Personal Finance Advice and Education! (11 Viewers)

[themeanmachine]

Anyone with experience paying for college out of a 529?

Son is a freshman, I paid the first semester out of regular bank account, but for this semester plan to start tapping the 529.  Looks like I have a few options for how to do this.  The two I'm considering are 1) transferring the funds to my bank account, then I pay the university, or 2) 529 administrator sends a check directly to the university. 

Either way, it's a fully qualified withdrawal, and it seems that for tax purposes there is no difference between the two.  If I read correctly, you don't even report it on your tax filings, just keep records in case you get audited.

At first glance it seemed a check to the university would be more straightforward. But I feel like there's some risk involved - making sure I enter the university address correctly, and hoping the check gets cut and sent on time (payment due Feb 5), and hoping the university processes it correctly.  If I have it electronically deposited to my bank account, then I pay the university electronically using their system, I'm in control of the process. I'm thinking that's the less risky approach, and it's not that much work.

Anyone have previous experience with this and upsides/downsides to the two approaches that I'm not considering?

 

[Desert_Power]

Not sure what happened above with last post.  Anyway, anyone here familiar with, or better yet actually done a ROTH IRA conversion?  If I’m understanding it right, this could be huge for lots of people.  

I haven't done it, but it is a huge topic in the FIRE communities. Great way to get money out of pretax vehicles before 59 and 1/2

 

[matttyl]

I haven't done it, but it is a huge topic in the FIRE communities. Great way to get money out of pretax vehicles before 59 and 1/2

Especially at today’s historically low tax rates.  Very much considering this strategy over next few years.  Convert what I can up until the next tax bracket.  Done with tax on that money and it can grow for next 20+ years.  

 

[matttyl]

Anyone with experience paying for college out of a 529?

Son is a freshman, I paid the first semester out of regular bank account, but for this semester plan to start tapping the 529.  Looks like I have a few options for how to do this.  The two I'm considering are 1) transferring the funds to my bank account, then I pay the university, or 2) 529 administrator sends a check directly to the university. 

Either way, it's a fully qualified withdrawal, and it seems that for tax purposes there is no difference between the two.  If I read correctly, you don't even report it on your tax filings, just keep records in case you get audited.

At first glance it seemed a check to the university would be more straightforward. But I feel like there's some risk involved - making sure I enter the university address correctly, and hoping the check gets cut and sent on time (payment due Feb 5), and hoping the university processes it correctly.  If I have it electronically deposited to my bank account, then I pay the university electronically using their system, I'm in control of the process. I'm thinking that's the less risky approach, and it's not that much work.

Anyone have previous experience with this and upsides/downsides to the two approaches that I'm not considering?

Most 529 administrators as well as schools do this all the time.  They know the specific address to mail funds to, and can sometimes do it electronically.  

 

[BroncoFreak_2K3]

Most 529 administrators as well as schools do this all the time.  They know the specific address to mail funds to, and can sometimes do it electronically.  

We use the direct to university payment option through the Michigan 529 (MESP).  Been flawless so far. 

 

[BroncoFreak_2K3]

Anyone with experience paying for college out of a 529?

Son is a freshman, I paid the first semester out of regular bank account, but for this semester plan to start tapping the 529.  Looks like I have a few options for how to do this.  The two I'm considering are 1) transferring the funds to my bank account, then I pay the university, or 2) 529 administrator sends a check directly to the university. 

Either way, it's a fully qualified withdrawal, and it seems that for tax purposes there is no difference between the two.  If I read correctly, you don't even report it on your tax filings, just keep records in case you get audited.

At first glance it seemed a check to the university would be more straightforward. But I feel like there's some risk involved - making sure I enter the university address correctly, and hoping the check gets cut and sent on time (payment due Feb 5), and hoping the university processes it correctly.  If I have it electronically deposited to my bank account, then I pay the university electronically using their system, I'm in control of the process. I'm thinking that's the less risky approach, and it's not that much work.

Anyone have previous experience with this and upsides/downsides to the two approaches that I'm not considering?

We use the direct to university payment option through the Michigan 529 (MESP).  Been flawless so far. 

 

[NutterButter]

Especially at today’s historically low tax rates.  Very much considering this strategy over next few years.  Convert what I can up until the next tax bracket.  Done with tax on that money and it can grow for next 20+ years.  

At the very minimum, switch over to a Roth 401k if your desire is to have more in a Roth.  But I guess that also depends on how much of that will now fall in the next bracket.   

