Traditional and Roth 401k combined account

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GT99
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Traditional and Roth 401k combined account

Post by GT99 » Wed Jan 29, 2020 1:28 pm

I have what feels like a very random question, but I haven't found an answer elsewhere. My employer recently started offering a Roth 401k, so I'm taking advantage of it and planning to max both Traditional and Roth this year. Just started the Roth contributions at the beginning of January, and when I log into my account (serviced by 'The Standard') I only see a single account labeled 401k. This confused me because I expected to see 2 accounts, the Traditional and the Roth, much like I see separate accounts for my IRA and Taxable with Fidelity.

Thinking there had to be a problem, I called and they told me that no, both Traditional and Roth are combined in the same account. I can see the contributions broken out by Pre-tax and post-tax, but they go into the same bucket.
Is this normal?? Seems very strange to me. If it's normal, what happens when I leave this job and roll it over - how will Traditional and Roth be separated?

MotoTrojan
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Re: Traditional and Roth 401k combined account

Post by MotoTrojan » Wed Jan 29, 2020 1:32 pm

This seems odd to me as well but it should be easily handled when you leave. Let's say you contributed $10K to Roth and $40K to tIRA and the overall portfolio went up 100%. You'd have $20K Roth and $40K tIRA. This is simplified when in fact they would really need to look at the time-weighted average Roth vs. tIRA contribution in the account, since you may vary your contribution ratio over time.

I personally would prefer having separate control though.

You do realize the $19.5K annual limit is for a 401k irregardless of type though, right? You can't max a Roth and traditional with that amount separately, just as you can't do $6K in to a Roth IRA & tIRA separately.

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tfb
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Re: Traditional and Roth 401k combined account

Post by tfb » Wed Jan 29, 2020 1:33 pm

GT99 wrote:
Wed Jan 29, 2020 1:28 pm
Is this normal?? Seems very strange to me. If it's normal, what happens when I leave this job and roll it over - how will Traditional and Roth be separated?
It's normal. They track it internally. They know within each fund how much is Traditional and its earnings and how much is Roth and its earnings. They just don't show you that level of details.
Harry Sit, taking a break from the forums.

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anon_investor
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Re: Traditional and Roth 401k combined account

Post by anon_investor » Wed Jan 29, 2020 1:35 pm

tfb wrote:
Wed Jan 29, 2020 1:33 pm
GT99 wrote:
Wed Jan 29, 2020 1:28 pm
Is this normal?? Seems very strange to me. If it's normal, what happens when I leave this job and roll it over - how will Traditional and Roth be separated?
It's normal. They track it internally. They know within each fund how much is Traditional and its earnings and how much is Roth and its earnings. They just don't show you that level of details.
+1, this is very common. My current 401k tells me what % is Roth vs. Traditional, but all the funds are in 1 giant bucket, so you cannot have the investments allocated different between Roth / Traditional. Which is why I stopped holding bonds in my 401k, since they would be eating into my Roth space.

como
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Re: Traditional and Roth 401k combined account

Post by como » Wed Jan 29, 2020 1:45 pm

I had a Roth 401k available with my previous employer (held with Transamerica) and had both Roth and traditional contributions that were held together.

When I left and rolled the accounts over to two IRAs, they split the balances correctly, but there were places on the website that did not reflect the correct numbers for each type of contribution. I ended up calling several times before I was convinced they would do the rollover correctly, but it was fine in the end.

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Re: Traditional and Roth 401k combined account

Post by sailaway » Wed Jan 29, 2020 1:55 pm

In Fidelity's netbenefits, you can see "source" and select investments by source when you rebalance.

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TechGuy365
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Re: Traditional and Roth 401k combined account

Post by TechGuy365 » Thu Feb 13, 2020 9:46 pm

Same here, I also have Fidelity Netbenefits. The Account Balance is the total, but in the Contributions section of the dashboard it says:

PRE-TAX: x%
AFTER-TAX: y%
ROTH: z%

If you change the contribution amount it will also give you an option for DAILY ROTH IN-PLAN CONVERSATION.

Further down in the Sources sections it says:

EMPLOYEE PRE-TAX $x
EMPLOYER MATCH $y
PRE-TAX EMPLOYEE CATCH-UP $z (if you’re over50)
ROTH IN-PLAN CONVERSATION $w

lakpr
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Re: Traditional and Roth 401k combined account

Post by lakpr » Fri Feb 14, 2020 3:01 am

@GT99,

This is not an answer to your main question, but why do you want to do Roth 401k contributions in your 401k?

Roth 401k contributions once made, cannot be later turned into a Traditional 401k contribution. That decision once the amount leaves your paycheck and lands in your 401k account, is irrevocable and set in stone forever. You cannot undo the tax paid on that contribution.

For that decision to be in your favor, you should reasonably expect to be in a higher tax bracket in retirement than now. For very few people that is the case. Why do you expect to be in a higher tax bracket in retirement than now? Stated another way, if you are in a 22% tax bracket now, do you expect to be in a 22% tax bracket or higher in retirement (meaning you are already projecting to have $100k+ income, in inflation adjusted dollars). Are you sure? If you are, I am most interested in learning your reasoning.

I would rather escape taxes at 22% now, and pay taxes at 15% in retirement -- which I think is the most likely case for you. Traditional 401k is therefore the better choice.

