Should I consider roth401k?

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Topic Author
ltw2016
Posts: 15
Joined: Wed Feb 14, 2018 5:35 am

Should I consider roth401k?

Post by ltw2016 » Tue Jan 14, 2020 4:26 am

hi

I have 401k plan that allows pretax401k, roth401k and after tax contribution.
It also allows in-service withdrawal of after tax contribution to convert into Roth IRA.
I am planning to fully use pretax401k to the limit and after tax max and do a mega backdoor roth conversion.
not using roth401k.

on top of this i did 7+7k IRA and roth conversion for 2019 and 2020.

24% tax bracket.

Does this sound good ? any reason to consider roth401k in to this mix.

Thanks for your input.

Added more detail:

Pension: No
profession of occupation: Software Dev
tax-deductible accounts: $1.1 MM
Taxable account: $400K
HSA: 17K
Roth: Nil
Do you itemize deductions on your tax return: No
Age: 51
tax bracket: 24 %
What is your age and expected retirement date: 2032
Contributing to max HSA, 401K and 401K Catch-up.
Last edited by ltw2016 on Wed Jan 15, 2020 12:43 am, edited 1 time in total.

Ready3Retire
Posts: 147
Joined: Tue Sep 16, 2014 11:15 am
Location: Midwest

Re: Should I consider roth401k?

Post by Ready3Retire » Tue Jan 14, 2020 6:58 am

Some additional information needed in order to answer your question:
1) what marginal tax rate do you expect to be in after you retire?
2) will you (and spouse) have a pension and if so how much?
3) what do you expect your (and spouse) 401K/IRA balance to be when you retire?

retiredjg
Posts: 38957
Joined: Thu Jan 10, 2008 12:56 pm

Re: Should I consider roth401k?

Post by retiredjg » Tue Jan 14, 2020 8:00 am

ltw2016 wrote:
Tue Jan 14, 2020 4:26 am
Does this sound good ? any reason to consider roth401k in to this mix.
The only reason I can suggest would be because you already have more than enough in your tax-deferred accounts. In that case, using Roth 401k instead of traditional 401k would make sense.

For example, if you are 35 years old and have $350k in tax-deferral, keep adding to it.

If you are 60 and nearing retirement and have $1.5 million in tax deferral you may not need to add to it if your expenses will be low in retirement and/or you have a pension coming that will cover a good portfolio of your expenses.

If your expenses are high enough that you foresee actually using most of that $1.5 million, you might want to keep adding to it.

stan1
Posts: 7985
Joined: Mon Oct 08, 2007 4:35 pm

Re: Should I consider roth401k?

Post by stan1 » Tue Jan 14, 2020 8:29 am

There are some specialized scenarios with the goal of asset location diversification (spreading assets between Traditional, Roth, and taxable accounts):

If you are let's say 50 plus and already have $1M in Traditional 401K/IRA accounts you might consider the Roth 401K contribution as an estate planning tool so that your heirs receive Roth accounts.

If you are young, have many years of high income ahead, and are investing in taxable accounts you might consider Roth contributions now to build up a large Roth balance that will accumulate and appreciate without taxes over time.

Of course there's no way to predict the future, but that's the whole point of diversification. Diversification is a risk management strategy not an optimization strategy.

Topic Author
ltw2016
Posts: 15
Joined: Wed Feb 14, 2018 5:35 am

Re: Should I consider roth401k?

Post by ltw2016 » Tue Jan 14, 2020 12:55 pm

Ready3Retire wrote:
Tue Jan 14, 2020 6:58 am
Some additional information needed in order to answer your question:
1) what marginal tax rate do you expect to be in after you retire?
2) will you (and spouse) have a pension and if so how much?
3) what do you expect your (and spouse) 401K/IRA balance to be when you retire?
marginal tax rate between 22% to 24 % is the best guess
no pension
expect mine (and spouse) 401K/IRA balance to be greater than 2.5MM when retire (current balance 1.1 MM)
Age 51

Topic Author
ltw2016
Posts: 15
Joined: Wed Feb 14, 2018 5:35 am

Re: Should I consider roth401k?

Post by ltw2016 » Tue Jan 14, 2020 1:02 pm

retiredjg wrote:
Tue Jan 14, 2020 8:00 am
ltw2016 wrote:
Tue Jan 14, 2020 4:26 am
Does this sound good ? any reason to consider roth401k in to this mix.
The only reason I can suggest would be because you already have more than enough in your tax-deferred accounts. In that case, using Roth 401k instead of traditional 401k would make sense.

