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Old 05-08-2010, 09:11 AM
 
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The Case Against Roth 401(k) - The Finance Buff






I utilize the traditional 401k because Im in the 33% bracket my wife and I..and when you include state taxes my tax obligation goes up to 36%.. I save over 5K in taxes yearly by doing traditional.. Unfortunately I dont qualify for the Roth IRA because of income restrictions but I think if one does the best diversification measure is to do the traditional 401K and roll that tax savings into a Roth IRA.
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Old 05-08-2010, 12:32 PM
 
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If you roll a Traditional 401k into a Roth IRA you have to pay tax, the only savings would come if you stuffed a lot in a traditional 401k and if you lost your job so your income was low then rolled it over and paid taxes at a much lower rate.

The Roths were designed for folks like me in a much much lower tax bracket, I think we paid around 6% of our gross income in federal tax last year.
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Old 05-08-2010, 08:41 PM
 
Location: Las Flores, Orange County, CA
26,338 posts, read 93,355,219 times
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Quote:
Originally Posted by wheelsup View Post
If you roll a Traditional 401k into a Roth IRA you have to pay tax, the only savings would come if you stuffed a lot in a traditional 401k and if you lost your job so your income was low then rolled it over and paid taxes at a much lower rate.

The Roths were designed for folks like me in a much much lower tax bracket, I think we paid around 6% of our gross income in federal tax last year.
I don't think that is what the original poster is implying. I think he (poorly) used "roll" instead of "invest". Meaning, the money not paid in taxes because of the deduction of 401(k) can be used to put into a Roth IRA.
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Old 05-09-2010, 06:28 AM
 
20,793 posts, read 61,030,940 times
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Quote:
Originally Posted by Charles View Post
I don't think that is what the original poster is implying. I think he (poorly) used "roll" instead of "invest". Meaning, the money not paid in taxes because of the deduction of 401(k) can be used to put into a Roth IRA.
I am not quite sure I am following what the OP is suggesting either but if you take money from a 401K and put it into a ROTH IRA, you WILL pay taxes on that transfer of money.

OP-so you are in the 36% tax bracket now, what if you are in the 42% when you retire, do you still think a Roth is a bad idea?
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Old 05-09-2010, 08:30 AM
 
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Quote:
Originally Posted by Charles View Post
I don't think that is what the original poster is implying. I think he (poorly) used "roll" instead of "invest". Meaning, the money not paid in taxes because of the deduction of 401(k) can be used to put into a Roth IRA.


Thanks Charles thats excatly what i meant.
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Old 05-09-2010, 08:35 AM
 
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Originally Posted by golfgal View Post
I am not quite sure I am following what the OP is suggesting either but if you take money from a 401K and put it into a ROTH IRA, you WILL pay taxes on that transfer of money.

OP-so you are in the 36% tax bracket now, what if you are in the 42% when you retire, do you still think a Roth is a bad idea?


No.. I think each persons situation is different, however I think that the Roth 401k is extremely ove for most. I think the Roth IRA is a far better bang for the buck!
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Old 05-09-2010, 08:51 AM
 
Location: Las Flores, Orange County, CA
26,338 posts, read 93,355,219 times
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Quote:
Originally Posted by golfgal View Post
I am not quite sure I am following what the OP is suggesting either but if you take money from a 401K and put it into a ROTH IRA, you WILL pay taxes on that transfer of money.

OP-so you are in the 36% tax bracket now, what if you are in the 42% when you retire, do you still think a Roth is a bad idea?
He's not pulling money out of a 401(k). He is taking the money he wouldn't pay in taxes and investing in in a Roth IRA. When you contribute to a 401(k), your taxable income in decreased meaning you pay less taxes.
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Old 05-10-2010, 08:05 PM
 
14,250 posts, read 17,829,153 times
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You really have to look at your individual tax situation and that includes taking a view as to where your taxes will go in the future.

For example, I am retiring in June and there is a possibility I will be in AMT in 2010 and 2011. The tax guys are running the numbers as we speak. If it looks like i will be in AMT then one solution is to roll the 401K into a Roth IRA in order to incur the tax and therefore take me out of AMT.
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Old 05-14-2010, 04:10 AM
 
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make sure you run the numbers , the tax may not go away.... we sold some property and it brought us into the amt territory on income alone triggering it.

the fact we owed more taxes on the increased income didnt mitigate the amt.... im not so sure the increased income on the roth conversion will be much different
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Old 05-14-2010, 04:37 AM
 
105,481 posts, read 107,437,045 times
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the fact of retirement is that most of us will be in a lower tax bracket with no pay check then we are when we are collecting a paycheck.

with 80 million baby boomers retiring i cant see any political party telling the masses oh by the way we are raising your income taxes..

i think every tax in the world will go up but for baby boomers i think we are safe. dont forget for 40 years now every year the amount of money that goes thru at less and less taxes is greater and greater. we are at the lowest tax rates in recent history and the tax brackets are still increasing allowing more income thru at lower tax.

having said that let me tell you why roths are still very powerful:

if you have any money left at the end of the game roths are all about your heirs..

instead of dwindling down your savings at 70-1/2 as you take required distributions roths keep right on compounding...

that money goes to your heirs who if they keep it compounding and growing even with their tax free required distributions that money can end up being even greater then they started with thru their lifetime.

in fact make your grand children the heirs and you can have more than 100 years of growth tax free..... thats a big bang for the buck.



thats the real power of a roth, not the fact you may save a few bucks if your tax rates a little lower when you retire. that may or may not be true.... but thats bubkas compared to the roths power of wealth transfering.

couple roths with the power of tax free life insurance and you have a tax free winning strategy to pass lots of money thru your family without uncle sam as your partner.

as ed slott says we all know what we owe on our mortgages but what we owe on our 401k's and ira money is open ended so we are better off locking it in asap. dont forget taxes were once as high as 70% a few decades back.


most financial people today are good at only one thing, helping you accumulate a nest egg of investments. very few are good at helping you keep it in the 2nd half of the game.

its like most people negotiate the best darn deal when they buy a car but then trade it back to the dealer at wholesale prices later on.

very few people are really great at helping you plan so your partner uncle sam dosnt get as much or more than you do... the trick is finding those that are great at the 2nd half of the game. they are few and far between.

Last edited by mathjak107; 05-14-2010 at 05:42 AM..
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