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Old 10-24-2014, 04:38 PM   #1
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To Roth or Not

Hi,

I am considering retiring at the end of 2015, and I am wondering if I should put my 2015 401(k) contributions in a traditional account or in a Roth account.

Here's some info about us that I think is relevant to the decision. If you need more just let me know:

1. I am 56, DW is 55. DW is retired now.
2. We have no monies in Roth accounts now; only tIRAs and taxable.
3. My employer does not match 401(k) contributions
4. We will likely be in a 28% bracket next near, and then use taxable (post-tax) funds to be in lower brackets upon ER.
5. Portfolio is, coincidentally, 60/40 taxable/tax-deferred and same for stock/bond

Any thoughts? The idea of no tax-deferred contributions next year is a little concerning, but so is the idea of entering retirement with no Roth money.

Thanks again!
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Old 10-24-2014, 04:45 PM   #2
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If you anticipate your post-retirement tax rate to be lower than your current rate while working, which is usually the case, I would recommend placing the money in the tax advantaged traditional 401k. You will take the money out at a lower tax rate in retirement then you would pay to have it taxed as part of your income during your working years and put in a Roth.

Would you possibly be in a position, post-retirement, to have earned income and contribute to the Roth to grow the account and use later in life? That would be the only reason to put the money in the Roth that I can see, but it would be an unusual circumstance.
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Old 10-24-2014, 04:46 PM   #3
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I would put in in a regular 401K, and save 28% in federal taxes. Then, transfer it to a regular rollover IRA (at Fidelity or ?) after you retire, paying no income tax on the transfer/rollover.

Then, gradually move the IRA money to a Roth IRA. Only pay tax on what you move. Like a back door Roth IRA.
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Old 10-24-2014, 09:27 PM   #4
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Contribute to his and her Roth IRAs now for 2014.

Contribute to traditional 401(k) in 2015.

Contribute to his and her Roth IRAs in 2015 for 2015.

You know that 401(k) assets usually can be withdrawn without penalty for certain ex-employees age 55 and higher, right? So putting that money in a Roth IRA would probably not be wise.
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Old 10-24-2014, 10:24 PM   #5
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Originally Posted by Trooper View Post
Hi,

I am considering retiring at the end of 2015, and I am wondering if I should put my 2015 401(k) contributions in a traditional account or in a Roth account.

Here's some info about us that I think is relevant to the decision. If you need more just let me know:

1. I am 56, DW is 55. DW is retired now.
2. We have no monies in Roth accounts now; only tIRAs and taxable.
3. My employer does not match 401(k) contributions
4. We will likely be in a 28% bracket next near, and then use taxable (post-tax) funds to be in lower brackets upon ER.
5. Portfolio is, coincidentally, 60/40 taxable/tax-deferred and same for stock/bond

Any thoughts? The idea of no tax-deferred contributions next year is a little concerning, but so is the idea of entering retirement with no Roth money.

Thanks again!
Might make sense as a legacy play at this point.
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Old 10-25-2014, 07:50 AM   #6
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Contribute to his and her Roth IRAs now for 2014.

Contribute to traditional 401(k) in 2015.

Contribute to his and her Roth IRAs in 2015 for 2015.

You know that 401(k) assets usually can be withdrawn without penalty for certain ex-employees age 55 and higher, right? So putting that money in a Roth IRA would probably not be wise.
+1 maximize tax-deferred contributions while you are still in a high tax bracket if you will be in a lower tax bracket once you retire (most people are) but still maximize Roth contributions if you have available after-tax funds to invest.

In 2016, you could consider Roth conversions if you are in a lower tax bracket.

Be aware that not all plans allow penalty free withdrawals if you terminate after 55 - check you Summary Plan Description for details.
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Old 10-25-2014, 10:27 AM   #7
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Some Roth money may give you income source flexibility in the future when things like RMD's (Required Minimum Distributions) raise their ugly head and promise to take a bigger than usual tax bite.
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Old 10-25-2014, 10:39 AM   #8
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I hope it's clear from the responses so far that it makes absolutely no sense from a tax or investment point of view to contribute to a Roth while in the 28% tax bracket, only to have your income decline in retirement and put you in a lower tax bracket.

