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Roth 401K?
Old 04-04-2017, 10:38 PM   #1
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Roth 401K?

I recently did come across this strange employer sponsored plan: Roth 401K. It appears to be similar to ordinary 401K plan offered to employees, but funded by after tax money. I wonder does anyone actually have this plan? And if so, what is the advantage? I did some research on Internet and one opinion is that it may be easier to roll over 401K into Roth 401K, rather than into Roth IRA after employment termination. But I'm not quite convinced. It looks like another advantage is for those people who expect their tax to grow later in time (so they can pay lower tax early). But it is hard to see in the case of ER: the tax usually reduced after retirement. I'd appreciate your opinions.
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Old 04-04-2017, 10:58 PM   #2
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Our company offers a choice of either traditional or Roth. If you are in a low tax bracket now but expect to be in a higher bracket later, the Roth option may be preferable.
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Old 04-04-2017, 11:20 PM   #3
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You can roll over a Roth 401k to a Roth IRA without any tax impact. The advantage of the Roth is that you do not have to take Required Minimum Distributions (RMDs) at age 70.5 and the tax benefit will pass on to your heir(s). The RMDs for regular 401k & IRAs are designed to be expended over your lifetime. With Roth 401k, any employer matching will still be tax deferred.
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Old 04-05-2017, 12:12 AM   #4
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Originally Posted by evilanne View Post
You can roll over a Roth 401k to a Roth IRA without any tax impact. The advantage of the Roth is that you do not have to take Required Minimum Distributions (RMDs) at age 70.5 and the tax benefit will pass on to your heir(s). The RMDs for regular 401k & IRAs are designed to be expended over your lifetime. With Roth 401k, any employer matching will still be tax deferred.
evilanne, thanks for explanation. It is nice to know, that Roth 401K to Roth IRA rollover does not have any tax impact. Which is reasonable, since Roth 401K is funded with employee's after tax money. But I still wonder, if Roth 401K will be of any help in the following situation for example: employee has both ordinary 401K and Roth 401K, contributing small amount of money into Roth 401K (most of money still come to 401K). Then after voluntary or involuntary termination, employee decided to convert everything into Roth IRA. Is there any advantage to roll over ordinary 401K into Roth 401K, and then Roth 401K into Roth IRA. Another scenario: would there be any advantage to roll over 401K into Roth 401K in this situation (assuming low tax bracket), and then wait till 59.5 to start tax free distributions from Roth 401K?
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Old 04-05-2017, 12:20 AM   #5
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There are no income limits for Roth 401k contributions. Of course the higher the income the higher the value of the potential deduction that you are forgoing by using a Roth 401k instead of a Trad 401k.

Having a Roth option in a 401k is becoming increasingly common.
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Old 04-05-2017, 01:07 AM   #6
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Originally Posted by Alex The Great View Post
Is there any advantage to roll over ordinary 401K into Roth 401K, and then Roth 401K into Roth IRA. Another scenario: would there be any advantage to roll over 401K into Roth 401K in this situation (assuming low tax bracket), and then wait till 59.5 to start tax free distributions from Roth 401K?
Assuming the plan can or will let you do that, it would generate a taxable event to roll over 401K to Roth 401K. For me, without getting down to the minute details of a 401k vs IRA, is to think of a 401k= tIRA and Roth 401k=Roth IRA as far as roll over(s) and taxable events.

So you could roll over a 401k to a tIRA without a taxable event and same with Roth 401k to Roth IRA but converting a tIRA to Roth IRA will generate a taxable event similar to 401k to Roth 401k
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Old 04-05-2017, 01:20 AM   #7
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What I'm waiting for is for my employer to offer after tax additions to Roth 401k when I have hit my IRS max for the year $18k. What I have seen described is since the maximum that can be contributed to all retirement plans for the year is $54k (including employer contributions). So in theory you could put in $18k, say your employer has a match of 50% and they put in $9k and you put in $5k to your Roth IRA. That leaves you with $22k still eligible to be put in ($54-18-9-5=22) So you put that in after tax, into the Roth 401k and immediately roll it over to Roth IRA and potentially contribute another $22k. I am not sure how it works, but that is the theory. Anyone else heard of that gimmick loophole?

