Taxes on Roth 401K

[arrieros81]

Originally Posted by sixburgh90

Ok, thanks! I am trying to gain a better understanding and I see I already got things confused

The company offers a two options; pretax 401k and roth 401k

I thought the limit for the pretax was 18k and the limit for the roth was 5.5k, but it sounds they both can only total 18k? Example 13k pretax and 5k roth

So it doesn't sound like using the pretax 401k to lower your bracket so the roth contributions (Taxed then) is taxed at the lower rate, correct?


Appreciate the help

I don't know about your second question, but regarding your first question you can contribute 18K to the 401k (either pretax, or Roth 401k, or a combination of both), and an additional $5500 to an IRA (either traditional, Roth, or a combination of both).

So a maximum of $23,500 in total a year by maxing out the 401k and IRA.

[sixburgh90]

Originally Posted by arrieros81

I don't know about your second question, but regarding your first question you can contribute 18K to the 401k (either pretax, or Roth 401k, or a combination of both), and an additional $5500 to an IRA (either traditional, Roth, or a combination of both).

So a maximum of $23,500 in total a year by maxing out the 401k and IRA.

Thanks that makes sense! I was getting the roth 401k confused with the IRA

So my plan is to use the little I need pretax 401k (18k limit) to lower me from the 25% bracket to the 15% bracket... a few thousand

Then try and max out the roth ira (5.5k limit) and use anything I have left towards the roth 401k (18k limit...combined with pretax 401k)

I appreciate the help and know my comment above is noting focusing on the roth 401k after I lower the bracket, but it sounds to tackle the roth ira first makes more sense after the bracket is lowered

[arrieros81]

Originally Posted by sixburgh90

Thanks that makes sense! I was getting the roth 401k confused with the IRA

So my plan is to use the little I need pretax 401k (18k limit) to lower me from the 25% bracket to the 15% bracket... a few thousand

Then try and max out the roth ira (5.5k limit) and use anything I have left towards the roth 401k (18k limit...combined with pretax 401k)

I appreciate the help and know my comment above is noting focusing on the roth 401k after I lower the bracket, but it sounds to tackle the roth ira first makes more sense after the bracket is lowered

ok, I'm just making a suggestion, but you might not even bother contributing to the traditional 401k to lower your tax base (contributions to your Roth 401k don't lower your tax base).

Might as well just do Roth 401k, up to company matching if any (company contributions are pre-tax), then max out Roth IRA since you can withdraw contributions penalty free at any time which gives you some flexibility, and then if you have anything additional to save to contribute into the Roth 401k.

[sixburgh90]

Originally Posted by arrieros81

ok, I'm just making a suggestion, but you might not even bother contributing to the traditional 401k to lower your tax base (contributions to your Roth 401k don't lower your tax base). Might as well just do Roth 401k, up to company matching if any (company contributions are pre-tax), then max out Roth IRA since you can withdraw contributions penalty free at any time which gives you some flexibility, and then if you have anything additional to save to contribute into the Roth 401k.

Say my income is 39k after the standard ded and tax exmp

I am thinking contributing 2k pretax 401k only

Then I am now in the 15% bracket at 37k instead of the 25% bracket

So If I max out the roth ira (5.5k) it is then taxed at 15% instead of 25%

Then anything I contribute to the roth 401k would be taxed at 15% instead of the 25%

Because if I do not do the 2k pretax... then the roth ira and roth 401k would all get hit at 25% from my understanding

Does that sound like a decent approach? I currently just do the company match pretax, but have finally started looking into the other options (Which I should have started doing when I first started working), but better now than never :-). So anyways I am still trying to figure this all out and appreciate any feedback on my approach

[arrieros81]

Originally Posted by sixburgh90

Say my income is 39k after the standard ded and tax exmp

I am thinking contributing 2k pretax 401k only

Then I am now in the 15% bracket at 37k instead of the 25% bracket

So If I max out the roth ira (5.5k) it is then taxed at 15% instead of 25%

Then anything I contribute to the roth 401k would be taxed at 15% instead of the 25%

Because if I do not do the 2k pretax... then the roth ira and roth 401k would all get hit at 25% from my understanding

Does that sound like a decent approach? I currently just do the company match pretax, but have finally started looking into the other options (Which I should have started doing when I first started working), but better now than never :-). So anyways I am still trying to figure this all out and appreciate any feedback on my approach

I suppose you could do that, seems like a good strategy given your current income. You sound pretty smart.

