Help with New Retirement Plan Option

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docjay1
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Joined: Mon Jun 17, 2013 1:15 pm

Help with New Retirement Plan Option

Post by docjay1 » Wed Jun 13, 2018 5:38 am

Hi,
I currently participate in employer-sponsored 403(b) + 457(b) plans and maximize contributions and associated match; my income precludes contributions directly into a personal Roth IRA. My retirement plan now offers a new option:

“We are happy to announce an exciting new upgrade to our 403(b)/401(k) retirement plans. We're replacing the existing after-tax contribution option with a Roth option. Roth contributions are combined with pre-tax contributions, and in total you can contribute up to $18,500 if under age 50. You may contribute up to 75% of your eligible compensation up to the IRS annual limit (currently $18,500, though other plan limits may apply). Match contributions will be calculated on both pretax and Roth contributions up to a maximum of 2% of your eligible pay, and are deposited to your account on a tax-deferred basis.

Consider a Roth account if:
• Your pay exceeds Roth IRA limits and you cannot open Roth IRA elsewhere.
• You think your income will be subject to a higher effective tax rate when you retire than it is today."


Does this mean that I can now fund a Roth 403b through my employer with $18,500/year with no income limit (at the cost of forgoing regular 403(b) pre-tax contributions)? How should this effect my retirement savings/planning?

Thank you, in advance, for your input.

student
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Joined: Fri Apr 03, 2015 6:58 am

Re: Help with New Retirement Plan Option

Post by student » Wed Jun 13, 2018 5:44 am

My understanding is that any limitation is applied to your regular 401k and Roth 401k as one-unit. So you can contribute $18,500 (assuming there is no other limits) to regular 401k or Roth 401k. You can also contribute partly to regular 401k and partly to Roth 401k as long as the total does not exceed $18,500.

Personally, I think contributing to Roth 401k is better when one is young and with lower income.

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ruralavalon
Posts: 13495
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Help with New Retirement Plan Option

Post by ruralavalon » Wed Jun 13, 2018 12:25 pm

Welcome to the forum :) .

docjay1 wrote:
Wed Jun 13, 2018 5:38 am
Hi,
I currently participate in employer-sponsored 403(b) + 457(b) plans and maximize contributions and associated match; my income precludes contributions directly into a personal Roth IRA. My retirement plan now offers a new option:

“We are happy to announce an exciting new upgrade to our 403(b)/401(k) retirement plans. We're replacing the existing after-tax contribution option with a Roth option. Roth contributions are combined with pre-tax contributions, and in total you can contribute up to $18,500 if under age 50. You may contribute up to 75% of your eligible compensation up to the IRS annual limit (currently $18,500, though other plan limits may apply). Match contributions will be calculated on both pretax and Roth contributions up to a maximum of 2% of your eligible pay, and are deposited to your account on a tax-deferred basis.

Consider a Roth account if:
• Your pay exceeds Roth IRA limits and you cannot open Roth IRA elsewhere.
• You think your income will be subject to a higher effective tax rate when you retire than it is today."


Does this mean that I can now fund a Roth 403b through my employer with $18,500/year with no income limit (at the cost of forgoing regular 403(b) pre-tax contributions)?

Your understanding of the new Roth option in your 403b/401k plan is correct.

docjay1 wrote:
Wed Jun 13, 2018 5:38 am
How should this effect my retirement savings/planning?
More information is necessary. It depends on estimating what your marginal tax rate might be in retirement, which depends on your income during retirement, which depends on a lot of information we don't know.

What is your current tax bracket or marginal tax rate, both federal and state?

What are you tax bracket or marginal tax rate expectations your future working years?

How much is currently in your 403b/401k and 457 accounts?

Will you be eligible for a significant pension?

Are you eligible for Social Security too?

What is your age?

About how long until your expected retirement?

Please simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is, in one place.

. . . . .

Retirement usually means that employment income has ended. Most people are in a lower tax bracket in retirement. The income tax code is progressive, with a lower tax rate for lower income. Therefore, for most people traditional 401k contributions will probably be better. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."

A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
"Tax considerations:
* If your current marginal tax rate is 15% or less, prefer a Roth.
* If you expect to have higher marginal rates than your current marginal rate for most of your career, prefer a Roth.
* If you will have a traditional account or a pension large enough to meet your expected retirement expenses (and you expect to take that pension shortly after retiring), prefer a Roth.
* Otherwise, prefer a traditional account."
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Duckie
Posts: 5808
Joined: Thu Mar 08, 2007 2:55 pm

Re: Help with New Retirement Plan Option

Post by Duckie » Wed Jun 13, 2018 3:04 pm

docjay1 wrote:My retirement plan now offers a new option:

“We are happy to announce an exciting new upgrade to our 403(b)/401(k) retirement plans. We're replacing the existing after-tax contribution option with a Roth option.
Does "after-tax" mean you previously were allowed to contribute an extra $36.5K to an after-tax sub-account? If that is the case, losing this option is not an upgrade.

sco
Posts: 756
Joined: Thu Sep 24, 2015 2:28 pm

Re: Help with New Retirement Plan Option

Post by sco » Wed Jun 13, 2018 11:38 pm

Why are you not allowed to do a Backdoor Roth for an extra $5500+ each year, outside of what you are doing today?

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