Should I use a Roth 401k instead of a regular 401k?

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Topic Author
william.don
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Joined: Sat Apr 03, 2021 5:15 pm

Should I use a Roth 401k instead of a regular 401k?

Post by william.don »

Hello all,

You've all been helping my retirement plan, but I noticed something...
I have been contributing to a PRE-TAX 401k, but it looks like I have a ROTH 401k and AFTER-TAX 401k as options too.
This is all through Fidelity.

I am 29 and I make about 140k a year.
My retirement plan is currently set aside 15%
1. Get employer 401k match
2. Max Traditional IRA
3. Fund 401k more
4. If needed, fund HSA

My salary will continue to go up over time (maybe not a whole lot more though).
I have about $30,000 in my PRE-TAX 401k currently.
I can afford to pay taxes if I roll over to ROTH 401k.

Should I roll over to ROTH 401k and start using that instead of PRE-TAX 401k?
Anything to be aware of?
If I roll over, how do I pay taxes? Will TurboTax help me with that next year?

Thanks bogleheads :sharebeer

EDIT: It looks like there is no income limits on the ROTH either. And if my salary continues to go up, my taxes will be higher later in life, so it's better to pay the tax now and use a ROTH right?

EDIT2: I'm single, I have a full emergency fund.
Last edited by william.don on Mon Apr 05, 2021 10:19 pm, edited 1 time in total.
sailaway
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by sailaway »

What are your long term goals? ie, do you plan to retire early?

How will the change affect your taxes? Will it affect any credits?

I certainly don't see a reason to convert your existing balance at this time. Starting Roth contributions may be useful, depending on the bigger picture.
Topic Author
william.don
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by william.don »

sailaway wrote: Mon Apr 05, 2021 9:02 pm What are your long term goals? ie, do you plan to retire early?

How will the change affect your taxes? Will it affect any credits?

I certainly don't see a reason to convert your existing balance at this time. Starting Roth contributions may be useful, depending on the bigger picture.
The idea of retiring early has only come to my attention in the last couple of days so I definitely can't say for sure right now.

It'll affect taxes in that I will have to pay taxes on the existing 401k rollover.
Also given stock incentives and other benefits, my adjusted income can be quite a bit higher sometimes, which seems to eliminate tax benefits I might get. Though that might not happen much longer.

What kinds of things makes ROTH more attractive?
MrJedi
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by MrJedi »

It's not really about whether or not you'll have a higher salary later in life, it's whether or not you'll have a higher tax rate when you withdraw from it.

Major considerations for this would be if you will have any supplemental income during retirement (like a pension or a side business), or if it will be mostly your savings and social security. If it's the latter, that tends to err toward pretax since your income will be significantly lower in retirement, and thus lower tax rate.
sailaway
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by sailaway »

How will the change in taxes affect you personally. It sounds like you have high income years. This may mean that the tax deduction is saving you quite a bit right now. That deduction may be the difference to move you from one tax bracket to another. This is one piece of the information you need to determine whether Roth or traditional is better for you.

You also need to think about the future. If you are on an upward career path and expect to work until full retirement age, you can expect to accumulate much more than if you are hoping to retire at 45. An early retirement can leave lots of room to access retirement accounts over a very long period, limiting taxes along the way, for example.

For most people above median income, a traditional 401k is probably better. You may want to stick with that until you have a better understanding of the pros and cons and how they affect your individual situation.

For example, let's say you would save 24% of 19500 this year. That is nearly $5k extra to put towards your HSA or other savings vehicle. If, on the other hand, you have a number of deductions or dependents, and you are only paying 12% tax on that amount, Roth may be a better deal.
Grt2bOutdoors
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by Grt2bOutdoors »

william.don wrote: Mon Apr 05, 2021 9:07 pm
sailaway wrote: Mon Apr 05, 2021 9:02 pm What are your long term goals? ie, do you plan to retire early?

How will the change affect your taxes? Will it affect any credits?

I certainly don't see a reason to convert your existing balance at this time. Starting Roth contributions may be useful, depending on the bigger picture.
The idea of retiring early has only come to my attention in the last couple of days so I definitely can't say for sure right now.

It'll affect taxes in that I will have to pay taxes on the existing 401k rollover.
Also given stock incentives and other benefits, my adjusted income can be quite a bit higher sometimes, which seems to eliminate tax benefits I might get. Though that might not happen much longer.

What kinds of things makes ROTH more attractive?
1) You are in a low tax bracket now, you will retire into a higher tax bracket.
2) You will have a large estate and want to leave a sum of monies tax free to your heirs.
3) There is no required minimum distribution on Roth IRA or Roth 401k's for the owner of the account. You can leave that pot of monies alone to compound into the future or until you decide to take a withdrawal from there, not because you are required to like you will be with a pre-tax 401K or Traditional IRA account.

