Traditional 401K or Roth?

[Xtreme Cowboy]

I couldn't find the answer in the search, so I'm going to ask you "brainiacs"!

I'm currently sitting with just over $100K in my company 401K.

I'm currently 34, and wanting to retire by 55.

Do I roll over my 401K to a Roth or just keep maxing out my current 401K?

(I'm young and dumb) and just found out about the "required take out" that has to be done when I get older.

Would it be better for me to take the "dump" now, and if so, how NASTY is it going to be for me?

Thanks in advance for the help!

 

[ExtinctBird]

I'm not sure I understand your full situation or question. If you are still employed by the company that your 401K is with, then you probably cannot roll it over into an IRA (Roth or traditional). If you have the choice of a regular 401K or a Roth 401K, then most say you make the choice of which to fund based on whether you believe you will be in a higher tax bracket in retirement than you are now.

I'm not sure I would consider converting your existing $100K to a Roth, given the immediate tax hit you would get. Maybe starting to fund the Roth with new funds is right for you though. Others might have a better opinion on this than I.

 

[Xtreme Cowboy]

To Clarify...

I'm not sure I understand your full situation or question. If you are still employed by the company that your 401K is with, then you probably cannot roll it over into an IRA (Roth or traditional). If you have the choice of a regular 401K or a Roth 401K, then most say you make the choice of which to fund based on whether you believe you will be in a higher tax bracket in retirement than you are now.

I'm not sure I would consider converting your existing $100K to a Roth, given the immediate tax hit you would get. Maybe starting to fund the Roth with new funds is right for you though. Others might have a better opinion on this than I.

I am still employed by the company. I hadn't checked into that one...thanks. I'm planning on being in roughly the same tax bracket I am now...I hope to live on roughly the same amount I am now...obviously without the house payment.

I guess my question is this: I've been told at the age of 70 you have to start taking out the principal in the 401K. My goal, of course, was to live on the interest and never touch the principal. If this is the case, what is my best option when this time comes around? I've been told a Roth 401 has no requirement that it ever has to be taken out, but you've got a point...I guess I wasn't going to actually switch what I currently have in, but was looking for my options for future contributions.

 

[mickeyd]

Hey Cowboy,

You have almost too many questions to address, but at least you are asking the questions and that is an excellent thing to be doing.

Can I suggest that you do a little reading on this subject? This reading list has served many of us well as a place to start :Investment Books .


You may wish to start with these two from the list:

The Bogleheads' Guide to Investing

and The Coffeehouse Investor but they are all good. Check your local public library as they probably have most of them already.

 

[BigBob]

I've been told a Roth 401 has no requirement that it ever has to be taken out, but you've got a point...

I believe that a Roth 401K has RMD requirements. However, you may be able to roll it into a Roth IRA to avoid the required distributions. (This is what I plan to do with my Roth 401K)
Our company offers the Roth 401K, so I have signed up for all of my contributions to go to this, and the company match goes into the vanilla 401K.
I like the idea of "tax diversification" of my nest egg, so that I can draw from several sources to optimize my tax hit at retirement time. My ultimate goal is 1/3 in Roth accounts, 1/3 in tax deferred accounts (401K), and 1/3 in taxable accounts.

 

[Xtreme Cowboy]

Thank you...

I appreciate all the help. I did some research, and guess I was just "steered" wrong a little bit with some information. I don't see the 401K being that bad. From what I'm understanding, you have to start taking money out at 70 (which I'll already be living on some of the interest, hopefully by 55), but it REALLY isn't that much. It seems like it takes till over the age of 80 before you start having to take out a high enough percentage that you might be starting to touch principal if you have it low risk.

I was being told (by someone that has NO clue) that at 70, if they predict you only to live to 80, and let's say there's 1M in, then you would have to take out 100K every year to deplete by 80. For a young "newbie" that sounded kinda scary. I now understand it's well under 5% from from 70 to around 80, so I'm cool now!

Thanks for the help, and if you have any more input for me, I definitely do appreciate it...I guess I've been putting it away SO well, I didn't figure how I was going to get it out when 50 to 55 hit! I still have 15 to 20 years to figure that out, and to see what the governments "plans" are for my hard work

 

[BigBob]

Here's a good article that covers the Roth 401K:
Assessing the Roth 401(k) - Investment Advisor Magazine
..and a snippet:
The rules for the Roth 401(k) look similar to those for the Roth IRA, but there are some important differences. In a Roth 401(k), income taxes are paid at participants’ regular income tax rates at the time of contribution, and earnings and withdrawals are not taxed if withdrawals begin after age 591/2 and if five years have elapsed from the date of the first contribution to the plan. Taxes and penalties are waived if a participant dies or is disabled. Participants must take minimum distributions beginning the year after they turn 701/2. A Roth 401(k) can be rolled into a Roth IRA if the participant leaves the company, relieving the participant from taking minimum distributions—a noteworthy planning option.
...and you can get more info at Roth 401(k) Web Site and Roth IRA Web Site Home Page for Roth 401ks and Roth IRAs.
IMHO, I would just consider spreading contributions across "already taxed" Roths, "tax deferred" IRAs/401ks, and taxable accounts so that at distribution time, depending on the laws in place at that time, you have more options.