Article - Why 91% of People Shouldn’t Invest In a Roth 401k

[jazz4cash]

My employer was pretty early rolling out a 401k plan in ‘83 but I can’t recall when the provided the Roth version. Google tells me the Roth was authorized in 2006. I think I did not sign up till 2012 or thereabouts. At that point the tax deferral was not as important to me.
I liked the fact that our company match was always tax deferred so you were still adding to the traditional account.

 

[Exchme]

Traditional was right for us, but not necessarily for the reasons discussed.

Early in our careers with modest income, a mortgage and children, having the immediate tax break of a traditional 401K was a must.

Late in our careers, Roth 401ks would have been silly because we were in a high tax bracket. Had Roths been available in the middle, they might still have been wrong in hindsight as tax rates have trended down.

Importantly, there was never a guarantee of having a nice, comfy retirement. Many co-workers were let go before they wanted to leave, folks had health problems or family problems interrupt their careers, etc. So taking the immediate tax break of the traditional was probably right from a risk management standpoint too (if you are lucky enough to have a big tax bill in retirement, you didn't get completely derailed during your career).

 

[Koolau]

My employer was pretty early rolling out a 401k plan in ‘83 but I can’t recall when the provided the Roth version. Google tells me the Roth was authorized in 2006. I think I did not sign up till 2012 or thereabouts. At that point the tax deferral was not as important to me.
I liked the fact that our company match was always tax deferred so you were still adding to the traditional account.

Never had the 401(k) Roth, so it was "complicated." 1) Contribute to 401(k) until company match was completely absorbed. 2) Contribute to Roth IRA until legal (and any catch-up) amounts filled. 3) Contribute EITHER to the remaining 401(k) and catch-up OR tIRA - in my case in anticipation of converting to Roth at some point. 4) Contribute more to 401(k). Sorta glad that aspect of pre-FIRE is over for me.

 

[JBTX]

The article was pretty shallow. In retirement they use an effective tax rate vs marginal rate. Using a marginal rate would lead you to the conclusion that a mix of traditional and Roth would lead to the best outcome. Also it ignores the impacts of the taxability of social security.

They also assume future tax rates will stay the same as today, which may or may not be true.

Also you can effectively contribute more after tax dollars in a Roth

It certainly is true that for many people traditional will make more sense as the primary contribution vehicle, given their marginal tax rates in retirement will likely be lower than during working years. Most people probably should have at least some traditional to fill up the lower brackets in retirement.

In their first example it would have made more sense if they showed traditonal contributions enough to fill up the lowest brackets then Roth for amounts above that. Again even that ignores the fairly complex impacts of social security taxation on marginal tax rates in retirement.

 

[Montecfo]

Barrons article says the opposite - almost all workers should contribute to Roth

https://www.barrons.com/articles/roth-401k-ira-retirement-savings-b62194f3

It's a very fluffy article. It says most workers should contribute for "flexibility" not because they would have more funds later.

It also proposes a funky rule of thumb for determining how to split regular and Roth contributions. The rule of thumb ignores taxes.

The article basically says having money in a Roth is good. Not exactly a news flash.

 

[LateToFIRE]

Not intending to derail the topic, but this discussion prompted me to look at how WD's from after-tax t-IRA's are taxed. Ugh, complicated. Kinda wish I'd never been talked into doing any. Seems unfortunately, can’t take a tax-free withdrawal of just after-tax money, leaving any taxable amounts in the account for later. For tax purposes, all the IRA assets get aggregated as one pool of money, even if they are held at different financial institutions. Then taxable amounts are determined on a pro-rata basis, for example if your after-tax t-IRA is 10% of the total, then only 10% of your distributions are tax-free. You can't pick and choose after-tax vs pre-tax distributions.

Did I get that right? Wish I'd just avoided the after-tax contributions, as its a small % but a big headache to track.

 

[Gumby]

Yes, that's right. That's why you need always to keep a copy of your form 8606, so you can keep track of your basis.