Unfortunately, when I inquired about the after tax contributions I was told my employer didn't support that option.
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Old 04-05-2017, 01:48 AM   #8
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evilanne, thanks for explanation. It is nice to know, that Roth 401K to Roth IRA rollover does not have any tax impact. Which is reasonable, since Roth 401K is funded with employee's after tax money. But I still wonder, if Roth 401K will be of any help in the following situation for example: employee has both ordinary 401K and Roth 401K, contributing small amount of money into Roth 401K (most of money still come to 401K). Then after voluntary or involuntary termination, employee decided to convert everything into Roth IRA. Is there any advantage to roll over ordinary 401K into Roth 401K, and then Roth 401K into Roth IRA. Another scenario: would there be any advantage to roll over 401K into Roth 401K in this situation (assuming low tax bracket), and then wait till 59.5 to start tax free distributions from Roth 401K?
1. If you are in a lower tax bracket and you needed to take a large withdrawal for a down payment on a house or major medical expense like long term care, etc, it may put you in a higher tax bracket; e.g. if you needed $100K for any reason, you would likely end up in a higher tax bracket for that year with only deferred 401k/IRA. I think of the Roth as an additional emergency fund that gives you more flexibility to manage your tax impact each year. Depending on you tax situation, you could take it all from the Roth or a combination of Roth & Regular accounts to minimize your taxes. In later years your deferred account may be much lower, possibly when you need it most.

2. If you have a large portfolio that increases over time, RMD withdrawals could actually increase your tax rate at some point in the future and put you in a higher tax bracket. There are calculators out there that will show you what your withdrawals would be given your assumptions such as rate of returns.

3. Once you put the money in a Roth, all the earnings are tax free, so much depends on how well your investments gain over time. It also depends on the financial situation and needs for your heirs, if they are doing well...a regular account could create a higher tax liability for them. Whether you want to leave a legacy for your family/heirs or provide for those less fortunate. There are a multitude of situations that may influence each person's decision on how to allocate between Regular and Roth accounts. My personal belief is that some type of mix of the two options is a best option which provides you flexibility in managing your income and tax liability.

Note: If your income is below a certain level, you can open an outside Roth account in addition to your 401k
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Old 04-05-2017, 02:13 AM   #9
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Originally Posted by Ronnieboy View Post
What I'm waiting for is for my employer to offer after tax additions to Roth 401k when I have hit my IRS max for the year $18k. What I have seen described is since the maximum that can be contributed to all retirement plans for the year is $54k (including employer contributions). So in theory you could put in $18k, say your employer has a match of 50% and they put in $9k and you put in $5k to your Roth IRA. That leaves you with $22k still eligible to be put in ($54-18-9-5=22) So you put that in after tax, into the Roth 401k and immediately roll it over to Roth IRA and potentially contribute another $22k. I am not sure how it works, but that is the theory. Anyone else heard of that gimmick loophole?

