Roth 401k vs traditional 401k

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jopra
Posts: 6
Joined: Wed Mar 01, 2017 9:05 pm

Roth 401k vs traditional 401k

Post by jopra » Wed Jun 12, 2019 5:44 am

I have a self directed 401k, which allows me to put up to $54k into each year. I've recently thought about directing some of that money into a Roth 401k. We are currently in a high tax bracket and our taxable income is around $700k/year. Does it make sense to put any of that money into the Roth 401k for tax diversity? I always thought that my tax rate in retirement would be lower than what my current rate is, but am I missing something?

Thanks for any advice!

ImaBeginner
Posts: 97
Joined: Fri Sep 11, 2015 12:21 pm

Re: Roth 401k vs traditional 401k

Post by ImaBeginner » Wed Jun 12, 2019 6:00 am

I do. I also do a backdoor Roth for myself and my spouse.
1. I expect to be in the highest tax bracket after retirement for at least 15 years due to my investments.
2. No RMD
3. Better for giving to kids since I don’t think I will ever need that money.

Topic Author
jopra
Posts: 6
Joined: Wed Mar 01, 2017 9:05 pm

Re: Roth 401k vs traditional 401k

Post by jopra » Wed Jun 12, 2019 6:05 am

Thanks! Yeah, we do a backdoor roth too. I'll probably start putting my wife's 401k into a roth 401k. So, that gives us $30k in roth accounts a year. Not sure if I should put $19k out of my $54k into a roth as well.

Thanks again for your thoughts!

rkhusky
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Re: Roth 401k vs traditional 401k

Post by rkhusky » Wed Jun 12, 2019 6:36 am

What is your expected account balance at retirement?
What are your expected expenses in retirement?
Do you expect to retire many years before age 70?

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ruralavalon
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Location: Illinois

Re: Roth 401k vs traditional 401k

Post by ruralavalon » Wed Jun 12, 2019 6:50 am

jopra wrote:
Wed Jun 12, 2019 5:44 am
I have a self directed 401k, which allows me to put up to $54k into each year. I've recently thought about directing some of that money into a Roth 401k. We are currently in a high tax bracket and our taxable income is around $700k/year. Does it make sense to put any of that money into the Roth 401k for tax diversity? I always thought that my tax rate in retirement would be lower than what my current rate is, but am I missing something?

Thanks for any advice!
.

1) In general traditional contributions will likely be better for most people, unless there will be a significant pension or very large tax-deferred accounts or a combination of both.

What is your age? About how long until expected retirement? How much are you contributing annually to investing for retirement?

About how much money do you currently have in traditional tax-deferred accounts?

Will you be eligible for a significant pension?

For most people traditional 401k contributions will likely be better.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional 401k contributions will probably be better. In addition when you withdraw from your 401k in retirement, your income is not all taxed at your marginal tax rate specified for your tax bracket. 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)."

"Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. 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.

Wiki article, "Traditional vs Roth".
"Tax considerations:
* If your current marginal tax rate is 15% or less, prefer a Roth.
* If you expect to have higher marginal rates than your current marginal rate for most of your career, prefer a Roth.
* If you will have a traditional account or a pension large enough to meet your expected retirement expenses (and you expect to take that pension shortly after retiring), prefer a Roth.
* Otherwise, prefer a traditional account."

. . . . .

2) Sometimes there are very useful Roth options in-plan.

Does your employer's 401k plan allow non-Roth after-tax contributions?

Does your employer's 401k plan permit those non-Roth after-tax contributions to be distributed while you are still working there (an in-service distribution)?

Does your employer's 401k plan offer a Roth 401k option, and if so can those non-Roth after-tax contributions be rolled over to the Roth 401k part of the plan (an in-plan Roth rollover)?

Please see the TFB blog post, "The Elusive Mega Backdoor Roth".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Watty
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Re: Roth 401k vs traditional 401k

Post by Watty » Wed Jun 12, 2019 9:05 am

jopra wrote:
Wed Jun 12, 2019 5:44 am
I always thought that my tax rate in retirement would be lower than what my current rate is, but am I missing something?
A couple of things to include to your checklist;

1) You might move to a state with higher or lower state income taxes.

2) Your marital status might change if you are get married, divorced or widowed.

3) Estate planning if you will be over the net worth limits. Your heirs will likely be in a lower tax bracket than you.

4) If you are a long way from retirement a lot can change and you might actually not have the high income until then.

5) IRMAA medicare surcharges.

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FiveK
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Re: Roth 401k vs traditional 401k

Post by FiveK » Wed Jun 12, 2019 11:13 am

jopra wrote:
Wed Jun 12, 2019 5:44 am
We are currently in a high tax bracket and our taxable income is around $700k/year. Does it make sense to put any of that money into the Roth 401k for tax diversity? I always thought that my tax rate in retirement would be lower than what my current rate is, but am I missing something?
Might be worth going beyond "thought" to "back of the envelope estimate". E.g., see toward the bottom of the Investment Order post. What do you get for a marginal rate in retirement from that approach?

Then see also Maxing out your retirement accounts to see how much lower your marginal rate in retirement could be compared with your marginal rate now and still have Roth now be preferable.

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