Roth vs. Traditional 401k

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FrugalPharmacist
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Roth vs. Traditional 401k

Post by FrugalPharmacist » Sat Nov 10, 2018 8:33 pm

Hello,

I am looking for some advice about where we should direct our retirement funds. I have read many conflicting things about Roth vs. traditional 401k. Can someone explain what would be the best fit for us? Or perhaps direct me to some resources to learn more about it for myself?

Some facts about us- married- both employed and contributing to retirement, 3 kids. Gross income ~$225,000. Debt-free except our mortgage which will be paid off in ~10 years or possibly sooner. Maxing out our HSA, saving for college for the kids. Both my spouse (age 28) & I (age 30) have the option to choose a traditional or Roth retirement account. Current retirement account balances are $110,000 in traditional 401k, $20,000 in Roth 401k between both of us. Currently on track for both of us to max out these accounts ($18,500 each this year). I am currently employed part-time & will likely increase my hours over the next 5 years (additional $50-60,000/year once full-time). I'm happy to provide other info as needed. I appreciate any help you can provide. Thanks!

hawkfan55
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Re: Roth vs. Traditional 401k

Post by hawkfan55 » Sat Nov 10, 2018 9:04 pm

Roth 401k's are great for people who are or expect to be high earners and whose income in retirement will put them in a similar tax bracket or higher than during their working years.
I would recommend you take full advantage of the Roth 401k options given your high income and expected higher earnings in the future. At your ages, you'll have many years of tax free growth within a Roth 401k plan!
You could also do a mix of traditional 401k and Roth 401k, say 1/3 traditional 401k and 2/3 Roth 401k for some tax diversification and tax bracket planning.
Google Roth 401k to learn more.
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KlangFool
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Re: Roth vs. Traditional 401k

Post by KlangFool » Sat Nov 10, 2018 9:23 pm

OP,

It is very simple.

Max up the Trad. 401K and put the tax savings into the Roth IRAs. It is the best of both worlds. You get both: tax-deferred account and Roth. Roth 401K is the wrong answer for most people.

KlangFool

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FiveK
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Re: Roth vs. Traditional 401k

Post by FiveK » Sat Nov 10, 2018 9:27 pm

You are currently in the 24% bracket.

It takes ~$2.5 million in traditional accounts for a 4%/yr withdrawal rate on those alone to get out of the 12% bracket.

Until you expect to reach that amount, putting 100% into the traditional 401k is likely best.

FrugalPharmacist
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Re: Roth vs. Traditional 401k

Post by FrugalPharmacist » Sat Nov 10, 2018 9:29 pm

KlangFool wrote:
Sat Nov 10, 2018 9:23 pm
OP,

It is very simple.

Max up the Trad. 401K and put the tax savings into the Roth IRAs. It is the best of both worlds. You get both: tax-deferred account and Roth. Roth 401K is the wrong answer for most people.

KlangFool
Would you still recommend traditional 401k once we hit the income limit for Roth IRAs?

KlangFool
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Re: Roth vs. Traditional 401k

Post by KlangFool » Sat Nov 10, 2018 9:33 pm

FrugalPharmacist wrote:
Sat Nov 10, 2018 9:29 pm
KlangFool wrote:
Sat Nov 10, 2018 9:23 pm
OP,

It is very simple.

Max up the Trad. 401K and put the tax savings into the Roth IRAs. It is the best of both worlds. You get both: tax-deferred account and Roth. Roth 401K is the wrong answer for most people.

KlangFool
Would you still recommend traditional 401k once we hit the income limit for Roth IRAs?
FrugalPharmacist,

1) Unless you like paying taxes, why would you choose Roth 401K?

2) Once you reach the limit, you should look at backdoor Roth IRAs.

KlangFool

hawkfan55
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Re: Roth vs. Traditional 401k

Post by hawkfan55 » Sat Nov 10, 2018 10:40 pm

Under Current Tax Law, you have the ability to place retirement savings in a Roth 401k at lower tax rates than you'll be paying in 2025 when tax brackets are scheduled to return to their 2017 brackets. Something to consider.

Table 2. Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year)
Married Filing Jointly
2017 Tax Brackets/ Tax Cuts and Jobs Act (2018-2025)
10% $0-$19,050 / 10% $0-$19,050
15% $19,050-$77,400 / 12% $19,050-$77,400
25% $77,400-$156,150 / 22% $77,400-$165,000
28% $156,150-$237,950 / 24% $165,000-$315,000
33% $237,950-$424,950 / 32% $315,000-$400,000
35% $424,950-$480,050 / 35% $400,000-$600,000
39.60% $480,050+ / 37% $600,000+

Many retirees find themselves converting from Traditional IRA to Roth IRA to avoid higher tax brackets when RMDs begin. We contributed to tax deferred accounts (401k and 403b) and Roth IRAs since they were first offered. Really glad we did both. Since we will have pensions and social security, deferred account savings will move us into higher tax brackets so we are doing Roth Conversions now during the lower Tax Cuts and Jobs Act years.

Not really as simple as some would have you believe!
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FiveK
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Re: Roth vs. Traditional 401k

Post by FiveK » Sat Nov 10, 2018 10:50 pm

hawkfan55 wrote:
Sat Nov 10, 2018 10:40 pm
Under Current Tax Law, you have the ability to place retirement savings in a Roth 401k at lower tax rates than you'll be paying in 2025 when tax brackets are scheduled to return to their 2017 brackets.
Assuming either
a) current tax brackets and rates will continue in place forever, or
b) the 2017 tax brackets and rates will return in 2025 and then continue in place forever
is defensible.

If one chooses to assume "b", then the advice in viewtopic.php?p=4207602#p4207602 changes to
"It takes ~$2.4 million in traditional accounts for a 4%/yr withdrawal rate on those alone to get out of the 15% bracket.

