Balancing Roth 401k and 401k

[livingalmostlarge]

I'm having a discussion with a couple of coworkers/friends. Both say there is never a point to not using a Roth 401k. They said even at the 37% bracket they always tell people and have been to "seminars" saying the Roth 401k is always the way to.

Personally I don't suggest that and I don't do it either. We've always done the 401k and we have done after tax backdoor mega roth contributions. We also have maxed out the ESPP or any other opportunities.

Also we've been pretty highly compensenated so our bracket has always been 32% or higher until now. We recently went to the 24% bracket or thought we were until a bonus hit and now we're back at 37%.

Anyway DH had a 401k Roth option (no match on either) but I told him do the regular 401k for 2023 because I had suspicions the "bonus" would cause us to jump to the 37% bracket and it did. There is no backdoor after tax roth option so we're just stashing it in the taxable.

But the argument is that you need a roth because the earnings on $22,500 will grow a lot and it's better it be taxed otherwise even at 37%. Or at 32%.

My thought has always been, personally we live in the 22-24% bracket (at least we do) and paying 37% seems nuts. Plus to get to that sort of RMD you will need $15M in 401k. $7M RMD at 73 is only $280k which doesn't get you to the 37% bracket.

I'm not sure which is the correct way to think about it? Or are there other considerations? I've always said it's 1st world problems and if I bet wrong on our regular 401k and make $800k+ a year because my RMD on my 401k is so large then I'm happy to pay taxes. FWIW our 401k won't be large enough for $7M i'm guessing.

 

[RetireBy90]

As many have said here, a Roth is just an arbitrage on tax rates. If your rate on a Roth contribution or conversion is lower than you would pay later then it can save you taxes and thus more after tax man gets his cut.
If you have an idea of your income will be in retirement then you can estimate your RMD and figure what your tax bracket will be at that point. The problem is that there is lots of assumptions to figure future tax rates, and even if you are 100% correct on your taxable income in retirement, which I couldn’t do, the tax rates can or will change down the road.
My advice is to take some time to figure your untaxed pile when you and DH retire and what your tax rate will be given today’s tax code and proceed from there.
I always have tried to be conservative in planning as I can’t see the future, and those California psychics don’t really work either. Plan what to do if your savings don’t grow as much as you expect or expenses are higher or both.

 

[pb4uski]

.... But the argument is that you need a roth because the earnings on $22,500 will grow a lot and it's better it be taxed otherwise even at 37%. Or at 32%.

My thought has always been, personally we live in the 22-24% bracket (at least we do) and paying 37% seems nuts. Plus to get to that sort of RMD you will need $15M in 401k. $7M RMD at 73 is only $280k which doesn't get you to the 37% bracket.

I'm not sure which is the correct way to think about it? Or are there other considerations? I've always said it's 1st world problems and if I bet wrong on our regular 401k and make $800k+ a year because my RMD on my 401k is so large then I'm happy to pay taxes. FWIW our 401k won't be large enough for $7M i'm guessing.

Growth doesn't matter a bit. The only thing that matters is your tax rate now vs your tax rate later when withdrawing. If the tax rate later is lower than the tax rate now then it is better to use the traditional 401k.

 

[CardsFan]

Growth doesn't matter a bit. The only thing that matters is your tax rate now vs your tax rate later when withdrawing. If the tax rate later is lower than the tax rate now then it is better to use the traditional 401k.

Why must you make it so simple? How are all those advisors supposed to make a living?

 

[Kendoo]

When I was first offered a Roth 401K option I decided I would put some of my contribution into it. I just figured it would give me more options down the line. Fast Forward to retirement at 56 years old and accessing my 401K via rule of 55. I was receiving a monthly distribution from my pre-tax funds. 401K gets sold to another company that will not allow me to specify where funds come from. My balance is 85% pretax and 15% roth. The new 401k company only distributes funds based on balance (for a $100 withdrawal, $85 from pretax, $15 from roth) so now I get to pay taxes on my roth funds until I hit 59.5 and can get my money out of there. Just something I never thought about.

 

[RetireBy90]

I put part of my 401K into the Roth when it was available, or when I learned of it. Probably in 22% at the time. It did give me options now even though our taxable income will continue in 22 or 24 or whatever future hit is. No way to know what rates will be so for us, a mix is our goal, and where we find ourselves today.

 

[Qs Laptop]

Growth doesn't matter a bit. The only thing that matters is your tax rate now vs your tax rate later when withdrawing. If the tax rate later is lower than the tax rate now then it is better to use the traditional 401k.

There is also the inheritance factors to think about. Your non-spouse heirs will have to take required distributions from a 401k/IRA and be taxed on that income if in a trad account, whereas they won't be taxed on Roth distributions.

 

[karen1972]

We do it case by case each year, usually putting enough in the Traditional 401k to knock us back down 1 tax bracket and then the remaining in the Roth 401k. We usually fall on the margins.

I use to put it all in the Traditional 401k, but once they lowered the tax brackets, Roth became more appealing to pay now (at an assumed lower rate). its easier for me to justify paying 24% now assuming it would otherwise be 28% when I pull it out even if I stay in the same tax bracket.

However, its highly unlikely we will never get to the 32% bracket in retirement, so I'm ok deferring anything that falls into that bucket and taking my chances that I can figure out how to withdraw that at a lower rate.