401K, Roth IRA, Roth 401K - Need advice please

[tsturbo]

Situation, I am 49 & my wife is 51. We both have Roth IRA's through Vangaurd. We both are still working and contributing to our Company 401k's.

On my Company 401K I can contribute to the regular 401K or I can direct all or a portion of my contribution to a Roth 401K.

Should we fund our Roth IRA's first? And what is the max we can contribute to these?

On my 401K, I am currently contributing a portion to the Roth 401K and a portion to the regular 401K, should I be doing more or all into one versus the other or should I continue to contribute to both?

Thanks!

 

[LOL!]

Your best move will depend on your tax bracket and your expenses and whether your company matches contributions to your 401(k). It will also depend on whether you will draw a pension during retirement or not. You need to tell us all this to get the best advice.

Contribute enough to the 401(k) (or Roth 401(k)) to get the entire company match.

If you are in a marginal income tax bracket higher than 15%, then the 401(k) is probably your best choice. Your contributions to the 401(k) will reduce your AGI which can then make you eligible for a Roth IRA, but they will also reduce your taxes.

If you are in the 15% or lower bracket, then the Roth 401(k) may make sense.

Also if you are going to retire early: In early retirement before drawing on SS you can convert your regular 401(k) to a Roth practically tax-free. That means you got it tax-free going in (the 401(k)) and tax-free coming out (the Roth). If you had paid into the Roth 401(k) while working, you would've paid taxes that you didn't need to.

 

[tsturbo]

Yes, we are in the higher tax bracket (above 15%) and yes, I contribute at least enough into my Company 401K to get the full Company match. I like what you indicate about converting my regular 401K to a Roth 401K at retirement, please expand upon this.

So from what I can tell thus far, we should max out our Roth IRA's (what is the max at our ages?) and STOP contributing to the Roth 401K portion through my Company, put it all towards the regular 401K portion.

Please keep the suggestions & advice coming. Thank you!

 

[kaneohe]

yes, I contribute at least enough into my Company 401K to get the full Company match.

You may already know this and it may/may not apply...
some companies match per pay period. This means you could contribute enough to get the full match in principle but if you contribute for only part of a full year (e.g. you max out before the end of the yr),
you will not get the match for those missing months. If this applies, then simply reduce your monthly contributions so that you max out at the end of the yr. Not all companies do this........mine did.

 

[kaneohe]

Roth IRA - Wikipedia, the free encyclopedia

seems like a good article re: contribution limits (amounts vs age, amounts vs MAGI)
also a good pro/con discussion.

 

[LOL!]

OK, tsturbo, I'm gonna let you in on a little secret. The forum you are reading now is really, really good for folks who are retired early or who are gonna be retired early.
But the best place on the web for free personalized financial advice is over at www.bogleheads.org and in particular Bogleheads :: View Forum - Investing - Help with Personal Investments

Anyways, the 401(k) vs Roth 401(k) question comes up over and over and is debated endlessly. Most of the authors do not understand the nuance of converting a rollover IRA to a Roth IRA while in a very low tax bracket while in retirement. Those same authors also assume that retirees pay taxes at a higher rate than when they are working, when the opposite is actually the case.

Here is one discussion: Bogleheads :: View topic - Roth 401K vs Traditional 401K

 

[LOL!]

Here's more on converting your 401(k) tax-free to a Roth. Remember the 401(k) money was tax-free going in.

Let's say you are a motivated early retiree. To get there you have not only maxed out your 401(k) each and every year of your working life, but you have also lived well below your means. Thus, you have also saved/invested in a taxable account for many years. So now you are 50 years old and have a million in your taxable accounts and a million in your tax-advantaged accounts. You now retire and live off the money in your taxable accounts. That is, all your expenses are paid by money you withdraw from your taxable accounts.

So you discover that you have no income and thus no need to pay any taxes. How can that be?

First, return of capital is tax-free. Second, you have lots of carryover capital losses from the 2008 market crash, so that you will not have any net capital gains for many years.

