Change from Regular 401K To Roth 401K question

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PoultryMan
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Change from Regular 401K To Roth 401K question

Post by PoultryMan » Thu Dec 19, 2019 11:30 am

Since I really dont know what my tax status will be when I retire, is there any downside to changing my current employer based 401k plan to a Roth 401K plan so I have assets in both?

Does anything preclude me from switching with the new year?

sailaway
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Re: Change from Regular 401K To Roth 401K question

Post by sailaway » Thu Dec 19, 2019 11:32 am

Have you considered a mega back door Roth, allowing you to continue to reap the current tax benefits and build your Roth accounts?

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JamesSFO
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Re: Change from Regular 401K To Roth 401K question

Post by JamesSFO » Thu Dec 19, 2019 11:33 am

Second question answered first: You can usually switch pay period to pay period at many companies

First question: Why not mix things up by maxing out a Roth IRA (or do a backdoor to do so) it gives you the mix of tax advantaged accounts without losing the deduction for your 401k. More generally we need more information about your current income/tax bracket and best guess of the future to give a better answer.

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RickBoglehead
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Re: Change from Regular 401K To Roth 401K question

Post by RickBoglehead » Thu Dec 19, 2019 11:34 am

It's not changing, it's adding Roth as an option. You can then choose where your contributions go, and change it during the year also. You can easily run the numbers to see the impact on your 2020 projected taxes, and then make a judgement.
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bloom2708
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Re: Change from Regular 401K To Roth 401K question

Post by bloom2708 » Thu Dec 19, 2019 11:34 am

If you don't have a pension, re-visit when you get to $1 million+ pre-tax.

Use pre-tax for the $19,500 in 2020, put the tax savings in your Roth IRA (front door or back door). Utilize HSA, Mega Back Door Roth, ESPP harvesting, taxable if you have much more to save.

Saving more is the best strategy today. Not paying the Fed/State tax today is the best way to do that today.
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Silk McCue
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Re: Change from Regular 401K To Roth 401K question

Post by Silk McCue » Thu Dec 19, 2019 11:38 am

It would help tremendously if you had shared your current investments and your plans for spending in retirement.

Just shy of two years ago you posted that you planned to spend $125k or so in retirement and held these investments at that time.
Age: 50 and 48
State: DE
Children : 1, age 10
Home-paid off worth $400k
Debt-none

Current asset balance:

Taxable- 1.5M
Tax deferred acts-1.32M
Allocation is 65/25/10(cash)
Annual contribution-29,500k
529-$90k
It shouldn't be too difficult to calculate what your taxes will look like in retirement in order to have some confidence in this decision.

Cheers

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PoultryMan
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Re: Change from Regular 401K To Roth 401K question

Post by PoultryMan » Thu Dec 19, 2019 11:40 am

Years ago I did a backdoor Roth for about $10k. Im not sure how, if at all this limits what I can do with another? Help is appreciated.

lakpr
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Re: Change from Regular 401K To Roth 401K question

Post by lakpr » Thu Dec 19, 2019 11:59 am

Can you post what's your tax-deferred balance now? If as Silk McCue posted, you had $1.32 million two years ago, it should be close to $1.7 million now with additional contributions and market growth? [ 20% growth this year alone ... ]

If so, I do think you are a good candidate to switch to Roth 401k for now, at least from now until the TCJA expires and the tax rates revert to higher 2017 levels. A 4% withdrawal from this tax-deferred balance would give you about $70k, and social security income could possibly push your income to $125k or so, and put you in the 22% tax bracket. If you are in the 22% bracket now, it's a break even; with tax brackets moving higher in 2026 and beyond, Roth 401k may be the best answer.

Even so, I still am hesitant to recommend the Roth 401k, even if your tax-deferred balances are $1.7 million. Once the Roth 401k contribution leaves your paycheck, it can never be turned back into a Traditional 401k contribution. It's cast in stone. With a Traditional 401k contribution, you have the option of converting it to Roth at a later date when you actually retire, and when the conversion is to your benefit. Choosing Roth 401k now means you give up that option.
PoultryMan wrote:
Thu Dec 19, 2019 11:40 am
Years ago I did a backdoor Roth for about $10k. Im not sure how, if at all this limits what I can do with another? Help is appreciated.
As long as you do not have any traditional IRA balance as of 12/31/2019, you are good to do the Backdoor Roth again this year.
Also, what you do in your IRA does not affect what you do in the 401k, and vice versa.

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PoultryMan
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Re: Change from Regular 401K To Roth 401K question

Post by PoultryMan » Thu Dec 19, 2019 12:18 pm

We have about half our retirement savings in traditional IRA's as a result of employer change rollovers.

lakpr
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Re: Change from Regular 401K To Roth 401K question

Post by lakpr » Thu Dec 19, 2019 12:22 pm

PoultryMan wrote:
Thu Dec 19, 2019 12:18 pm
We have about half our retirement savings in traditional IRA's as a result of employer change rollovers.
Well, all is not lost yet. Check if your current 401k plan can accept rollover from traditional IRA / rollover IRA accounts. If they do, initiate a rollover.

This does take 2 to 3 weeks, too late for 2019, but then, you can contribute and convert for 2019 tax year up to April 15, 2020. If you initiate the transfer now, at least in Jan or Feb you can do the backdoor Roth IRA.

If your current 401k plan choices are crappy, though, I would forego this step. What you would gain by getting access to backdoor Roth, will be squandered by the higher expense ratios in your 401k plan. But if your 401k plan choices are excellent (less than 0.1%) to good (less than 0.3%), roll in would be still worth it.

vandarye
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Re: Change from Regular 401K To Roth 401K question

Post by vandarye » Thu Dec 19, 2019 1:04 pm

I don't think it is what you intend, but if you switch completely away from 401k to Roth 401k, you would no longer receive an employer match. Matching only happens on pre-tax accounts.

CMD1
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Re: Change from Regular 401K To Roth 401K question

Post by CMD1 » Thu Dec 19, 2019 1:17 pm

vandarye wrote:
Thu Dec 19, 2019 1:04 pm
I don't think it is what you intend, but if you switch completely away from 401k to Roth 401k, you would no longer receive an employer match. Matching only happens on pre-tax accounts.
This has not been true in any 401k plan I have had - the match still applies but your employer matches with traditional dollars rather than Roth.

vandarye
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Re: Change from Regular 401K To Roth 401K question

Post by vandarye » Thu Dec 19, 2019 1:25 pm

You may be right, and I may be half right. Matching definitely only occurs on pre-tax. If electing 0 on pre-tax and X on post-tax (Roth), maybe the employer would match but into the pre-tax account. I was confident my original post was correct, but perhaps I am wrong.

livesoft
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Re: Change from Regular 401K To Roth 401K question

Post by livesoft » Thu Dec 19, 2019 1:31 pm

Matching occurs on all employee contributions up to the stated plan limit whether the contributions go to Roth or traditional side.

However, the employer match must all go into the traditional side. One can see why this might be the case since the employer match is not taxed.

The OP's question about downside is that they may pay more tax if they put taxed contributions into the Roth side and find out later that all their 401(k) withdrawals or conversions are tax-free. So that already hints at what I am going to write next: Under present law one can rollover from traditional 401(k) to traditional IRA and convert some of that traditional IRA to a Roth IRA.

So I see no reason to contribute to Roth 401(k) as long as one uses the tax savings from contributing to a traditional 401(k) to contribute to their Roth IRA.
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