To Roth 401(k) or not to Roth 401(k)

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Triple digit golfer
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To Roth 401(k) or not to Roth 401(k)

Post by Triple digit golfer » Tue Dec 15, 2009 7:39 pm

That is the question.

I am on the low end of the 25% tax bracket. My company is going to be offering a Roth option for our 401(k) starting January 1st.

I participate with 5% of my salary in the 401(k) and I put in another 8.5% or so in my Roth IRA at Vanguard.

So...to Roth or not to Roth?

Right now, with a traditional 401(k) and a Roth IRA, I have some tax diversification. Whether taxes go up or down in the future won't matter much to me.

On the other hand, it's almost a given, or so it seems, that taxes will be rising in the future. So that's a plus for the Roth option.

What would you do and why?

livesoft
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Post by livesoft » Tue Dec 15, 2009 7:42 pm

Check with what your accountant says. What do they say?

Wabbit
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Re: To Roth 401(k) or not to Roth 401(k)

Post by Wabbit » Tue Dec 15, 2009 7:58 pm

Do you get an employer match with the 401(k)? Would that match still be given if you only contribute to the Roth option? That would be my primary consideration - I wouldn't want to lose any employer matching. As I understand, depending on the plan, the employer matching may only apply to funds in the traditional option of the 401(k).
Triple digit golfer wrote: Right now, with a traditional 401(k) and a Roth IRA, I have some tax diversification. Whether taxes go up or down in the future won't matter much to me.

On the other hand, it's almost a given, or so it seems, that taxes will be rising in the future. So that's a plus for the Roth option.
Or they could rise over the next two decades, and then come back down again before you actually retire. Or stay higher from now on, or lower. I don't know what will happen, but I think it is too much to say it is almost a given that tax rates will be rising in the future.

sscritic
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Re: To Roth 401(k) or not to Roth 401(k)

Post by sscritic » Tue Dec 15, 2009 8:18 pm

Wabbit wrote:Do you get an employer match with the 401(k)? Would that match still be given if you only contribute to the Roth option? That would be my primary consideration - I wouldn't want to lose any employer matching. As I understand, depending on the plan, the employer matching may only apply to funds in the traditional option of the 401(k).
As I understand the law, the match must go to a corresponding 401(k). My son has a Roth 401(k) at work for his contributions, and he has a traditional 401(k) for the matching contributions from his company. The match is dollar for dollar up to the limit.

Note that a dollar put into a Roth 401(k) costs more than a dollar put into the traditional 401(k) since the tax is due now for the Roth dollar. This also means that you can put away "more" into the Roth if you go to the max since these will all be after tax dollars.

bdpb
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Post by bdpb » Tue Dec 15, 2009 8:36 pm

Put enough pre-tax in your 401k until you drop to the 15% bracket.
Then Roth everything else, Roth IRA first then back to the 401k Roth.

DSInvestor
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Post by DSInvestor » Tue Dec 15, 2009 8:50 pm

Here's something from tfb on the subject:
http://thefinancebuff.com/2008/03/case- ... -401k.html

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Boglenaut
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Post by Boglenaut » Tue Dec 15, 2009 9:15 pm

That "Case Against the Roth 401K" was a very good paper, but would have been better titled "Case Against the Roth 401K (for Some People)". His arguments put a good case for me to put at least some in Roth 401k (as he acknowledges.)

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SpecialK22
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Post by SpecialK22 » Tue Dec 15, 2009 10:27 pm

bdpb wrote:Put enough pre-tax in your 401k until you drop to the 15% bracket.
Then Roth everything else, Roth IRA first then back to the 401k Roth.
Why the Roth IRA before the Roth 401(k)? I don't necessarily disagree with you, but I think there are also situations where contributing to a Roth 401(k) first may be the better option. For example, a 401(k) with low expense index funds which beat options for a Roth IRA such as at Vanguard.

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grabiner
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Re: To Roth 401(k) or not to Roth 401(k)

Post by grabiner » Tue Dec 15, 2009 10:29 pm

Triple digit golfer wrote:That is the question.

I am on the low end of the 25% tax bracket. My company is going to be offering a Roth option for our 401(k) starting January 1st.
What is your expected tax rate in retirement? If you are in the low end of the 25% bracket now, and you have a Roth IRA for part of your retirement income, you may retire in the 15% tax bracket. In that case, you should prefer a traditional 401(k) to a Roth, because the traditional 401(k) saves you 25% now to avoid paying 15% later.

If you can put enough in your 401(k) that you drop to the 15% bracket, then you should Roth everything else.
Wiki David Grabiner

bdpb
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Post by bdpb » Wed Dec 16, 2009 7:47 am

SpecialK22 wrote:
bdpb wrote:Put enough pre-tax in your 401k until you drop to the 15% bracket.
Then Roth everything else, Roth IRA first then back to the 401k Roth.
Why the Roth IRA before the Roth 401(k)? I don't necessarily disagree with you, but I think there are also situations where contributing to a Roth 401(k) first may be the better option. For example, a 401(k) with low expense index funds which beat options for a Roth IRA such as at Vanguard.
You are right, there are situations where Roth 401k first may be better.
In most cases (maybe 80% or better), an IRA gives better options than
a 401k. I just went with the higher probability.