Unfortunately, when I inquired about the after tax contributions I was told my employer didn't support that option.
401k (Roth & Regular combined) is limited to 18K per year (+$6K over 50)
Most employers don't match that high a percentage (if at all)
Most employers won't allow you to roll over your 401k while you are working
Outside Roth IRA is limited to $5,500/year ($6,500 over 50) but there are income limitations where contributions are phased out.
Higher income earners sometime open regular IRA (not tax deductible) and immediately convert to Roth, paying associated tax at their marginal rate--called a back door Roth. (This may be the gimmick)
You can roll over Regular account to a Roth but you have to pay the taxes
All employer matching contributions are regular tax deferred contribution
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Old 04-05-2017, 05:46 AM   #10
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Originally Posted by Alex The Great View Post
I recently did come across this strange employer sponsored plan: Roth 401K. It appears to be similar to ordinary 401K plan offered to employees, but funded by after tax money. I wonder does anyone actually have this plan? And if so, what is the advantage? I did some research on Internet and one opinion is that it may be easier to roll over 401K into Roth 401K, rather than into Roth IRA after employment termination. But I'm not quite convinced. It looks like another advantage is for those people who expect their tax to grow later in time (so they can pay lower tax early). But it is hard to see in the case of ER: the tax usually reduced after retirement. I'd appreciate your opinions.
I have this option and use it. Each paycheck I put 14% in my 401k and 4% in my Roth 401k. Here's why I do it:
1. While I "expect" my tax rate to be lower when I initially retire, RMDs could result in much higher tax rates later in retirement depending on how my investments do over the years.
2. Additionally, tax policy can change. So what I think is the slightly better financial option now (traditional) may not still seem like a better option next year, 5 years from now, or 30 years from now. So putting some into the Roth 401k is a way to "hedge my bets".
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Old 04-05-2017, 08:02 AM   #11
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I am using this option this year--we are working 1/2 year, so our marginal rate will be lower than in past. (Also used it for a couple of years earlier before realizing it was clearly better in our high bracket years to put in pretax and convert after retirement.)
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Old 04-05-2017, 08:26 AM   #12
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Roth 401k is not strange or unusual. I used both Roth and regular 401k contributions when working. We didn't qualify for Roth IRA and the contribution limits are low anyway. Even before the Roth401k was available we had option for after tax 401k contributions and I used that too. I don't see any advantage to rolling funds into a Roth 401k. Our plan combines regular and aftertax/Roth balances until you withdraw/rollover and they are very good at sorting pretax and aftertax distributions at Fidelity.
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Old 04-05-2017, 08:51 AM   #13
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I have this option and use it. Each paycheck I put 14% in my 401k and 4% in my Roth 401k. Here's why I do it:
1. While I "expect" my tax rate to be lower when I initially retire, RMDs could result in much higher tax rates later in retirement depending on how my investments do over the years.
2. Additionally, tax policy can change. So what I think is the slightly better financial option now (traditional) may not still seem like a better option next year, 5 years from now, or 30 years from now. So putting some into the Roth 401k is a way to "hedge my bets".
I'm contributing to a Roth 401K at work and have been since 2012. From the perspective of paying a higher tax rate now versus a lower tax rate in the future, the Roth doesn't seem to make sense. To have some diversification to make strategic withdrawals in the future makes sense to me.
I also started a Roth IRA just to get the 5 year "clock" running. I may use this during retirement to make roll over contributions up to the top of my tax bracket.
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Old 04-05-2017, 09:33 AM   #14
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I think the other posters have cited most of the reasons for using a Roth 401K option. For me I love it, and actually pushed my company to add the option which they did recently. Projecting out a few years, I anticipate that RMDs far beyond my needs will push me into a higher tax bracket that I'd prefer. I split my contributions 50/50 between the Roth and traditional 401K.
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Old 04-05-2017, 10:57 AM   #15
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I'm contributing to a Roth 401K at work and have been since 2012. From the perspective of paying a higher tax rate now versus a lower tax rate in the future, the Roth doesn't seem to make sense. To have some diversification to make strategic withdrawals in the future makes sense to me.
I also started a Roth IRA just to get the 5 year "clock" running.
I may use this during retirement to make roll over contributions up to the top of my tax bracket.
+1
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Old 04-05-2017, 11:00 AM   #16
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Originally Posted by Olbidness View Post
I'm contributing to a Roth 401K at work and have been since 2012. From the perspective of paying a higher tax rate now versus a lower tax rate in the future, the Roth doesn't seem to make sense. To have some diversification to make strategic withdrawals in the future makes sense to me.
I also started a Roth IRA just to get the 5 year "clock" running.
I may use this during retirement to make roll over contributions up to the top of my tax bracket.
+1
+2. We converted 10K each in the 2013 tax year for that very reason. Unlikely we'll need the Roth withdrawals in early years, but just in case.
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Old 04-05-2017, 11:55 AM   #17
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Thanks to everyone for great comments and explanations! I realize Roth 401K indeed make sense. My current income does not qualify for Roth IRA, so I'd consider traditional IRA or Roth 401K or both.
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Old 04-05-2017, 12:54 PM   #18
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One advantage to a Roth 401k that I don't believe has been mentioned yet (and I believe is correct) is that you are effectively able to sock more money away in a Roth 401k vs regular 401k. The nominal limits on both are 18k. As Roth 401k is after tax money, 18k into a Roth 401k > 18k into a regular 401k. So if you are bumping up against the 18k limit you can put more money into a tax deferred growth account by putting into a Roth 401k. That plus hedging bets against whatever taxes may be 30 years in the future, and adding a little flexibility to modify taxable income is why I'm contributing to a Roth 401k.
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Old 04-05-2017, 01:12 PM   #19
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One advantage to a Roth 401k that I don't believe has been mentioned yet (and I believe is correct) is that you are effectively able to sock more money away in a Roth 401k vs regular 401k. ... That plus hedging bets against whatever taxes may be 30 years in the future, and adding a little flexibility to modify taxable income is why I'm contributing to a Roth 401k.
True, but the impact is diluted if you invest the tax savings rather than spend them. Agree on the last two points--but if you are at nominal 39.6 marginal fed (plus its add-ons/phaseouts, plus any state), you may determine that taxes on withdrawal/conversion in retirement are highly unlikely to top your present marginal rate....

(of course, it all depends upon how big of a pot you need to retire)
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