Switch from Traditional 401K to Roth 401K?

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ImpalaGuy
Posts: 2
Joined: Tue Nov 28, 2017 7:55 pm

Switch from Traditional 401K to Roth 401K?

Post by ImpalaGuy » Tue Nov 28, 2017 10:42 pm

I've been lurking here quite awhile and am hoping folks can help me with whether I should switch from my traditional 401K to Roth 401K. I think its probably a good idea. I would just like to hear some opinions to make sure I'm not missing anything.

Some Details:
Im 33 years old, married, and have 5 children ranging in age from 10 to 2. Wife stays at home with the kiddos. I earn about $140K a year working in a steel mill. I've been there 10 years. The company offers a 401K and Roth 401K and the company match varies (as does my pay) based on the profitability of the company. Presently they are matching 31% of whatever I put in. I put $18,000 a year in my 401K. The company match is a little more then $5k this year and we get profit sharing in the spring which is split 80/20 in the 401K and cash to me. This year they put about $12K in my 401K from profit sharing (This is included in my $140K total earnings, my wages will be just under $130K this year).

We already had Roth IRAs when I went to work there and I went with the regular 401K because I figured I'd split my tax liability later in life. What I've been thinking is because I have so many children I pay very little in federal taxes it would make more sense to save those 401K dollars in a Roth and never pay taxes again. The company match and profit sharing contributions cannot go into a Roth401K and would remain in a traditional account. My AGI makes it such that I don't think I'll pay very much in taxes on that 18K if I redirect it to a roth401K.

Also, should I consider converting my current balance to a Roth? I understand I would need to have the money to pay the taxes which shouldn't be a problem. Would that tax be calculated for each year those dollars were earned?

In addition to fully funding my 401K we fully fund Roth IRAs, contribute $5K to HSA, pay about 10K extra on mortgage principal, and save another $5-7K in a taxable account. Presently, my 401K balance is $182,000. My Roth IRA is $91,000. Wife's Roth IRA is $54,000. Taxable investment account is $125,000. We have about $25k in cash. Have about 130K in home equity with a mortgage balance of $146,000. We also have rental property which will barely more then break even this year but going forward we should bring home another 10K-15k or so from that.

Any input would be greatly appreciated! Thanks.

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FiveK
Posts: 4928
Joined: Sun Mar 16, 2014 2:43 pm

Re: Switch from Traditional 401K to Roth 401K?

Post by FiveK » Wed Nov 29, 2017 1:16 am

ImpalaGuy wrote:
Tue Nov 28, 2017 10:42 pm
My AGI makes it such that I don't think I'll pay very much in taxes on that 18K if I redirect it to a roth401K.
Based on your numbers, it appears you save 30% on the $18K: 25% from the tax bracket, and another 5% because you are in the child tax credit phaseout region. Traditional is likely better than Roth at that marginal saving rate.
You could check the marginal rate in your tax software of choice, or see a chart by entering a few numbers in the personal finance toolbox spreadsheet.

If your itemized deductions are large, you might not save 30% on the whole $18K. Assuming standard deduction, it seem you have:
AGI = $140K - $5K - $18K = $117K
Taxable = $117K - $12,700 - $28,350 = $75,950.

ImpalaGuy
Posts: 2
Joined: Tue Nov 28, 2017 7:55 pm

Re: Switch from Traditional 401K to Roth 401K?

Post by ImpalaGuy » Thu Nov 30, 2017 1:41 pm

Thanks very much for your feedback. I'll attempt to model it in the spreadsheet.

DSInvestor
Posts: 10806
Joined: Sat Oct 04, 2008 11:42 am

Re: Switch from Traditional 401K to Roth 401K?

Post by DSInvestor » Thu Nov 30, 2017 1:43 pm

ImpalaGuy wrote:
Thu Nov 30, 2017 1:41 pm
Thanks very much for your feedback. I'll attempt to model it in the spreadsheet.
If you do your taxes with tax software, try saving the 2016 file to a new name, then adding 18K of ordinary income and see how your Fed and state income tax changes. It looks like you're in the 25% Fed Tax bracket so adding 18K to your taxable income could increase your Fed taxes by $4500. Do you pay state income taxes? The higher AGI may also result in loss of tax credits.

IMO, a good default plan in your situation would be to max out Traditional 401k for 18K , Roth IRA for 11K and HSA. This gives you a nice mix of Traditional and Roth space while maximizing pre-tax tax benefits which is useful for making extra mortgage principal payments, taxable investing, saving for next car etc.

Will you receive a defined benefit pension?
Wiki

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