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celia
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Re: Traditional and Roth 401k combined account

Post by celia » Fri Feb 14, 2020 4:59 am

I would not expect them to be tracked as one account either. I would want to know what would happen in this situation:

Suppose you have $10K pre-tax in a bond fund. Then you start adding $10K to Roth in a stock fund, then stopped contributing. If market conditions were such that the bond fund stayed stable, but the stock fund doubled, would my Roth vs pre-tax allocation then be 66.6% Roth, 33.3% pre-tax or would it be 50-50?

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celia
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Re: Traditional and Roth 401k combined account

Post by celia » Fri Feb 14, 2020 5:15 am

lakpr wrote:
Fri Feb 14, 2020 3:01 am
This is not an answer to your main question, but why do you want to do Roth 401k contributions in your 401k?
I’m not the OP, but if given the option, I would want the tax diversity. If I didn’t need the money to buy something in taxable, it is a no-brainer to put the money in any kind of Roth account, so the growth can be tax-free. I would pay the same taxes whether it was put in taxable or Roth.

And in a 401K, you also get the added bonus of additional employer contributions!

And if the tax rate goes up in 2026, you will be glad you paid today’s historically low tax rate on the contribution!

Sounds like an all around winner to me, as long as the answer in my above post is 66.6% Roth!
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

ivk5
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Re: Traditional and Roth 401k combined account

Post by ivk5 » Fri Feb 14, 2020 5:57 am

sailaway wrote:
Wed Jan 29, 2020 1:55 pm
In Fidelity's netbenefits, you can see "source" and select investments by source when you rebalance.
Same with my Vanguard-administered 401(k).

Poorman
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Re: Traditional and Roth 401k combined account

Post by Poorman » Fri Feb 14, 2020 7:55 am

You can max both to 19.5k?! I have a 457b account. I can contribute up to 19.5k in either or combination. It's just one account.

retiredjg
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Re: Traditional and Roth 401k combined account

Post by retiredjg » Fri Feb 14, 2020 8:18 am

GT99 wrote:
Wed Jan 29, 2020 1:28 pm
My employer recently started offering a Roth 401k, so I'm taking advantage of it and planning to max both Traditional and Roth this year.
This sounds like you think you can put $19.5k in each one. The limit is for both traditional and Roth together. You can fill one or the other or split it, but the total is $19.5k.

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Re: Traditional and Roth 401k combined account

Post by niceguy7376 » Fri Feb 14, 2020 8:26 am

Poorman wrote:
Fri Feb 14, 2020 7:55 am
You can max both to 19.5k?! I have a 457b account. I can contribute up to 19.5k in either or combination. It's just one account.
Trad + Roth = 19.5K for 401k. Employer Match always into Trad bucket.

lakpr
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Re: Traditional and Roth 401k combined account

Post by lakpr » Fri Feb 14, 2020 8:32 am

niceguy7376 wrote:
Fri Feb 14, 2020 8:26 am
Poorman wrote:
Fri Feb 14, 2020 7:55 am
You can max both to 19.5k?! I have a 457b account. I can contribute up to 19.5k in either or combination. It's just one account.
Trad + Roth = 19.5K for 401k. Employer Match always into Trad bucket.
457 plans have their own separate $19.5k limit. If an employer offers both 401k plan and 457 plan; or more commonly a 403b plan and a 457 plan, one can shelter $39k together, $19.5k in each. If older than 50 years by 12/31/2020, an additional $6.5k in both for a total of $52k.

Poorman
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Re: Traditional and Roth 401k combined account

Post by Poorman » Fri Feb 14, 2020 10:16 am

Why don't you just email your 401k provider. Or look under faq. Problem solved.

azanon
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Re: Traditional and Roth 401k combined account

Post by azanon » Fri Feb 14, 2020 10:43 am

lakpr wrote:
Fri Feb 14, 2020 3:01 am
@GT99,

This is not an answer to your main question, but why do you want to do Roth 401k contributions in your 401k?

Roth 401k contributions once made, cannot be later turned into a Traditional 401k contribution. That decision once the amount leaves your paycheck and lands in your 401k account, is irrevocable and set in stone forever. You cannot undo the tax paid on that contribution.

For that decision to be in your favor, you should reasonably expect to be in a higher tax bracket in retirement than now. For very few people that is the case. Why do you expect to be in a higher tax bracket in retirement than now? Stated another way, if you are in a 22% tax bracket now, do you expect to be in a 22% tax bracket or higher in retirement (meaning you are already projecting to have $100k+ income, in inflation adjusted dollars). Are you sure? If you are, I am most interested in learning your reasoning.

I would rather escape taxes at 22% now, and pay taxes at 15% in retirement -- which I think is the most likely case for you. Traditional 401k is therefore the better choice.
The reason why I use and max a Roth 401K, is because I can afford to do it.

A Roth 401K maxed, should be a better deal than a Traditional 401K max + the extra you didn't have to pay taxes on put into a taxable account. The tax-deferred growth of the Roth 401K (vs. all of that spillover you'll have to put in a taxable account, that'll be taxed every single year that it's invested) should trounce any advantage you got on the front end of maxing a traditional 401K with 1st year tax savings.

It's this reason I always find this comparison strange: A maxed Roth 401K is just flat out more money than a maxed Traditional 401K. The only way to compare the two, is to assume the Roth 401K isn't being maxed, and subtracting the taxes first then investing the smaller amount vs. a maxed traditional 401K. That's hard to explain but I hope that makes sense.

lakpr
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Re: Traditional and Roth 401k combined account

Post by lakpr » Fri Feb 14, 2020 11:05 am

azanon wrote:
Fri Feb 14, 2020 10:43 am
The reason why I use and max a Roth 401K, is because I can afford to do it.