Until you expect to reach that amount, putting 100% into the traditional 401k is likely best."

hawkfan55
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Re: Roth vs. Traditional 401k

Post by hawkfan55 » Sat Nov 10, 2018 11:11 pm

Under Current Tax Law, you have the ability to place retirement savings in a Roth 401k at lower tax rates than you'll be paying in 2025 when tax brackets are scheduled to return to their 2017 brackets.Assuming either
a) current tax brackets and rates will continue in place forever, or
b) the 2017 tax brackets and rates will return in 2025 and then continue in place forever
is defensible.

If one chooses to assume "b", then the advice in viewtopic.php?p=4207602#p4207602 changes to
"It takes ~$2.4 million in traditional accounts for a 4%/yr withdrawal rate on those alone to get out of the 15% bracket.

Until you expect to reach that amount, putting 100% into the traditional 401k is likely best."
OP, do you expect to receive Social Security and do you or your spouse expect to receive a pension? If yes to both or either, I still feel it could be beneficial to have both deferred and Roth accounts. In addition, your income is likely to increase as you move into 40s and 50s peak earning years which could place you in higher tax brackets. Tax brackets and law will most likely change during your accumulation years.
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JustinR
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Re: Roth vs. Traditional 401k

Post by JustinR » Sat Nov 10, 2018 11:28 pm

As a rule, deferring taxes is always superior to paying taxes now. (Very few exceptions)

So do a traditional 401k.

JW-Retired
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Re: Roth vs. Traditional 401k

Post by JW-Retired » Sun Nov 11, 2018 10:03 am

FrugalPharmacist wrote:
Sat Nov 10, 2018 9:29 pm
Would you still recommend traditional 401k once we hit the income limit for Roth IRAs?
There is no income limit for doing "Backdoor Roth" contributions. You didn't mention having any tIRAs, SEP IRAs, simple IRAs, or rollover IRAs? If it's true you don't any of these, you each are all set up to do yearly individual "Backdoor Roth" contributions.

Just be sure you have understood and done dry runs of the IRS 8606 form paper work before you do anything. Not doing it right can have bad consequences.

https://www.bogleheads.org/wiki/Backdoor_Roth_IRA
JW
Retired at Last

stan1
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Re: Roth vs. Traditional 401k

Post by stan1 » Sun Nov 11, 2018 10:21 am

One other data point. What is your state tax rate? Higher state taxes may give more push to the Traditional 401K to get the immediate benefit.

There's no right or wrong answer because you won't know what the right decision was for decades. You have no control over future tax rates, inflation, or rates of return. You have partial control over future income and state of residence. I say partial for income and state of residence because there certainly are people who find themselves in an unplanned early retirement situation or living in a location to be near family. Unplanned divorce, disability, life expectancy, health insurance, social security.

In general at your income level even without knowing your state tax rate I'd take the sure thing of the current tax benefits that come with a Traditional 401K, contribute as much as you can to a Roth IRA directly or via a back door, and then save the rest in college and taxable accounts. Personally I would also build up a taxable account simultaneously with paying off a mortgage at your ages.

AMG79
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Re: Roth vs. Traditional 401k

Post by AMG79 » Sun Nov 11, 2018 1:50 pm

KlangFool wrote:
Sat Nov 10, 2018 9:23 pm
OP,

It is very simple.

Max up the Trad. 401K and put the tax savings into the Roth IRAs. It is the best of both worlds. You get both: tax-deferred account and Roth. Roth 401K is the wrong answer for most people.

KlangFool
KlangFool - mind if I chime in? We only have a Roth 401K offered to us (husband's job). Is this the ideal order of contributions... contribute up to the company match in Roth 401k, max HSA, max two TIRAs, max Roth 401k, then taxable? Both 40 years old in 22 - 24% tax bracket.

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FiveK
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Re: Roth vs. Traditional 401k

Post by FiveK » Sun Nov 11, 2018 2:10 pm

AMG79 wrote:
Sun Nov 11, 2018 1:50 pm
We only have a Roth 401K offered to us (husband's job).
Are you sure? I thought Employers may offer a Roth 401(k) only if they already offer a traditional 401(k).
Is this the ideal order of contributions... contribute up to the company match in Roth 401k,
e.g., into what account do the company match dollars go?

AMG79
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Re: Roth vs. Traditional 401k

Post by AMG79 » Sun Nov 11, 2018 2:20 pm

FiveK: Very good question. I always thought the only option was Roth. I've never seen what you mentioned before. I will dig deeper.

KlangFool
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Re: Roth vs. Traditional 401k

Post by KlangFool » Sun Nov 11, 2018 2:27 pm

FiveK wrote:
Sun Nov 11, 2018 2:10 pm
AMG79 wrote:
Sun Nov 11, 2018 1:50 pm
We only have a Roth 401K offered to us (husband's job).
Are you sure? I thought Employers may offer a Roth 401(k) only if they already offer a traditional 401(k).
Is this the ideal order of contributions... contribute up to the company match in Roth 401k,
e.g., into what account do the company match dollars go?
+1.

KlangFool

AMG79
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Re: Roth vs. Traditional 401k

Post by AMG79 » Sun Nov 11, 2018 2:38 pm

So assuming he does have a traditional 401K offered, would it be best to switch contributions to traditional and also switch IRA contributions to traditional? I have always thought we were doing it right by contributing to the Roth accounts.

