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401k vs Roth 401k
Old 05-31-2017, 09:36 AM   #1
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401k vs Roth 401k

Wanting some to weigh in on the difference in the 2 investments and when to invest in each. Currently my DH contributes the max to traditional 401k. His company started offerig a Roth 401k about 2 yrs ago. He is at a point where the company will automatically contribute 10% of salary to traditional 401k no match required. We have discussed the benifits of reducing our current tax bill but wonder about future tax implications. He is at about 400k in his portfolio at 34yo. We talked about switching over to the Roth 401k when his tradition reaches 500k maybe another 2yrs. We think our Magi may completely box us out from being able to do our Roth IRAs at that point, thus losing one advantage of diverting $$from taxation now.
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Old 05-31-2017, 09:49 AM   #2
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Wanting some to weigh in on the difference in the 2 investments and when to invest in each. Currently my DH contributes the max to traditional 401k. His company started offerig a Roth 401k about 2 yrs ago. He is at a point where the company will automatically contribute 10% of salary to traditional 401k no match required. We have discussed the benifits of reducing our current tax bill but wonder about future tax implications. He is at about 400k in his portfolio at 34yo. We talked about switching over to the Roth 401k when his tradition reaches 500k maybe another 2yrs. We think our Magi may completely box us out from being able to do our Roth IRAs at that point, thus losing one advantage of diverting $$from taxation now.
What's your current tax bracket and what do you envision for retirement bracket?

"We have discussed the benifits of reducing our current tax bill but wonder about future tax implications."

A ROTH would increase your current tax bill. If your in a high bracket, shield the earnings now and convert it to ROTH in retirement, staying in the bracket you decide.
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Old 05-31-2017, 09:57 AM   #3
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What's your current tax bracket and what do you envision for retirement bracket?

"We have discussed the benifits of reducing our current tax bill but wonder about future tax implications."

A ROTH would increase your current tax bill. If your in a high bracket, shield the earnings now and convert it to ROTH in retirement, staying in the bracket you decide.
I think we are in 25% bracket
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Old 05-31-2017, 10:10 AM   #4
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If you think you can live off 96.5k a year in the future, with current brackets, you can pay 25% now (ROTH) or 15% later. (96.5k = 75.9k top of 15% bracket plus 12.7k for couple standard deduction and 8.01k combined personal exemption)
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Old 05-31-2017, 10:15 AM   #5
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I think we are in 25% bracket
You need ~$2.4 million in traditional accounts before a 4% withdrawal ratio would put you into the 25% bracket, based on those withdrawals alone.

If you have other guaranteed retirement income, such as pensions, that $2.4 million decreases by 25 times the other annual income.

Given that, it seems continuing with the traditional 401k is the better bet. How does it look to you?
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Old 05-31-2017, 10:18 AM   #6
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We think our Magi may completely box us out from being able to do our Roth IRAs at that point....
It would not preclude a Backdoor Roth IRA.
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Old 05-31-2017, 10:33 AM   #7
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You need ~$2.4 million in traditional accounts before a 4% withdrawal ratio would put you into the 25% bracket, based on those withdrawals alone.

If you have other guaranteed retirement income, such as pensions, that $2.4 million decreases by 25 times the other annual income.

Given that, it seems continuing with the traditional 401k is the better bet. How does it look to you?
Will be at - 3.8mil at ER age 48&51 with expected pension. We could delay pension and start converting traditional but its my understanding that you can not start converting until age 59.5 without penalty. We should have enough taxfree IRA and roths to draw in until that time. DH also though about working as teacher/coach for a few years after ER for fun so we can bridge the gap on time til withdrawl.
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Old 05-31-2017, 10:44 AM   #8
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Will be at - 3.8mil at ER age 48&51 with expected pension. We could delay pension and start converting traditional but its my understanding that you can not start converting until age 59.5 without penalty. We should have enough taxfree IRA and roths to draw in until that time. DH also though about working as teacher/coach for a few years after ER for fun so we can bridge the gap on time til withdrawl.
IIRC, age only factors in if you're still working for them (can't convert until after 59.5). You're not withdrawing so there should be no penalty, just taxes.
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Old 05-31-2017, 10:47 AM   #9
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Contrary to traditional, sound advice, I put my last few working years of contributions in a Roth 401k. It now looks likely that will end up costing a few thousand in taxes compared to having made deductible contributions and converting later. Circumstances changed, and I now expect to be in a lower bracket than forecast.

Didn't look that way at the time though, and no regrets about having a Roth "starter fund"

My experience is things can change quickly, and things can change a lot over many years. Having a range of sources to draw from gives one flexibility. I consider the higher taxes to be the price of that flexibility.
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Old 05-31-2017, 10:48 AM   #10
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I think we are in 25% bracket
For me, I'd probably max out a traditional 401k when in the 25% tax bracket.

Check to make sure that reduces your taxes as much as you would expect (it might depend on the types and sizes of deductions you take). Also try to take a stab at what your tax bracket might be in retirement, assuming current tax laws stay the same.

Nobody knows what the future holds, but there are many ways you could reduce your tax burden down the line when you retire. The rates might be changed by the current administration. In early retirement, you might have a period of low income where a Roth conversion might work out well.

