401k/Roth 401K split

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Mjar
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Joined: Wed May 23, 2018 5:18 pm

401k/Roth 401K split

Post by Mjar » Thu Jun 21, 2018 3:53 pm

my whole adult working life I have put full max into 401k and still doing that now. My company is offering roth 401k as an option as well. To get the full match I am putting in 18% into pre-tax 401k now. I am debating on switching to a split between the two options but I still want to max out the limit. The IRS limit of $18.5k that is regardless of if it is pre or post tax 401k correct? I know the difference between non-roth and roth but any feedback on what others do in relation to 401k (not IRAs). I am thinking about splitting to 18% into 9% into pre-tax 401k to get the full match from my company then to get to the limit (actually go over slightly) is to put 10% in to the Roth 401k. This reduces my take home pay by roughly $200 which I am fine with on a budget standpoint. Just wanted to see what others think I should do split or not split and what others have done that have this option as well? If I do this split can I still contribute to a Roth IRA account at the 5.5k limit?

My I am 38 with a 401k balance is at $103k, I have a rollover IRA at $286k from a previous company 401k that I am going to leave alone as an IRA and not convert to a roth. I have a separate Roth IRA I contribute to when I have the extra cash that year which is at $7k.

So time IMO is still on my side to take advantage of this split or should I just stick with the pre-tax 401k? My wife and I live a simple life and probably will do so when we retire as well so I don't expect to be in a higher tax bracket when I retire.

Thanks in advance.
$Jar

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Duckie
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Re: 401k/Roth 401K split

Post by Duckie » Thu Jun 21, 2018 4:19 pm

Mjar wrote:The IRS limit of $18.5k that is regardless of if it is pre or post tax 401k correct?
Correct, $18.5K total.
I know the difference between non-roth and roth but any feedback on what others do in relation to 401k (not IRAs).
Contributing strictly pre-tax will reduce your income taxes now. Contributing strictly Roth may reduce your income taxes in the future. Here are two articles by tfb about this:
If I do this split can I still contribute to a Roth IRA account at the 5.5k limit?
Yes.

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patrick013
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Re: 401k/Roth 401K split

Post by patrick013 » Thu Jun 21, 2018 4:38 pm

Mjar wrote:
Thu Jun 21, 2018 3:53 pm
......... so when we retire as well so I don't expect to be in a higher tax bracket when I retire.
Invest in tax-deferred if the marginal tax rate in retirement
is expected to be less. Based on your budget you could put
some 401k money into a Roth 401k if the plan permits. You
would still have tax-deferred and post-tax at the plan limits,
but ask them regarding that.

It's deceiving when you have to start paying taxes in retirement
on RMD's but all those years of tax-deferral add up to a higher
overall return anyway when you estimate retirement taxes at
a lower rate which is what is needed. If retirement taxes are
going to be about equal the Roth becomes more flexible. Before
70 is usually a good time to convert some TD to Roth without
going to a higher bracket.

Check the Wiki for a Backdoor Roth, it may be useful information.
age in bonds, buy-and-hold, 10 year business cycle

KlangFool
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Re: 401k/Roth 401K split

Post by KlangFool » Thu Jun 21, 2018 4:47 pm

Mjar wrote:
Thu Jun 21, 2018 3:53 pm

I have a separate Roth IRA I contribute to when I have the extra cash that year which is at $7k.
Mjar,

Why would you contribute to Roth 401K when you can

A) Contribute to the Trad. 401K

B) Put the tax savings into Roth IRA.

This gives you the best of both worlds: tax-deferred and Roth. Contributing to the Trad. 401K will make sure that you have the extra cash.

You can open a Roth IRA for your spouse too. That will give you another 5.5K per year space.

KlangFool

JBTX
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Re: 401k/Roth 401K split

Post by JBTX » Thu Jun 21, 2018 8:47 pm

Mjar,

It is actually a pretty complicated question, based upon a lot of factors, many of which are not listed in your post.

As a general rule, for most people, it is probably better to put 401k into pretax (and take the tax savings and either put it in a Roth or taxable account). But it really depends on your current marginal tax rate, and what you expect your tax rate to be in retirement - which is admittedly hard to predict at your age.

If you are in a high tax bracket, then traditional will usually be the best bet. If you are in a moderate or lower tax rate, it really depends. If you can contribute to a separate Roth IRA, then you obviously aren't in the very highest tax brackets.

When all is said and done, it will be a good idea to have both traditional and Roth, whether in IRA, 401k, etc. The question is when do you fund the Roth. if you plan to retire before social security, then doing Roth conversions before retirement may be the way to go.

