Roth 401K? (1 Viewer)

So I'm starting a new job in a few weeks, and the company offers both a traditional, pre-tax 401(k) option and a Roth 401(k) option. The overall IRS contribution limit is the max total contribution, and it can be split any way the employee wants between the two options.

Obviously, in a traditional 401(k), contributions are not taxed, but withdrawals are taxable. Any contributions to the Roth 401(k) would be taxed first, and would thus lower take home pay, but then withdrawals would never be taxed.

In the past, I have always attempted to contribute the maximum amount (up to the IRS limit) to a traditional 401(k). Then in some years, I made an additional contribution to a Roth IRA. But there was no real choice to be made there. All of my 401(k) contributions had to go into a traditional IRA, meaning all other income that I had to consider contributing to an IRA had already been taxed.

Here, if I go the Roth 401(k) route, my contributions will be made after federal, state, Social Security, and Medicare taxes have been taken out.

I'm leaning towards putting all of my contribution into the Roth 401(k). Just wondering if anyone has experience with this decision and can articulate any pros and cons I haven't addressed.

The Roth / Traditional decision is mostly based on two details. Your tax rate now and your projected tax rate when you retire.

Having both types of accounts will give you more flexibility in controlling your retirement tax rate. For example, under current tax laws, a married couple could take $72,500/year out of your traditional and pay marginal rates up to 15%. Any additional money you need to take out would come from your Roth, avoiding crossing over into the 25% bracket.

Of course, if you're paying 25% marginal rate to put that money in, there is no real tax advantage.

One advantage that is often overlooked is that if you max out the 401(k) contribution, you are actually putting more money into the Roth than you are the traditional (since taxes will eventually come out of the traditional).

Coming up on a decision to start hitting the Roth 401k over and above my traditional 401k (up to the match) and maxing out annual Roth IRA contributions.

mquinnjr said:

Coming up on a decision to start hitting the Roth 401k over and above my traditional 401k (up to the match) and maxing out annual Roth IRA contributions.

Click to expand...

I may not be reading this right, but you do know that the max applies for Roth 401k + 401k. You don't get two 17.5k allotments + Roth.

Roth is independent of Roth 401k. I know you said that, but wanted to restate it.

culdeus said:

mquinnjr said:

Coming up on a decision to start hitting the Roth 401k over and above my traditional 401k (up to the match) and maxing out annual Roth IRA contributions.

Click to expand...

I may not be reading this right, but you do know that the max applies for Roth 401k + 401k. You don't get two 17.5k allotments + Roth.

Roth is independent of Roth 401k. I know you said that, but wanted to restate it.

Click to expand...

I believe he means he will contribute to the traditional to get the full match then put the balance into the Roth to the max for the year.

Dragons said:

The Roth / Traditional decision is mostly based on two details. Your tax rate now and your projected tax rate when you retire.

Having both types of accounts will give you more flexibility in controlling your retirement tax rate. For example, under current tax laws, a married couple could take $72,500/year out of your traditional and pay marginal rates up to 15%. Any additional money you need to take out would come from your Roth, avoiding crossing over into the 25% bracket.

Of course, if you're paying 25% marginal rate to put that money in, there is no real tax advantage.

One advantage that is often overlooked is that if you max out the 401(k) contribution, you are actually putting more money into the Roth than you are the traditional (since taxes will eventually come out of the traditional).

Click to expand...

An additional consideration is that we have no idea what the tax rates will be when you retire. As a 30 year-old, I am maxing out my ROTH 401K. When you consider the deficit that our nation faces and future SS and Medicare obligations, the country will eventually realize that we need to both cut and tax our way out of the hole that we have created. There will be tough decisions ahead, and I am very confident that tax rates will be much higher 30-40-50 years down the road than they are today.

If you get a match, always do that first.

After that is up to your current and expected future tax rates.

I don't get a match and pay ~5% in taxes, so I max our Roths first.

commoncents said:

Dragons said:

The Roth / Traditional decision is mostly based on two details. Your tax rate now and your projected tax rate when you retire.

Having both types of accounts will give you more flexibility in controlling your retirement tax rate. For example, under current tax laws, a married couple could take $72,500/year out of your traditional and pay marginal rates up to 15%. Any additional money you need to take out would come from your Roth, avoiding crossing over into the 25% bracket.

Of course, if you're paying 25% marginal rate to put that money in, there is no real tax advantage.

One advantage that is often overlooked is that if you max out the 401(k) contribution, you are actually putting more money into the Roth than you are the traditional (since taxes will eventually come out of the traditional).

Click to expand...

An additional consideration is that we have no idea what the tax rates will be when you retire. As a 30 year-old, I am maxing out my ROTH 401K. When you consider the deficit that our nation faces and future SS and Medicare obligations, the country will eventually realize that we need to both cut and tax our way out of the hole that we have created. There will be tough decisions ahead, and I am very confident that tax rates will be much higher 30-40-50 years down the road than they are today.

Click to expand...

I'm interested to see how the Feds start taxing our Roth.

FUBAR said:

commoncents said:

Dragons said:

The Roth / Traditional decision is mostly based on two details. Your tax rate now and your projected tax rate when you retire.

Having both types of accounts will give you more flexibility in controlling your retirement tax rate. For example, under current tax laws, a married couple could take $72,500/year out of your traditional and pay marginal rates up to 15%. Any additional money you need to take out would come from your Roth, avoiding crossing over into the 25% bracket.

Of course, if you're paying 25% marginal rate to put that money in, there is no real tax advantage.