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simplesimon
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Post by simplesimon » Wed Dec 16, 2009 9:14 am


markcoop
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Post by markcoop » Wed Dec 16, 2009 9:41 am

A big point for me, and TFB mentions it as well (Avoid triggering phase-outs), is losing out on money that gets phased out. I have 3 kids and my child tax credit is limited by the amount of taxable income. I was losing money today by not being able to take as much for the child tax credit when I contributed to a ROTH 401K last year.
Last edited by markcoop on Wed Dec 16, 2009 11:38 am, edited 1 time in total.
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Chuck
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Post by Chuck » Wed Dec 16, 2009 11:38 am

markcoop wrote:A big point for me, and TFB mentions it as well (Avoid triggering phase-outs), is losing out money that gets phased out. I have 3 kids and my child-care tax credit is limited by the amount of taxable income. I was losing money today by not being able to take as much for the child tax credit when I contributed to a ROTH 401K last year.
I did the same thing for a few months, but I changed it back as soon as I figured out what was going on. I'm in the 25% bracket, tax credit phaseout is 5%, and my NYS tax is almost 7%. So I went all-in on the regular 401k because I will be hard pressed to pay 37% tax in retirement. (If I do, that will be great news!) I think I may have also started the 5-year clock on my Roth, which might be and advantage to contributing now, but I'm not too clear on whether or not that is meaningful in a Roth 401k.

ianferrel
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Post by ianferrel » Wed Dec 16, 2009 7:16 pm

DSInvestor wrote:Here's something from tfb on the subject:
http://thefinancebuff.com/2008/03/case- ... -401k.html
Thanks so much for posting that. I read it, and on reflection realized that I've been putting too much into Roth 401(k).

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Triple digit golfer
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Post by Triple digit golfer » Wed Dec 16, 2009 7:45 pm

So contribute enough to the 401(k) so that I have less taxable income, and at the amount I'd contribute that will get me back into the 15% tax bracket, contribute any additional funds to the Roth.

I'm very close to that already.

Should I consider expenses in here, too? My 401(k) options are around 1%. Roth options are 0.2-0.3%.

mikep
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Post by mikep » Wed Dec 16, 2009 7:53 pm

Triple digit golfer wrote:So contribute enough to the 401(k) so that I have less taxable income, and at the amount I'd contribute that will get me back into the 15% tax bracket, contribute any additional funds to the Roth.

I'm very close to that already.

Should I consider expenses in here, too? My 401(k) options are around 1%. Roth options are 0.2-0.3%.
At that point, I'd fund Roth IRA to the max before doing Roth 401(k).

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Triple digit golfer
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Post by Triple digit golfer » Wed Dec 16, 2009 8:03 pm

mikep wrote:
Triple digit golfer wrote:So contribute enough to the 401(k) so that I have less taxable income, and at the amount I'd contribute that will get me back into the 15% tax bracket, contribute any additional funds to the Roth.

I'm very close to that already.

Should I consider expenses in here, too? My 401(k) options are around 1%. Roth options are 0.2-0.3%.
At that point, I'd fund Roth IRA to the max before doing Roth 401(k).
I think I'll keep doing what I'm doing. No one knows which will be better, a Roth or a traditional, so I might as well consider them equal and go with the one where I know my expenses are lower.

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Ducks
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Post by Ducks » Wed Dec 16, 2009 8:14 pm

It's hard for me to give you advice on what you should do; you can guess the best on what's coming in your future. I'll tell you what we decided to do, though:

We fund hub's 401k to the match, then both our Roth IRA's. My 401k is the "floater." I expect that we will be in the same or higher tax bracket in retirement. Because of that, I have decided to wait until the end of the year to make contributions. If we are over the Roth IRA limit, I will use my Traditional 401k to get us under that limit. But if we are not, I'll use the Roth option. This year, we are not so lucky to be near the cutoff, so I got to use the Roth. ;)

Do you have such flexibility each year to do something like that? Make a decision year-to-year, based on what's going on in your financial life?
Getting our Ducks in a row since 2008.

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Triple digit golfer
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Post by Triple digit golfer » Wed Dec 16, 2009 8:22 pm

Ducks wrote:Do you have such flexibility each year to do something like that? Make a decision year-to-year, based on what's going on in your financial life?
I suppose so, sure. I can change my 401(k) contributions quarterly.

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grabiner
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Post by grabiner » Wed Dec 16, 2009 8:27 pm

Triple digit golfer wrote:So contribute enough to the 401(k) so that I have less taxable income, and at the amount I'd contribute that will get me back into the 15% tax bracket, contribute any additional funds to the Roth.

I'm very close to that already.

Should I consider expenses in here, too? My 401(k) options are around 1%. Roth options are 0.2-0.3%.
At that rate, you should fund the Roth IRA in preference to either traditional or Roth 401(k) contributions beyond the amount your employer matches. If you stay with this employer for 20 years, you'll lose 15% of the 401(k) to higher expenses; that's not enough to negate the tax benefit over a taxable account, but it is more than any tax advantage of a traditional account over a Roth.
Wiki David Grabiner

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