 

[matttyl]

At the very minimum, switch over to a Roth 401k if your desire is to have more in a Roth.  But I guess that also depends on how much of that will now fall in the next bracket.   

That’s is now offered at work, and I’m checking into conversion steps if I go that route.  It’s all (to me at least) about staying under that next tax bracket.  Plowing more into traditional lowers taxable income and keeps me (hopefully) under next bracket.  Problem is I’m a commission based sales - so I dont know what I’m going to make in 2022 - a big sale late in year can negate any planning info now.

 

[NutterButter]

That’s is now offered at work, and I’m checking into conversion steps if I go that route.  It’s all (to me at least) about staying under that next tax bracket.  Plowing more into traditional lowers taxable income and keeps me (hopefully) under next bracket.  Problem is I’m a commission based sales - so I dont know what I’m going to make in 2022 - a big sale late in year can negate any planning info now.

the conversion at the end of the year is your best bet then

 

[SFBayDuck]

I just realized that the 401K limit jumped from $19,500 to $20,500, so don't forget to update those contribution amounts.

I also just realized I turn 50(!!!!!!) towards the end of this year, so I guess I can now contribute $27,000 per year.

 

[-OZ-]

Not sure what happened above with last post.  Anyway, anyone here familiar with, or better yet actually done a ROTH IRA conversion?  If I’m understanding it right, this could be huge for lots of people.  

That’s part of our plan at 55. 

 

[-OZ-]

I just realized that the 401K limit jumped from $19,500 to $20,500, so don't forget to update those contribution amounts.

I also just realized I turn 50(!!!!!!) towards the end of this year, so I guess I can now contribute $27,000 per year.

Plus if eligible, $7,000 to your IRA

 

[Lion to myself]

I just realized that the 401K limit jumped from $19,500 to $20,500, so don't forget to update those contribution amounts.

I also just realized I turn 50(!!!!!!) towards the end of this year, so I guess I can now contribute $27,000 per year.

Plus if eligible, $7,000 to your IRA

Finally some reasons to celebrate getting older.  

 

[themeanmachine]

Most 529 administrators as well as schools do this all the time.  They know the specific address to mail funds to, and can sometimes do it electronically.  

That's how I was hoping this would work, that I could just enter the name of the school, and everything would be seamless.  But the only option direct to the school is by check, no electronic option.  And I have to manually fill in all of the school address info - it even gives a warning on the page, "Some schools have multiple mailing addresses. Make sure you enter the right address for your payment."  That's where I'm thinking just having it sent to me, then I pay the bill myself is less risky.

 

[BigJim®]

I'm at a crossroads where I either need to learn *a lot* and do something with Roth or just bide my remaining <> 15-20 years of employment in the same pre-tax 401K I've always used. I'd dabbed my toe in this thread months ago, and looked into whether my company offered Roth. They do, except the company match cannot be done Roth. Seemed like a lot to learn and do re: 1 nth of my savings strategy so late in the game. I basically chose to do nothing at all.

My "role" in my 401K occurred years ago when I clicked a withhold % to hit the max and selected target funds. I have no concerns whatsoever about my current 401K balance, or living well in retirement, because I began saving at age 23 and I'm 52. I have almost zero debt. 

So here I am again, unable to shake this lingering Roth curiosity and questioning whether my ignorance is overwhelming something that is very simple to do. The Roth "conversion" discussion just makes my head hurt. It's no small decision as it may be for some of the savants in this thread. I don't understand it at all. Not even a little. Use of "IRA" in these discussions is confusing to me as I don't think my 401K is currently an IRA. The recent exchange about bringing oneself to another tax bracket doing conversion - that only increases the magnitude of headache. I don't have a financial planner, and I'm probably too miserly/distrustful to consider one.

Am I understanding right I can convert some/all of my substantial pre-tax 401K balances to a Roth? In doing that, am I basically deciding I need to pull out my checkbook and write significant checks to the IRS re: funds historically excluded from taxation? 

 

[ConstruxBoy]

I'm at a crossroads where I either need to learn *a lot* and do something with Roth or just bide my remaining <> 15-20 years of employment in the same pre-tax 401K I've always used. I'd dabbed my toe in this thread months ago, and looked into whether my company offered Roth. They do, except the company match cannot be done Roth. Seemed like a lot to learn and do re: 1 nth of my savings strategy so late in the game. I basically chose to do nothing at all.