 

[LateToFIRE]

Yes, that's right. That's why you need always to keep a copy of your form 8606, so you can keep track of your basis.

Thanks. I'm pretty sure my advisor said non-ded IRA contributions would be a good idea because the earnings would grow "tax-free" (which I'm starting to understand really means "tax-free" until its time to pay the tax, i.e. tax-deferred).

I understand encouraging me to save above and beyond my 401K, but see little benefit to the non-ded IRA vs the record-keeping/form-filing hassle and the added complexity. At least DW was able to do back-door Roth conversions each year with hers (I think because she did not have a 401k or pension plan).

 

[USGrant1962]

I did after-tax 401(k) contributions because I didn't know any better. That was a mistake, I think. Roth 401(k) wasn't available to me at the time. I should have put that money in taxable stock accounts. A lot of tax-deferred/Roth discussions totally ignore the advantageous tax treatment of LTCGs, especially if you avoid high dividend stocks (tax drag). I think that would have been better than being locked up in a traditional 401(k) exposed to ordinary income taxes.

Per some of the discussion above, I have a tranche of after-tax "trapped" in my 401(k). Per my 401(k) rules I can do a Roth 401(k) conversion. The contributions and growth roll over and I pay tax on the growth. Then could roll over to separate tIRA and Roth IRA.

I'm looking for a good opportunity to execute that plan when I have the tax space headroom.

 

[SunGuy]

A lot of your planning is going to stem from if you will be retiring into a higher or lower tax bracket.

Once you figure that out, the rest is pretty easy to determine. Pay a couple hundred $ for a tax consultation with a good RIA fee based fiduciary planning service with tax agents on staff for a good overall discussion.

 

[badatmath]

Yeah I am still thinking all this over but I expected to be same/lower in retirement and I might actually be higher in my later years (RMDs) though not presently.

I wish I had put more in taxable or spent more tbh. I could have had an improved living situation had I only realized it 10 years ago. Now it is still somewhat possible but more complicated to work out.

 

[Koolau]

Yeah I am still thinking all this over but I expected to be same/lower in retirement and I might actually be higher in my later years (RMDs) though not presently.

I wish I had put more in taxable or spent more tbh. I could have had an improved living situation had I only realized it 10 years ago. Now it is still somewhat possible but more complicated to work out.

Regrets won't help. Figure out where you are now and go on with your life based on what you have and where you are financially. I'm guessing you have the ability to live a pretty nice life now. Start from there and enjoy.

 

[Exchme]

Thanks. I'm pretty sure my advisor said non-ded IRA contributions would be a good idea because the earnings would grow "tax-free" (which I'm starting to understand really means "tax-free" until its time to pay the tax, i.e. tax-deferred).

I understand encouraging me to save above and beyond my 401K, but see little benefit to the non-ded IRA vs the record-keeping/form-filing hassle and the added complexity. At least DW was able to do back-door Roth conversions each year with hers (I think because she did not have a 401k or pension plan).

Do you still have a 401k and if so, does the plan allow roll-ins? If so, you can roll your pre-tax portion of your t-IRA (but only that portion) to your 401k. Then you can Roth convert your after tax IRA money, but since it after-tax, there's no taxes due.

I have a similar situation, but don't do the roll-in as I believe Vanguard would send a paper check, so my IRA money would be out of the market for a week or so and then someday when I want to pull the money back, it will be out of the market again. If the market goes up while I'm out, I lose out on the gain. I've made two large moves in the past and ended up with 4% market moves while I was out each time - one went in my favor, the other against. Awfully big risk for eliminating some paperwork, so I don't do it.

 

[NgineER]

Thanks. I'm pretty sure my advisor said non-ded IRA contributions would be a good idea because the earnings would grow "tax-free" (which I'm starting to understand really means "tax-free" until its time to pay the tax, i.e. tax-deferred

You should ask your advisor what he means with non-deductible.
I believe he means for you to do a back door Roth contribution. Look it up…

If you are paying an advisor, ask him what the advise means.