Jamesla30
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Re: Roth vs. Traditional 401k

Post by Jamesla30 » Sun Nov 11, 2018 2:39 pm

AMG79 wrote:
Sun Nov 11, 2018 2:20 pm
FiveK: Very good question. I always thought the only option was Roth. I've never seen what you mentioned before. I will dig deeper.
Employer contributions are only allowed to go into a traditional IRA. Chances are you have balances in both traditional and roth. And chances are you can contribute to the traditional account instead of roth if you want to.

KlangFool
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Re: Roth vs. Traditional 401k

Post by KlangFool » Sun Nov 11, 2018 2:42 pm

Jamesla30 wrote:
Sun Nov 11, 2018 2:39 pm
AMG79 wrote:
Sun Nov 11, 2018 2:20 pm
FiveK: Very good question. I always thought the only option was Roth. I've never seen what you mentioned before. I will dig deeper.
Employer contributions are only allowed to go into a traditional IRA 401K. Chances are you have balances in both traditional and roth. And chances are you can contribute to the traditional account instead of roth if you want to.
Jamesla30,

It is a 401K. Please use the proper term. IRA is not 401K.

KlangFool

Jamesla30
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Re: Roth vs. Traditional 401k

Post by Jamesla30 » Sun Nov 11, 2018 2:50 pm

KlangFool wrote:
Sun Nov 11, 2018 2:42 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:39 pm
AMG79 wrote:
Sun Nov 11, 2018 2:20 pm
FiveK: Very good question. I always thought the only option was Roth. I've never seen what you mentioned before. I will dig deeper.
Employer contributions are only allowed to go into a traditional IRA 401K. Chances are you have balances in both traditional and roth. And chances are you can contribute to the traditional account instead of roth if you want to.
Jamesla30,

It is a 401K. Please use the proper term. IRA is not 401K.

KlangFool
Sorry, yes that is correct.

Jamesla30
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Re: Roth vs. Traditional 401k

Post by Jamesla30 » Sun Nov 11, 2018 2:51 pm

Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.

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FiveK
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Re: Roth vs. Traditional 401k

Post by FiveK » Sun Nov 11, 2018 3:07 pm

Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
It is simple, and will be correct for some. For others, e.g., those who become eligible for more saver's and earned income credits with lower AGIs, the traditional accounts can be much better even at lower incomes.

KlangFool
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Re: Roth vs. Traditional 401k

Post by KlangFool » Sun Nov 11, 2018 3:13 pm

Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
I give you an even simple rule. Do not contribute to Roth 401K. Almost every time someone posted that they contribute to Roth 401K, we can prove that it is not a good idea.

KlangFool

KlangFool
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Re: Roth vs. Traditional 401k

Post by KlangFool » Sun Nov 11, 2018 3:14 pm

FiveK wrote:
Sun Nov 11, 2018 3:07 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
It is simple, and will be correct for some. For others, e.g., those who become eligible for more saver's and earned income credits with lower AGIs, the traditional accounts can be much better even at lower incomes.
+1.

KlangFool

Jamesla30
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Re: Roth vs. Traditional 401k

Post by Jamesla30 » Sun Nov 11, 2018 3:24 pm

KlangFool wrote:
Sun Nov 11, 2018 3:13 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
I give you an even simple rule. Do not contribute to Roth 401K. Almost every time someone posted that they contribute to Roth 401K, we can prove that it is not a good idea.

KlangFool
We'll have to agree to disagree. I believe for 'low'-income earners there is a great deal of benefit to roth contributions. Of course every situation is different, but I believe my rule is simple and easy to follow for most members. If you can lock in a low rate for your contributions to a roth account, they offer much more flexibility in the future than traditional retirement accounts.

international001
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Re: Roth vs. Traditional 401k

Post by international001 » Sun Nov 11, 2018 3:26 pm

IT has beaten to death in other threads. Unless you are 100% your tax rate (not only marginal, but above SSN and other incomes) will be lower when retired, it's better to have a combination of Roth or pre-tax (IRA or 401k, whatever). Given the low tax brackets today, there is a high likelihood that your tax rate will be higher than 24% in the future. Or if that if it's lower, it won't be much lower. Even if the tax brackets stay the same, what are the chances that you go under 22%.

Also, in your earlier years, it's better to do the Roth. In 10-15 years, when your income grows and you are in a higher tax-bracket, you can do pre-tax.

That's the advice I wished someone had given me when I was your age.

KlangFool
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Re: Roth vs. Traditional 401k

Post by KlangFool » Sun Nov 11, 2018 3:28 pm

Jamesla30 wrote:
Sun Nov 11, 2018 3:24 pm
KlangFool wrote:
Sun Nov 11, 2018 3:13 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
I give you an even simple rule. Do not contribute to Roth 401K. Almost every time someone posted that they contribute to Roth 401K, we can prove that it is not a good idea.

KlangFool
We'll have to agree to disagree. I believe for 'low'-income earners there is a great deal of benefit to roth contributions. Of course every situation is different, but I believe my rule is simple and easy to follow for most members. If you can lock in a low rate for your contributions to a roth account, they offer much more flexibility in the future than traditional retirement accounts.
Jamesla30,

<< I believe for 'low'-income earners there is a great deal of benefit to roth contributions. >>

Yes for Roth IRA. No for Roth 401K.

<< If you can lock in a low rate for your contributions to a roth account, they offer much more flexibility in the future than traditional retirement accounts.>>

You get both by contributing to Trad. 401K and Roth IRA. Roth 401K is still a bad idea.

KlangFool

KlangFool
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Re: Roth vs. Traditional 401k

Post by KlangFool » Sun Nov 11, 2018 3:31 pm

international001 wrote:
Sun Nov 11, 2018 3:26 pm
IT has beaten to death in other threads. Unless you are 100% your tax rate (not only marginal, but above SSN and other incomes) will be lower when retired, it's better to have a combination of Roth or pre-tax (IRA or 401k, whatever). Given the low tax brackets today, there is a high likelihood that your tax rate will be higher than 24% in the future. Or if that if it's lower, it won't be much lower. Even if the tax brackets stay the same, what are the chances that you go under 22%.