For example, if you are 35 years old and have $350k in tax-deferral, keep adding to it.

If you are 60 and nearing retirement and have $1.5 million in tax deferral you may not need to add to it if your expenses will be low in retirement and/or you have a pension coming that will cover a good portfolio of your expenses.

If your expenses are high enough that you foresee actually using most of that $1.5 million, you might want to keep adding to it.
Current tax deferred balance is $1.1M
no pension
51 year old
have 450K in taxable investment

Topic Author
ltw2016
Posts: 15
Joined: Wed Feb 14, 2018 5:35 am

Re: Should I consider roth401k?

Post by ltw2016 » Tue Jan 14, 2020 1:08 pm

stan1 wrote:
Tue Jan 14, 2020 8:29 am
There are some specialized scenarios with the goal of asset location diversification (spreading assets between Traditional, Roth, and taxable accounts):

If you are let's say 50 plus and already have $1M in Traditional 401K/IRA accounts you might consider the Roth 401K contribution as an estate planning tool so that your heirs receive Roth accounts.

If you are young, have many years of high income ahead, and are investing in taxable accounts you might consider Roth contributions now to build up a large Roth balance that will accumulate and appreciate without taxes over time.

Of course there's no way to predict the future, but that's the whole point of diversification. Diversification is a risk management strategy not an optimization strategy.
I am 51
Yes, I am thinking about this as diversification. Never done Roth or IRA. Only Traditional 401K so far. This year I am starting TIRA/Roth Conversion for 2019/2020. Also considering mega backdoor roth since my 401k after tax contribution allows it. Since I never had roth so far it is a good idea to
build that free assets in roth401K vs roth IRA. This is the decision I am finding it bit hard.
Last edited by ltw2016 on Tue Jan 14, 2020 1:41 pm, edited 1 time in total.

User avatar
Watty
Posts: 18034
Joined: Wed Oct 10, 2007 3:55 pm

Re: Should I consider roth401k?

Post by Watty » Tue Jan 14, 2020 1:15 pm

You will get better suggestions if you post your information using this suggested format as a guideline.

viewtopic.php?f=1&t=6212

There is just too much unknown information to really give any good suggestions.

It would not be impossible but it would take a very special situation to make using a Roth 401k a good choice in the 24% federal tax bracket.

I would not do it unless I could come up with a slam dunk compelling case to use a Roth in that tax bracket.

stan1
Posts: 7985
Joined: Mon Oct 08, 2007 4:35 pm

Re: Should I consider roth401k?

Post by stan1 » Tue Jan 14, 2020 2:20 pm

Agree this one will be situational, and some personal preferences. Optimization or maximization requires assumptions that are likely to be wrong. As we learned in 2017 and again in 2019 making the assumption that tax laws remain the same is a bad assumption. It does making planning harder and probably more subjective.

As a personal example: In my case I had less than 10% of assets in a Roth IRA and was putting $30-40K per year into a taxable account. I have always made Traditional 401K contributions in the past but made the decision to switch to Roth 401K contributions for a few years in lieu of taxable investing. I expect to be in the same tax bracket during retirement (if nothing changes). My heirs are very likely to be non-spousal and I don't know what their future tax rate will be as they are still minors. The sure thing of the current year tax writeoff is hard to pass up, but I decided to try to get Roth up closer to 20% of assets before I stop working then continue some conversions while in retirement at the same tax rate. I expect others might make a different choice in my situation.

Topic Author
ltw2016
Posts: 15
Joined: Wed Feb 14, 2018 5:35 am

Re: Should I consider roth401k?

Post by ltw2016 » Tue Jan 14, 2020 4:48 pm

got more insights, thank you all, good points. looks like no compelling reason for roth401k in my situation. I was mainly trying to diversify tax location but my after tax 401k contribution is already doing it. so will skip roth401 for now.

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ruralavalon
Posts: 17076
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Should I consider roth401k?

Post by ruralavalon » Tue Jan 14, 2020 4:55 pm

ltw2016 wrote:
Tue Jan 14, 2020 4:26 am
hi

I have 401k plan that allows pretax401k, roth401k and after tax contribution.
It also allows in-service withdrawal of after tax contribution to convert into Roth IRA.
I am planning to fully use pretax401k to the limit and after tax max and do a mega backdoor roth conversion.
not using roth401k.

on top of this i did 7+7k IRA and roth conversion for 2019 and 2020.