A Roth 401K maxed, should be a better deal than a Traditional 401K max + the extra you didn't have to pay taxes on put into a taxable account. The tax-deferred growth of the Roth 401K (vs. all of that spillover you'll have to put in a taxable account, that'll be taxed every single year that it's invested) should trounce any advantage you got on the front end of maxing a traditional 401K with 1st year tax savings.

It's this reason I always find this comparison strange: A maxed Roth 401K is just flat out more money than a maxed Traditional 401K. The only way to compare the two, is to assume the Roth 401K isn't being maxed, and subtracting the taxes first then investing the smaller amount vs. a maxed traditional 401K. That's hard to explain but I hope that makes sense.
The fallacy here is that you are saying the tax savings on the Traditional 401k must go into the taxable account. Why not Roth IRA (backdoor Roth if necessary)? I get it that money in Roth 401k is effectively more than the max in traditional 401k. No arguments there. My argument is more about, is that really worth the high cost NOW, a decision that you can never take back?

A Roth 401k contribution is essentially a judgment call between your marginal tax bracket now vs. marginal tax bracket in your retirement (or at least, at the time of withdrawal). You are betting that by paying x% tax now, you will withdraw money from the account when the marginal tax would have been y%, and x is less than y.

I want you (not you as in @azanon, but a generic you) to examine that assumption in the first place. Let's assume a 5% withdrawal on the traditional 401k balance at the time of retirement -- note that 5% is an unsustainable rate of withdrawal, by choosing this high a withdrawal rate I am trying to increase the justification for the Roth option now. Would that income place you in a tax bracket higher or lower than your current rate?

Even assume that the tax rates are increasing. They are scheduled to increase to 2017 levels, in 2026.

To approach a 25% marginal tax rate, even with the 2017 tax brackets, it would require $80k minimum income for a couple. If this is 5%, you need to have at least $1.6 million already in traditional 401k assets. If you don't have at least that much in 401k assets, then contributing now to a Roth 401k, when you are presumably in 22% or 24% tax bracket, is a money-losing proposition since you had the choice to escape taxes at 22%/24%, and pay taxes at 15% instead at the time of withdrawal.

At higher tax brackets, this difference is even more stark.
Last edited by lakpr on Fri Feb 14, 2020 11:12 am, edited 1 time in total.

azanon
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Re: Traditional and Roth 401k combined account

Post by azanon » Fri Feb 14, 2020 11:11 am

lakpr wrote:
Fri Feb 14, 2020 11:05 am
azanon wrote:
Fri Feb 14, 2020 10:43 am
The reason why I use and max a Roth 401K, is because I can afford to do it.

A Roth 401K maxed, should be a better deal than a Traditional 401K max + the extra you didn't have to pay taxes on put into a taxable account. The tax-deferred growth of the Roth 401K (vs. all of that spillover you'll have to put in a taxable account, that'll be taxed every single year that it's invested) should trounce any advantage you got on the front end of maxing a traditional 401K with 1st year tax savings.

It's this reason I always find this comparison strange: A maxed Roth 401K is just flat out more money than a maxed Traditional 401K. The only way to compare the two, is to assume the Roth 401K isn't being maxed, and subtracting the taxes first then investing the smaller amount vs. a maxed traditional 401K. That's hard to explain but I hope that makes sense.
The fallacy here is that you are saying the tax savings on the Traditional 401k must go into the taxable account. Why not Roth IRA (backdoor Roth if necessary)? I get it that money in Roth 401k is effectively more than the max in traditional 401k. No arguments there. My argument is more about, is that really worth the high cost NOW, a decision that you can never take back?

A Roth 401k contribution is essentially a judgment call between your marginal tax bracket now vs. marginal tax bracket in your retirement (or at least, at the time of withdrawal). You are betting that by paying x% tax now, you will withdraw money from the account when the marginal tax would have been y%, and x is greater than y.
Sorry, I should have "closed the doors" so-to-speak on other tax advantaged options, so let me rephrase what I was saying: If you can afford to max all of your Roth options (e.g. Roth IRA AND Roth 401(k)), then that should always be a better deal than using a traditional for the 401K no matter what your tax bracket is (at least up until you're no longer qualified for a Roth IRA), and then being forced to save the spillover into a taxable account. Said another way, this is ONLY a dilemma for someone that can't afford to max 2 Roths.

I can afford to max both, so I don't and shouldn't have to make a judgment call. There's no judgment needed to conclude that any tax advantaged account will trounce a taxable one.

Maybe you're making the same fallacy with the OP? If the OP is maxing a Roth IRA,then a part Traditional, Part Roth 401k > all Traditional + taxable for spillover, no matter what.

Ready3Retire
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Re: Traditional and Roth 401k combined account

Post by Ready3Retire » Fri Feb 14, 2020 11:55 am

lakpr wrote:
Fri Feb 14, 2020 3:01 am

Why do you expect to be in a higher tax bracket in retirement than now? Stated another way, if you are in a 22% tax bracket now, do you expect to be in a 22% tax bracket or higher in retirement (meaning you are already projecting to have $100k+ income, in inflation adjusted dollars). Are you sure? If you are, I am most interested in learning your reasoning.