Also, in your earlier years, it's better to do the Roth. In 10-15 years, when your income grows and you are in a higher tax-bracket, you can do pre-tax.

That's the advice I wished someone had given me when I was your age.
international001,

And, the best combination is Trad. 401K with Roth IRA. You save taxes by Trad. 401K and you put the tax savings into Roth IRAs.

<< Also, in your earlier years, it's better to do the Roth.>>

Why say so? You could get tax credits by contributing to Trad. 401K if your income is low enough.

KlangFool
Last edited by KlangFool on Sun Nov 11, 2018 3:33 pm, edited 1 time in total.

Jamesla30
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Re: Roth vs. Traditional 401k

Post by Jamesla30 » Sun Nov 11, 2018 3:32 pm

KlangFool wrote:
Sun Nov 11, 2018 3:13 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
I give you an even simple rule. Do not contribute to Roth 401K. Almost every time someone posted that they contribute to Roth 401K, we can prove that it is not a good idea.

KlangFool
I will add that there is definitely situations where someone is absolutely making the wrong decision by following your rule. If they have low enough income, they can contribute to roth accounts tax free. There is absolutely zero argument you can make against that situation.

Jamesla30
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Re: Roth vs. Traditional 401k

Post by Jamesla30 » Sun Nov 11, 2018 3:35 pm

KlangFool wrote:
Sun Nov 11, 2018 3:28 pm
Jamesla30 wrote:
Sun Nov 11, 2018 3:24 pm
KlangFool wrote:
Sun Nov 11, 2018 3:13 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
I give you an even simple rule. Do not contribute to Roth 401K. Almost every time someone posted that they contribute to Roth 401K, we can prove that it is not a good idea.

KlangFool
We'll have to agree to disagree. I believe for 'low'-income earners there is a great deal of benefit to roth contributions. Of course every situation is different, but I believe my rule is simple and easy to follow for most members. If you can lock in a low rate for your contributions to a roth account, they offer much more flexibility in the future than traditional retirement accounts.
Jamesla30,

<< I believe for 'low'-income earners there is a great deal of benefit to roth contributions. >>

Yes for Roth IRA. No for Roth 401K.

<< If you can lock in a low rate for your contributions to a roth account, they offer much more flexibility in the future than traditional retirement accounts.>>

You get both by contributing to Trad. 401K and Roth IRA. Roth 401K is still a bad idea.

KlangFool
The rules for roth vs. traditional shouldn't matter whether it is deducted from your paycheck through a 401k, or you put it in after the fact (IRA). What differences are you alluding to?

KlangFool
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Re: Roth vs. Traditional 401k

Post by KlangFool » Sun Nov 11, 2018 3:38 pm

Jamesla30 wrote:
Sun Nov 11, 2018 3:32 pm
KlangFool wrote:
Sun Nov 11, 2018 3:13 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
I give you an even simple rule. Do not contribute to Roth 401K. Almost every time someone posted that they contribute to Roth 401K, we can prove that it is not a good idea.

KlangFool
I will add that there is definitely situations where someone is absolutely making the wrong decision by following your rule. If they have low enough income, they can contribute to roth accounts tax free. There is absolutely zero argument you can make against that situation.
Jamesla30,

<< If they have low enough income, they can contribute to roth accounts tax free. There is absolutely zero argument you can make against that situation.>>

In that situation, why forgo free money from the government? With the tax credit, besides not paying tax, the government gives you money.

KlangFool

KlangFool
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Re: Roth vs. Traditional 401k

Post by KlangFool » Sun Nov 11, 2018 3:41 pm

Jamesla30 wrote:
Sun Nov 11, 2018 3:35 pm
KlangFool wrote:
Sun Nov 11, 2018 3:28 pm
Jamesla30 wrote:
Sun Nov 11, 2018 3:24 pm
KlangFool wrote:
Sun Nov 11, 2018 3:13 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
I give you an even simple rule. Do not contribute to Roth 401K. Almost every time someone posted that they contribute to Roth 401K, we can prove that it is not a good idea.

KlangFool
We'll have to agree to disagree. I believe for 'low'-income earners there is a great deal of benefit to roth contributions. Of course every situation is different, but I believe my rule is simple and easy to follow for most members. If you can lock in a low rate for your contributions to a roth account, they offer much more flexibility in the future than traditional retirement accounts.
Jamesla30,

<< I believe for 'low'-income earners there is a great deal of benefit to roth contributions. >>

Yes for Roth IRA. No for Roth 401K.

<< If you can lock in a low rate for your contributions to a roth account, they offer much more flexibility in the future than traditional retirement accounts.>>

You get both by contributing to Trad. 401K and Roth IRA. Roth 401K is still a bad idea.

KlangFool
The rules for roth vs. traditional shouldn't matter whether it is deducted from your paycheck through a 401k, or you put it in after the fact (IRA). What differences are you alluding to?
It matters because of

A) Tax credits.

B) The flexibility of withdrawing money penalty-free of Roth IRA versus Roth 401K

C) Contribution limit of 401K versus IRA

D) Investment choice of 401K versus URA.

KlangFool

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grabiner
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Re: Roth vs. Traditional 401k

Post by grabiner » Sun Nov 11, 2018 3:42 pm

Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
Here are the rules of thumb from Traditional versus Roth on the wiki.

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.