My "role" in my 401K occurred years ago when I clicked a withhold % to hit the max and selected target funds. I have no concerns whatsoever about my current 401K balance, or living well in retirement, because I began saving at age 23 and I'm 52. I have almost zero debt. 

So here I am again, unable to shake this lingering Roth curiosity and questioning whether my ignorance is overwhelming something that is very simple to do. The Roth "conversion" discussion just makes my head hurt. It's no small decision as it may be for some of the savants in this thread. I don't understand it at all. Not even a little. Use of "IRA" in these discussions is confusing to me as I don't think my 401K is currently an IRA. The recent exchange about bringing oneself to another tax bracket doing conversion - that only increases the magnitude of headache. I don't have a financial planner, and I'm probably too miserly/distrustful to consider one.

Am I understanding right I can convert some/all of my substantial pre-tax 401K balances to a Roth? In doing that, am I basically deciding I need to pull out my checkbook and write significant checks to the IRS re: funds historically excluded from taxation? 

Lots of things to discuss. The easiest thing to do if you want some Roth savings is switch some of your 401k withholding to Roth, as you say your company does that. As you mention, the company match is pre-tax and not Roth (post tax). But that would get you started without having to do a conversion. 

As for why to do it, it's basically a bit of a hedge with some advantages. So if your first $80k a year is taxed at 12% now, and you will want to withdraw $80k a year in retirement, how sure are you that the rate for the first $80k in 15-20 years will be 12% or lower? If it's higher in the future when you retire, you would have been better paying taxes now with a Roth. 

Of course by having lower taxable income now, you are helping pay a lower tax now on each yearly tax return. 

The other big advantage to a Roth is that there are no Required Minimum Distributions (RMD). Once you get to your mid-70s, the government wants you to start paying tax on that money you put away tax free in your traditional 401k. They have a formula based on your 401k (and IRA) balance and your life expectancy. So even though you only want to take out $80k a year, they may say you have to take out $95k a year and that extra $15k, which you don't need, may be taxed at a higher rate than the $80k you actually need. 

The Roth money has already been taxed so it's not counted in your 401k/IRA balance, leading to lower RMDs each year. 

My advice is that everyone has some Roth money just as a hedge. 

 

[b-snatchers]

I'm at a crossroads where I either need to learn *a lot* and do something with Roth or just bide my remaining <> 15-20 years of employment in the same pre-tax 401K I've always used. I'd dabbed my toe in this thread months ago, and looked into whether my company offered Roth. They do, except the company match cannot be done Roth. Seemed like a lot to learn and do re: 1 nth of my savings strategy so late in the game. I basically chose to do nothing at all.

My "role" in my 401K occurred years ago when I clicked a withhold % to hit the max and selected target funds. I have no concerns whatsoever about my current 401K balance, or living well in retirement, because I began saving at age 23 and I'm 52. I have almost zero debt. 

So here I am again, unable to shake this lingering Roth curiosity and questioning whether my ignorance is overwhelming something that is very simple to do. The Roth "conversion" discussion just makes my head hurt. It's no small decision as it may be for some of the savants in this thread. I don't understand it at all. Not even a little. Use of "IRA" in these discussions is confusing to me as I don't think my 401K is currently an IRA. The recent exchange about bringing oneself to another tax bracket doing conversion - that only increases the magnitude of headache. I don't have a financial planner, and I'm probably too miserly/distrustful to consider one.

Am I understanding right I can convert some/all of my substantial pre-tax 401K balances to a Roth? In doing that, am I basically deciding I need to pull out my checkbook and write significant checks to the IRS re: funds historically excluded from taxation? 

I don't think you have to convert anything here. Just re-allocate your contribution to some roth and some 401K. Its that simple. No taxes need to be paid. This is all inside your 401K. Different story if you are talking about an IRA

 

[matttyl]

Lots of things to discuss. The easiest thing to do if you want some Roth savings is switch some of your 401k withholding to Roth, as you say your company does that. As you mention, the company match is pre-tax and not Roth (post tax). But that would get you started without having to do a conversion. 

As for why to do it, it's basically a bit of a hedge with some advantages. So if your first $80k a year is taxed at 12% now, and you will want to withdraw $80k a year in retirement, how sure are you that the rate for the first $80k in 15-20 years will be 12% or lower? If it's higher in the future when you retire, you would have been better paying taxes now with a Roth. 