Another way for someone to be in the same tax bracket in retirement is if they have a pension. The pension income plus 401K RMDs plus any tIRA RMDs could push them to an equivalent (or higher) tax bracket in retirement.

Tax diversity, and the above situation is why I began contributing 50% to Roth 401K and 50% to traditional 401K last year.

lakpr
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Re: Traditional and Roth 401k combined account

Post by lakpr » Fri Feb 14, 2020 11:59 am

Ready3Retire wrote:
Fri Feb 14, 2020 11:55 am
lakpr wrote:
Fri Feb 14, 2020 3:01 am

Why do you expect to be in a higher tax bracket in retirement than now? Stated another way, if you are in a 22% tax bracket now, do you expect to be in a 22% tax bracket or higher in retirement (meaning you are already projecting to have $100k+ income, in inflation adjusted dollars). Are you sure? If you are, I am most interested in learning your reasoning.

Another way for someone to be in the same tax bracket in retirement is if they have a pension. The pension income plus 401K RMDs plus any tIRA RMDs could push them to an equivalent (or higher) tax bracket in retirement.

Tax diversity, and the above situation is why I began contributing 50% to Roth 401K and 50% to traditional 401K last year.
Yes, a guaranteed pension income in retirement will definitely skew the equation towards Roth 401k. But that's not evident in the original post, and given that the pensions are going the way of the dodo, I wanted him to explicitly confirm the reasoning.

123
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Re: Traditional and Roth 401k combined account

Post by 123 » Fri Feb 14, 2020 12:08 pm

I work for a megacorp in financial services and our 401K statements and onlne displays breakout the current year contributions to traditional and Roth but the balances in the various investments are combined and when we allocate to investments that allocation applies to both the traditional and Roth sides. There is no way to discern what the sub-balances are in the respective traditional and Roth side of each investment. They've allowed the option to make Roth 401K contributions for maybe 5 years. I would have thought that a megacorp in financial services would do a better job for their employees, but they don't. They treat the employees as badly as the customers.
The closest helping hand is at the end of your own arm.

lakpr
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Re: Traditional and Roth 401k combined account

Post by lakpr » Fri Feb 14, 2020 12:11 pm

azanon wrote:
Fri Feb 14, 2020 11:11 am
Maybe you're making the same fallacy with the OP? If the OP is maxing a Roth IRA,then a part Traditional, Part Roth 401k > all Traditional + taxable for spillover, no matter what.
I do not think so, because the tax rates on long term capital gains is lesser than ordinary income tax bracket, at EVERY TAX BRACKET level.
Choosing a Roth 401k option, even for part of the total, means you are choosing to pay the ordinary income tax rate on that portion of the contribution.
The only way you can gain on this would be to have the long term capital gains tax rates be equal to the ordinary income tax rates.

Otherwise, "no matter what", Roth 401k < Traditional 401k + taxable account for tax savings.

Dividend tax drag doesn't significantly skew the difference towards Roth 401k. A tax efficient fund like VTSAX, distributes around 2% dividends annually and since most of those dividends are qualified, they will attract a 15% tax rate. So the dividend tax drag is 15% * 2% = 0.3%.

So where Roth 401k and Traditional 401k can grow at an assumed 6% rate (for example), the taxable account grows at a 5.7% tax rate.

azanon
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Re: Traditional and Roth 401k combined account

Post by azanon » Fri Feb 14, 2020 12:38 pm

lakpr wrote:
Fri Feb 14, 2020 12:11 pm
azanon wrote:
Fri Feb 14, 2020 11:11 am
Maybe you're making the same fallacy with the OP? If the OP is maxing a Roth IRA,then a part Traditional, Part Roth 401k > all Traditional + taxable for spillover, no matter what.
I do not think so, because the tax rates on long term capital gains is lesser than ordinary income tax bracket, at EVERY TAX BRACKET level.
Choosing a Roth 401k option, even for part of the total, means you are choosing to pay the ordinary income tax rate on that portion of the contribution.
The only way you can gain on this would be to have the long term capital gains tax rates be equal to the ordinary income tax rates.

Otherwise, "no matter what", Roth 401k < Traditional 401k + taxable account for tax savings.

Dividend tax drag doesn't significantly skew the difference towards Roth 401k. A tax efficient fund like VTSAX, distributes around 2% dividends annually and since most of those dividends are qualified, they will attract a 15% tax rate. So the dividend tax drag is 15% * 2% = 0.3%.

So where Roth 401k and Traditional 401k can grow at an assumed 6% rate (for example), the taxable account grows at a 5.7% tax rate.
If the OP uses all VTSAX for his/her retirement account, then that might work out. My personal preference is a 40/60 though, and I like the ability be able to rebalance freely without restriction without a tax consequence for doing so.

Topic Author
GT99
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Re: Traditional and Roth 401k combined account

Post by GT99 » Fri Feb 14, 2020 12:39 pm

Poorman wrote:
Fri Feb 14, 2020 10:16 am
Why don't you just email your 401k provider. Or look under faq. Problem solved.
Why don't you read the whole post before responding? I clearly said I spoke with them. This was after going through FAQs and trying to contact them online and not getting an answer.
Last edited by GT99 on Fri Feb 14, 2020 12:43 pm, edited 1 time in total.

