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Old 02-05-2013, 02:31 PM   #21
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Having a young family, our Effective Tax Rate is quite low compared to our Marginal Tax Bracket. We do have rIRAs, and if my employer offered a r401(k), I would jump on it. We already max my 401(k).

My fears are:
A) Having too much (comparitively) in our deffered accounts
B) Not taking advantage of our low (~4%) Tax Rate now VS a *much* higher rate in ER

I think diversafication (from an Account Type perspective) is as important as AA diversafication. I really don't know what life is going to throw our way, so I want to prepare as much as possible.
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Old 02-05-2013, 04:47 PM   #22
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Never had option of 401(k)ROTH, so take for what it's worth.

In the tIRA vs Roth IRA world, EQUIVALENT sheltered amounts have different values (based on the taxable income rate). Essentially, you have a "bigger" IRA (more money sheltered in the future) if you have a Roth than if you have a tIRA - once you've paid the up-front taxes. If you've ever wished you could contribute more to your IRA, you can, if you choose the ROTH over the tIRA. The ROTH is bigger than the tIRA by the taxes that would have been paid when cashed in - if you do it right, that's the amount of taxes you paid when you funded the ROTH.

I don't know if the equivalent is true for 401(k) vs 401(k)Roth.
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Old 02-05-2013, 05:33 PM   #23
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Quote:
Originally Posted by JoshTrent View Post
Having a young family, our Effective Tax Rate is quite low compared to our Marginal Tax Bracket. We do have rIRAs, and if my employer offered a r401(k), I would jump on it. We already max my 401(k).

My fears are:
A) Having too much (comparitively) in our deffered accounts
B) Not taking advantage of our low (~4%) Tax Rate now VS a *much* higher rate in ER

I think diversafication (from an Account Type perspective) is as important as AA diversafication. I really don't know what life is going to throw our way, so I want to prepare as much as possible.
Just to be clear, the analysis should be done using your marginal tax rate. Not your effective.
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Old 02-05-2013, 06:30 PM   #24
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GrayHare - are they really the same under my modified assumption (that I will pay taxes in addition to my contribution)?

If I put 17k in a t401k and 17k in a r401k the balances may be the same at retirement but r401k is tax free dollars so it actually has more value than t401k dollars that I will actually receive $0.80 on the dollar (or less).

Your analysis is the same analysis I always hear but I think it is making some big assumptions.
It is not comparing apples to apples figuring 17k in both. You are prepaying the taxes with money outside the roth in advance. You are then pulling the tax money from within the regular ira.
Not apples to apples.

Rerun the numbers taking the money for the taxes from outside the deductable ira just like you did for the roth.

Even if tax rates are the same the roth would have paid more in tax.

The last 40 years has seen the tax brackets adjusted every year and allow more and more income go through with less and less tax.

Another few years and 100k will be at the 25% marginal rate with most going through at lower rates.

Marginal tax rates can even rise off in the future but you may still pay less in tax then the roth today.
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Old 02-05-2013, 06:40 PM   #25
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Do the math: if your tax rate is the same now as when you withdraw, the after-tax value of a t401k and r401k are identical.

Some might mistakenly try to use an r401k to avoid RMDs, but unlike rIRAs, an r401k has RMDs just like a t401k.
Roth 401k's have no rmd's as long as the owner is alive same as regular roths.
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Old 02-05-2013, 07:16 PM   #26
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Originally Posted by ronocnikral

Just to be clear, the analysis should be done using your marginal tax rate. Not your effective.
Care to explain the thinking?
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Old 02-05-2013, 08:55 PM   #27
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Care to explain the thinking?
When you contribute to a 401k, the dollars come off the top of your income, which is the part taxed at your highest marginal rate. Figure your taxes without the contribution and then with the contribution.

When you withdraw from a 401k then you may make full utilization of the average tax rate, providing you don't have any other taxable income sources. Combining 401k and Roth withdrawals let you control your tax level.
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Old 02-05-2013, 09:07 PM   #28
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Roth 401k's have no rmd's as long as the owner is alive same as regular roths.
The IRS says r401ks do have an RMD: "The RMD rules also apply to Roth 401(k) accounts." The quote is from http://www.irs.gov/Retirement-Plans/...-Distributions
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Old 02-05-2013, 10:43 PM   #29
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Originally Posted by JoshTrent

Care to explain the thinking?
Do your taxes. Deduct $5k as if you are making a deductible IRA contribution. Note change in taxes. Do the same thing, but add the $5k into your income. Note tax liability. The difference will be approx $5000*marginal tax rate, not your effective rate. Unless the $5k falls over 2 tax rates and/or the above the line deduction allows you other deductions, (eg student loan interest deduction, child tax credit etc)
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Old 02-06-2013, 01:22 AM   #30
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The IRS says r401ks do have an RMD: "The RMD rules also apply to Roth 401(k) accounts." The quote is from Retirement Plans FAQs regarding Required Minimum Distributions
Yes, but you can roll the Roth 401k to a Roth IRA prior to RMD age.

http://www.irs.gov/pub/irs-tege/rollover_chart.pdf
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Old 02-06-2013, 02:38 AM   #31
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The IRS says r401ks do have an RMD: "The RMD rules also apply to Roth 401(k) accounts." The quote is from Retirement Plans FAQs regarding Required Minimum Distributions
all it means is you have to move it from a roth 401k to a roth ira .

they want you to start to move it away from the company at some point so that is the catalyst but it really is a non event.
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