Roth 401k or Not

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welderwannabe
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Roth 401k or Not

Post by welderwannabe »

All,

My company classifies me as a highly compensated employee and therefore my 401k contributions are limited to only 6%. This has been going on for about 5 years. When that happened I immediately changed my contributions to Roth ones since I figured if I was limited, I might as well get the biggest bang for my buck.

We are in the 33% tax bracket. Based on some recent reading, I am wondering if I should switch back to pre-tax and invest the tax savings in a taxable account. Wanted to get some opinions.

Thanks for your feedback.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
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Peter Foley
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Re: Roth 401k or Not

Post by Peter Foley »

Are you allowed to do a combination of the two? I would maximize the amount in tax deferred and then switch to Roth if that were possible. This assumes you will be in a lower tax bracket for at least a few years when you retire.
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welderwannabe
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Re: Roth 401k or Not

Post by welderwannabe »

Peter Foley wrote:Are you allowed to do a combination of the two? I would maximize the amount in tax deferred and then switch to Roth if that were possible. This assumes you will be in a lower tax bracket for at least a few years when you retire.
Yes, they allow me to mix between Roth and non-Roth, but either way my total contributions cannot exceed 6%.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
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Nate79
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Re: Roth 401k or Not

Post by Nate79 »

It's really hard to imagine Roth being a better choice than traditional in your very high tax situation.
rkhusky
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Re: Roth 401k or Not

Post by rkhusky »

If you expect your traditional withdrawals will be taxed at 25% or lower in retirement, traditional would be better now. All at 25% would mean that you expect about $100K in other income in retirement, such as pension or part-time employment, if married with standard deductions.
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welderwannabe
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Re: Roth 401k or Not

Post by welderwannabe »

Thanks, everybody. This was what I was leaning towards and what my crappy Excel spreadsheet I made was telling me.

I will switch to non-roth 401k contributions. I will then invest the tax savings (33% of the contributions) in a taxable account and try to do a backdoor roth conversion from that every year. That should get me the best of both worlds.

Thanks for the feedback as always.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
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ruralavalon
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Re: Roth 401k or Not

Post by ruralavalon »

welderwannabe wrote:All,

My company classifies me as a highly compensated employee and therefore my 401k contributions are limited to only 6%. This has been going on for about 5 years. When that happened I immediately changed my contributions to Roth ones since I figured if I was limited, I might as well get the biggest bang for my buck.

We are in the 33% tax bracket. Based on some recent reading, I am wondering if I should switch back to pre-tax and invest the tax savings in a taxable account. Wanted to get some opinions.

Thanks for your feedback.
Will you be eligible for a significant pension? That has a large impact on the traditional vs Roth decision.

For most people traditional 401k contributions will probably be better. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."

Ordinarily most people are likely better off making traditional contributions to their work-based plans. A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Peter Foley
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Re: Roth 401k or Not

Post by Peter Foley »

welderwannabe wrote:
I will switch to non-roth 401k contributions. I will then invest the tax savings (33% of the contributions) in a taxable account and try to do a backdoor roth conversion from that every year. That should get me the best of both worlds.
This is a good solid plan.
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welderwannabe
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Re: Roth 401k or Not

Post by welderwannabe »

ruralavalon wrote: Will you be eligible for a significant pension? That has a large impact on the traditional vs Roth decision.
No pensions. Just defined contribution plans only.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
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welderwannabe
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Re: Roth 401k or Not

Post by welderwannabe »

Peter Foley wrote: This is a good solid plan.
Thanks, Peter. Wish I had looked into this 5 years ago. I made the mistake of doing some spreadsheet math on this to see how much I probably lost by doing roth 401k the last 5 years or so.... :annoyed

Good news is that I am reversing course now so no further damage.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
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ruralavalon
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Re: Roth 401k or Not

Post by ruralavalon »

welderwannabe wrote:
ruralavalon wrote: Will you be eligible for a significant pension? That has a large impact on the traditional vs Roth decision.
No pensions. Just defined contribution plans only.
Peter Foley wrote:welderwannabe wrote:
I will switch to non-roth 401k contributions. I will then invest the tax savings (33% of the contributions) in a taxable account and try to do a backdoor roth conversion from that every year. That should get me the best of both worlds.
This is a good solid plan.
I agree, that is a good solid plan.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
shermanpie
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Re: Roth 401k or Not

Post by shermanpie »

welderwannabe wrote:I made the mistake of doing some spreadsheet math on this to see how much I probably lost by doing roth 401k the last 5 years or so.... :annoyed
The spreadsheet math for this is actually really hard to get right. Since the "extra" money in your roth account is free of tax drag, eventually the higher rate of growth will overpower any difference in tax rates. Eventually.

Based on my spreadsheet math if you retire in the 28% bracket the break even point is ~23 years and for the 25% bracket it's ~55 years.
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welderwannabe
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Re: Roth 401k or Not

Post by welderwannabe »

shermanpie wrote: The spreadsheet math for this is actually really hard to get right. Since the "extra" money in your roth account is free of tax drag, eventually the higher rate of growth will overpower any difference in tax rates. Eventually.

Based on my spreadsheet math if you retire in the 28% bracket the break even point is ~23 years and for the 25% bracket it's ~55 years.
Do those numbers factor in investing the annual tax savings in a Roth?
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
shermanpie
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Re: Roth 401k or Not

Post by shermanpie »

No, they assume you're investing them in a taxable account. My analysis is for people who are out of tax-advantaged space (which I assume people in the 33% bracket would be).

In this case I'm skeptical about the phrasing of investing the savings in a Roth IRA, since that probably should have been maxed out regardless.
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welderwannabe
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Re: Roth 401k or Not

Post by welderwannabe »

shermanpie wrote:No, they assume you're investing them in a taxable account. My analysis is for people who are out of tax-advantaged space (which I assume people in the 33% bracket would be).

In this case I'm skeptical about the phrasing of investing the savings in a Roth IRA, since that probably should have been maxed out regardless.
They haven't been because I have had a rollover IRA and didn't want to take the tax hit. I am in the process of setting up a Solo 401k at Fidelity and going to move the Rollover-IRA into that. Then I can do Roth conversions.

When they limited my contributions into my 401k many years ago, I switched to Roth. I was doing 12% contributions before, dropped to 6% Roth. Since I didn't get a deduction, it felt more like an 8% contribution from a paycheck standpoint. I put the other 4% I was previously contributing into a taxable account, as well as some of it into non deductible IRA for bonds.

Now that I am going Pretax, that basically provides me another 2% I can stick into the market (33% of my 6% contribution).

Like I said, wish I had thought of this before.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.
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