24% tax bracket.

Does this sound good ? any reason to consider roth401k in to this mix.

Thanks for your input.
Will either or both of you be eligible for a significant pension in addition to Social Security?

What is your profession of occupation?

About how much do you currently have in traditional tax-deductible accounts?

Do you itemize deductions on your tax return?

What is your age and expected retirement date?

You can simply add this to your original post using the edit button (the pencil icon near the upper right corner of post), it helps a lot if all of your information is in one place.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

retiredjg
Posts: 38957
Joined: Thu Jan 10, 2008 12:56 pm

Re: Should I consider roth401k?

Post by retiredjg » Tue Jan 14, 2020 5:00 pm

ltw2016 wrote:
Tue Jan 14, 2020 1:02 pm
retiredjg wrote:
Tue Jan 14, 2020 8:00 am
ltw2016 wrote:
Tue Jan 14, 2020 4:26 am
Does this sound good ? any reason to consider roth401k in to this mix.
The only reason I can suggest would be because you already have more than enough in your tax-deferred accounts. In that case, using Roth 401k instead of traditional 401k would make sense.

For example, if you are 35 years old and have $350k in tax-deferral, keep adding to it.

If you are 60 and nearing retirement and have $1.5 million in tax deferral you may not need to add to it if your expenses will be low in retirement and/or you have a pension coming that will cover a good portfolio of your expenses.

If your expenses are high enough that you foresee actually using most of that $1.5 million, you might want to keep adding to it.
Current tax deferred balance is $1.1M
no pension
51 year old
have 450K in taxable investment
If you plan to retire early, having a large tax-deferred account is no problem because you may have many years use some of it and to convert some to Roth. Keep on contributing to traditional.

If you plan to retire at 70 with $2.5 million in tax-deferral, that is going to turn into an income producing machine that may push you (or the survivor if one of you dies) into a bracket higher than your current 24%.

I don't see a great deal of pressure to abandon your tax-deferred contributions just yet, but it seems you may not want to pour money in there for another 15 years.

If you believe you will go up a tax bracket before retiring, I'd use Roth 401k now (while tax rates are lower) and use traditional 401k later on when your rate is higher. In fact, I might do that even if there is no big promotion on the horizon at least until 2025.

There is no way to predict the very best choice. Much of this is a guess.

Topic Author
ltw2016
Posts: 15
Joined: Wed Feb 14, 2018 5:35 am

Re: Should I consider roth401k?

Post by ltw2016 » Wed Jan 15, 2020 12:46 am

ruralavalon wrote:
Tue Jan 14, 2020 4:55 pm
Will either or both of you be eligible for a significant pension in addition to Social Security?

What is your profession of occupation?

About how much do you currently have in traditional tax-deductible accounts?

Do you itemize deductions on your tax return?

What is your age and expected retirement date?

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

Topic Author
ltw2016
Posts: 15
Joined: Wed Feb 14, 2018 5:35 am

Re: Should I consider roth401k?

Post by ltw2016 » Wed Jan 15, 2020 12:50 am

retiredjg wrote:
Tue Jan 14, 2020 5:00 pm
If you plan to retire early, having a large tax-deferred account is no problem because you may have many years use some of it and to convert some to Roth. Keep on contributing to traditional.

If you plan to retire at 70 with $2.5 million in tax-deferral, that is going to turn into an income producing machine that may push you (or the survivor if one of you dies) into a bracket higher than your current 24%.

I don't see a great deal of pressure to abandon your tax-deferred contributions just yet, but it seems you may not want to pour money in there for another 15 years.

If you believe you will go up a tax bracket before retiring, I'd use Roth 401k now (while tax rates are lower) and use traditional 401k later on when your rate is higher. In fact, I might do that even if there is no big promotion on the horizon at least until 2025.

There is no way to predict the very best choice. Much of this is a guess.
thank you for the insights!!

MathIsMyWayr
Posts: 1222
Joined: Mon Mar 27, 2017 10:47 pm
Location: CA

Re: Should I consider roth401k?

Post by MathIsMyWayr » Wed Jan 15, 2020 1:13 am

If your plan allows an in-plan conversion of tax-deferred 401(k) to Roth 401(k), you may park money in tax-deferred 401(k) and convert to Roth later if desirable. At least you can buy time.

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