Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
No Brainer? Roth 401K vs Taxable
Old 08-31-2007, 07:31 AM   #1
Recycles dryer sheets
BigBob's Avatar
 
Join Date: Apr 2007
Location: Sebring
Posts: 190
No Brainer? Roth 401K vs Taxable

Background:
I fully fund a Roth IRA for myself and DW and am funding a Roth 401K above the corporate match (but under the max). I plan to RE in 8 years at 55, and from age 55 to 59.5 use money in Taxable accounts and Roth IRA (it may be likely that I will need to draw some from my contributions).

Is there anything I am missing that I might want to consider that would have me save in a Taxable account versus what I am doing now, saving above the company match in the Roth 401k?

I welcome any comments.
-Bob
__________________

__________________
BigBob is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-31-2007, 07:41 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,627
You are missing that you will be in a much lower tax bracket when you are retired, so you should be maxing your 401k and not your Roth 401k. Here's how it works: You put $15,500 into your 401k and do not pay any taxes on it. When you are retired at age 55, you can earn more than $16,000 a year tax-free, so you withdraw from 401k tax-free. Tax-free money now; tax-free money in the future.

You can also convert some of your money to a Roth and pay a lower tax rate then.

If you wait to convert until you are receiving SS benefits, then you may end up paying more taxes because more of your SS benefits will be taxed.

Run your own numbers to see what I mean, but I don't think a Roth 401k is a good idea for early retirees.
__________________

__________________
LOL! is offline   Reply With Quote
Old 08-31-2007, 07:59 AM   #3
Recycles dryer sheets
 
Join Date: Aug 2007
Location: Midwest
Posts: 109
Here's something you should be aware of. If you leave employment after Jan 1 of the year you turn 55, whether their choice or yours, you are able to withdraw money from the retirement plan sponsored by that employer without penalty. If you think you will stay with your current employer until then tax-advantaged accounts before current-taxable accounts is a no brainer. And even if you don't stay with them, there's the 72t option.

As to whether the tax-advantaged savings should be tax-deferred or Roth, that takes a bit more study of your own situation -- particularly how much you already have as tax-deferred. But it probably will come out tax-deferred as LOL suggests.
__________________
Engineering My Finances Blog
EngineeringMyFinances is offline   Reply With Quote
Old 08-31-2007, 08:04 AM   #4
Dryer sheet aficionado
 
Join Date: Aug 2007
Posts: 47
Interesting thoughts LOL. I guess i had always imagined saving early and retiring at a higher standard of living. Very good point though that those considering early retirement really will need to earn at or below what they did in their w*rking years to be comfortable (a large portion of income no longer needs to be put aside for retirement).
__________________
hova22 is offline   Reply With Quote
Old 08-31-2007, 08:11 AM   #5
Recycles dryer sheets
BigBob's Avatar
 
Join Date: Apr 2007
Location: Sebring
Posts: 190
Quote:
Originally Posted by LOL! View Post
You are missing that you will be in a much lower tax bracket when you are retired, so you should be maxing your 401k and not your Roth 401k. Here's how it works: You put $15,500 into your 401k and do not pay any taxes on it. When you are retired at age 55, you can earn more than $16,000 a year tax-free, so you withdraw from 401k tax-free. Tax-free money now; tax-free money in the future.
Thanks for the reply. I am not sure I will be in a lower tax bracket(who knows what the gummint will do), as I plan to draw money from a pension(about 16K) and then my own resources to a total of about $40k per year, which currently is 15% bracket. But what you said made me reconsider, as I would like to stay in the 15% bracket NOW, and I may need to divert some more from a regular 401K to keep me in this bracket.

Also, unless I am mistaken, I don't think I can withdraw from 401k till 59.5 (unless I do a SEPP, which I don't want to do).
__________________
BigBob is offline   Reply With Quote
Old 08-31-2007, 08:19 AM   #6
Full time employment: Posting here.
 
Join Date: Oct 2003
Posts: 961
Quote:
Originally Posted by BigBob View Post
Thanks for the reply. I am not sure I will be in a lower tax bracket(who knows what the gummint will do), as I plan to draw money from a pension(about 16K) and then my own resources to a total of about $40k per year, which currently is 15% bracket. But what you said made me reconsider, as I would like to stay in the 15% bracket NOW, and I may need to divert some more from a regular 401K to keep me in this bracket.

