Roth vs traditional 401k

[AreWeThereYet0]

I just found out that I am able to contribute to both a Roth and a traditional 401k at work simultaneously. I am still subject to the 19500k limit. While I like reducing my tax liability by 19500 every year I have to wonder when I have a 401k with already over 600k in it and I want to retire in 8 years at 50 if I should consider putting half into traditional and half into Roth so I don’t have to pay taxes when I do withdraw. Please note that I already also max out a Roth IRA yearly but due to contribution limits that account is around 190k. Thoughts? Thanks.

[TechLead]

Your 401k likely allows "After Tax Contributions". If so max out regular 401k contributions and then make after tax contributions. You can then roll after tax contributions to Roth IRA.

I don't like Roth 401k contributions since *usually* those cannot be rolled to Roth IRA without rolling entire 401k and breaking it into Roth and non-Roth accounts. (401k gives you stronger Assets Protection than IRA so such rolling is not desirable)

[pb4uski]

Tax-deferred contributions are principally a tax arbitrage play. What is your marginal tax rate and what would the tax savings be of you did tax-deferred contributions? What do you expect your income and marginal tax rate to be in retirement... especially after any pensions of Social Security start (keeping in mind that at most only 85% of Social Security is taxable)?

If your marginal tax rate today is substantially higher than what you expect it to be in retirement then tax-deferred is the way to go. If the inverse or it isn't much different then I would favor Roth contributions.

If you retire at 50 you'll likely have 12-20 years that you might be in a low tax bracket and able to do no or low tax cost Roth conversions.

[gwraigty]

DH's 401k is a mix of traditional, after-tax, and Roth. Because of the Roth option not having been available at the start and the company match being pre-tax, most of the balance will be taxable. It is what it is. If you foresee being in a higher tax bracket due to RMD's, a Roth option makes sense.

Please note that some states offer much the same asset protection to IRAs as 401ks enjoy. Blanket statements suggesting otherwise are not true.

[TechLead]

Quote:

Originally Posted by pb4uski If you retire at 50 you'll likely have 12-20 years that you might be in a low tax bracket and able to do no or low tax cost Roth conversions.

You may also have 15 years when you will have to buy your own Health Insurance .

Roth account withdrawals do not count as part of MAGI. You may be wiser withdrawing from Roth than converting to Roth during those years. Depends on your situation. (That 100% will be my case)

[pb4uski]

Fair point but it depends on the situation. It might be that the OP can live within the ACA MAGI limits or that they live on a combination of 72t/SEPP withdrawals under the MAGI limits and Roth conversions. Or they might have Tricare. Hard to know without more details.

[Big_Hitter]

Quote:

Originally Posted by TechLead Your 401k likely allows "After Tax Contributions". If so max out regular 401k contributions and then make after tax contributions. You can then roll after tax contributions to Roth IRA.

those fell out of favor once Roths happened, as they are subject to the ACP test - my old mega had one and I put my excess into that, but remember, there is an annual overriding limit to pre/post/employer contributions to a DC plan

[TechLead]

Quote:

Originally Posted by Big_Hitter those fell out of favor once Roths happened, as they are subject to the ACP test - my old mega had one and I put my excess into that, but remember, there is an annual overriding limit to pre/post/employer contributions to a DC plan

I am not sure what you are talking about.

I make 19500 401k Pre Tax Contribution, 6500 401k catchup Pre Tax Contribution, 6000 Employer Match + 31500 401k After Tax contribution which I roll into Roth IRA.

Plus 7000 After Tax Contribution to Regular IRA.

Grand Total 70500 a year to retirement accounts. My spouse does the same thing.

[Big_Hitter]

limits: https://www.irs.gov/retirement-plans...ibution-limits

testing: https://fitsmallbusiness.com/acp-test-vs-adp-test/

[Perryinva]

I would follow techleads example. They already doing the right thing, it seems to me, so adjust yours to the same scaled. Wow, techlead, $140k/yr savings for retirement!!! IMPRESSIVE!!

[Big_Hitter]

Quote:

Originally Posted by Perryinva Wow, though, $140k/yr savings for retirement!!! IMPRESSIVE!!

+100, very impressive

[TechLead]

Quote:

Originally Posted by Perryinva You are already doing the right thing, it seems to me. Wow, though, $140k/yr savings for retirement!!! IMPRESSIVE!!

Well our dividends in After Tax accounts are almost crossing 4 * Poverty Level which is very bad for ACA.

So we have no choice but pump as much as possible into tax deferred accounts or BRKB which does not pay dividend.

[RetireBy90]

FWIW, my last 5 or 6 years I changed my 401K to all Roth so taxes would be done and over with. I did roll over for entire 401K to TIRA and Roth to get better able to manage my AA along with my old IRAs. My company wouldn’t allow any partial roll overs, only a monthly check or full roll over. No regrets here.
I would suggest a goal of at least 50/50 between traditional and Roth To provide max flexibility on withdraws of tax free and taxable. Just one more opinion

[AreWeThereYet0]

What if my SO, who would be my husband by then is working when I retire? I would guess that we would have a combined income that is higher than expected when considering this and I would not get the benefit of a lower tax rate.

[pb4uski]

Yes, in looking at tax rates you need to do it based on your tax return income. So your rate may go down some when you retire because you'll no longer have your income... and even more when he retires.