Planning ER – which to contribute- Roth 401K or 401K? Why? Why not?
- Thread starter MN_1021
- Start date
I vote traditional 401k. The less you pay in taxes, the more you'll be able to save. You can easily do Roth conversions once retired and in a lower tax bracket.
Typically, by age 55, you can withdraw from your 401k without the 10% early withdrawal penalty as long as you've already left your employer anyway.
Typically, by age 55, you can withdraw from your 401k without the 10% early withdrawal penalty as long as you've already left your employer anyway.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
If your current marginal tax rate is higher than what you expect it to be in retirement then the 401k (pre-tax aka tax-deferred) is preferable. This is the most common situation.
If your current marginal tax rate is the same then it doesn't matter. While it would be rare, if your current marginal tax rate is lower than what you expect it to be in retirement then the Roth 401k (after-tax) is preferable.
If your current marginal tax rate is the same then it doesn't matter. While it would be rare, if your current marginal tax rate is lower than what you expect it to be in retirement then the Roth 401k (after-tax) is preferable.
jIMOh
Thinks s/he gets paid by the post
I would answer this by looking at the following TAX information
https://www.pdffiller.com/en/project/47213965.htm?form_id=6962262
What is your AGI on your tax return? Line 37 or 38
What is your taxable income on your tax return? Line 43
What is your filing status? Page 1 box 1,2,3,4 or 5
Then look up your filing status and taxable income here
2016 Tax Rate Schedules - Fairmark.com Fairmark.com
For example, you are trying to see if your taxable income is "just above" one of the tax brackets listed for your filing status-
for example if you are married and file a joint return, and have a taxable income of $85,000 you are over the 25% bracket cap of 75,300
so in this case use the regular 401k (pre-tax) for at least (85,000-75,300=$9700), then use the Roth on the rest (18,000-9700=$8300).
The challenge with doing this is many:
1) You cannot recharacterize a contribution after the fact (unless someone here knows something I don't)
2) error on the side of pre-tax, so if you expect to be $9700 over, budget to contribute $12000 to pre-tax to be safe
3) This calculation will change EVERY YEAR so you need to tax plan in January for what you will file 15 months later in April. This is not easy with tax code changes (deductions, income, adjustments to taxes, payroll deductions), raises (you hope)
4) Doing this will save you a decent amount in taxes and it should be easy to calculate the benefit looking at tax returns year over year.
5) the match is always pre-tax, so even if you did $18,000 in Roth, the match would be 100% pre-tax
https://www.pdffiller.com/en/project/47213965.htm?form_id=6962262
What is your AGI on your tax return? Line 37 or 38
What is your taxable income on your tax return? Line 43
What is your filing status? Page 1 box 1,2,3,4 or 5
Then look up your filing status and taxable income here
2016 Tax Rate Schedules - Fairmark.com Fairmark.com
For example, you are trying to see if your taxable income is "just above" one of the tax brackets listed for your filing status-
for example if you are married and file a joint return, and have a taxable income of $85,000 you are over the 25% bracket cap of 75,300
so in this case use the regular 401k (pre-tax) for at least (85,000-75,300=$9700), then use the Roth on the rest (18,000-9700=$8300).
The challenge with doing this is many:
1) You cannot recharacterize a contribution after the fact (unless someone here knows something I don't)
2) error on the side of pre-tax, so if you expect to be $9700 over, budget to contribute $12000 to pre-tax to be safe
3) This calculation will change EVERY YEAR so you need to tax plan in January for what you will file 15 months later in April. This is not easy with tax code changes (deductions, income, adjustments to taxes, payroll deductions), raises (you hope)
4) Doing this will save you a decent amount in taxes and it should be easy to calculate the benefit looking at tax returns year over year.
5) the match is always pre-tax, so even if you did $18,000 in Roth, the match would be 100% pre-tax
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jazz4cash
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I think you need both. I just retired and I am very glad that I switched over to Roth 401k for the last 2 years. For tax diversification, I wish I had about 30% of my retirement savings in the Roth, but the option was not available. You will see many, many threads on here about Roth IRA Conversions and I believe the Roth 401k is a bit less cumbersome. I do see some potential issues with segregating the Roth $ from pre-tax savings. If I had a chance, I would avoid having both pre-tax and after-tax in the same fund. Most of the time company match money will go into pre-tax even if you choose 100% Roth for contributions, so that may make it harder to segregate.
It's looking more and more like I will be in the same tax bracket in retirement, so the tax benefit is a wash.
It's looking more and more like I will be in the same tax bracket in retirement, so the tax benefit is a wash.
2015 employee contribution limits:
401k/403b/etc
Normal: $18,000
Catchup: $6,000
IRA (direct Roth or backdoor)
Normal: $5,500
Catchup: $1,000
Assuming you don't have any after tax retirement savings, that's already 21-23% in Roth. If you keep all your bonds in tax deferred and go 100% stock in Roth, chances are you'd meet or exceed your 30% in Roth target.
The actual act of doing Roth IRA conversions isn't cumbersome at all. Folks here just try to maximize/optimize their Roth conversions by converting a bunch of different funds and then recharacterizing the funds that have done poorly so it seems more complicated than it actually is.
Not necessarily. Marginal tax rate is quite different from effective tax rate.
A single filer in the 25% marginal tax bracket with no dependents using just standard deduction and exemption who takes a $50,000 distribution from his tax deferred account would only pay ~$5,800 in federal income tax. While working, it's quite likely that the entire $50,000 would have been subject to the 25% marginal rate and would have paid $12,500 in federal income tax. Exception to this would be folks who are receiving generous pensions.