Topic Author
GT99
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Re: Traditional and Roth 401k combined account

Post by GT99 » Fri Feb 14, 2020 12:42 pm

retiredjg wrote:
Fri Feb 14, 2020 8:18 am
GT99 wrote:
Wed Jan 29, 2020 1:28 pm
My employer recently started offering a Roth 401k, so I'm taking advantage of it and planning to max both Traditional and Roth this year.
This sounds like you think you can put $19.5k in each one. The limit is for both traditional and Roth together. You can fill one or the other or split it, but the total is $19.5k.
I'd never had a Roth 401k option before, and when it came available the documentation I got was VERY poorly worded (the wording pretty clearly implied a separate $19.5k cap). I caught that quickly (my original post was a couple weeks back) and reverted back to full traditional because I have no doubt my taxable income will be significantly lower in retirement. I'd much rather save the 32% up front.

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GT99
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Re: Traditional and Roth 401k combined account

Post by GT99 » Fri Feb 14, 2020 12:50 pm

azanon wrote:
Fri Feb 14, 2020 11:11 am


Sorry, I should have "closed the doors" so-to-speak on other tax advantaged options, so let me rephrase what I was saying: If you can afford to max all of your Roth options (e.g. Roth IRA AND Roth 401(k)), then that should always be a better deal than using a traditional for the 401K no matter what your tax bracket is (at least up until you're no longer qualified for a Roth IRA), and then being forced to save the spillover into a taxable account. Said another way, this is ONLY a dilemma for someone that can't afford to max 2 Roths.

I can afford to max both, so I don't and shouldn't have to make a judgment call. There's no judgment needed to conclude that any tax advantaged account will trounce a taxable one.

Maybe you're making the same fallacy with the OP? If the OP is maxing a Roth IRA,then a part Traditional, Part Roth 401k > all Traditional + taxable for spillover, no matter what.
OP here - not eligible for a Roth IRA due to income. But you need to check your math - this is pretty clearly not a true statement: "If you can afford to max all of your Roth options (e.g. Roth IRA AND Roth 401(k)), then that should always be a better deal than using a traditional for the 401K no matter what your tax bracket is"

azanon
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Re: Traditional and Roth 401k combined account

Post by azanon » Fri Feb 14, 2020 1:46 pm

GT99 wrote:
Fri Feb 14, 2020 12:50 pm
azanon wrote:
Fri Feb 14, 2020 11:11 am


Sorry, I should have "closed the doors" so-to-speak on other tax advantaged options, so let me rephrase what I was saying: If you can afford to max all of your Roth options (e.g. Roth IRA AND Roth 401(k)), then that should always be a better deal than using a traditional for the 401K no matter what your tax bracket is (at least up until you're no longer qualified for a Roth IRA), and then being forced to save the spillover into a taxable account. Said another way, this is ONLY a dilemma for someone that can't afford to max 2 Roths.

I can afford to max both, so I don't and shouldn't have to make a judgment call. There's no judgment needed to conclude that any tax advantaged account will trounce a taxable one.

Maybe you're making the same fallacy with the OP? If the OP is maxing a Roth IRA,then a part Traditional, Part Roth 401k > all Traditional + taxable for spillover, no matter what.
OP here - not eligible for a Roth IRA due to income. But you need to check your math - this is pretty clearly not a true statement: "If you can afford to max all of your Roth options (e.g. Roth IRA AND Roth 401(k)), then that should always be a better deal than using a traditional for the 401K no matter what your tax bracket is"
Your quote of me is wrong - you didn't include the qualifier and cut it off mid-sentence.

Is math necessary to show that a Roth 401K, is a better deal than a taxable account? That's what you'll be forced to use if you have 19.5K of after-tax money you're ready, willing, and able to invest in a 401K.

Debates of Roth 401K vs. Traditional 401K are misleading. If the same amount of after tax money is going to be invested for retirement, the comparison is really Roth 401K vs. Traditional 401K plus a taxable account for the spillover due to the tax savings on the traditional. Another way of wording what I'm saying is, that 100% tax advantaged, is better than less than 100% tax advantaged.

lakpr
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Re: Traditional and Roth 401k combined account

Post by lakpr » Fri Feb 14, 2020 2:12 pm

azanon wrote:
Fri Feb 14, 2020 1:46 pm
Is math necessary to show that a Roth 401K, is a better deal than a taxable account? That's what you'll be forced to use if you have 19.5K of after-tax money you're ready, willing, and able to invest in a 401K.

Debates of Roth 401K vs. Traditional 401K are misleading. If the same amount of after tax money is going to be invested for retirement, the comparison is really Roth 401K vs. Traditional 401K plus a taxable account for the spillover due to the tax savings on the traditional.
Correct. The comparison is
- $19.5k per year invested in Roth 401k for 30 years
VS.
- $19.5k per year invested in Traditional 401k for 30 years
PLUS
- $4290 (at 22% tax rate) per year invested in Taxable Investment account.

For proper comparison sake, no withdrawals in either account, until year-31, when the couple would require about $80k after-tax for living expenses.

A $19.5k periodic deposit, for 30 years, at a nominal rate of 6% would grow to $1.6 million. In either Roth or Traditional.
The $4290 per year tax savings -- even growing 0.3% less than 6% due to dividend tax drag -- has grown nicely to $330k after 30 years.

When the couple withdraws $80k for living expenses from either account, $1.52 million is left in either account.

But wait, taxes need to be paid. So the couple chooses to pay taxes from the taxable account.
In the case of Roth 401k, er, there's no taxable account. No taxes due of course. But the couple is left with $1.52 million only.