Why you would not want to fund a Roth 401k - you are in a high tax bracket today and will be retiring into a lower tax bracket.
2) You can stuff more dollars into a pre-tax account than you could if you had to with an after tax amount per paycheck.
3) You will be retiring early and can do conversions into a ROTH account over many years to reduce your overall taxable balance (paying for the taxes owed on conversion with monies you have saved in a taxable account).
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Funancials
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by Funancials »

I would keep the $30k where it is and split future contributions between Traditional and Roth. For example, 10% to Traditional and 5% to Roth (or whatever distribution makes sense to you).

Your employer’s match will go towards Traditional.
lazynovice
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by lazynovice »

william.don wrote: Mon Apr 05, 2021 8:57 pm Hello all,

You've all been helping my retirement plan, but I noticed something...
I have been contributing to a PRE-TAX 401k, but it looks like I have a ROTH 401k and AFTER-TAX 401k as options too.
This is all through Fidelity.

I am 29 and I make about 140k a year.
My retirement plan is currently set aside 15%
1. Get employer 401k match
2. Max Traditional IRA
3. Fund 401k more
4. If needed, fund HSA

My salary will continue to go up over time (maybe not a whole lot more though).
I have about $30,000 in my PRE-TAX 401k currently.
I can afford to pay taxes if I roll over to ROTH 401k.

Should I roll over to ROTH 401k and start using that instead of PRE-TAX 401k?
Anything to be aware of?
If I roll over, how do I pay taxes? Will TurboTax help me with that next year?

Thanks bogleheads :sharebeer

EDIT: It looks like there is no income limits on the ROTH either. And if my salary continues to go up, my taxes will be higher later in life, so it's better to pay the tax now and use a ROTH right?
Why are you contributing to the 401(k) and the traditional IRA? Are there bad choices in the plan? If not, why not do a back door Roth instead?

Assuming you are single, make 140k, take the standard deduction and pay 3k in before tax health insurance: 140k- 12.5k- 3k= 124.5k, you are in the 24% bracket. It rarely makes sense to do Roth in the 24% bracket because very few retirees will be in the 24% bracket. The world can change of course.
I definitely would not convert the current 401(k) as that will be taxed at 24% and possibly part of it at 32% if it is at all large.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
DSInvestor
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by DSInvestor »

Are you single or married filing jointly? If single, your high income and coverage by employer sponsored retirement plan will make you ineligible to take the Traditional IRA deduction.

See IRS page on IRA deduction limits:
https://www.irs.gov/retirement-plans/ir ... ion-limits

Full Roth IRA contributions are permitted if MAGI for Roth IRA purposes is under 125K for a single filer. I would keep maxing out Traditional 401k contributions and HSA contributions which reduce your AGI and MAGI. If you have made Traditional IRA contributions for 2020 and 2021 tax year, you have time to recharacterize those to 2020 and 2021 Roth IRA contributions. If you cannot deduct your Traditional IRA contributions, it is better to switch to Roth IRA contributions instead.

If you do this you get your Roth space without giving up any tax break.
Last edited by DSInvestor on Mon Apr 05, 2021 10:12 pm, edited 1 time in total.
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miket29
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by miket29 »

My retirement plan is currently set aside 15%
I would suggest bumping this up to 20% minimum and more if you can. Also you don't mention whether you have an emergency fund set aside. Depending on your risk tolerance you have, 3-6 months expenses should be in a relatively safe investment. As I got older and had a mortgage to feed I became more risk averse and held a year's worth so that I could ride out a job loss until I was working again.
Topic Author
william.don
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by william.don »

miket29 wrote: Mon Apr 05, 2021 10:06 pm
My retirement plan is currently set aside 15%
I would suggest bumping this up to 20% minimum and more if you can. Also you don't mention whether you have an emergency fund set aside.
I have too much emergency fund right now. My money is doing nothing! That's next on my list :happy
lazynovice wrote: Mon Apr 05, 2021 9:48 pm Why are you contributing to the 401(k) and the traditional IRA? Are there bad choices in the plan? If not, why not do a back door Roth instead?
Those are the only options (afaik) for reaching 15% retirement fund. From what I've read, Roth IRA isn't an option due to my income and adjusted income.
I need to look up back door roth now! :confused
sailaway
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by sailaway »

