Traditional vs Roth vs 401k

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Ody
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Traditional vs Roth vs 401k

Post by Ody » Sun Feb 28, 2010 4:36 pm

I'm in my late 20's and I have an inclination toward risk, which is to say that I'm not risk averse in so far as investments are concerned.

Typically, I contribute the maximum pretax amount allowable by my employer sponsored plan (read 401k). This is usually 15% of my income. The last few years I've also be throwing some extra money into a traditional IRA.

Among other things, my reasoning has been to lower my taxable income, which has been ranging in the low to mid 40's for the last few years; thus, 401k and traditional IRA. My ultimate goals are not too dissimilar from many of you.

1 At this point in my financial and physical life, would it be more appropriate to utilize roth IRAs over traditional ones?

2 Does it make sense to only contribute the maximum dollar amount to my 401k to obtain employer matching contributions and use the excess income in a traditional IRA?

Thanks
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Post by simplesimon » Sun Feb 28, 2010 4:42 pm


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Post by Ody » Sun Feb 28, 2010 4:44 pm

Thanks.

I tried searching for this topic because it has been undoubtedly raised numerous times but couldn't find it. I failed. :wink:
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Post by retiredjg » Sun Feb 28, 2010 5:36 pm

In addition to the above, the general rule of thumb for investing priority is:

1. 401k/403b up to the company match
2. Max out Roth IRA (not traditional)
3. Max out 401k/403b
4. Taxable Investing

Of course, opinions vary. Some believe you should switch #2 and #3.

I don't know of anyone around here who suggests traditional IRA if you are eligible for Roth IRA. Having a Roth IRA in addition to a 401k gives you "tax-diversification".

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Post by natureexplorer » Sun Feb 28, 2010 6:18 pm

retiredjg wrote:1. 401k/403b up to the company match
2. Max out Roth IRA (not traditional)
3. Max out 401k/403b
4. Taxable Investing
...
I don't know of anyone around here who suggests traditional IRA if you are eligible for Roth IRA.
Why not a traditional IRA and take home the immediate tax benefit?

To the OP, are you actually eligible though to contribute to a deductible traditional IRA?

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Post by FredPeterson » Sun Feb 28, 2010 6:27 pm

If you can afford Roth, you do Roth.

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Post by retiredjg » Sun Feb 28, 2010 6:29 pm

natureexplorer wrote:Why not a traditional IRA and take home the immediate tax benefit?
I was not around when that list was formulated, so I'm speculating.

First, I'd say to get tax-diversification. In the long run, it is probably good to have buckets of money that will be treated differently by the IRS. In that way, you are likely to have something that gets sweet tax treatment. If you just go one way or the other, you could get all the good stuff, or none of it.

Second, the people who CAN contribute to Roth IRA are in the lower tax brackets and more likely to go up in tax bracket that down, at least before retirement. This order would get as much money as possible into Roth (already taxed) while paying the less in taxes (or at least not more in taxes).

Third, whatever money you put into Roth IRA is yours. And it will grow tax free and the income grows tax free. And it is all still yours when you take it out (under current law).

Whatever you put into traditional IRA is partly yours, partly the government's - since you have not yet paid taxes on it. It does grow tax free till you take it out. But when withdrawal time comes part is not even yours, so you've lost some of the benefit of compounding.

Again, I'm speculating. Could be right. Could be wrong. But it makes good sense to me.

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Post by simplesimon » Sun Feb 28, 2010 6:37 pm

retiredjg wrote:
natureexplorer wrote:Why not a traditional IRA and take home the immediate tax benefit?
I was not around when that list was formulated, so I'm speculating.

First, I'd say to get tax-diversification. In the long run, it is probably good to have buckets of money that will be treated differently by the IRS. In that way, you are likely to have something that gets sweet tax treatment. If you just go one way or the other, you could get all the good stuff, or none of it.

Second, the people who CAN contribute to Roth IRA are in the lower tax brackets and more likely to go up in tax bracket that down, at least before retirement. This order would get as much money as possible into Roth (already taxed) while paying the less in taxes (or at least not more in taxes).

Third, whatever money you put into Roth IRA is yours. And it will grow tax free and the income grows tax free. And it is all still yours when you take it out (under current law).

Whatever you put into traditional IRA is partly yours, partly the government's - since you have not yet paid taxes on it. It does grow tax free till you take it out. But when withdrawal time comes part is not even yours, so you've lost some of the benefit of compounding.