However, is your income going to go up over time? Hopefully it will. At that point this strategy will have to be readjusted when your income goes up. You'd have to contribute more into the pre-tax 401k to get back into the 15% bracket for your Roth IRA and Roth 401k contributions, and with the benefits of contributing into a Roth vs. traditional 401k, you might be better off just forgoing any contributions into a traditional to reduce your taxable income just to make it into the 15% bracket.

I wouldn't even begin to be able to calculate any kind of tax implication though. I just try to KISS.

[sixburgh90]

Originally Posted by arrieros81

I suppose you could do that, seems like a good strategy given your current income. You sound pretty smart.

However, is your income going to go up over time? Hopefully it will. At that point this strategy will have to be readjusted when your income goes up. You'd have to contribute more into the pre-tax 401k to get back into the 15% bracket for your Roth IRA and Roth 401k contributions, and with the benefits of contributing into a Roth vs. traditional 401k, you might be better off just forgoing any contributions into a traditional to reduce your taxable income just to make it into the 15% bracket.

I wouldn't even begin to be able to calculate any kind of tax implication though. I just try to KISS.

Appreciate all of the help! Yes, hopefully I will run into that issue down the line. I think with the low pretax needed now... it makes sense. Ex. Once I need say 4 - 6k then I see your point. Not sure what the magic number would be, but will cross that bridge when I get there :-)

[Petunia 100]

Originally Posted by sixburgh90

Say my income is 39k after the standard ded and tax exmp

I am thinking contributing 2k pretax 401k only

Then I am now in the 15% bracket at 37k instead of the 25% bracket

So If I max out the roth ira (5.5k) it is then taxed at 15% instead of 25%

Then anything I contribute to the roth 401k would be taxed at 15% instead of the 25%

Because if I do not do the 2k pretax... then the roth ira and roth 401k would all get hit at 25% from my understanding

Does that sound like a decent approach? I currently just do the company match pretax, but have finally started looking into the other options (Which I should have started doing when I first started working), but better now than never :-). So anyways I am still trying to figure this all out and appreciate any feedback on my approach

No, if 37k is the cutoff for 15% then only 2k is taxed at 25%.


Imagine that tax brackets are buckets and your income is water. The water is poured into each bucket in turn, filling the lowest taxed bucket completely before moving on to the next. The water in the 10% bucket is taxed at 10% and so on. The water in the 10% bucket will always be taxed at 10%, even if there is 2k of water in the 25% bucket.


I think your strategy to stay in the 15% bracket is a smart one, unless you expect substantial taxable income from a pension, rentals, an S-Corp, a partnership, or some other source in retirement.

[sixburgh90]

Originally Posted by Petunia 100

No, if 37k is the cutoff for 15% then only 2k is taxed at 25%.


Imagine that tax brackets are buckets and your income is water. The water is poured into each bucket in turn, filling the lowest
I think your strategy to stay in the 15% bracket is a smart one, unless you expect substantial taxable income from a pension, rentals, an S-Corp, a partnership, or some other source in retirement.

Thanks

So 2k pretax would defer the 25% tax and lower my income to the 15% bracket of 37k, which I think is the way to go in my situation, but who knows what the brackets will be down the line.. as I will likely be married then too, which should help

Then any roth ira or roth 401k contributions would get hit with the 15% tax right away

My thoughts are since all of the tax brackets 10%, 15%, 25%, 28, 33, 35, 39.6%

That 10% jump is big, as most bracket increases do not carry as much weight, but the 25% to 15% does

I appreciate the feedback. I have only been working for a few years, which I doubt I will ever find a company that offers a pension anymore and am only counting on SS as a nice to have. I do have one rental (as I originally lived in a condo and moved to a house, but kept the condo to rent), which I am already counting the home interest, tax, etc... to lower my bracket. Other than that I have minimally invested in dividend stocks, but have been trying to avoid, with the market being so high since I started working.

[arrieros81]

Originally Posted by Petunia 100

No, if 37k is the cutoff for 15% then only 2k is taxed at 25%.


Imagine that tax brackets are buckets and your income is water. The water is poured into each bucket in turn, filling the lowest taxed bucket completely before moving on to the next. The water in the 10% bucket is taxed at 10% and so on. The water in the 10% bucket will always be taxed at 10%, even if there is 2k of water in the 25% bucket.


I think your strategy to stay in the 15% bracket is a smart one, unless you expect substantial taxable income from a pension, rentals, an S-Corp, a partnership, or some other source in retirement.

Oh, that's how it works. He'd be better off increasing his income as much as possible instead of trying to strategize contributions to three different types of retirement accounts then.