Being that the couple is in 15% tax bracket, long term capital gains tax rate is 0, or even at worst, 15%.
So the couple needs to sell an amount of 1.15 * 0.15 * $80k = $13,800 for taxes to IRS.

With Traditional 401k: the couple is left with after-tax money still of $330k - $14k = $316k.
With Roth 401k: the couple is left with after-tax money of $0.


Repeat another $80k the year following. Roth and Traditional balances will both equal: $1.44 million.
With Traditional 401k, the couple is still ahead by $316k - $14k = $302k. And that's not including a 5.7% growth on the $316k for one year.

azanon
Posts: 2686
Joined: Mon Nov 07, 2011 10:34 am

Re: Traditional and Roth 401k combined account

Post by azanon » Fri Feb 14, 2020 3:49 pm

lakpr wrote:
Fri Feb 14, 2020 2:12 pm
azanon wrote:
Fri Feb 14, 2020 1:46 pm
Is math necessary to show that a Roth 401K, is a better deal than a taxable account? That's what you'll be forced to use if you have 19.5K of after-tax money you're ready, willing, and able to invest in a 401K.

Debates of Roth 401K vs. Traditional 401K are misleading. If the same amount of after tax money is going to be invested for retirement, the comparison is really Roth 401K vs. Traditional 401K plus a taxable account for the spillover due to the tax savings on the traditional.
Correct. The comparison is
- $19.5k per year invested in Roth 401k for 30 years
VS.
- $19.5k per year invested in Traditional 401k for 30 years
PLUS
- $4290 (at 22% tax rate) per year invested in Taxable Investment account.

For proper comparison sake, no withdrawals in either account, until year-31, when the couple would require about $80k after-tax for living expenses.

A $19.5k periodic deposit, for 30 years, at a nominal rate of 6% would grow to $1.6 million. In either Roth or Traditional.
The $4290 per year tax savings -- even growing 0.3% less than 6% due to dividend tax drag -- has grown nicely to $330k after 30 years.

When the couple withdraws $80k for living expenses from either account, $1.52 million is left in either account.

But wait, taxes need to be paid. So the couple chooses to pay taxes from the taxable account.
In the case of Roth 401k, er, there's no taxable account. No taxes due of course. But the couple is left with $1.52 million only.

Being that the couple is in 15% tax bracket, long term capital gains tax rate is 0, or even at worst, 15%.
So the couple needs to sell an amount of 1.15 * 0.15 * $80k = $13,800 for taxes to IRS.

With Traditional 401k: the couple is left with after-tax money still of $330k - $14k = $316k.
With Roth 401k: the couple is left with after-tax money of $0.


Repeat another $80k the year following. Roth and Traditional balances will both equal: $1.44 million.
With Traditional 401k, the couple is still ahead by $316k - $14k = $302k. And that's not including a 5.7% growth on the $316k for one year.
Ok, so you're basically saying being forced to save the spillover into a taxable doesn't end up being near as big of a factor, as the bigger question, which is tax rate the year the money's earned, vs. tax rate at the withdrawal point.

My personal choice is complicated by something brought up earlier, which is that I anticipate receiving a pension that'll be over 30K/year. So that, + 2 social securities (married), are going to place me close to, or at the 22% bracket today before I withdraw anything from my TSP (401k). Also, my wife might end up working well beyond my retirement date, pushing up our earned (taxable) income for many years after retirement.

The other factor I worry about is if we trend more towards a socialistic society whereby the government would be funding many more benefits, and presuming that at some point, that'll require a higher tax rate to be able to fund those additional programs. So if I were forced to guess, I'd suspect tax brackets are more likely to rise than fall. That, and 23.2 trillion worth of debt (and rising) makes me think taxes are more likely to rise. But of course who knows.

lakpr
Posts: 3997
Joined: Fri Mar 18, 2011 9:59 am

Re: Traditional and Roth 401k combined account

Post by lakpr » Fri Feb 14, 2020 3:57 pm

azanon wrote:
Fri Feb 14, 2020 3:49 pm
Ok, so you're basically saying being forced to save the spillover into a taxable doesn't end up being near as big of a factor, as the bigger question, which is tax rate the year the money's earned, vs. tax rate at the withdrawal point.
Whew, precisely!! Restated -- The question of Roth 401k contributions (or even Roth conversions now) basically boil down to "Marginal tax rate now vs. Marginal tax rate at retirement".
case 1: If marginal tax rate now is higher, Traditional.
case 2: If both are equal, Toss up. Even here, I'd advocate Traditional since you retain the option to convert later, which has value in itself.
case 3: If marginal tax rate is higher at retirement, then Roth now.

This last case really applies to a minority of people.
azanon wrote:
Fri Feb 14, 2020 3:49 pm
My personal choice is complicated by something brought up earlier, which is that I anticipate receiving a pension that'll be over 30K/year. So that, + 2 social securities (married), are going to place me close to, or at the 22% bracket today before I withdraw anything from my TSP (401k).
Well, bingo ... having a guaranteed pension is a definite known factor to skew the contributions towards Roth. That pension would, basically, fill out the lower tax brackets in retirement, and you are guaranteed to pay at least 22% / 25% in retirement. This is definitely either case 2 or case 3.
azanon wrote:
Fri Feb 14, 2020 3:49 pm
The other factor I worry about is if we trend more towards a socialistic society whereby the government would be funding many more benefits, and presuming that at some point, that'll require a higher tax rate to be able to fund those additional programs. So if I were forced to guess, I'd suspect tax brackets are more likely to rise than fall. That, and 23.2 trillion worth of debt (and rising) makes me think taxes are more likely to rise. But of course who knows.
We are not allowed to speculate on future policies and politics on this forum. But even if it were to come to pass, the tax code is guaranteed to be progressive, with gradual steps based on income. The whole point of deferring taxes now is that you anticipate being in a lower step in retirement than now.