Again, I'm speculating. Could be right. Could be wrong. But it makes good sense to me.
If I recall correctly, if you participate in a 401k, you are not eligible for a traditional tax-deductible IRA.

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Post by retiredjg » Sun Feb 28, 2010 7:09 pm

simplesimon wrote:
retiredjg wrote:
natureexplorer wrote:Why not a traditional IRA and take home the immediate tax benefit?
I was not around when that list was formulated, so I'm speculating.

First, I'd say to get tax-diversification. In the long run, it is probably good to have buckets of money that will be treated differently by the IRS. In that way, you are likely to have something that gets sweet tax treatment. If you just go one way or the other, you could get all the good stuff, or none of it.

Second, the people who CAN contribute to Roth IRA are in the lower tax brackets and more likely to go up in tax bracket that down, at least before retirement. This order would get as much money as possible into Roth (already taxed) while paying the less in taxes (or at least not more in taxes).

Third, whatever money you put into Roth IRA is yours. And it will grow tax free and the income grows tax free. And it is all still yours when you take it out (under current law).

Whatever you put into traditional IRA is partly yours, partly the government's - since you have not yet paid taxes on it. It does grow tax free till you take it out. But when withdrawal time comes part is not even yours, so you've lost some of the benefit of compounding.

Again, I'm speculating. Could be right. Could be wrong. But it makes good sense to me.
If I recall correctly, if you participate in a 401k, you are not eligible for a traditional tax-deductible IRA.
Well, I could have it wrong because it is very confusing. But my understanding is that anyone with earned income who is less than 70.5 years can contribute to a traditional IRA. If you also contribute to to a 401k, the deductibility of your traditional IRA depends on your income. Lower incomes can deduct, higher incomes can't.

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Post by MachAF » Sun Feb 28, 2010 7:36 pm

simplesimon wrote: If I recall correctly, if you participate in a 401k, you are not eligible for a traditional tax-deductible IRA.
I've never heard this before. As far as I am aware you can contribute to a Traditional IRA, whether you can deduct it is based on your adjusted gross income. For 2010 56k or less if you're single 89k if married. If you have a 401k these income limit do not apply, you can deduct it no matter what your income is.

Retirement is too confusing. Government always needs their share....VAT please. VAT makes too much sense I guess.
Last edited by MachAF on Sun Feb 28, 2010 7:42 pm, edited 2 times in total.

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Post by simplesimon » Sun Feb 28, 2010 7:38 pm

MachAF wrote:
simplesimon wrote: If I recall correctly, if you participate in a 401k, you are not eligible for a traditional tax-deductible IRA.
I've never heard this before. As far as I am aware you can contribute to a Traditional IRA, whether you can deduct it is based on your adjusted gross income. For 2010 56k or less if you're single 89k if married.
I stand corrected, thank you and retiredjg.

http://www.smartmoney.com/personal-fina ... /#eligible

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Post by retiredjg » Sun Feb 28, 2010 7:55 pm

It's a common misconception and the eligibility only applies to a limited group of people (people with a 401, but with an income less that XXX). Edit. I think that is why many people think that since they can't contribute, that the same is true for everyone.

I'm saving your link as it is much simpler than the ones I was finding. Thanks!
Last edited by retiredjg on Sun Feb 28, 2010 9:58 pm, edited 1 time in total.

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Post by Ody » Sun Feb 28, 2010 8:05 pm

Employee sponsored plans (read 401k and 403b) are completely separate from either IRA choice (traditional or roth). There are no rules stating you can't have any combination of IRA's or employee sponsored plans. The only rules that apply to any of the accounts have to do with yearly deposit amounts and, concerning IRA's, age restrictions.

Here's the background behind my original thought.

I want to lower my taxable income (i.e. increase my refund) as much as possible; I file single status every year. Thus, I contribute the maximum pretax dollar amount I can from my salary, which hasn't reached the yearly max yet (yet! I'm trying :) ) and throw extra money into a traditional IRA. I don't really think I'll be in a hire tax bracket when I retire.

Based on that assumption, my distributions should be taxed at a lower rate and therefore paying a hire tax now doesn't make sense.

Is my assumption wrong? I'm trying to wrap my head around tax diversification.
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Post by natureexplorer » Sun Feb 28, 2010 8:10 pm

Ody wrote:Employee sponsored plans (read 401k and 403b) are completely separate from either IRA choice (traditional or roth). There are no rules stating you can't have any combination of IRA's or employee sponsored plans. The only rules that apply to any of the accounts have to do with yearly deposit amounts and, concerning IRA's, age restrictions.