If you want to split between traditional and Roth, I don't think that is a horrible strategy - but again would really have to know more specifics to really evaluate that.

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FiveK
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Re: 401k/Roth 401K split

Post by FiveK » Thu Jun 21, 2018 11:32 pm

JBTX wrote:
Thu Jun 21, 2018 8:47 pm
...would really have to know more specifics to really evaluate that.
+1

Mjar, here are some "for example"s. Assumptions:
- no pension
- 5% real growth
- 2018 tax brackets and rate
- 4% withdrawal rate from pre-tax accounts is the only retirement income
- retire in 20 years
- filing MFJ with no dependents

If you
- switch all contributions to Roth, your $389K will grow to ~$1 million at retirement. A 4% withdrawal rate puts you in the 10% bracket, so if you are now in the 12% or higher bracket, at least some of your contributions over the next 20 years should be traditional.
- contribute $18.5K/yr to traditional 401k, your $389K plus contributions will grow to ~$1.6 million at retirement. A 4% withdrawal rate puts you in the 22% bracket, so if you are now in the 22% or lower bracket, at least some of your contributions over the next 20 years should be Roth.

It may take a little time to parse the above comments. The table in cells Calculations!T14:U20 of the personal finance toolbox spreadsheet may be helpful. Also the Traditional versus Roth - Bogleheads wiki.

Any questions, just ask.

Mjar
Posts: 47
Joined: Wed May 23, 2018 5:18 pm

Re: 401k/Roth 401K split

Post by Mjar » Tue Jun 26, 2018 11:26 am

KlangFool wrote:
Thu Jun 21, 2018 4:47 pm
Mjar wrote:
Thu Jun 21, 2018 3:53 pm

I have a separate Roth IRA I contribute to when I have the extra cash that year which is at $7k.
Mjar,

Why would you contribute to Roth 401K when you can

A) Contribute to the Trad. 401K

B) Put the tax savings into Roth IRA.

This gives you the best of both worlds: tax-deferred and Roth. Contributing to the Trad. 401K will make sure that you have the extra cash.

You can open a Roth IRA for your spouse too. That will give you another 5.5K per year space.

KlangFool
I contribute to Trad 401k maxing that out but I was wondering to split it within the 401k to Trad401k/Roth 401k almost 50/50. I have a seperate Roth IRA for myself and one for my wife. So in a regular year I put 18.5K in 401k and 5k in my Roth, and 5k in my wife's Roth. My question if I act on it would change to 9k Trad 401k, 9.5k Roth 401k, and 5k in my Roth, and 5k in my wife's Roth. From the article another user posted it suggest that i should do this since I am maxing out my 401k.

Mjar
Posts: 47
Joined: Wed May 23, 2018 5:18 pm

Re: 401k/Roth 401K split

Post by Mjar » Tue Jun 26, 2018 11:38 am

FiveK wrote:
Thu Jun 21, 2018 11:32 pm
JBTX wrote:
Thu Jun 21, 2018 8:47 pm
...would really have to know more specifics to really evaluate that.
+1

Mjar, here are some "for example"s. Assumptions:
- no pension
- 5% real growth
- 2018 tax brackets and rate
- 4% withdrawal rate from pre-tax accounts is the only retirement income
- retire in 20 years
- filing MFJ with no dependents

If you
- switch all contributions to Roth, your $389K will grow to ~$1 million at retirement. A 4% withdrawal rate puts you in the 10% bracket, so if you are now in the 12% or higher bracket, at least some of your contributions over the next 20 years should be traditional.
- contribute $18.5K/yr to traditional 401k, your $389K plus contributions will grow to ~$1.6 million at retirement. A 4% withdrawal rate puts you in the 22% bracket, so if you are now in the 22% or lower bracket, at least some of your contributions over the next 20 years should be Roth.

It may take a little time to parse the above comments. The table in cells Calculations!T14:U20 of the personal finance toolbox spreadsheet may be helpful. Also the Traditional versus Roth - Bogleheads wiki.

Any questions, just ask.
Those are all the assumptions I put into my thoughts/calcs. based on MFJ I am in the 22% bracket. I am looking at 50/50 split between Roth40k (9.5k) and Trad 401k (9k) that the combo maxes out the 18.5k then 5k each into my Roth and my wife's Roth. I am allowed to split the 401k between Roth and Trad when I max out to the 18.5. SO would be investing 24.5k into retirement accounts.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: 401k/Roth 401K split

Post by KlangFool » Tue Jun 26, 2018 11:39 am

Mjar wrote:
Tue Jun 26, 2018 11:26 am
KlangFool wrote:
Thu Jun 21, 2018 4:47 pm
Mjar wrote:
Thu Jun 21, 2018 3:53 pm

I have a separate Roth IRA I contribute to when I have the extra cash that year which is at $7k.
Mjar,

Why would you contribute to Roth 401K when you can

A) Contribute to the Trad. 401K

B) Put the tax savings into Roth IRA.

