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Roth 401K - Worth it?
Old 09-08-2013, 12:52 AM   #1
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Roth 401K - Worth it?

My employer will be offering Roth 401K, and I would like some input.

Background:

I am 54. Hopefully, I will get to FIRE around 60.

Close to 70% of my portfolios are in my tax deferred accounts. I have been doing the after tax IRA conversion to Roth IRA the last few years in addition, but that is a very small amount in tax free account compared to the tax deferred.

I was looking at Fido RIP numbers and my Minimum Required Distribution is in the 50K range (per year) on average. With the taxes I would have to pay for the SS payment, it looks to me like I would be paying a lot on taxes.

I could be wrong, but maybe tax rate will go up in the future... (We can never know about the days to come, but we think about them anyway...) Maybe not. I don't know, but I feel (although I don't know why) that it would be nice if I had some after tax money that is in my portfolio I could use in conjunction with my before tax money so I won't get hit hard with taxes each year....

Would it be stupid to do Roth 401K this late in the game - a few years from retirement? (I am in 28% tax bracket right now, but I am socking away (=investing) a lot of after tax money - after 401K, after tax IRA, etc, I think I am putting in about 20K into the market) - maybe I may not want to do 100% Roth 401K but a part of it?

What would you do in my situation?
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Old 09-08-2013, 05:12 AM   #2
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A Roth 401(k) is probably not a good idea for you, but you will have to really check for youreslf.

Since you are retiring early, you should be able to do Roth conversions between age 60 and 70 while in a very low tax bracket and thus have tax-free Roth withdrawals and lower traditional IRA RMDs when you start receiving SS at age 70.

So instead of paying 28% income tax now, you could pay 0% now and then you could pay 0% or maybe 15% later.

I would just invest the extra $20K a year tax-efficiently in a taxable account to use for those future lower tax payments.

And don't forget to read the 2 articles linked here: Bogleheads • View topic - Roth 401K Confusion
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Old 09-08-2013, 08:33 AM   #3
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You need to look at the income including RMDs that you expect in retirement and what tax brackets that will put you in compared to your current tax bracket. If you will be an a substantially lower tax bracket in retirement, then skip the Roth 401k. If your tax bracket in retirement will be the same or higher, then go for it.

I think there is value to having good diversification across taxable, tax-deferred and tax-free funds in retirement and the Roth 401k would add some diversity so I would favor it unless the tax cost is significant.
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Old 09-08-2013, 08:41 AM   #4
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Have you done any tax simulations? The usual traditional vs Roth answer is that you compare what you pay or save now vs during wthdrawal. Very much depends on your own personal situation e.g. what other sources of income you have so you should model your own situation.

A simple case : If you had only SS (assume 20K) and 50K of RMD, you would pay about 8K in taxes. Without the RMD, you would pay 0 taxes.
You therefore are paying 8K taxes on 50K of RMD income or about 16% while
you saved 28% in taxes while you were working if you did the traditional 401K. This is for filing single. If this is your case, sounds like better to stick w/traditional. If you have other sources of income, your marginal effective rate for your RMD will increase making the traditional less favorable.

In addition, as LOL has pointed out, you can do the conversion in your interim yrs before RMD.

extra credit: http://www.fatwallet.com/forums/finance/1296478/
a similar question relating to 25% bracket
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Old 09-08-2013, 09:35 AM   #5
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I believe some of the benefits of a Roth IRA don't apply to a Roth 401(k), including protection from RMD's.
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Old 09-08-2013, 09:53 AM   #6
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Sure a Roth 401(k) has RMDs, but folks just roll it over to a Roth IRA which has no RMDs.
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Old 09-08-2013, 12:51 PM   #7
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Originally Posted by someguy View Post
I believe some of the benefits of a Roth IRA don't apply to a Roth 401(k), including protection from RMD's.
I believe the references to RMD are to the traditional 401K/IRAs OP has.
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Old 09-08-2013, 01:27 PM   #8
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Figure out the highest marginal rate at which you will be withdrawing pre-tax 401k/IRA money during retirement. If that rate is equal to or higher than your current marginal tax rate, then you should probably use your Roth 401k instead. Check it each year to make sure your tax rates still look the same.

Here's one exception: I'm 5 years older than DW. I can Roth convert some of my IRA balance, or DW can contribute to her Roth 401k (or both of course). If DW contributes pre-tax to her regular 401k, I can Roth convert more of my IRA. That reduces my RMD, which is always 5 years higher (a larger percentage of the balance) than DW's in any given calendar year. Until my IRA is all converted, it's best for DW to stay with pre-tax contributions.

It's all tax reduction strategy, so it's very dependent on the specifics of your taxes.
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Old 09-08-2013, 01:30 PM   #9
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Thank you very much for all your posts. From what you are all telling me, I think I should stick with traditional 401K, but here is the breakdown I see in Fido RIP for when I am 72.

Total Expense - 90K
Tax Detail - 23K
Pension - 4.5K
SS - 44K
MRD - 39.5K
Total withdrawal - 63K

Does the tax detail look high to you? I would expect it to be much lower from the numbers you have given me. (I need to talk to Fido next week to clarify the definition of Tax Detail...) I live in CA and I will be in the 9%+ tax bracket with the amount of money listed here..