Here's the background behind my original thought.

I want to lower my taxable income (i.e. increase my refund) as much as possible; I file single status every year. Thus, I contribute the maximum pretax dollar amount I can from my salary, which hasn't reached the yearly max yet (yet! I'm trying :) ) and throw extra money into a traditional IRA. I don't really think I'll be in a hire tax bracket when I retire.

Based on that assumption, my distributions should be taxed at a lower rate and therefore paying a hire tax now doesn't make sense.

Is my assumption wrong? I'm trying to wrap my head around tax diversification.
I am wondering about the long term capitla gains tax rate. If you had an investment that was heavily dominated by capital gains, it could be you would have been better off investing in a taxable account. For example if the long term capital gains tax rate is 15%, but your income tax is 25%. Just a thought.

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Post by natureexplorer » Sun Feb 28, 2010 8:10 pm

retiredjg, thanks for your comment. I personally don't quite understand it and I haven't researched it since I am not eligible for a deductible traditonal IRA contribution.

Regarding your second point. I don't quite see, why the higher tax bracket later but still prior to retirement would matter. The only tax rate that matters will be the one during retirement, and that could be lower for many people. I for example, expect to be able to live from a taxable account for some, hence I will not have to withdraw from retirement account for some time. During those years of low tax rates I could convert traditional IRAs to Roth IRA. It's possible that some earned money will never get taxed.

I do know that Roth IRA have many advantages, for example it is easier to withdraw from them before 59.5 and inheritance tax aspects seem to be favorable as well. I also see that long terms capital gains tax rates might be lower than the general income tax.

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Post by e5116 » Sun Feb 28, 2010 8:56 pm

I am wondering about the long term capitla gains tax rate. If you had an investment that was heavily dominated by capital gains, it could be you would have been better off investing in a taxable account. For example if the long term capital gains tax rate is 15%, but your income tax is 25%. Just a thought.
Is that logic correct? Maybe I'm misunderstanding it, but that doesn't seem right to me. Let's pose a hypothetical. You make $1,000 on a paycheck and deduct 10% dedicated to a 401k and you're in the 25% tax bracket. So, you reduce your income to $900 and owe $225 in taxes. The $100 in your 401k you owe simply 25% in taxes when you withdraw if in the same bracket. Let's assume 20% total capital gain on all assets with no dividends (keeping it simple), so your $100 grows to $120. You owe 25% of $120 or $30, so you withdraw the amount as $90. The $900 is reduced by $225 after taxes to $675, and grows 20% or $135 to $810. You owe 15% long term cap gains tax on the $135 gain, or $20.25.

Thus, total in retirement after taxes you have ($810-$20.25)=$789.75+$90 = $879.75 if you contributed to the 401k.

If you left it all as taxable, your $1000 in income would be reduced to $750. You gain 20% of the $750 or $150. Thus, you owe 15% of $150 in taxes, or $22.80. So, you end up with $750+$150-$22.80=$877.20.

The difference is small in this example since it's a small amount put in the 401k, but obviously with larger numbers, dividends, etc. the 401k is more advantageous. As opposed to paying 25% off the bat of all income, and then 15% of capital gains, using the 401k, you avoided paying 25% of all income off the bat of the $100 and delayed that; you didn't have to pay the 15% at all, but simply the 25% at the end.

Is that not right? Perhaps I misunderstood what you were saying, but just want to make sure I'm thinking about it properly. Or I may have made a calculation mistake...

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Post by natureexplorer » Sun Feb 28, 2010 9:32 pm

e5116, I am not sure. What happens if you increase the total capital gain to 100%?

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Post by retiredjg » Sun Feb 28, 2010 10:02 pm

Ody wrote:Based on that assumption, my distributions should be taxed at a lower rate and therefore paying a hire tax now doesn't make sense.

Is my assumption wrong? I'm trying to wrap my head around tax diversification.
See if this helps. It addresses what you are saying, among other things.

http://money.cnn.com/2004/03/25/retirem ... /index.htm

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Post by celia » Mon Mar 01, 2010 4:47 am

I don't think anyone, especially the Original Poster, should assume (s)he will be in a lower tax bracket when they are 70 1/2. The OP is young, and as (s)he gains experience, his income should rise. Along with this, his savings, 401k's, IRAs will grow.

IRAs have only been around for 30 years. Those who retired more than 10 years ago didn't have to worry about their traditional IRA balances being too large ("too large" in the sense that the required minimum distributions in tax-deferred IRAs pushed them up to a higher tax bracket than they expected). However, I've heard that this is affecting more people as time goes on since those retiring now have had more time to put money in and the original contribution has had more time to grow.

