New Roth 401k option and closer to retirement than not.

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Expro
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Location: Girona

New Roth 401k option and closer to retirement than not.

Post by Expro » Tue Aug 21, 2018 4:32 pm

We have a new Roth 401k option offered through my wife's job. We are both over 55 and I expect my wife will retire in 4 to 5 years.
We each have older Roth IRAs that haven't much $ in them as we've MAGI out of contributing to them for many years and we never had any $ to contribute before then so they are now less than 1% of our total retirement assets.

My question is this, Should she even bother to contribute to the Roth 401k or just continue using the usual 401k?

SelfEmployed123
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Joined: Sun Apr 15, 2018 8:57 pm

Re: New Roth 401k option and closer to retirement than not.

Post by SelfEmployed123 » Tue Aug 21, 2018 5:12 pm

We would be better able to answer your question if you provide the below information:

1) Current marginal state and federal tax rate
2) Expected marginal state and federal tax rate in retirement (this depends on how much income per year you expect to have as well as whether you will be moving to a higher or lower tax state)
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

Expro
Posts: 65
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Location: Girona

Re: New Roth 401k option and closer to retirement than not.

Post by Expro » Tue Aug 21, 2018 5:21 pm

SelfEmployed123 wrote:
Tue Aug 21, 2018 5:12 pm
We would be better able to answer your question if you provide the below information:

1) Current marginal state and federal tax rate
2) Expected marginal state and federal tax rate in retirement (this depends on how much income per year you expect to have as well as whether you will be moving to a higher or lower tax state)
2018 Tax rate 32% Federal 4.63% State
2019 Tax Rate 35% could be 37%. 4.63% State

Retired Tax rates? Lets assume 4.63% State and 22% Federal.

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arcticpineapplecorp.
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Re: New Roth 401k option and closer to retirement than not.

Post by arcticpineapplecorp. » Tue Aug 21, 2018 5:32 pm

Expro wrote:
Tue Aug 21, 2018 5:21 pm
SelfEmployed123 wrote:
Tue Aug 21, 2018 5:12 pm
We would be better able to answer your question if you provide the below information:

1) Current marginal state and federal tax rate
2) Expected marginal state and federal tax rate in retirement (this depends on how much income per year you expect to have as well as whether you will be moving to a higher or lower tax state)
2018 Tax rate 32% Federal 4.63% State
2019 Tax Rate 35% could be 37%. 4.63% State

Retired Tax rates? Lets assume 4.63% State and 22% Federal.
If your tax rate will be lower in retirement (22%) than it is while you're contributing (32%-37%) then I think you have your answer. Why pay higher taxes now (if going Roth) to escape lower taxes in retirement? You should get the higher deduction now (32%-37%) and pay the lower tax (22%) in retirement. Doing so would save you 10%-15% in taxes overall, right (the difference between what you will save now and what you'll pay later)? So continue going pre-tax and get the higher deduction of income taxes since you're bracket is so high (and higher than it will be in retirement, which is true for most).

The Roth makes sense for people who are in a lower tax bracket while contributing then they will be in retirement. Some with pensions could be in this scenario if their pension and SS is significantly higher (because not all SS is taxable) than their earnings while working. So they're willing to pay the tax while working to save more tax in retirement (if in a higher bracket).
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

Expro
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Location: Girona

Re: New Roth 401k option and closer to retirement than not.

Post by Expro » Wed Aug 22, 2018 10:53 am

This was my thinking too. I was also thinking there might be circumstances where Roth money might be an advantage once retired.
I'm only now starting to think about retirement planning.
Thanks

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FiveK
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Re: New Roth 401k option and closer to retirement than not.

Post by FiveK » Wed Aug 22, 2018 12:00 pm

Expro wrote:
Wed Aug 22, 2018 10:53 am
I was also thinking there might be circumstances where Roth money might be an advantage once retired.
There can be, for example if one's expectation of retirement marginal rate is incorrect due to not knowing about Taxation of Social Security benefits, IRMAA tiers, etc.

At first glance, using traditional does seem better for you (I only took the one glance).

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