william.don wrote: Mon Apr 05, 2021 10:19 pm
miket29 wrote: Mon Apr 05, 2021 10:06 pm
My retirement plan is currently set aside 15%
I would suggest bumping this up to 20% minimum and more if you can. Also you don't mention whether you have an emergency fund set aside.
I have too much emergency fund right now. My money is doing nothing! That's next on my list :happy
lazynovice wrote: Mon Apr 05, 2021 9:48 pm Why are you contributing to the 401(k) and the traditional IRA? Are there bad choices in the plan? If not, why not do a back door Roth instead?
Those are the only options (afaik) for reaching 15% retirement fund. From what I've read, Roth IRA isn't an option due to my income and adjusted income.
I need to look up back door roth now! :confused
How many non deductible IRA contributions did you make? Those you might want to convert, depending on growth.
Topic Author
william.don
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by william.don »

sailaway wrote: Mon Apr 05, 2021 10:21 pm How many non deductible IRA contributions did you make? Those you might want to convert, depending on growth.
I contributed $6k for 2020 and $6k for 2021. I was not able to deduct these from taxes this year.
DSInvestor
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by DSInvestor »

william.don wrote: Mon Apr 05, 2021 10:42 pm
sailaway wrote: Mon Apr 05, 2021 10:21 pm How many non deductible IRA contributions did you make? Those you might want to convert, depending on growth.
I contributed $6k for 2020 and $6k for 2021. I was not able to deduct these from taxes this year.
Recharacterize those Traditional IRA contributions to Roth IRA contributions if your income allows for direct Roth IRA contributions.
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lazynovice
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by lazynovice »

william.don wrote: Mon Apr 05, 2021 10:19 pm
miket29 wrote: Mon Apr 05, 2021 10:06 pm
My retirement plan is currently set aside 15%
I would suggest bumping this up to 20% minimum and more if you can. Also you don't mention whether you have an emergency fund set aside.
I have too much emergency fund right now. My money is doing nothing! That's next on my list :happy
lazynovice wrote: Mon Apr 05, 2021 9:48 pm Why are you contributing to the 401(k) and the traditional IRA? Are there bad choices in the plan? If not, why not do a back door Roth instead?
Those are the only options (afaik) for reaching 15% retirement fund. From what I've read, Roth IRA isn't an option due to my income and adjusted income.
I need to look up back door roth now! :confused
Some poor phrasing on my part. Why are you inserting the IRA step here between getting the match and maxing the 401(k)? You can get to 15% by maxing the 401(k)? Why go the traditional IRA route?

Yes, look up the back door Roth bit see also the posts about recharacterization and/or converting those. If you convert, you will have done the Back Door.
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FiveK
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by FiveK »

See Investment Order and Prioritizing investments for some suggestions that might have you tweak your current plan. E.g., fully fund your HSA if eligible.

See Traditional versus Roth - Bogleheads for more on that question.
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Duckie
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by Duckie »

william.don wrote: Mon Apr 05, 2021 8:57 pm I have been contributing to a PRE-TAX 401k, but it looks like I have a ROTH 401k and AFTER-TAX 401k as options too.
Does your after-tax 401k option allow for in-plan rollovers to your Roth 401k or in-service rollovers to your Roth IRA? Whether you choose to contribute pre-tax or Roth as your $19.5K elective deferral, you could contribute an extra $38.5K to your 401k using the after-tax option.
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by willthrill81 »

I think that very few individuals will be well served with a Roth 401k. Only those with substantial non-portfolio income (e.g. pension, real estate) or those likely to have a genuine RMD problem, which very few do, should even consider it, based on what I've seen.
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william.don
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by william.don »

DSInvestor wrote: Mon Apr 05, 2021 11:08 pm Recharacterize those Traditional IRA contributions to Roth IRA contributions if your income allows for direct Roth IRA contributions.
I'm new to all this. What is the benefit of this?
lazynovice wrote: Tue Apr 06, 2021 12:29 am Some poor phrasing on my part. Why are you inserting the IRA step here between getting the match and maxing the 401(k)? You can get to 15% by maxing the 401(k)? Why go the traditional IRA route?
I've seen guides online suggest that specific ordering. But as of now, it looks like I'll be maxing out both anyway :happy
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grabiner
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by grabiner »

william.don wrote: Mon Apr 05, 2021 8:57 pm I am 29 and I make about 140k a year.
My retirement plan is currently set aside 15%
1. Get employer 401k match
2. Max Traditional IRA
3. Fund 401k more
4. If needed, fund HSA
Funding the HSA (if eligible) should be preferred to unmatched contributions to either traditional or Roth accounts. Traditional contributions give a deduction when made but are taxed on withdrawal. Roth contributions are not deductible when made but are tax-free on withdrawal. The HSA has the advantage of both. If you don't need it for current medical expenses, it can grow tax-free for medical expenses later in life.

Also, at your income level, you can't deduct contributions to a traditional IRA, and a non-deductible IRA is worse than either traditional or Roth, as you get no tax deduction and pay tax on gains. If you are under the income limit to contribute to a Roth IRA, you can do that. Otherwise, contribute to a traditional IRA and then immediately convert to Roth; this is known as the "backdoor Roth IRA".