The first rule is close to your guideline; for 2018, the 22% tax bracket starts at $50,700 single, $101,400 married. The second and third are less common.
Wiki David Grabiner

Jamesla30
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Re: Roth vs. Traditional 401k

Post by Jamesla30 » Sun Nov 11, 2018 3:44 pm

KlangFool wrote:
Sun Nov 11, 2018 3:38 pm
Jamesla30 wrote:
Sun Nov 11, 2018 3:32 pm
KlangFool wrote:
Sun Nov 11, 2018 3:13 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
I give you an even simple rule. Do not contribute to Roth 401K. Almost every time someone posted that they contribute to Roth 401K, we can prove that it is not a good idea.

KlangFool
I will add that there is definitely situations where someone is absolutely making the wrong decision by following your rule. If they have low enough income, they can contribute to roth accounts tax free. There is absolutely zero argument you can make against that situation.
Jamesla30,

<< If they have low enough income, they can contribute to roth accounts tax free. There is absolutely zero argument you can make against that situation.>>

In that situation, why forgo free money from the government? With the tax credit, besides not paying tax, the government gives you money.

KlangFool
What "tax credit" are you referring to? Chances are that person is going to qualify for the same tax credits regardless of if they do traditional or roth contributions. However, if they do a traditional contribution they will get a tax benefit of exactly $0 dollars. But in the future they will have to pay taxes on all their gains. With roth, they also get a tax benefit of $0 dollars, but they also get a benefit of $0 tax owned on all future growth and earnings.

Jamesla30
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Re: Roth vs. Traditional 401k

Post by Jamesla30 » Sun Nov 11, 2018 3:56 pm

KlangFool wrote:
Sun Nov 11, 2018 3:41 pm
Jamesla30 wrote:
Sun Nov 11, 2018 3:35 pm
KlangFool wrote:
Sun Nov 11, 2018 3:28 pm
Jamesla30 wrote:
Sun Nov 11, 2018 3:24 pm
KlangFool wrote:
Sun Nov 11, 2018 3:13 pm


I give you an even simple rule. Do not contribute to Roth 401K. Almost every time someone posted that they contribute to Roth 401K, we can prove that it is not a good idea.

KlangFool
We'll have to agree to disagree. I believe for 'low'-income earners there is a great deal of benefit to roth contributions. Of course every situation is different, but I believe my rule is simple and easy to follow for most members. If you can lock in a low rate for your contributions to a roth account, they offer much more flexibility in the future than traditional retirement accounts.
Jamesla30,

<< I believe for 'low'-income earners there is a great deal of benefit to roth contributions. >>

Yes for Roth IRA. No for Roth 401K.

<< If you can lock in a low rate for your contributions to a roth account, they offer much more flexibility in the future than traditional retirement accounts.>>

You get both by contributing to Trad. 401K and Roth IRA. Roth 401K is still a bad idea.

KlangFool
The rules for roth vs. traditional shouldn't matter whether it is deducted from your paycheck through a 401k, or you put it in after the fact (IRA). What differences are you alluding to?
It matters because of

A) Tax credits.

B) The flexibility of withdrawing money penalty-free of Roth IRA versus Roth 401K

C) Contribution limit of 401K versus IRA

D) Investment choice of 401K versus URA.

KlangFool
This would be a separate discussion on 401k vs IRA, not a discussion about if diverting money towards traditional accounts or roth accounts is best.

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FiveK
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Re: Roth vs. Traditional 401k

Post by FiveK » Sun Nov 11, 2018 4:00 pm

grabiner wrote:
Sun Nov 11, 2018 3:42 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
Here are the rules of thumb from Traditional versus Roth on the wiki.

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.

The first rule is close to your guideline; for 2018, the 22% tax bracket starts at $50,700 single, $101,400 married. The second and third are less common.
Unfortunately, many people confuse "tax bracket" with "marginal rate". Yes, sometimes those are equivalent, but when saver's and earned income credits are in play, the marginal rates can be significantly higher than the nominal bracket.

Perhaps the best rule of thumb for traditional vs. Roth is "check your specific situation, because generic rules of thumb for this question have frequent exceptions." :)

Jamesla30
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Re: Roth vs. Traditional 401k

Post by Jamesla30 » Sun Nov 11, 2018 4:00 pm

grabiner wrote:
Sun Nov 11, 2018 3:42 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
Here are the rules of thumb from Traditional versus Roth on the wiki.

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.

The first rule is close to your guideline; for 2018, the 22% tax bracket starts at $50,700 single, $101,400 married. The second and third are less common.
+1

For most folks on here asking, the $50k/$100k rule will work just fine. If you are a higher earner and make more than $150k/$300k, you're probably going to want to do all-traditional. If you are in between those amounts, feel free to mix it up or do all traditional.

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FiveK
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Re: Roth vs. Traditional 401k

Post by FiveK » Sun Nov 11, 2018 4:05 pm

Jamesla30 wrote:
Sun Nov 11, 2018 3:44 pm
What "tax credit" are you referring to? Chances are that person is going to qualify for the same tax credits regardless of if they do traditional or roth contributions.
Not true for the earned income credit. For that, one does two calculations: one based on earned income alone (affected by 401k contributions), and the other based on AGI (affected by both 401k and IRA contributions). The credit is the smaller of the two calculations.
However, if they do a traditional contribution they will get a tax benefit of exactly $0 dollars. But in the future they will have to pay taxes on all their gains. With roth, they also get a tax benefit of $0 dollars, but they also get a benefit of $0 tax owned on all future growth and earnings.
Yes, if the marginal rate for a traditional contribution is 0% then traditional cannot be better than Roth. Note that even if one gets a refundable credit, the marginal rate can be non-zero.

hawkfan55
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Re: Roth vs. Traditional 401k