For example, you need $100,000 to live on. You sell $100K of your Vanguard total stock market index fund with no cap gain, so no taxes. Or you sell your Vanguard FTSE all-world ex-US fund, but your cost basis was $90K, so you have only $10K gain. So you have plenty of spending money, but virtually no taxable income. Qualified dividends are taxed favorably. Long-term cap gains are taxed at 0% if you are in a low tax bracket (or at a favorable rate if you are not).

Third, the first tax bracket is 0%. With all your exemptions and deductions, you won't pay tax on the first $16K or so of income. Some early retirees even have kids, so you get the child tax credit as well. You could have something like $50K of income and pay no taxes. So while you are in a low tax bracket you can now convert some of your rollover IRA money (rolled over from your 401(k)) into a Roth IRA while you are in the 0% or other low tax bracket. If you retire early enough and have enough in your taxable account, you can convert enough each year to essentially get all your original 401(k) money into a Roth IRA. So that money was tax-free going in and some was tax-free doing the conversion with the rest taxed at a very low rate.

 

[jIMOh]

Numbers pulled from Reference Room

Do you file taxes as
married filing jointly (2009 taxable income less than 67,900=15% or less than 137,050=25%)
single (2009 taxable income less than 33,950=15% or less than 82,250=25%)

or something else (look up and list the numbers for the 15% and 25% brackets).

Your best goal for the Roth to work well is to use the 401k (the regular kind) to reduce your taxable income to one penny (or one dollar) less than the 15% bracket cap, then pay taxes on the rest and put all remaining investment monies into the Roth accounts (Roth IRA and Roth 401k would be equal in this regard if the initial 401k contribution captured the full match). If you have a match, you need to make sure you capture the whole match.

There are many things which lower taxable income.
401k contributions (or similar 403b plan)
deductable IRA contribtions
HSAs
are the 3 easiest ways to describe on a forum like this.

Increasing deductions (on schedule A) would be another.

Should be noted the first 3 lower AGI- which makes you eligible for the Roth IRA, and the fourth (deductions) lowers your taxable income, which determines the percentages listed above.

You need a Roth IRA if you ever plan to convert pre-tax 401k money into a Roth later. So make sure you create a Roth IRA if you can (even with $1000 or so) just to do some conversion tricks as you near retirement or ever find yourself in a low tax bracket.

 

[LOL!]

\...
You need a Roth IRA if you ever plan to convert pre-tax 401k money into a Roth later. So make sure you create a Roth IRA if you can (even with $1000 or so) just to do some conversion tricks as you near retirement or ever find yourself in a low tax bracket.

You make it sound like if you don't have a Roth now, that you cannot convert money to a Roth some time in the future and that ain't true. For instance, one can rollover the 401(k) into an IRA and then convert some or all of that IRA to a brand-spanking-new-never-created-before Roth IRA. Or did I miss some intent in your statement?

We don't have Roths now, but when we get to a low enough income in retirement, we will be doing the conversion thing.

 

[jIMOh]

You make it sound like if you don't have a Roth now, that you cannot convert money to a Roth some time in the future and that ain't true. For instance, one can rollover the 401(k) into an IRA and then convert some or all of that IRA to a brand-spanking-new-never-created-before Roth IRA. Or did I miss some intent in your statement?

We don't have Roths now, but when we get to a low enough income in retirement, we will be doing the conversion thing.

Someone on this board pointed that out to me (that you needed a roth to do partial conversions). I have not checked IRS pubs to know if that was true or not.

 

[harley]

You make it sound like if you don't have a Roth now, that you cannot convert money to a Roth some time in the future and that ain't true. For instance, one can rollover the 401(k) into an IRA and then convert some or all of that IRA to a brand-spanking-new-never-created-before Roth IRA. Or did I miss some intent in your statement?

We don't have Roths now, but when we get to a low enough income in retirement, we will be doing the conversion thing.