Since you have already made non-deductible contributions to the traditional IRA, you should convert that to Roth. You will pay tax on the gains, but you will get tax-free growth in the future, and you will lose a larger fraction of the account to taxes if you don't convert now. In addition, you have to get rid of the traditional IRA before you can use the backdoor Roth.
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by DSInvestor »

william.don wrote: Tue Apr 06, 2021 7:30 pm
DSInvestor wrote: Mon Apr 05, 2021 11:08 pm Recharacterize those Traditional IRA contributions to Roth IRA contributions if your income allows for direct Roth IRA contributions.
I'm new to all this. What is the benefit of this?
Edit: Before considering recharacterizing your Trad IRA contributions to Roth IRA contributions, make sure you are eligible for Roth IRA contributions as Roth IRA may not be permitted if income is too high. (Thanks Grabiner).

Recharacterization of the Traditional IRA contribution to Roth IRA contribution will make it as though you had contributed to Roth IRA all along. Once in Roth IRA, the investments can grow and be withdrawn tax free. Say the $6000 investment grows to $1 million. You can withdraw $1 million tax free.

If you keep your Traditional IRA contributions as is, and your contributions are deemed non-deductible (high income and covered by employer plan), you will have IRA basis. IRA basis needs to be tracked and it will reduce the taxable amount on withdrawal. The money will grow but you will be taxed upon withdrawal. In the example where the 6K grows to $1 million, you withdraw $1 million and $6000 is nontaxable (IRA basis) and $994,000 will be taxable.

In both cases, you received no tax deduction for the IRA contribution. Which sounds better to you?
1) No deduction up front and tax free withdrawal for Roth IRA or
2) No deduction up from and taxable withdrawal to keep the money in the Traditional IRA.

Given your level of income and coverage by employer plan, I would recommend maxing out Traditional 401k which allows deduction not matter how high your income. Get the Roth space by using Roth IRA or backdoor into Roth IRA if necessary.

Take a look at fairmark's page on Roth retirement accounts. They have a great section on recharacterization.
https://fairmark.com/retirement/roth-accounts/
Last edited by DSInvestor on Wed Apr 07, 2021 12:13 am, edited 1 time in total.
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drumboy256
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by drumboy256 »

william.don wrote: Mon Apr 05, 2021 8:57 pm Hello all,

You've all been helping my retirement plan, but I noticed something...
I have been contributing to a PRE-TAX 401k, but it looks like I have a ROTH 401k and AFTER-TAX 401k as options too.
This is all through Fidelity.

I am 29 and I make about 140k a year.
My retirement plan is currently set aside 15%
1. Get employer 401k match
2. Max Traditional IRA
3. Fund 401k more
4. If needed, fund HSA

My salary will continue to go up over time (maybe not a whole lot more though).
I have about $30,000 in my PRE-TAX 401k currently.
I can afford to pay taxes if I roll over to ROTH 401k.

Should I roll over to ROTH 401k and start using that instead of PRE-TAX 401k?
Anything to be aware of?
If I roll over, how do I pay taxes? Will TurboTax help me with that next year?

Thanks bogleheads :sharebeer

EDIT: It looks like there is no income limits on the ROTH either. And if my salary continues to go up, my taxes will be higher later in life, so it's better to pay the tax now and use a ROTH right?

EDIT2: I'm single, I have a full emergency fund.
Easy....

10% to tIRA
5%+ to 401k Roth
2-5% to HSA
Everything else to taxable or emergency fund.
Promise is one thing. Fulfilling that promise is quite another. - Sir Alex Ferguson
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by grabiner »

DSInvestor wrote: Tue Apr 06, 2021 7:42 pm
william.don wrote: Tue Apr 06, 2021 7:30 pm
DSInvestor wrote: Mon Apr 05, 2021 11:08 pm Recharacterize those Traditional IRA contributions to Roth IRA contributions if your income allows for direct Roth IRA contributions.
I'm new to all this. What is the benefit of this?
Recharacterization of the Traditional IRA contribution to Roth IRA contribution will make it as though you had contributed to Roth IRA all along. Once in Roth IRA, the investments can grow and be withdrawn tax free. Say the $6000 investment grows to $1 million. You can withdraw $1 million tax free.
But you can only do this if you are under the Roth IRA contribution limit (for both 2020 and 2021). If you are over the limit, you need to convert instead, paying tax on any gains.

With a salary of $140K, if you max out the 401(k), your income is $121K, which is under the limit. In 2020, since you didn't max out, you may be in the phase-out range and only be allowed to recharacterize part of the contribution.
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Re: Should I use a Roth 401k instead of a regular 401k?

Post by placeholder »

You'd be better not starting separate threads for every aspect of your investing.
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