Some of the responses highlight the benefits of having some Roth money, and this is certainly true. But the right way to get money into a Roth in your situation is to make tax deferred contributions while you are working, then gradually do rollovers into a Roth IRA after retirement, thereby taking advantage of your lower tax bracket.
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Old 10-25-2014, 10:46 AM   #9
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LOL's suggestion also makes a lot of sense, but only if you can afford to max out the tax deferred money in your 401k in 2014 and 2015 and also contribute to Roth IRAs at the same time. This would give you a headstart on getting money into a Roth.
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Old 10-25-2014, 11:05 AM   #10
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Right. I want to be clear: Max out 401(k) contributions (next year $24,000 for the OP) before contributing to a Roth IRA.
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Old 10-25-2014, 11:26 AM   #11
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Some Roth money may give you income source flexibility in the future when things like RMD's (Required Minimum Distributions) raise their ugly head and promise to take a bigger than usual tax bite.
Yes this is a good strategy. The RMD can force you into a high tax bracket if you have a really large 401k balance and the markets perform as advertised.

I will have a decent(hopefully) pension income plus SS so I won't even need to touch my 401k until the RMD is required. This could really push me into a high tax bracket.
I guess I might need to start withdrawing from the 401k before RMD to manage the tax hit.

So I do both the Roth 401k(only 2%) and mostly traditional 401k with contributions.

Chances are the RMD age will be raised by the time I reach my 70s.
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Old 10-25-2014, 11:39 AM   #12
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Right. I want to be clear: Max out 401(k) contributions (next year $24,000 for the OP) before contributing to a Roth IRA.
I max out my 401k(23k). Should I just completely skip the Roth 401k?

I also max out my Roth IRA($6500). I am hoping to leave that all to my son.

My plan with the Roth 401k money is to maybe put it towards a Newmar RV or a small Colorado or Utah cabin.

I have about a 8 to 12 year window to FIRE.
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Old 10-25-2014, 03:50 PM   #13
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I don't think with only one or two years to contribute there will be a significant difference If you go Roth or traditional. I am also in 28% bracket and expect that to stay the same in retirement. About 5 years ago I started putting 1/2 of my max 401K into the Roth version, and last year changed that to all contrib going into Roth 401K. So I will have 6 years in Roth when I fire. Still, not a significant portion of full retirement finds. On paper it makes sense for me to do non-Roth, but this gives me some flexibility and under current law will work better if we leave it to our kids. for me it makes me feel safer, a small stash I can take out without taxes if we need it, and gives me options.

Just my 0.02, contrarian but then that is who I am.
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Old 10-25-2014, 06:25 PM   #14
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If you are only working a few more years, then you might consider using traditional 401k while working, take the deduction, and then convert to Roth after you retire and have lower income and tax bracket.
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Old 10-25-2014, 08:43 PM   #15
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I was about to give you one answer. Then I re-read your post and I think Iím going to give you another answer.

But the real answer is no one has a crystal ball and can tell you what the best answer is going to be for your future circumstances (including what happens to taxes the future).

Iím biased toward the Roth because
  • I think taxes will go up in the future
  • I like knowing that when I take the money out of the Roth I get to keep it all (no taxes)
  • I like the added flexibility the Roth provides
I was going to go down the path already suggested that you max out your pre-tax 401K savings and then convert Traditional to Roth while you are in a lower tax bracket (enough to max out your 15% tax bracket).

But then I re-read your bullet 4. And now Iím reading that you will only be in a lower bracket because you are pulling from you taxable account (only growth portion of what you pull is taxable). So I assume that if you pull the same amount from your Traditional Retirement account that you would be back in the 28% bracket. Iím also kind of reading between the lines that while you may be in a lower tax bracket by using your un-sheltered account, you donít have much room left for conversions. Additionally if you do a conversion, you would need to also pull enough money from your un-sheltered accounts to cover the additional tax caused by the conversion which would also move you closer to the 15% bracket limit. The current 0% tax on long term capital gains is sweet and I wouldnít want to do anything to mess that up.