I would think I should still stick with traditional 401K. I read the links you'all posted and since we cannot predit if the tax rate will go up in the future, I will be better off sticking with traditional 401K...

Oh, another question - Ah... I cannot find the article LOL linked now that I read... Anyway, somewhere in the article it said I could convert 401K (after I retire) to traditional IRA and then covert it to Roth IRA. Can I do this with no earned income (or they would consider SS as income)?
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Old 09-08-2013, 02:19 PM   #10
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Referring to the original post; my employer started offering Roth 403(b) in 2008. I jumped on it and stopped traditional contributions. I put money in nothing but diversified stock funds (no bonds, I left those in the traditional) and kept doing it month after month. We all know what happened to the market in '08, so in one sense I stumbled into luck.

I'm glad now I made that choice, however we also had a separate deferred compensation plan (more like a traditional 401/403) that I also contributed to. I sold taxable funds to cover the hit in take-home pay caused by the deferrals.
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Old 09-08-2013, 02:21 PM   #11
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p.s. I was a little younger than you when I started with the Roth 403(b), but not by much.
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Old 09-08-2013, 02:46 PM   #12
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Quote:
Originally Posted by tmm99 View Post
Oh, another question - Ah... I cannot find the article LOL linked now that I read... Anyway, somewhere in the article it said I could convert 401K (after I retire) to traditional IRA and then covert it to Roth IRA. Can I do this with no earned income (or they would consider SS as income)?
When I retired at age 55, I rolled my 401K into a tIRA. Then at age 59 I began converting some of the tIRA assets into Roth IRAs. Wish I had started right away at 55, would have saved on taxes. My total additional tax over 6 years has been $30k on $300k converted, so 10%. Even with the late start, I should have a very low RMD at age 70-1/2.
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Old 09-08-2013, 02:47 PM   #13
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Quote:
Originally Posted by tmm99 View Post
but here is the breakdown I see in Fido RIP for when I am 72.

Total Expense - 90K
Tax Detail - 23K
Pension - 4.5K
SS - 44K
MRD - 39.5K
Total withdrawal - 63K

Does the tax detail look high to you? I would expect it to be much lower from the numbers you have given me. (I need to talk to Fido next week to clarify the definition of Tax Detail...) I live in CA and I will be in the 9%+ tax bracket with the amount of money listed here..

Oh, another question - Ah... I cannot find the article LOL linked now that I read... Anyway, somewhere in the article it said I could convert 401K (after I retire) to traditional IRA and then covert it to Roth IRA. Can I do this with no earned income (or they would consider SS as income)?
You do not need earned income to do a Roth conversion .

The numbers above are a bit confusing: are you saying you are withdrawing 63K from 401K (which includes the RMD) which with your 4.5K pension and 44K SS is about 112K income . This will almost match your 90K expenses
and 23K taxes which is 113K expenses. Taxes not included in expenses?
If it is, why not take out less from the 401K.

you can try playing with this Free 2012 Tax Estimator & Tax Return Calculator - H&R BlockŪ

If I input MFJ (you didn't say but that SS looks pretty big for one person), 44K SS, 63K from 401K, 4.5K from pension, I get tax (fed only) of 12835. For single, tax (fed only) is 19697
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Old 09-09-2013, 02:42 PM   #14
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Quote:
Originally Posted by kaneohe View Post
You do not need earned income to do a Roth conversion .

The numbers above are a bit confusing: are you saying you are withdrawing 63K from 401K (which includes the RMD) which with your 4.5K pension and 44K SS is about 112K income . This will almost match your 90K expenses
and 23K taxes which is 113K expenses. Taxes not included in expenses?
If it is, why not take out less from the 401K.

you can try playing with this Free 2012 Tax Estimator & Tax Return Calculator - H&R BlockŪ

If I input MFJ (you didn't say but that SS looks pretty big for one person), 44K SS, 63K from 401K, 4.5K from pension, I get tax (fed only) of 12835. For single, tax (fed only) is 19697
I didn't know you can do Roth conversion without earned income. Thank you very much for that. I will definitely play with the calculator you listed here.

As for the numbers I listed. I am actually not sure how the numbers were derived, so I will have to contact Fido to find out for sure, but from what I can tell, the total withdrawal is MRD + withdrawal from other assets (I cannot tell from the table if the other withdrawal comes from 401K or from other after tax assets.) The tax detail value is very, very low up until Age 66 (less than $400 on average) and then it spiks to $1K and then to $3K which makes me think the calculation is probably depleting all after tax assets first before going for the 401K, although it's just my speculation. (I may find this info in their PDF's..)

Total expense for Age 72 is $88K (I was mistakingly reading the expense for Age 73 in the earlier post, it said 90K. MRD+SS+Pension to add up to the total expense)

The numbers are for one person only, but I see all the numbers are higher as I age (I believe Fido is stating the inflated amount - hence the SS looks big.) From what I can tell, 401K amount is MRD so you cannot take out less from 401K as you suggest (especially if my assumption is correct that RIP is depleting all the after tax assets first.)

I could probably distribute the tax burden by taking out some form 401K instead of spending all after tax money first.
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Old 09-10-2013, 02:16 AM   #15
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You might want to compare the results of the HR Block calculator with this one
https://turbotax.intuit.com/tax-tool...ors/taxcaster/
to make sure they agree.
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