Of course by having lower taxable income now, you are helping pay a lower tax now on each yearly tax return. 

The other big advantage to a Roth is that there are no Required Minimum Distributions (RMD). Once you get to your mid-70s, the government wants you to start paying tax on that money you put away tax free in your traditional 401k. They have a formula based on your 401k (and IRA) balance and your life expectancy. So even though you only want to take out $80k a year, they may say you have to take out $95k a year and that extra $15k, which you don't need, may be taxed at a higher rate than the $80k you actually need. 

The Roth money has already been taxed so it's not counted in your 401k/IRA balance, leading to lower RMDs each year. 

My advice is that everyone has some Roth money just as a hedge. 

Great info, but one thing I just learned.  While Roth IRAs might not have RMDs, ROTH 401ks do.  You get around that by rolling your Roth 401 into a Roth IRA after retiring.

Considering a Roth conversion is like a 5 dimensional math problem.  Lots of things to consider.  The idea being that you’ll pay a little bit now to prevent paying more later.  
 

Example - you have $100k in 401k/Ira.  You’re 40 and married.  You’re taxable income in the household is $60k.  That’s taxed at 12% up to $83k this year.  So you can “convert” $23k from 401k to Roth.  That increase your taxable income to $83k (the top of 12% bracket) and that extra income has a $2,760 additional federal tax on it (23k x.12) - which hopefully you pay out of pocket.  
 

You retire at 65 - that $23k could have grown (7% annual) to ~$125k, and it would all be taxable.  Assuming an average tax rate of 15% in retirement, and a 5% withdrawal rate it produces $5,312 a year after tax. Or if in Roth it would produce $6,250 a year (tax free), $938 a year more.    Is it worth paying $2,760 now one time to have $938 a year more in retirement?  To me, yes it would be, assuming I had that money on hand for that additional tax.  
 

But converting the entire amount would bump taxable income up and over the next bracket (which is 22% - a huge jump).  That math now doesn’t work out so we’ll (unless you assume a much higher tax rate in retirement, which could still happen).  
 

To me this only works if you have some room in your taxable income before the tax jump to 22% ($83.5k Married filing joint) or to 32% ($340k married filing jointly) and you expect to be in a similar tax bracket (or higher) in retirement.  

 

[-OZ-]

I don't think you have to convert anything here. Just re-allocate your contribution to some roth and some 401K. Its that simple. No taxes need to be paid. This is all inside your 401K. Different story if you are talking about an IRA

Not really a different story as we’re talking about future contributions. Just put new money where you want it. 

Great info, but one thing I just learned.  While Roth IRAs might not have RMDs, ROTH 401ks do.  You get around that by rolling your Roth 401 into a Roth IRA after retiring.

Considering a Roth conversion is like a 5 dimensional math problem.  Lots of things to consider.  The idea being that you’ll pay a little bit now to prevent paying more later.  
 

Example - you have $100k in 401k/Ira.  You’re 40 and married.  You’re taxable income in the household is $60k.  That’s taxed at 12% up to $83k this year.  So you can “convert” $23k from 401k to Roth.  That increase your taxable income to $83k (the top of 12% bracket) and that extra income has a $2,760 additional federal tax on it (23k x.12) - which hopefully you pay out of pocket.  
 

You retire at 65 - that $23k could have grown (7% annual) to ~$125k, and it would all be taxable.  Assuming an average tax rate of 15% in retirement, and a 5% withdrawal rate it produces $5,312 a year after tax. Or if in Roth it would produce $6,250 a year (tax free), $938 a year more.    Is it worth paying $2,760 now one time to have $938 a year more in retirement?  To me, yes it would be, assuming I had that money on hand for that additional tax.  
 

But converting the entire amount would bump taxable income up and over the next bracket (which is 22% - a huge jump).  That math now doesn’t work out so we’ll (unless you assume a much higher tax rate in retirement, which could still happen).  
 

To me this only works if you have some room in your taxable income before the tax jump to 22% ($83.5k Married filing joint) or to 32% ($340k married filing jointly) and you expect to be in a similar tax bracket (or higher) in retirement.  

 

this is just one reason I converted my TSP to IRAs last year. Roth to Roth, traditional to traditional. The money now in Roth IRA isn’t subject to RMDs  

 But I don’t back door, watch out for that if it’s a consideration. 