Ody,
I used to think like you and defer as much income as we could to defer the taxes. Now, I am still working, but getting everything in place to retire within a year. And I've been converting traditional IRAs/401Ks to Roths for a few years already. My rationale is partly that our pensions and Social Security will cover most of our needs and be taxable, while the Required Minimum Distributions could push us into the next tax bracket. So we are eating the taxes now and encouraging our kids to contribute to Roths while their tax rates are so low.

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Post by Ody » Mon Mar 01, 2010 8:39 am

Thanks for all the input!

So if my understanding is correct, utilizing both IRA types is a hedge against possible future tax where as relying solely on either is kind of like rolling the dice (with respect to taxes at retirement). So essentially, in the case of the former, you're controlling the controllables.


As for my second question way up top: would it be prudent to max out 401k deposits, in so much as my income allows, or focus on the deposit requirement that achieves company matches (arbitrarily, lets say 6% or what ever the case may be) then focus on traditional/roth deposits?

Thanks
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Post by JW-Retired » Mon Mar 01, 2010 9:12 am

Ody wrote:1 At this point in my financial and physical life, would it be more appropriate to utilize roth IRAs over traditional ones?

2 Does it make sense to only contribute the maximum dollar amount to my 401k to obtain employer matching contributions and use the excess income in a traditional IRA?
RE 1: Maybe but we don't know enough. What is your marginal tax bracket? With a "mid 40s" taxable income it's 25% if you are single and 15% if married filing joint, plus any state income tax could add as much as another 10%. What's the real number? At 15% I think going Roth is a real no-brainer. At 25% or more not so clear. For the same after-tax income saved, the math says if your effective tax bracket on the money you take out in retirement is the same as your marginal bracket when you put it in, you will get the same after-tax retirement income on a TIRA as a Roth. So to know for sure what to do you have to guess your tax bracket 40 years from now. Pretty impossible to know so most think it would be good to have some of both IRA types. It's just a guess but if it was me for that diversification I would choose Roth as long as my bracket was 25% or less. Especially if you think you might be in a higher bracket when you get older.

RE 2: We really need to know the expenses of your 401k but unless they are simple dreadful the usual is...
1. 401k/403b up to the company match
2. Max out IRA (whichever type works best for you)
3. Max out 401k/403b
4. Taxable Investing

JW

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Post by retiredjg » Mon Mar 01, 2010 9:41 am

natureexplorer wrote:Regarding your second point. I don't quite see, why the higher tax bracket later but still prior to retirement would matter. The only tax rate that matters will be the one during retirement, and that could be lower for many people. I for example, expect to be able to live from a taxable account for some, hence I will not have to withdraw from retirement account for some time. During those years of low tax rates I could convert traditional IRAs to Roth IRA. It's possible that some earned money will never get taxed.
What you are saying is correct. I'm just not sure it applies to many people as it would be only the folks in the 15% and 25% brackets who know they will be making a lot of money at one point and will drop into a very low tax bracket for a few years after retirement. And of those folks, it would only be the ones who are willing to bet that Roth conversion exists when they get to retirement. I hope that made sense.

What you are saying certainly does apply to all those folks in the 28%, 33% and 35% brackets who are contemplating Roth conversion. Not a good idea for just the reasons you mentioned.

I was just trying to say, and I don't think I said it very well, is that the more money you can get into Roth while in the lower brackets like 15% and 25%, the better. The usual order (401 up to max, then Roth IRA) achieves that.

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Post by Ody » Mon Mar 01, 2010 9:42 am

JW Nearly Retired wrote:RE 1: Maybe but we don't know enough. What is your marginal tax bracket?

RE 2: We really need to know the expenses of your 401k but unless they are simple dreadful the usual is...
1. 401k/403b up to the company match
2. Max out IRA (whichever type works best for you)
3. Max out 401k/403b
4. Taxable Investing

JW
I live in FL so there are no state taxes, thankfully!
Last edited by Ody on Mon Mar 01, 2010 12:49 pm, edited 1 time in total.
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Post by Doc » Mon Mar 01, 2010 10:12 am

celia wrote:I don't think anyone, especially the Original Poster, should assume (s)he will be in a lower tax bracket when they are 70 1/2.
I conducted a poll on this subject a while back. As a general statement younger investors tended to think their tax rate would be higher in retirement and older investors thought they would be lower.