Do you have any pension that will kick in either immediately or at a certain age? Then there is the issue of social security benefits and how where you draw your money factors into your taxes.

If it were me (and I read your situation correctly), I would max out all Roth avenues available to me Ė meaning maxing out your 401K Roth and you and your wifeís Roth IRAs (if eligible Ė sounds like you are not) Ė this year and next.

I would then also continue the route of converting Traditional to Roth maximizing the 15% tax bracket if you can. That way when things like pensions (if applicable), social security income, and RMDs (which will now be lower due to the Roth conversions) kick in you will have some flexibility with your tax-free savings to optimize your future taxes.

Re-re-reading your post, you said you are currently in the 28% bracket and you would be lower after you ER (at least initially) Ė lower 15% or lower 25%? If you are only lowering to the 25% bracket I might be tempted to do something really radical and max out the 25% bracket with conversions. I would probably also play with the way I cashed things in so that one year I would max out the 25% bracket (long term capital gains + withdrawals from Traditional accounts + conversions) Ė then the next year draw only from the unsheltered accounts to max out the 15% tax bracket. If I need more money the 2nd year than what I can pull to keep in the 15% bracket, then I would pull enough money the prior year to cover the delta. So the first year I max out the 25% bracket and the 2nd year I pay no taxes.

Iím also kind of tempted to pull living expenses from the Traditional accounts during years that the 25% bracket is maxed so that I can save the capital gains for years in the 15% bracket Ė but I also donít know how long the favorable tax on long term capital gains will stick around.

I donít know what portion of my ramblings apply to you, but hopefully it gives you some ideas.
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Old 10-26-2014, 09:49 AM   #16
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While I don't want to hijack the thread, are there others out there that won't be in position to get 15% tax rate in retirement? I'm still working but DW and I both are retired Army, and with the 2 checks I don't see us getting below current 28% rate. Just curious, am I the only one in this position?
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Old 10-28-2014, 02:36 PM   #17
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Thanks everyone for your helpful, as always, thoughts. I want to get more familiar with the 2015 rules for non-working spousal IRAs -- both the contribution limits and the deductibility -- prior to making a final decision. I believe that's IRS Pub 590?
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Old 10-28-2014, 04:44 PM   #18
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I max out my 401k(23k). Should I just completely skip the Roth 401k?



I also max out my Roth IRA($6500). I am hoping to leave that all to my son.



My plan with the Roth 401k money is to maybe put it towards a Newmar RV or a small Colorado or Utah cabin.



I have about a 8 to 12 year window to FIRE.

I would contribute fully to your 401(k) before contributing to a Roth. You can also do an after tax contribution to your 401(k) and then roll that over to a Roth 401(k). This is employer dependent however, but is on top of your 17500 limit
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Old 10-28-2014, 04:55 PM   #19
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Originally Posted by Trooper View Post
Hi,



I am considering retiring at the end of 2015, and I am wondering if I should put my 2015 401(k) contributions in a traditional account or in a Roth account.



Here's some info about us that I think is relevant to the decision. If you need more just let me know:



1. I am 56, DW is 55. DW is retired now.

2. We have no monies in Roth accounts now; only tIRAs and taxable.

3. My employer does not match 401(k) contributions

4. We will likely be in a 28% bracket next near, and then use taxable (post-tax) funds to be in lower brackets upon ER.

5. Portfolio is, coincidentally, 60/40 taxable/tax-deferred and same for stock/bond



Any thoughts? The idea of no tax-deferred contributions next year is a little concerning, but so is the idea of entering retirement with no Roth money.



Thanks again!

As I mentioned to purplesky, you should check if you can do after tax contributions. These can be rolled over into a roth
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Old 10-28-2014, 04:57 PM   #20
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Put it in the tax deferred account. You can change your mind later by rolling to a Roth but not vice versa.

As long as your marginal tax rate is lower in retirement you win (do a quick calc yourself to prove this).


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