One advantage that is often overlooked is that if you max out the 401(k) contribution, you are actually putting more money into the Roth than you are the traditional (since taxes will eventually come out of the traditional).

Click to expand...

An additional consideration is that we have no idea what the tax rates will be when you retire. As a 30 year-old, I am maxing out my ROTH 401K. When you consider the deficit that our nation faces and future SS and Medicare obligations, the country will eventually realize that we need to both cut and tax our way out of the hole that we have created. There will be tough decisions ahead, and I am very confident that tax rates will be much higher 30-40-50 years down the road than they are today.

Click to expand...

I'm interested to see how the Feds start taxing our Roth.

Click to expand...

Such a tiny portion use it I wouldn't worry about it.

commoncents said:

Dragons said:

The Roth / Traditional decision is mostly based on two details. Your tax rate now and your projected tax rate when you retire.

Having both types of accounts will give you more flexibility in controlling your retirement tax rate. For example, under current tax laws, a married couple could take $72,500/year out of your traditional and pay marginal rates up to 15%. Any additional money you need to take out would come from your Roth, avoiding crossing over into the 25% bracket.

Of course, if you're paying 25% marginal rate to put that money in, there is no real tax advantage.

One advantage that is often overlooked is that if you max out the 401(k) contribution, you are actually putting more money into the Roth than you are the traditional (since taxes will eventually come out of the traditional).

Click to expand...

An additional consideration is that we have no idea what the tax rates will be when you retire. As a 30 year-old, I am maxing out my ROTH 401K. When you consider the deficit that our nation faces and future SS and Medicare obligations, the country will eventually realize that we need to both cut and tax our way out of the hole that we have created. There will be tough decisions ahead, and I am very confident that tax rates will be much higher 30-40-50 years down the road than they are today.

Click to expand...

I think this is a legitimate concern.

Just to make sure my situation is clear. I can and will put $17.5K per year into my 401(k), and will increase that if and when allowed. The question is how to allocate that between the traditional and Roth 401(k) accounts.

The company will give a typical match of 50% up to my first 6% contributed, meaning I will get a match of 3% of my salary, since my $17.5K contribution will exceed 6% of my salary. The match goes into the traditional 401(k) account, so it will be taxable down the road. The match is provided without regard to how I make my contribution. So I can put all $17.5K into the Roth 401(k) account and get the 3% match in the traditional 401(k) account.

I understand that the traditional decision can be based on whether you expect to be taxed at a lower rate when you withdraw your 401(k) funds than you are when you are contributing them. And I agree with the other poster who suggested there is significant risk that tax rates could go up substantially between now and when I would expect to withdraw my 401(k) funds (25+ years from now for me). Of course, it is also not out of the question that something could be changed in the future that leads to taxation of Roth funds. IMO it isn't safe to assume anything, though the probability seems lower of Roths becoming taxable than tax rates going up.

Thanks for all of the comments.

fourd said:

culdeus said:

mquinnjr said:

Coming up on a decision to start hitting the Roth 401k over and above my traditional 401k (up to the match) and maxing out annual Roth IRA contributions.

Click to expand...

I may not be reading this right, but you do know that the max applies for Roth 401k + 401k. You don't get two 17.5k allotments + Roth.

Roth is independent of Roth 401k. I know you said that, but wanted to restate it.

Click to expand...

I believe he means he will contribute to the traditional to get the full match then put the balance into the Roth to the max for the year.

Click to expand...

Sorry for the confusion, guys.

Currently, I contribute 6% of my salary into a traditional 401k to get the 75% match up to 6% of salary my company offers. I also max out my Roth IRA contribution ($5,500/yr), been doing that for two years now going on three for 2014, sending my bonus (net of tax) right into the Roth IRA account. I like the fact that I can touch the principal on the Roth IRA if a true emergency came up, and I exhausted the 6 months cash & stock emergency funds I already have setup.

I'm now getting ready to start contributing to the Roth 401k with my salary increase (~2%) for 2014, on top of the 6% I put in traditional IRA to get my full match. My AGI is under 114k, so I can also contribute to the Roth IRA with my bonus (up to $5,500 for 2014). I'm shooting the excess 2% salary increase to the Roth 401k, which would be a combined 8% of pay (6% pre-tax and 2% after tax) to total 401k contributions, well under the 17.5k IRS limit.

commoncents said:

Dragons said:

The Roth / Traditional decision is mostly based on two details. Your tax rate now and your projected tax rate when you retire.

Having both types of accounts will give you more flexibility in controlling your retirement tax rate. For example, under current tax laws, a married couple could take $72,500/year out of your traditional and pay marginal rates up to 15%. Any additional money you need to take out would come from your Roth, avoiding crossing over into the 25% bracket.

Of course, if you're paying 25% marginal rate to put that money in, there is no real tax advantage.

One advantage that is often overlooked is that if you max out the 401(k) contribution, you are actually putting more money into the Roth than you are the traditional (since taxes will eventually come out of the traditional).

Click to expand...

An additional consideration is that we have no idea what the tax rates will be when you retire. As a 30 year-old, I am maxing out my ROTH 401K. When you consider the deficit that our nation faces and future SS and Medicare obligations, the country will eventually realize that we need to both cut and tax our way out of the hole that we have created. There will be tough decisions ahead, and I am very confident that tax rates will be much higher 30-40-50 years down the road than they are today.

Click to expand...

It's an excellent point but the only thing the Left has to do to tip things back towards Conservative America is start hiking up tax brackets for the working class.

Roth has a few other benefits. You can get to your money easier before 59 1/2. You also don't have to withdraw at a certain age like with non Roths.