There were basically five categories in the poll young/higher, young/lower, older/higher, older/lower and don't know/don't care. Other than what I noted above there were a lot of votes in each category. Taxes are a very individual thing and people should be aware of the process involved in the ROTH/Traditional decision so that they can apply their own situation to the problem. One size does not fit all.
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Post by icedtea » Sat Mar 13, 2010 12:52 pm

I was just trying to say, and I don't think I said it very well, is that the more money you can get into Roth while in the lower brackets like 15% and 25%, the better. The usual order (401 up to max, then Roth IRA) achieves that.
Hi,

I started a similar thread about roth 401ks and traditional 401ks the other day. It seemed evident that contributing to a roth 401k when at the 15% tax bracket was advantageous, but that it was not advised at 25%. The thread can be found here: http://www.bogleheads.org/forum/viewtopic.php?t=51738

I've read lots of other threads about the subject on this forum, and well, I'm still not sure I'm assessing my personal situation accurately.

I've already been contributing to my Roth 401k this year. But after running the math, I now estimate my 2010 taxable income will be in the bottom of the 25% bracket. (Had I just maxed my tradtl 401k, I might end up at the top of the 15% but it's too late for that.)

Though some of the advice I received in my thread was quite convincing, it doesn't seem 100% clear to me that the Roth 401k is a bad idea if you're in the 25% bracket, given all the variables (taxable income at retirement, tax levels, amount of taxable and pretax investments to live off of in retirement, etc.)

I'm 28. I expect to be earning more in my 60s, and I'll have a sizeable pool of money in my tradtl 401k and taxable investments. But, on the other hand, I don't expect a pension, and I'm currently living in a state that has high taxes.

Is there more I should be considering when making a decision between Roth 401k and tradtl 401k? I already max my Roth IRA every year so maybe that's enough for hedging my bets.

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Post by livesoft » Sat Mar 13, 2010 1:04 pm

Why do you believe you will be earning more in your 60s? I won't even be working in my 60s.

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Post by icedtea » Sat Mar 13, 2010 1:09 pm

livesoft wrote:Why do you believe you will be earning more in your 60s? I won't even be working in my 60s.
I expect to work through my mid to late 60s. Maybe I'm being overly optimistic that I'll want to continue working longer than I might need to, but I'm hoping I'll still like my career. Haha. Assuming the above is true, I'll definitely be earning a much higher salary than I do now. Most likely double or more.

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Post by livesoft » Sat Mar 13, 2010 1:15 pm

Even though your salary will be double or triple, inflation will mean you will have a similar buying power. Tax brackets will creep as well (and so will exemptions & standard deductions) so that your tax rate may not be much different.

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Post by icedtea » Sat Mar 13, 2010 1:23 pm

livesoft wrote:Even though your salary will be double or triple, inflation will mean you will have a similar buying power.
This is tough to swallow. But I can't argue with it.

So do you think that I've considered all possibilities? In your mind, is it a definite NO for someone in my situation to contribute to a Roth 401k, even just a little bit?

My CPA's advice was based solely on my 2009 return. She doesn't know anything about my total savings, investments, job outlook, etc. That's why I came to this board for more opinions.

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Post by retiredjg » Sat Mar 13, 2010 1:38 pm

icedtea wrote:
retiredjg wrote: I was just trying to say, and I don't think I said it very well, is that the more money you can get into Roth while in the lower brackets like 15% and 25%, the better. The usual order (401 up to max, then Roth IRA) achieves that.
Though some of the advice I received in my thread was quite convincing, it doesn't seem 100% clear to me that the Roth 401k is a bad idea if you're in the 25% bracket, given all the variables (taxable income at retirement, tax levels, amount of taxable and pretax investments to live off of in retirement, etc.)
Iced tea, in my quote above, I was referring to using Roth IRA as opposed to traditional IRA. I was not talking about Roth 401k. In general, I suspect traditional 401 and Roth IRA is the best choice for a person in the 25% bracket. But, in the end, that is simply an opinion.
Is there more I should be considering when making a decision between Roth 401k and tradtl 401k?
I think pretty much everyone agrees that Roth 401 in the 15% tax bracket is a no-brainer. But opinions vary in the 25% tax bracket. That could be because the differences are not all that big. Or it could be because both ideas are just fine. Or maybe really nobody knows. Or maybe one is best for some people and one is best for others.

The point I'm trying to make is that the question may be unanswerable (without a crystal ball) or it may not make that big a difference in the long run. Either way, I'm not sure that question is worthy of so much of your time and energy. Pick one or the other or pick a middle ground by doing some of both.