azanon
Posts: 2686
Joined: Mon Nov 07, 2011 10:34 am

Re: Traditional and Roth 401k combined account

Post by azanon » Fri Feb 14, 2020 4:10 pm

lakpr wrote:We are not allowed to speculate on future policies and politics on this forum. But even if it were to come to pass, the tax code is guaranteed to be progressive, with gradual steps based on income. The whole point of deferring taxes now is that you anticipate being in a lower step in retirement than now.
Just for the record, I was trying to be really careful that I wasn't speculating on political policies, rather just identifying one of a few possible outcomes. At 48, I just don't recall any of those movements when I was much younger, but now there are at least some that would like to see us trend that way. So, on that basis, I'm just saying it seems more possible today than, say, 20 years ago, so I consider it when making the decision on which 401k to use. Hopefully even speaking that vaguely about it wasn't breaking the rules, and if still it was, I sincerely apologize to the group.

Poorman
Posts: 40
Joined: Sat Jan 11, 2020 9:57 am

Re: Traditional and Roth 401k combined account

Post by Poorman » Fri Feb 14, 2020 5:13 pm

GT99 wrote:
Fri Feb 14, 2020 12:39 pm
Poorman wrote:
Fri Feb 14, 2020 10:16 am
Why don't you just email your 401k provider. Or look under faq. Problem solved.
Why don't you read the whole post before responding? I clearly said I spoke with them. This was after going through FAQs and trying to contact them online and not getting an answer.
Call

le_sacre
Posts: 65
Joined: Tue Jan 05, 2016 2:20 am
Location: San Francisco, CA

Re: Traditional and Roth 401k combined account

Post by le_sacre » Fri Feb 14, 2020 8:59 pm

sailaway wrote:
Wed Jan 29, 2020 1:55 pm
In Fidelity's netbenefits, you can see "source" and select investments by source when you rebalance.
I want to ask a question but it seems like everything is so circumstance-dependent, I can't ask it intelligently without providing some detail. So here we go...

I have a small 401k from a former employer, also administered through Fidelity NetBenefits, but apparently my plan just doesn't permit different allocations among the different sources. It's split about 40% Roth, 60% tax deferred. This account is where I hold bonds--will soon be increasing my bond allocation in this account to 100%, since it's small compared to my taxable account.

My current employer has a 401k which similarly forces the same allocation regardless of Roth/tax-deferred. My income is on the low side currently compared to what I expect in coming years, not sure about during retirement... so I'm doing about 50/50 Roth/tax-deferred. This account is even smaller (we just started it end of last year, and there's no after-tax contributing allowed, just maxing out the 19.5K/yr). 25% bond allocation here.

Roth is 100% equities, but also on the small side. (For a long time in grad school/startup career, I wasn't allowed to or couldn't afford to contribute much.)

So taxable account is about 80% of my retirement savings currently. I hold California munis here, but mostly equities.

Overall AA is around 12% bonds and set to rise steadily over the next 10 years, when I hope to be able to start considering retirement, maybe, if I run into some luck. I'm 40.

My question is, since neither 401k permits separate allocations for Roth/tax-deferred sources, is it dumb to "waste" the Roth space on bonds even if that's the only way to get bonds in tax-deferred space? Or, I guess more generally, what am I overlooking? I've been meaning to do a full portfolio review post here, but this topic really caught my eye since I've had this 401k question on my mind.

lakpr
Posts: 3997
Joined: Fri Mar 18, 2011 9:59 am

Re: Traditional and Roth 401k combined account

Post by lakpr » Sat Feb 15, 2020 5:58 am

@le_sacre,

What is your current tax bracket? I ask because you said you are holding munis in your taxable account. Munis would be sensible only for 24% bracket or higher, as the after tax yield would be more from regular bond fund than munis, for 12% and 22% brackets.

Yes it would be a waste of Roth space for bonds. Since you have three separate sources, you could probably rebalance across them all. Since your current 401k balance is small, and apparently you desire a 90:10 allocation (if I am not wrong), you could use 100% bonds in current 401k, make previous 401k and taxable as 100% stocks, and build up gradually. If you have Target date funds in either 401k with low expense ratio, you could use them as a proxy to attain 90:10 allocation as well.

If you will start a separate thread may be we can help

retiredjg
Posts: 39380
Joined: Thu Jan 10, 2008 12:56 pm

Re: Traditional and Roth 401k combined account

Post by retiredjg » Sat Feb 15, 2020 8:21 am

le-sacre, I'll disagree. It appears you intend for your new 401k to be a combination of traditional and Roth as well. How can it be wasting Roth space if you have no other space to put the bonds?

You could roll your old 401k to Roth IRA (for the Roth part) and the new 401k (for the traditional part) and modify your ratios a little. If you are in a higher tax bracket, hold some of your bonds in taxable in the form of CA munis/national munis.

More information is needed - start a separate thread so that people's information does not get mixed up.