 

[matttyl]

In the end (retirement, whenever that is) it would be optimal to have as much monies as possible in Roth IRA/401k, HSAs, and well, a savings account or similar (or cash value life insurance, but that’s another discussion).  These are all buckets of money that you can access free if taxes.  This lowers your taxable income from other sources and thus your tax liability.  Could also keep you under thresholds for Medicare hidden taxes (IRMAA).  Now that can be difficult as we’d all love the tax break (extra money) now via traditional 401k/Ira.  We want that instant gratification, but if this is retirement planning, depending on age, all of this could be 10-30 years in the future for it to even start, and then possibly 20-40 years after that.  

 

[Tom Hagen]

Three other advantages to having Roth IRA money available in retirement:

1. Roth IRA distributions do not affect the amount of Social Security benefits subject to income tax the way traditional IRA/401(k) distributions do.
   
2. Early retirees can use Roth distributions to keep their MAGI low enough to qualify for an ACA health plan subsidy until they qualify for Medicare since qualified Roth distributions are not included in income when calculating the premium tax credit.
   
3. Qualified Roth distributions are not considered income for calculating increased Medicare premiums under IRMAA. 
   

There are a lot of ancillary benefits to being able to control your income with Roth distributions that may actually be more beneficial than the tax savings for some.

 

[The Z Machine]

I tried to open a Vanguard brokerage account using my wife's 403b info and I got through putting all the info in, including bank routing, etc. and right after I "sign" the docs, the system boots me and throws an error.  I did this first on Dec 31 and tried again today and it failed the same way.  I called the number on the screen for customer service and the backlog was over an hour to talk to a rep.

Maybe Vanguard won't get that brokerage account...

 

[BigJim®]

Lots of things to discuss. The easiest thing to do if you want some Roth savings is switch some of your 401k withholding to Roth, as you say your company does that. As you mention, the company match is pre-tax and not Roth (post tax). But that would get you started without having to do a conversion. 

As for why to do it, it's basically a bit of a hedge with some advantages. So if your first $80k a year is taxed at 12% now, and you will want to withdraw $80k a year in retirement, how sure are you that the rate for the first $80k in 15-20 years will be 12% or lower? If it's higher in the future when you retire, you would have been better paying taxes now with a Roth. 

Of course by having lower taxable income now, you are helping pay a lower tax now on each yearly tax return. 

The other big advantage to a Roth is that there are no Required Minimum Distributions (RMD). Once you get to your mid-70s, the government wants you to start paying tax on that money you put away tax free in your traditional 401k. They have a formula based on your 401k (and IRA) balance and your life expectancy. So even though you only want to take out $80k a year, they may say you have to take out $95k a year and that extra $15k, which you don't need, may be taxed at a higher rate than the $80k you actually need. 

The Roth money has already been taxed so it's not counted in your 401k/IRA balance, leading to lower RMDs each year. 

My advice is that everyone has some Roth money just as a hedge. 

Boy, I feel so stupid asking this question... but is it as simple as changing from pre-tax to Roth? In other words, if my pay is $100 and I have pre-tax setting set to contribute 10%, I assume it is contributing $10. When I change to Roth, do I need to contribute a higher %? For example, because the Roth contribution is using after tax... is it taking the % from $75 after tax pay, where 10% is only contributing $7.50... and I need to contribute 13.5% to hit the same $10?

 

[ConstruxBoy]

Great info, but one thing I just learned.  While Roth IRAs might not have RMDs, ROTH 401ks do.  You get around that by rolling your Roth 401 into a Roth IRA after retiring.

Considering a Roth conversion is like a 5 dimensional math problem.  Lots of things to consider.  The idea being that you’ll pay a little bit now to prevent paying more later.  
 

Example - you have $100k in 401k/Ira.  You’re 40 and married.  You’re taxable income in the household is $60k.  That’s taxed at 12% up to $83k this year.  So you can “convert” $23k from 401k to Roth.  That increase your taxable income to $83k (the top of 12% bracket) and that extra income has a $2,760 additional federal tax on it (23k x.12) - which hopefully you pay out of pocket.  
 

You retire at 65 - that $23k could have grown (7% annual) to ~$125k, and it would all be taxable.  Assuming an average tax rate of 15% in retirement, and a 5% withdrawal rate it produces $5,312 a year after tax. Or if in Roth it would produce $6,250 a year (tax free), $938 a year more.    Is it worth paying $2,760 now one time to have $938 a year more in retirement?  To me, yes it would be, assuming I had that money on hand for that additional tax.  
 