You do have to creat a Roth IRA first to convert your Roth 401(k) into. No problem there, except there is a 5 year hold requirement for Roth IRA money. If you convert your Roth 401(k) to a newly created Roth IRA you then have to hold the money for the 5 years. However, if you create a Roth IRA now (or asap) you can avoid that requirement. For example, assuming you aren't eligible to start a Roth IRA now due to income restrictions, convert a portion of an regular IRA to a Roth in 2010 when there are no income restrictions. Then if you convert your Roth 401(k) later into that Roth IRA, you've already met some or all of the 5 year hold requirement. Clear as mud?

 

[jIMOh]

You do have to creat a Roth IRA first to convert your Roth 401(k) into. No problem there, except there is a 5 year hold requirement for Roth IRA money. If you convert your Roth 401(k) to a newly created Roth IRA you then have to hold the money for the 5 years. However, if you create a Roth IRA now (or asap) you can avoid that requirement. For example, assuming you aren't eligible to start a Roth IRA now due to income restrictions, convert a portion of an regular IRA to a Roth in 2010 when there are no income restrictions. Then if you convert your Roth 401(k) later into that Roth IRA, you've already met some or all of the 5 year hold requirement. Clear as mud?

This makes sense. Can you refer to pub 590 or something similar which would confirm what you posted here?

 

[harley]

This makes sense. Can you refer to pub 590 or something similar which would confirm what you posted here?

I've been reading Ed Slott's The Retirement Savings Time Bomb and How to Defuse It. It's got tons of great information in there about IRAs, Roths, 401(k)s and other vehicles. It's largely about keeping the gov't from getting any more of your money than you can (legally) avoid, and about passing on your hard earned riches to whomever you choose while keeping unca sammy's hands out of your pocket. I don't have the book with me right now, but I just read this part a couple days ago, so I'm sure about what he said. After a couple days I can't vouch for my memory. Anyway, he refers to the appropriate IRS pubs and laws in the book.

As I'm making it a hobby in ER to keep my money out of Unk's hands (for his own good), I highly recommend this book. It answers pretty much any questions you have on retirement savings vehicles, in much clearer language than the IRS uses.

 

[FinanceDude]

I've been reading Ed Slott's The Retirement Savings Time Bomb and How to Defuse It. It's got tons of great information in there about IRAs, Roths, 401(k)s and other vehicles. It's largely about keeping the gov't from getting any more of your money than you can (legally) avoid, and about passing on your hard earned riches to whomever you choose while keeping unca sammy's hands out of your pocket. I don't have the book with me right now, but I just read this part a couple days ago, so I'm sure about what he said. After a couple days I can't vouch for my memory. Anyway, he refers to the appropriate IRS pubs and laws in the book.

As I'm making it a hobby in ER to keep my money out of Unk's hands (for his own good), I highly recommend this book. It answers pretty much any questions you have on retirement savings vehicles, in much clearer language than the IRS uses.

Ed Slott is the MAN. His website is www.irahelp.com. Go to it and learn a bunch. I have all of his books, they are in my office at all times......

 

[JosefS]

Do someone familiar with a site that explains me how to plan my contributions correctly so I'll need to enter my income and it will give me an advice?

Josef

 

[Animorph]

I'll just add that if you are investing into taxable accounts in addition to retirement accounts, or have current investments in taxable accounts, the Roth has a definite advantage over taxable investing.

In half-retirement, my income is finally (I hope) low enough to be able to open Roth IRA's, and coincidentally DW now has a Roth 401k option this year and I was able to open an individual Roth 401k. We're maxing out the Roth contributions, mostly just transferring assets from taxable accounts to Roth accounts since we're also making small portfolio withdrawals at this point. Of course watch out for the 5 year rule and 59.5 year age limit to ensure you have enough taxable funds to last until your retirement account funds are available without penalty. Roth accounts are nice in allowing early withdrawals of contributions (not earnings) without a penalty.