This gives you the best of both worlds: tax-deferred and Roth. Contributing to the Trad. 401K will make sure that you have the extra cash.

You can open a Roth IRA for your spouse too. That will give you another 5.5K per year space.

KlangFool
I contribute to Trad 401k maxing that out but I was wondering to split it within the 401k to Trad401k/Roth 401k almost 50/50. I have a seperate Roth IRA for myself and one for my wife. So in a regular year I put 18.5K in 401k and 5k in my Roth, and 5k in my wife's Roth. My question if I act on it would change to 9k Trad 401k, 9.5k Roth 401k, and 5k in my Roth, and 5k in my wife's Roth. From the article another user posted it suggest that i should do this since I am maxing out my 401k.
1) The limit is 5.5K for Roth IRA now.

<<My question if I act on it would change to 9k Trad 401k, 9.5k Roth 401k, and 5k in my Roth, and 5k in my wife's Roth. >>

2) Why do that? You could choose the following:

A) Max up your Trad. 401K

B) Max up your Roth IRAs.

C) The rest invest in your taxable account.

KlangFool

Mjar
Posts: 47
Joined: Wed May 23, 2018 5:18 pm

Re: 401k/Roth 401K split

Post by Mjar » Tue Jun 26, 2018 11:42 am

KlangFool wrote:
Thu Jun 21, 2018 4:47 pm
Mjar wrote:
Thu Jun 21, 2018 3:53 pm

I have a separate Roth IRA I contribute to when I have the extra cash that year which is at $7k.
Mjar,

Why would you contribute to Roth 401K when you can

A) Contribute to the Trad. 401K

B) Put the tax savings into Roth IRA.

This gives you the best of both worlds: tax-deferred and Roth. Contributing to the Trad. 401K will make sure that you have the extra cash.

You can open a Roth IRA for your spouse too. That will give you another 5.5K per year space.

KlangFool
This is what I currently do, looking to split the 401k 18.5k amount between Roth 401k and Trad 401k, plus add near max amount into a seperate Roth IRA for me and my spouse which I will adding to.

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

Re: 401k/Roth 401K split

Post by FiveK » Tue Jun 26, 2018 11:43 am

Mjar wrote:
Tue Jun 26, 2018 11:26 am
My question if I act on it would change to 9k Trad 401k, 9.5k Roth 401k, and 5k in my Roth, and 5k in my wife's Roth. From the article another user posted it suggest that i should do this since I am maxing out my 401k.
Maxing out your retirement accounts is not a sufficient reason to use Roth instead of traditional.

It does increase the chance that Roth is favorable, vs. comparing smaller contributions, but your contribution/withdrawal tax rates still matter. See either of the spreadsheets mentioned in the link to check your own situation.

mcraepat9
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Re: 401k/Roth 401K split

Post by mcraepat9 » Tue Jun 26, 2018 3:32 pm

What are your current federal and state tax brackets? It is hard to imagine the Roth 401k being a good idea unless you are in very low brackets and/or you have a pension coming to you.
Amateur investors are not cool-headed logicians.

Mjar
Posts: 47
Joined: Wed May 23, 2018 5:18 pm

Re: 401k/Roth 401K split

Post by Mjar » Thu Jul 12, 2018 4:36 pm

mcraepat9 wrote:
Tue Jun 26, 2018 3:32 pm
What are your current federal and state tax brackets? It is hard to imagine the Roth 401k being a good idea unless you are in very low brackets and/or you have a pension coming to you.
22% is my fed tax bracket

MrBeaver
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Re: 401k/Roth 401K split

Post by MrBeaver » Thu Jul 12, 2018 8:51 pm

Mjar wrote:
Thu Jun 21, 2018 3:53 pm
I am thinking about splitting to 18% into 9% into pre-tax 401k to get the full match from my company
FYI, most (but check your plan documents) employers who match and offer a Roth 401k also match Roth dollars, though the match dollars are still pre-tax — the employer wants to get their deduction after all ;)

If you were not contributing enough to get the full match, it’s likely better to do traditional so that you get more of the match. But most employers will give you the match even if you contribute 100% Roth.

Like other commenters, I’d stay traditional unless you expect your income to rise dramatically and your marginal tax bracket in retirement to be above what it is now (including any state income tax, taking into account that many states with income tax have a lower rate for IRA distributions than regular income).

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