Topic Author
GT99
Posts: 315
Joined: Wed Jun 20, 2018 5:26 pm

Re: Traditional and Roth 401k combined account

Post by GT99 » Sat Feb 15, 2020 10:12 am

azanon wrote:
Fri Feb 14, 2020 1:46 pm
GT99 wrote:
Fri Feb 14, 2020 12:50 pm
azanon wrote:
Fri Feb 14, 2020 11:11 am


Sorry, I should have "closed the doors" so-to-speak on other tax advantaged options, so let me rephrase what I was saying: If you can afford to max all of your Roth options (e.g. Roth IRA AND Roth 401(k)), then that should always be a better deal than using a traditional for the 401K no matter what your tax bracket is (at least up until you're no longer qualified for a Roth IRA), and then being forced to save the spillover into a taxable account. Said another way, this is ONLY a dilemma for someone that can't afford to max 2 Roths.

I can afford to max both, so I don't and shouldn't have to make a judgment call. There's no judgment needed to conclude that any tax advantaged account will trounce a taxable one.

Maybe you're making the same fallacy with the OP? If the OP is maxing a Roth IRA,then a part Traditional, Part Roth 401k > all Traditional + taxable for spillover, no matter what.
OP here - not eligible for a Roth IRA due to income. But you need to check your math - this is pretty clearly not a true statement: "If you can afford to max all of your Roth options (e.g. Roth IRA AND Roth 401(k)), then that should always be a better deal than using a traditional for the 401K no matter what your tax bracket is"
Your quote of me is wrong - you didn't include the qualifier and cut it off mid-sentence.

Is math necessary to show that a Roth 401K, is a better deal than a taxable account? That's what you'll be forced to use if you have 19.5K of after-tax money you're ready, willing, and able to invest in a 401K.

Debates of Roth 401K vs. Traditional 401K are misleading. If the same amount of after tax money is going to be invested for retirement, the comparison is really Roth 401K vs. Traditional 401K plus a taxable account for the spillover due to the tax savings on the traditional. Another way of wording what I'm saying is, that 100% tax advantaged, is better than less than 100% tax advantaged.
Sorry, I certainly didn't mean to misquote, although I just compared your post that I quoted to the quote and they certainly seem identical.

Otherwise, I agree with lakpr's post below. It seems pretty clear to me that for anyone currently in the 32% or higher bracket that would expect to be in the 24% or lower bracket in retirement, that traditional is a no-brainer over Roth 401k (with some exception cases). I agree with you that tax brackets are more likely to go up than stay the same or go down, but odds of what is now the 24% bracket being above 32% seem low.

azanon
Posts: 2686
Joined: Mon Nov 07, 2011 10:34 am

Re: Traditional and Roth 401k combined account

Post by azanon » Sun Feb 16, 2020 2:11 pm

GT99 wrote:
Sat Feb 15, 2020 10:12 am
azanon wrote:
Fri Feb 14, 2020 1:46 pm
GT99 wrote:
Fri Feb 14, 2020 12:50 pm
azanon wrote:
Fri Feb 14, 2020 11:11 am


Sorry, I should have "closed the doors" so-to-speak on other tax advantaged options, so let me rephrase what I was saying: If you can afford to max all of your Roth options (e.g. Roth IRA AND Roth 401(k)), then that should always be a better deal than using a traditional for the 401K no matter what your tax bracket is (at least up until you're no longer qualified for a Roth IRA), and then being forced to save the spillover into a taxable account. Said another way, this is ONLY a dilemma for someone that can't afford to max 2 Roths.

I can afford to max both, so I don't and shouldn't have to make a judgment call. There's no judgment needed to conclude that any tax advantaged account will trounce a taxable one.

Maybe you're making the same fallacy with the OP? If the OP is maxing a Roth IRA,then a part Traditional, Part Roth 401k > all Traditional + taxable for spillover, no matter what.
OP here - not eligible for a Roth IRA due to income. But you need to check your math - this is pretty clearly not a true statement: "If you can afford to max all of your Roth options (e.g. Roth IRA AND Roth 401(k)), then that should always be a better deal than using a traditional for the 401K no matter what your tax bracket is"
Your quote of me is wrong - you didn't include the qualifier and cut it off mid-sentence.

Is math necessary to show that a Roth 401K, is a better deal than a taxable account? That's what you'll be forced to use if you have 19.5K of after-tax money you're ready, willing, and able to invest in a 401K.

Debates of Roth 401K vs. Traditional 401K are misleading. If the same amount of after tax money is going to be invested for retirement, the comparison is really Roth 401K vs. Traditional 401K plus a taxable account for the spillover due to the tax savings on the traditional. Another way of wording what I'm saying is, that 100% tax advantaged, is better than less than 100% tax advantaged.
Sorry, I certainly didn't mean to misquote, although I just compared your post that I quoted to the quote and they certainly seem identical.

Otherwise, I agree with lakpr's post below. It seems pretty clear to me that for anyone currently in the 32% or higher bracket that would expect to be in the 24% or lower bracket in retirement, that traditional is a no-brainer over Roth 401k (with some exception cases).
The bolded part is the part you left off "If you can afford to max all of your Roth options (e.g. Roth IRA AND Roth 401(k)), then that should always be a better deal than using a traditional for the 401K no matter what your tax bracket is (at least up until you're no longer qualified for a Roth IRA), and then being forced to save the spillover into a taxable account." Posting half of a sentence, is a misquote. Hope that helps.

Also, I never said I was in the 32% bracket. I'm in the 22% marginal bracket.

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