Order of Contribution Clarification Q

Postby TexasEng » Thu Apr 20, 2017 12:56 pm

I'm just trying to understand what I've read over my time browsing the site. Please correct or confirm the following statements.

From what I gather, the preferred avenue for retirement savings for a "high tax bracket" individual is to contribute to the pre-tax traditional 401K. This is due to the potential for lower taxes during retirement, correct?

Now, once that 18k of space is filled, THEN the Roth shall be filled, correct? My question is if the Roth is not the preferred option initially for "high tax" individuals, why contribute to it at all after the 401k space is filled, if our taxes now are likely to be higher than in retirement? Is it due to tax-free growth in the Roth?

Thanks for the information.

TexasEng

masteraleph
Posts: 426
Joined: Wed Nov 04, 2009 9:45 am

Re: 401k & Roth Order of Contribution Clarification Q

Postby masteraleph » Thu Apr 20, 2017 1:01 pm

Most people who are able to max out both a 401k and a Roth IRA are ineligible for a deductible traditional IRA. Therefore, their options are:

a) Contribute either directly to a Roth IRA or to a non-deductible TIRA and immediately convert to Roth. In this case, tax has been paid on the principal and there is no tax on the gains.

b) Contribute to a non-deductible TIRA and don't convert to a Roth. Tax has been paid on the principal and there is income tax on the gains when they are withdrawn.

c) Contribute to a taxable account. Tax has been paid and there is income/capital gains tax on interest/dividends respectively, and capital gains tax when you sell with a gain.

One of those is obviously preferable, and the answer is A. If you are still eligible to contribute to a deductible IRA, that may be better for you than a Roth IRA.

thangngo
Posts: 14
Joined: Sun Feb 26, 2017 2:08 pm

Re: 401k & Roth Order of Contribution Clarification Q

Postby thangngo » Thu Apr 20, 2017 1:10 pm

TexasEng wrote:I'm just trying to understand what I've read over my time browsing the site. Please correct or confirm the following statements.

From what I gather, the preferred avenue for retirement savings for a "high tax bracket" individual is to contribute to the pre-tax traditional 401K. This is due to the potential for lower taxes during retirement, correct?

Now, once that 18k of space is filled, THEN the Roth shall be filled, correct? My question is if the Roth is not the preferred option initially for "high tax" individuals, why contribute to it at all after the 401k space is filled, if our taxes now are likely to be higher than in retirement? Is it due to tax-free growth in the Roth?

Thanks for the information.

TexasEng


If your income is higher than 72,000 (single filer) or 119,000 (married filer), you won't be able to deduct contribution to traditional IRA. As masteraleph pointed out above, the next best thing after pre-tax 401k is Roth IRA. After filing Roth IRA space, I would invest in tax-efficient EFTs/funds in taxable account.

TexasEng
Posts: 7
Joined: Thu Dec 03, 2015 8:23 am

Re: 401k & Roth Order of Contribution Clarification Q

Postby TexasEng » Thu Apr 20, 2017 1:33 pm

Thanks for laying out the options and the salary considerations. I do not qualify for the deductible, so option A is in fact preferable.

TexasEng


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