Post by hawkfan55 » Sun Nov 11, 2018 4:32 pm

The OP states gross income of $225k (24% bracket) with anticipated income increasing 50-60k within the next 5 years (24% bracket). Given current tax law, in 2025 OP will have gross income of 275-285k (28-33% bracket). With high income and high savings, if OP maximizes only tax deferred accounts, throughout the next thirty or so years, RMDs will most likely affect the tax bracket OP finds themselves in. I stand by my opinion that OP may well benefit from Roth 401k over next five to six years. Invested in TSM or Index 500 over the following 30-40 years should result in great tax free returns! Once tax rates return to 2017 levels in 2025, traditional 401k would be my recommendation.
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White Coat Investor
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Re: Roth vs. Traditional 401k

Post by White Coat Investor » Sun Nov 11, 2018 4:35 pm

FrugalPharmacist wrote:
Sat Nov 10, 2018 8:33 pm
Hello,

I am looking for some advice about where we should direct our retirement funds. I have read many conflicting things about Roth vs. traditional 401k. Can someone explain what would be the best fit for us? Or perhaps direct me to some resources to learn more about it for myself?

Some facts about us- married- both employed and contributing to retirement, 3 kids. Gross income ~$225,000. Debt-free except our mortgage which will be paid off in ~10 years or possibly sooner. Maxing out our HSA, saving for college for the kids. Both my spouse (age 28) & I (age 30) have the option to choose a traditional or Roth retirement account. Current retirement account balances are $110,000 in traditional 401k, $20,000 in Roth 401k between both of us. Currently on track for both of us to max out these accounts ($18,500 each this year). I am currently employed part-time & will likely increase my hours over the next 5 years (additional $50-60,000/year once full-time). I'm happy to provide other info as needed. I appreciate any help you can provide. Thanks!
General rule: Tax-deferred in peak earnings years and Roth in all other years.

Be sure you're doing Backdoor Roth IRAs too.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

KlangFool
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Re: Roth vs. Traditional 401k

Post by KlangFool » Sun Nov 11, 2018 4:37 pm

hawkfan55 wrote:
Sun Nov 11, 2018 4:32 pm
The OP states gross income of $225k (24% bracket) with anticipated income increasing 50-60k within the next 5 years (24% bracket). Given current tax law, in 2025 OP will have gross income of 275-285k (28-33% bracket). With high income and high savings, if OP maximizes only tax deferred accounts, throughout the next thirty or so years, RMDs will most likely affect the tax bracket OP finds themselves in. I stand by my opinion that OP may well benefit from Roth 401k over next five to six years. Invested in TSM or Index 500 over the following 30-40 years should result in great tax free returns! Once tax rates return to 2017 levels in 2025, traditional 401k would be my recommendation.
hawkfan55,

<< if OP maximizes only tax deferred accounts, >>

The recommendation is Trad. 401K with Roth IRAs. It is not only Trad. 401K.

<<I stand by my opinion that OP may well benefit from Roth 401k over next five to six years.>>

Versus your recommendation of Roth 401K only.

So, please explain why Roth 401K only is better than Trad. 401K with Roth IRAs.

KlangFool

hawkfan55
Posts: 302
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Re: Roth vs. Traditional 401k

Post by hawkfan55 » Sun Nov 11, 2018 4:42 pm

General rule: Tax-deferred in peak earnings years and Roth in all other years.

Be sure you're doing Backdoor Roth IRAs too.
I agree with this advice as well. I feel strongly that tax diversification works for most situations and most retirees are glad to have both deferred and Roth accounts, or wish they did.
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teen persuasion
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Re: Roth vs. Traditional 401k

Post by teen persuasion » Sun Nov 11, 2018 7:50 pm

Jamesla30 wrote:
Sun Nov 11, 2018 3:44 pm
KlangFool wrote:
Sun Nov 11, 2018 3:38 pm
Jamesla30 wrote:
Sun Nov 11, 2018 3:32 pm
KlangFool wrote:
Sun Nov 11, 2018 3:13 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
I give you an even simple rule. Do not contribute to Roth 401K. Almost every time someone posted that they contribute to Roth 401K, we can prove that it is not a good idea.

KlangFool
I will add that there is definitely situations where someone is absolutely making the wrong decision by following your rule. If they have low enough income, they can contribute to roth accounts tax free. There is absolutely zero argument you can make against that situation.
Jamesla30,

<< If they have low enough income, they can contribute to roth accounts tax free. There is absolutely zero argument you can make against that situation.>>

In that situation, why forgo free money from the government? With the tax credit, besides not paying tax, the government gives you money.

KlangFool
What "tax credit" are you referring to? Chances are that person is going to qualify for the same tax credits regardless of if they do traditional or roth contributions. However, if they do a traditional contribution they will get a tax benefit of exactly $0 dollars. But in the future they will have to pay taxes on all their gains. With roth, they also get a tax benefit of $0 dollars, but they also get a benefit of $0 tax owned on all future growth and earnings.
The Earned Income Tax Credit depends on your line 7 wages and your AGI. Contributions to a traditional 401k will reduce both, while contributions to tIRA only reduces AGI. As FiveK explained, your credit is whichever calculation is lower.

The EITC is a refundable credit - you can receive a refund even if you have nothing withheld. The phaseout rate for the EITC is 21% for multiple children. My state also matches EITC at 30%, for an effective additional 6.3% phaseout rate. If you add in our state tax rate of 4% and our 10% bracket (before 401k contributions), and our marginal rate is 41.3%, despite being between your $50-100k (and even when we were well below $50k) range MFJ plus kids. We also are eligible for CTC (also refundable, partially for 2018, with another 33% state match), AOTC (partially refundable, smaller state analog), and with 401k contributions - Retirement Saver's Credit. We could do Roth 401k, and let credits wipe out tax owed, or we can contribute traditional 401k and drive our taxable income down to where non-refundable credits cover tax owed and receive all the refundable credits. That extra income can then fund our Roth IRAs (totally tax free going in). There's no further advantage to traditional in IRA for us - it won't increase our EITC, and there's no tax (other than a small state tax - skimpy standard deduction) left to avoid.


