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I'm thinking out loud here, and would like to hear about your experience with a Roth 401k.
In my case:
-- I already have a 401k of many years still with previous employer. And my own Roth IRA.
-- I'll only be in the 15% tax bracket. A lower bracket than previously.
My decision now is: with the next employer do I pick the 'traditional pre-tax 401k' or the after-tax Roth 401k (which essentially will mean two pots of money both pre and after tax in the same amount.)
Do you (did you) find that 'complicated' your decision about withdrawals in retirement, or did you find that confusing?
On hand #1 -- I already have a traditional 401k, so let this new 401k be traditional also. Same principles and rules regarding limits, matching, rollovers, distributions, etc.
On hand #2 -- I DO like the idea of a Roth IRA with after tax money in it. But the company match must be pre-tax and I'm not sure I like having two pots of money, under different tax rules in the same account.
But back on hand #1 -- if I have to start pulling money from all my 401ks at 70 1/2 -- I might as well try to get as much of that money into a ROTH 401k so it's not taxed as income later, when RMDs could push me into a higher bracket.
(Also, I'll be making so little money, that at this point I'm not sure I'll be able to keep putting money into MY OWN after tax Roth IRA....so the Roth 401k might be the only kind of any Roth retirement account I'll be consistently contributing to going forward. Given that I'll only be in the 15% tax bracket the appeal of my own Roth IRA is that I never have to take the money out....no RMDs. Before, I made more and maxed out the 401k AND contributed to my own Roth IRA. But I don't know about that going forward.)
So how did you decide about going with (or not) a Roth 401k? Thanks!
I do have 401K Roth with my current employer and I contribute, but my contribution is still highly weighted to pre-tax as I want the tax deferral.
However, check if your plan also has after-tax 401K available, as this is a very powerful bucket in and of itself. Monies contributed to this bucket can be converted to Roth, you can have the best of both worlds: able to make all your contributions up to your yearly limit pre-tax, AND fund what is, in essence, a "deferred roth."
Tip: if you do have after tax 401K available, max it out if you can every year, and do in-service conversions from after-tax to Roth 401K, if you can. All the gains on those contributions once converted to Roth will grow tax free. My plan started allowing us to do in-service conversions and as often as every pay period. I make that phone call to the 401K administrator after every payday and immediately have my after-tax 401K contributions converted to Roth.
So how did you decide about going with (or not) a Roth 401k? Thanks!
Easy. At first the only option we had was Traditional. They started offering the Roth option just in time for us to go downrange, so of course I switched to that and upped my contribution during that time. After I came back I ended up getting divorced, so I went back to Traditional just to make sure I stayed well away from the next tax bracket up from 15% as a single filer.
The 401k and Roth 401k are not in the same account. It may feel like that but they are accounted for independently and when you leave you can roll the respective balances into ira/Roth
I do have 401K Roth with my current employer and I contribute, but my contribution is still highly weighted to pre-tax as I want the tax deferral.
However, check if your plan also has after-tax 401K available, as this is a very powerful bucket in and of itself. Monies contributed to this bucket can be converted to Roth, you can have the best of both worlds: able to make all your contributions up to your yearly limit pre-tax, AND fund what is, in essence, a "deferred roth."
Tip: if you do have after tax 401K available, max it out if you can every year, and do in-service conversions from after-tax to Roth 401K, if you can. All the gains on those contributions once converted to Roth will grow tax free. My plan started allowing us to do in-service conversions and as often as every pay period. I make that phone call to the 401K administrator after every payday and immediately have my after-tax 401K contributions converted to Roth.
The after tax non Roth option only comes into play imo if you are already maxing out a Roth IRA annually, wish to contribute more, not take the pre tax contribution route and your 401k plan allows for at least once a year in service withdrawals of the after tax non Roth portion
Last edited by Lowexpectations; 08-23-2017 at 07:27 AM..
We do both traditional and Roth 401ks, along with a Keogh plan (and regular outside brokerage accounts) because we wanted tax diversification in our investments. Whether taxes go up or go down, or if rules change, we'll have more options.
We do traditional 401ks and Roth IRAs. I'd do all traditional if we could. We are at the point where we are phasing out of the child tax credit even after maxing out 2 traditional 401ks, so I'd put everything in traditional if we could. It would save us the regular 25% on federal taxes + 7% on state taxes + half of 2 child tax credits.
Plus we started our Roth IRAs so young even if we only work until 50 I expect us to have over $250k in just contributions in there (this also assumes no increases in contribution limits over the next 18 years). So we could live off of that + LTCGs or Qualified dividends while pulling out and converting $30-$40k/yr from our traditional while paying next to nothing in taxes (we'd owe $1.1k in taxes on a $40k conversion). Then 5 years after the conversion that $30-$40k becomes the same thing as a contribution.
The after tax non Roth option only comes into play imo if you are already maxing out a Roth IRA annually, wish to contribute more, not take the pre tax contribution route and your 401k plan allows for at least once a year in service withdrawals of the after tax non Roth portion
I believe in maxing out every retirement savings bucket one can (if one can afford to do so), including a Roth IRA outside of 401K if one is eligible with their income level. I wish 401Ks had been available my first decade of working. It would have been a nice jump start and made a difference.
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