Also, unless I am mistaken, I don't think I can withdraw from 401k till 59.5 (unless I do a SEPP, which I don't want to do).
Read your 401(k)'s summary plan description, which HR should have. Most 401(k)'s I've seen allow employees that separate from service after age 55 to begin withdrawals from the 401(k).
__________________
ats5g is offline   Reply With Quote
Old 08-31-2007, 08:21 AM   #7
Recycles dryer sheets
BigBob's Avatar
 
Join Date: Apr 2007
Location: Sebring
Posts: 190
Quote:
Originally Posted by EngineeringMyFinances View Post
Here's something you should be aware of. If you leave employment after Jan 1 of the year you turn 55, whether their choice or yours, you are able to withdraw money from the retirement plan sponsored by that employer without penalty. If you think you will stay with your current employer until then tax-advantaged accounts before current-taxable accounts is a no brainer. And even if you don't stay with them, there's the 72t option.
Thanks for this tidbit that I am sure I heard somewhere but it didn't sink in.
So it is possible without the SEPP/72t to withdraw without the penalty, given these conditions.

So now I feel comfortable with still sticking it into the 401K, and now I need to do some more research into Roth vs regular 401K, which I know there are numerous resources(of which I have some from when I signed up w/VG).

My gut feel is that I need to figger out the amount needed to put in the regular 401K to drop me into the 15% bracket, then the remainder into the Roth 401K. If things remained the same(tax bracket wise), I believe it could not hurt with this approach. If tax brackets creeped up in the future, this approach turns out even better.
-bob
__________________
BigBob is offline   Reply With Quote
Old 08-31-2007, 08:52 AM   #8
Recycles dryer sheets
BigBob's Avatar
 
Join Date: Apr 2007
Location: Sebring
Posts: 190
Quote:
Originally Posted by ats5g View Post
Read your 401(k)'s summary plan description, which HR should have. Most 401(k)'s I've seen allow employees that separate from service after age 55 to begin withdrawals from the 401(k).
ats5g,
You are right. My SPD says "If you receive a distribution or withdrawal before you reach age 59 and do not roll over the distribution to an IRA or similar plan within 60 calendar days, you may be subject to a special 10% excise tax in addition to regular income taxes as a penalty for early distribution. This penalty does not apply if a distribution is made after separation from service after you attain age 55..."
Thanks.
__________________
BigBob is offline   Reply With Quote
Old 08-31-2007, 11:10 AM   #9
Dryer sheet aficionado
 
Join Date: Aug 2007
Posts: 47
good stuff
__________________
hova22 is offline   Reply With Quote
Old 08-31-2007, 04:28 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,863
What happens to Roth tax benefits if the U.S. switches to some sort of national value added or consumption tax instead of income taxes? I feel a little better having some taxes paid already and some deferred. No telling what taxes will look like tomorrow.

Dan
__________________
Animorph is offline   Reply With Quote
Old 08-31-2007, 04:39 PM   #11
Thinks s/he gets paid by the post
teejayevans's Avatar
 
Join Date: Sep 2006
Posts: 1,228
Quote:
Originally Posted by Animorph View Post
What happens to Roth tax benefits if the U.S. switches to some sort of national value added or consumption tax instead of income taxes? I feel a little better having some taxes paid already and some deferred. No telling what taxes will look like tomorrow.

Dan
Do you really think the politicians are going to let all that IRA money that
was never taxed remain untaxed. Even if we went to VAT system, you can
count on IRAs still have to pay some kind of tax at some point.
TJ
__________________

__________________
teejayevans is online now   Reply With Quote
Reply

Tags
401k


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Need advice: traditional 403(b) vs. Roth 403(b) vs. Roth IRA vs. taxable account Silhan FIRE and Money 12 06-07-2007 11:08 AM
Trad 401k or Roth 401k for High Earners Linney Young Dreamers 7 01-01-2007 08:24 PM
roth 401k and roth dont seem good deal mathjak107 FIRE and Money 29 05-29-2006 06:43 AM
Hold regular bond in 401k or muni in taxable? soupcxan FIRE and Money 9 04-07-2005 05:54 PM
taxable vs. roth/401k strategy phhtj FIRE and Money 0 02-17-2005 09:23 AM

 

 
All times are GMT -6. The time now is 08:58 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.