So absolute income is not the metric to use - it is marginal rate. Refundable credits can effectively increase marginal rates in unexpected ways.

KlangFool
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Re: Roth vs. Traditional 401k

Post by KlangFool » Sun Nov 11, 2018 8:16 pm

teen persuasion wrote:
Sun Nov 11, 2018 7:50 pm
Jamesla30 wrote:
Sun Nov 11, 2018 3:44 pm
KlangFool wrote:
Sun Nov 11, 2018 3:38 pm
Jamesla30 wrote:
Sun Nov 11, 2018 3:32 pm
KlangFool wrote:
Sun Nov 11, 2018 3:13 pm


I give you an even simple rule. Do not contribute to Roth 401K. Almost every time someone posted that they contribute to Roth 401K, we can prove that it is not a good idea.

KlangFool
I will add that there is definitely situations where someone is absolutely making the wrong decision by following your rule. If they have low enough income, they can contribute to roth accounts tax free. There is absolutely zero argument you can make against that situation.
Jamesla30,

<< If they have low enough income, they can contribute to roth accounts tax free. There is absolutely zero argument you can make against that situation.>>

In that situation, why forgo free money from the government? With the tax credit, besides not paying tax, the government gives you money.

KlangFool
What "tax credit" are you referring to? Chances are that person is going to qualify for the same tax credits regardless of if they do traditional or roth contributions. However, if they do a traditional contribution they will get a tax benefit of exactly $0 dollars. But in the future they will have to pay taxes on all their gains. With roth, they also get a tax benefit of $0 dollars, but they also get a benefit of $0 tax owned on all future growth and earnings.
The Earned Income Tax Credit depends on your line 7 wages and your AGI. Contributions to a traditional 401k will reduce both, while contributions to tIRA only reduces AGI. As FiveK explained, your credit is whichever calculation is lower.

The EITC is a refundable credit - you can receive a refund even if you have nothing withheld. The phaseout rate for the EITC is 21% for multiple children. My state also matches EITC at 30%, for an effective additional 6.3% phaseout rate. If you add in our state tax rate of 4% and our 10% bracket (before 401k contributions), and our marginal rate is 41.3%, despite being between your $50-100k (and even when we were well below $50k) range MFJ plus kids. We also are eligible for CTC (also refundable, partially for 2018, with another 33% state match), AOTC (partially refundable, smaller state analog), and with 401k contributions - Retirement Saver's Credit. We could do Roth 401k, and let credits wipe out tax owed, or we can contribute traditional 401k and drive our taxable income down to where non-refundable credits cover tax owed and receive all the refundable credits. That extra income can then fund our Roth IRAs (totally tax free going in). There's no further advantage to traditional in IRA for us - it won't increase our EITC, and there's no tax (other than a small state tax - skimpy standard deduction) left to avoid.


So absolute income is not the metric to use - it is marginal rate. Refundable credits can effectively increase marginal rates in unexpected ways.
teen persuasion,

It will be very useful if you could point us to the old thread/topic that you go over your number. We should put that thread as one of our top thread/topic.

Thanks.

KlangFool

helloeveryone
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Re: Roth vs. Traditional 401k

Post by helloeveryone » Sun Nov 11, 2018 9:45 pm

FiveK wrote:
Sat Nov 10, 2018 9:27 pm
You are currently in the 24% bracket.

It takes ~$2.5 million in traditional accounts for a 4%/yr withdrawal rate on those alone to get out of the 12% bracket.

Until you expect to reach that amount, putting 100% into the traditional 401k is likely best.
Could you explain this? For 2018 the 12% tax bracket for married filing jointly is $77,400. I think I understand the big picture but wanted to make sure I’m not missing something. (ie- if expect to have more than $2.5mil in retirement then worry about roth but if not it’s not that big a concern)

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grabiner
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Re: Roth vs. Traditional 401k

Post by grabiner » Sun Nov 11, 2018 9:52 pm

helloeveryone wrote:
Sun Nov 11, 2018 9:45 pm
FiveK wrote:
Sat Nov 10, 2018 9:27 pm
You are currently in the 24% bracket.

It takes ~$2.5 million in traditional accounts for a 4%/yr withdrawal rate on those alone to get out of the 12% bracket.

Until you expect to reach that amount, putting 100% into the traditional 401k is likely best.
Could you explain this? For 2018 the 12% tax bracket for married filing jointly is $77,400. I think I understand the big picture but wanted to make sure I’m not missing something.
Add the standard deduction of $24,000 ($26,600 if you are over 65) to get $101,400 of total income. If you are withdrawing 4% from a $2.5M IRA or 401(k) as your sole source of income, you are under that level.

However, it's not quite that simple. If you are also taking Social Security, your marginal tax rate is likely to be 22.2% unless you are earning enough that the maximum 85% of Social Security is taxable. This 22.2% will become 27.75% if the tax rates go back up in 2026.
Wiki David Grabiner

helloeveryone
Posts: 163
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Re: Roth vs. Traditional 401k

Post by helloeveryone » Sun Nov 11, 2018 10:08 pm

grabiner wrote:
Sun Nov 11, 2018 9:52 pm
helloeveryone wrote:
Sun Nov 11, 2018 9:45 pm
FiveK wrote:
Sat Nov 10, 2018 9:27 pm
You are currently in the 24% bracket.

It takes ~$2.5 million in traditional accounts for a 4%/yr withdrawal rate on those alone to get out of the 12% bracket.