What most people do seem to agree on is that having some untaxed money and some already taxed money is a good thing in retirement. In that way, you always have some money in the more favored bucket no matter what taxes do. You are assured of being partly right no matter what happens.

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Post by livesoft » Sat Mar 13, 2010 1:41 pm

I cannot make your decision for you. I would wonder why you don't contribute to a Roth IRA instead of to your Roth 401(k). If your income is so high that you are not eligible for a Roth, then your tax bracket is such that a traditional 401(k) is very likely better. If your income is low (meaning you are definitely in the 15% or lower tax bracket), then a Roth 401(k) is better.

So, if you like, contribute the most to your traditional 401(k) to drop you into the 15% marginal income tax bracket, then if you have money left to invest, put it in a Roth IRA. I think was essentially the same as your CPAs advice.

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Post by icedtea » Sat Mar 13, 2010 1:43 pm

Thanks retiredjg. I tend to overthink the options sometimes.

livesoft, i do contribute to a roth IRA. I've maxed mine every year for the past 4 years.

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Post by retiredjg » Sat Mar 13, 2010 1:49 pm

icedtea wrote:Thanks retiredjg. I tend to overthink the options sometimes.
This may be one of those times. Let it sit on the back burner for a few days and see how you feel about it then.

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Post by celia » Sat Mar 13, 2010 4:40 pm

Ody wrote:Based on that assumption, my distributions should be taxed at a lower rate and therefore paying a hire tax now doesn't make sense.

Is my assumption wrong? I'm trying to wrap my head around tax diversification.
Ody, It appears you are near the beginning of your working career and your wages will rise as time goes on. Here is an article I loved (ignore the ads) that showed me (we're almost at retirement) that our tax rate will probably not be lower when we retire. Therefore, we've been converting to Roths:

Why You're Likely to be in a Higher Tax Bracket When You Retire.

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Post by livesoft » Sat Mar 13, 2010 5:02 pm

celia, at what tax rate are you converting to Roths?

We were in the 33% tax bracket a couple years ago. We are now in the 25% tax bracket since I semi-retired. I expect to go even lower when we stop working. But we will not be living off of IRA/401(k) withdrawals nor SS benefits for many, many years. That is what will keep our taxes low. Also the government will cut our taxes substantially because we will use some of our income to pay for college.

We will certainly convert money to Roths, but we hope it is when our bracket drops to 15%.

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Post by gkaplan » Sat Mar 13, 2010 8:29 pm

It seemed evident that contributing to a roth 401k when at the 15% tax bracket was advantageous.
I'm in the fifteen percent tax bracket, but I'm not able to contribute to a Roth 401(k) because I am in the fifteen percent tax bracket.
Gordon

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celia
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Post by celia » Sat Mar 13, 2010 11:14 pm

livesoft wrote:celia, at what tax rate are you converting to Roths?

We were in the 33% tax bracket a couple years ago. We are now in the 25% tax bracket since I semi-retired. I expect to go even lower when we stop working. But we will not be living off of IRA/401(k) withdrawals nor SS benefits for many, many years. That is what will keep our taxes low. Also the government will cut our taxes substantially because we will use some of our income to pay for college.

We will certainly convert money to Roths, but we hope it is when our bracket drops to 15%.
livesoft, Our situation is very similar to yours. I took more than the tax rate into account when we converted some of our traditional IRAs in Oct 2008 (when stocks were on "sale"). Even though we paid 35% (federal+state), we were able to convert twice the number of shares than we would normally have had the market not gone down so much. For example, say we converted $50,000 at a 35% tax rate. We paid the same in taxes (dollar-wise, not per cent) as if we were to convert $100,000 in a few years at a 17% rate. We had the tax money available at that time, but might not have it so readily available after retirement.

Hope you understand my logic.

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wlpotts
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Concerns: Roth 401K expenses versus Individual Roth Expenses

Post by wlpotts » Sun Mar 14, 2010 4:37 am

Just to throw another consideration into the mix, I would suggest that persons determine and understand the possibilty of any additional total expense implications of an employer sponsored Roth 401K versus an individual Roth account.

With my company's Roth 401K plan participation, I am subjected to the limitations of the plan's investment options. These limited fund options are controlled by the company and the options that available within the company's selected investment provider. Further, the available fund options are more expensive than those offered on the free market and, most likely, they may contain additional hidden expenses that will be passed onto the participants that contribute to the plan.

Research before you invest!

Warren P.
Some have it. Some don't. Either way, here I am!

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