For me, I got my tax breaks already in my pocket.
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Old 05-31-2017, 10:51 AM   #11
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We could delay pension and start converting traditional but its my understanding that you can not start converting until age 59.5 without penalty.
How to withdraw funds from your IRA and 401k without penalty before age 59.5 might be of interest.
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Old 05-31-2017, 02:41 PM   #12
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Ty this is helpful
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Old 05-31-2017, 05:57 PM   #13
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Consider an after tax 401k contribution if your plan allows. This can be converted to a Roth IRA immediately thus giving you the ability to better balance your taxes in retirement.
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Old 06-01-2017, 02:20 AM   #14
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Even if you will have a lower tax rate in retirement, it may still make sense to contribute to a Roth that will grow Tax Free. Suppose you contribute $100K over several years and pay 25% tax. In 20-25 years, with a reasonable RoR that amount should grow to about $300K (probably more). If you are at 15% tax bracket when withdrawn, the total amount of taxes paid will be 80% more in the long run. Any employer matching will still be tax deferred withdrawals taxed as ordinary income.

$100K *.25 = $25K Tax Roth
$300K *.15 = $45K vs Tax Deferred related Withdrawals
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Old 06-01-2017, 04:57 AM   #15
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Even if you will have a lower tax rate in retirement, it may still make sense to contribute to a Roth that will grow Tax Free. Suppose you contribute $100K over several years and pay 25% tax. In 20-25 years, with a reasonable RoR that amount should grow to about $300K (probably more). If you are at 15% tax bracket when withdrawn, the total amount of taxes paid will be 80% more in the long run. Any employer matching will still be tax deferred withdrawals taxed as ordinary income.

$100K *.25 = $25K Tax Roth
$300K *.15 = $45K vs Tax Deferred related Withdrawals
It isn't the amount of tax paid that matters. What matters is the amount you get to keep.

Taking the above example (i.e., investment growth of 3X), with a traditional account one gets to spend
$100K * 3 * (1 - 15%) = $255K
With a Roth,
$100K * (1 - 25%) * 3 = $225K.

The amount of tax paid is, strange as it may seem, irrelevant.

See Traditional versus Roth - Bogleheads for more.
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Old 06-01-2017, 06:57 AM   #16
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Will be at - 3.8mil at ER age 48&51 with expected pension. We could delay pension and start converting traditional but its my understanding that you can not start converting until age 59.5 without penalty. .................................................. ...............l.
How would you pay taxes on conversion? If you can pay with non-TIRA funds
(funds already taxed ), then there is tax on the conversion but no penalty.
If, however, you pay the conversion tax w/ more TIRA funds, you have then done an early distribution which is taxed and penalized if earlier than 59.5.
The penalty is only on the withdrawal part used to pay taxes, not on the conversion amount itself.
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Old 06-01-2017, 07:06 AM   #17
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It isn't the amount of tax paid that matters. What matters is the amount you get to keep.

.................................................. ........................
The amount of tax paid is, strange as it may seem, irrelevant.

.................................................. .........
so true! I had a friend w/ a rental who kept telling me he didn't want to raise the rent because that would decrease the amount of loss and cause him to pay more taxes. I don't think I ever convinced him that it was a good thing to increase income because he would pay a fraction of that in taxes but he would get to keep the rest. Need to think holistically and not just look at one of he small pieces of the puzzle.
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Old 06-01-2017, 07:53 AM   #18
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How would you pay taxes on conversion? If you can pay with non-TIRA funds
(funds already taxed ), then there is tax on the conversion but no penalty.
If, however, you pay the conversion tax w/ more TIRA funds, you have then done an early distribution which is taxed and penalized if earlier than 59.5.
The penalty is only on the withdrawal part used to pay taxes, not on the conversion amount itself.
Very good to know
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Old 06-02-2017, 04:43 AM   #19
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It isn't the amount of tax paid that matters. What matters is the amount you get to keep.

Taking the above example (i.e., investment growth of 3X), with a traditional account one gets to spend
$100K * 3 * (1 - 15%) = $255K
With a Roth,
$100K * (1 - 25%) * 3 = $225K.

The amount of tax paid is, strange as it may seem, irrelevant.

SeeTraditional versus Roth - Bogleheads for more.
This is misleading, because in the case of Roth, all earnings ($200K) are Tax Free. All qualified Roth withdrawals are tax free because you already paid the the extra $25K through your taxes when invested. 75% X $100K X 3 isn't representative of what actually happens. By paying extra $25K up front when invested, you will get the entire $300K when withdrawn with no additional taxes. $300K-$255K = $45K is more taxes than the $25K for the Roth.
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Old 06-02-2017, 05:00 AM   #20
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This is misleading, because in the case of Roth, all earnings ($200K) are Tax Free. All qualified Roth withdrawals are tax free because you already paid the the extra $25K through your taxes when invested. 75% X $100K X 3 isn't representative of what actually happens. By paying extra $25K up front when invested, you will get the entire $300K when withdrawn with no additional taxes. $300K-$255K = $45K is more taxes than the $25K for the Roth.
Ok, if you want the Roth to start with $100K we can look at that. To get $100K into a Roth when one is in the 25% bracket takes a starting amount of $100K / (1 - 25%) = $133,333.33.

Assuming the same investment growth of 3X, with a traditional account one gets to spend
$133,333.33 * 3 * (1 - 15%) = $340K
With a Roth,
$133,333.33 * (1 - 25%) * 3 = $300K.

The amount of tax paid remains irrelevant - provided one compares apples vs. apples by starting with identical amounts.

As noted in Traditional versus Roth - Bogleheads,
Quote:
Traditional = Original_amount * Growth * (1 - withdrawal_tax_rate)
Roth = Original_amount * (1 - contribution_tax_rate) * Growth

When the tax rates are equal, thanks to the commutative property of multiplication (i.e., A * B * C = A * C * B) the Traditional and Roth results are equal.
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