Until you expect to reach that amount, putting 100% into the traditional 401k is likely best.
Could you explain this? For 2018 the 12% tax bracket for married filing jointly is $77,400. I think I understand the big picture but wanted to make sure I’m not missing something.
Add the standard deduction of $24,000 ($26,600 if you are over 65) to get $101,400 of total income. If you are withdrawing 4% from a $2.5M IRA or 401(k) as your sole source of income, you are under that level.

However, it's not quite that simple. If you are also taking Social Security, your marginal tax rate is likely to be 22.2% unless you are earning enough that the maximum 85% of Social Security is taxable. This 22.2% will become 27.75% if the tax rates go back up in 2026.
thanks! there is so much to this :shock:

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FiveK
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Re: Roth vs. Traditional 401k

Post by FiveK » Sun Nov 11, 2018 10:10 pm

grabiner wrote:
Sun Nov 11, 2018 9:52 pm
helloeveryone wrote:
Sun Nov 11, 2018 9:45 pm
FiveK wrote:
Sat Nov 10, 2018 9:27 pm
You are currently in the 24% bracket.

It takes ~$2.5 million in traditional accounts for a 4%/yr withdrawal rate on those alone to get out of the 12% bracket.

Until you expect to reach that amount, putting 100% into the traditional 401k is likely best.
Could you explain this? For 2018 the 12% tax bracket for married filing jointly is $77,400. I think I understand the big picture but wanted to make sure I’m not missing something.
Add the standard deduction of $24,000 ($26,600 if you are over 65) to get $101,400 of total income. If you are withdrawing 4% from a $2.5M IRA or 401(k) as your sole source of income, you are under that level.

However, it's not quite that simple. If you are also taking Social Security, your marginal tax rate is likely to be 22.2% unless you are earning enough that the maximum 85% of Social Security is taxable. This 22.2% will become 27.75% if the tax rates go back up in 2026.
And if one is receiving a pension, getting dividends from taxable investments, or has other "unavoidable and guaranteed" sources of income, then one will hit higher marginal rates on traditional withdrawals at lower traditional withdrawal amounts.

It is certainly possible to have "too much" in traditional accounts because one was conservative in projections. That seems better than having too much in Roth because one was too optimistic and things didn't work out as well as hoped.

pepys
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Re: Roth vs. Traditional 401k

Post by pepys » Mon Nov 12, 2018 10:49 am

KlangFool wrote:
Sun Nov 11, 2018 3:13 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
I give you an even simple rule. Do not contribute to Roth 401K. Almost every time someone posted that they contribute to Roth 401K, we can prove that it is not a good idea.

KlangFool
I am 24 years old and maxing my 401k and IRA for this year, and intend to continue doing so for the foreseeable future. I am currently in the 22% tax bracket (and making over 50k a year), and expect that I will probably be in that bracket in retirement as well. By contributing to a Roth 401k versus a Traditional 401k, I can effectively put more money into the 401k (because the IRS does not distinguish between the maximum for the after-tax money of the Roth and the before tax money of the Traditional). That money otherwise would be in a taxable account. The spreadsheet at the Wiki page on Traditional versus Roth put me ahead with the Roth using these assumptions. Am I missing something, or am I one of those exceptions?

KlangFool
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Re: Roth vs. Traditional 401k

Post by KlangFool » Mon Nov 12, 2018 1:20 pm

pepys wrote:
Mon Nov 12, 2018 10:49 am
KlangFool wrote:
Sun Nov 11, 2018 3:13 pm
Jamesla30 wrote:
Sun Nov 11, 2018 2:51 pm
Here is a simple rule to follow: if you make <50k (individual) or <100k (jointly), direct your contributions to roth 401k (or roth ira). If you make more than that, go traditional.
I give you an even simple rule. Do not contribute to Roth 401K. Almost every time someone posted that they contribute to Roth 401K, we can prove that it is not a good idea.

KlangFool
I am 24 years old and maxing my 401k and IRA for this year, and intend to continue doing so for the foreseeable future. I am currently in the 22% tax bracket (and making over 50k a year), and expect that I will probably be in that bracket in retirement as well. By contributing to a Roth 401k versus a Traditional 401k, I can effectively put more money into the 401k (because the IRS does not distinguish between the maximum for the after-tax money of the Roth and the before tax money of the Traditional). That money otherwise would be in a taxable account. The spreadsheet at the Wiki page on Traditional versus Roth put me ahead with the Roth using these assumptions. Am I missing something, or am I one of those exceptions?
pepys,

<<I am currently in the 22% tax bracket (and making over 50k a year)>>
<<and expect that I will probably be in that bracket in retirement as well.>>

Your expectation is wrong. To be at 22% tax bracket, your gross income at retirement needs to be 50K. Let's assume that your social security income is 25K, you need another 25K. In order to receive 25K at retirement, your tax-deferred account needs to be at least 25X 25K = 625K.

Your tax-deferred account (Trad. 401K) is zero now. Thanks to the Roth 401K. So, please explain to me mathematically, how could your tax-deferred account be at 625K at retirement?

Roth 401K is the wrong answer!

It gets worse for you. You are foregoing free money from the government due to tax credits. Check out Earned Income Tax Credits and Saver's credits. You could be paying 0% or negative tax instead of 22% if you contribute to Trad. 401K.

Trad. 401K and Roth IRA is the best combination for most people. Save your taxes with Trad 401K. Put the tax savings into the Roth IRA.

KlangFool

P.S.: I maxed up my Trad. 401K for 20+ years. My current tax-deferred accounts (Trad. 401K + Rollover IRA) total is only 500K.
Last edited by KlangFool on Mon Nov 12, 2018 1:34 pm, edited 2 times in total.

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