But converting the entire amount would bump taxable income up and over the next bracket (which is 22% - a huge jump).  That math now doesn’t work out so we’ll (unless you assume a much higher tax rate in retirement, which could still happen).  
 

To me this only works if you have some room in your taxable income before the tax jump to 22% ($83.5k Married filing joint) or to 32% ($340k married filing jointly) and you expect to be in a similar tax bracket (or higher) in retirement.  

Yes agree that he needs a Roth IRA at some point at least 5 years before he wants to use the money. I just didn’t want to confuse him.

 

[Joe Mammy]

Three other advantages to having Roth IRA money available in retirement:

1. Roth IRA distributions do not affect the amount of Social Security benefits subject to income tax the way traditional IRA/401(k) distributions do.
   
2. Early retirees can use Roth distributions to keep their MAGI low enough to qualify for an ACA health plan subsidy until they qualify for Medicare since qualified Roth distributions are not included in income when calculating the premium tax credit.
   
3. Qualified Roth distributions are not considered income for calculating increased Medicare premiums under IRMAA. 
   

There are a lot of ancillary benefits to being able to control your income with Roth distributions that may actually be more beneficial than the tax savings for some.

I love this. Thank you Obama!

 

[NutterButter]

Boy, I feel so stupid asking this question... but is it as simple as changing from pre-tax to Roth? In other words, if my pay is $100 and I have pre-tax setting set to contribute 10%, I assume it is contributing $10. When I change to Roth, do I need to contribute a higher %? For example, because the Roth contribution is using after tax... is it taking the % from $75 after tax pay, where 10% is only contributing $7.50... and I need to contribute 13.5% to hit the same $10?

Not sure.   Would be easy to just try it for a pay period and see what you get.   I always use a fixed dollar amount so that I don't have to do any math to determine how to hit the max with equal amounts over all pay periods to assure that I get the match.  

 

[NutterButter]

Just keep in mind that when running the numbers, you're not comparing your marginal tax rate now when converting to your marginal tax rate in retirement.    You'll convert now at your marginal rate, but your effective rate in retirement for a traditional will be lower than your marginal rate.

 

[matttyl]

Boy, I feel so stupid asking this question... but is it as simple as changing from pre-tax to Roth? In other words, if my pay is $100 and I have pre-tax setting set to contribute 10%, I assume it is contributing $10. When I change to Roth, do I need to contribute a higher %? For example, because the Roth contribution is using after tax... is it taking the % from $75 after tax pay, where 10% is only contributing $7.50... and I need to contribute 13.5% to hit the same $10?

I think you’re making this too hard.  At least with my 401 I pick a % to put into traditional and a % to put into Roth 401.  Ones before tax and the other is after, simple as that.  You pick 10% in traditional 10 goes in and you’re taxed on 90.  You pick 10% in Roth $10 goes in and you’re taxed on 100.  You can also do 5% in one and 5% in other.

 

[BigJim®]

I think you’re making this too hard.  At least with my 401 I pick a % to put into traditional and a % to put into Roth 401.  Ones before tax and the other is after, simple as that.  You pick 10% in traditional 10 goes in and you’re taxed on 90.  You pick 10% in Roth $10 goes in and you’re taxed on 100.  You can also do 5% in one and 5% in other.

Sometimes ignorance and fear just looks an awful lot like making it too hard.  

I set it up and upped the % because I think I was under-aiming for my > 50 cap amount where I was. Since existing savings are already lopsided traditional, I'm not seeing any reason to put any part of my future contribution in the traditional. It's still going to be added to with the employer match.

I tried to find info online whether I had to have some % contributed to after tax as a condition to get employer after tax match. I'm just assuming they match what I do w/r/t Roth... just after tax. If that is something I should investigate further based on anyone's experience, much appreciated if you let me know. Otherwise I think I'm set. 

Thanks for the motivation to do something.

 

[-OZ-]

Boy, I feel so stupid asking this question... but is it as simple as changing from pre-tax to Roth? In other words, if my pay is $100 and I have pre-tax setting set to contribute 10%, I assume it is contributing $10. When I change to Roth, do I need to contribute a higher %? For example, because the Roth contribution is using after tax... is it taking the % from $75 after tax pay, where 10% is only contributing $7.50... and I need to contribute 13.5% to hit the same $10?

I’m pretty sure you keep the same % and will have the same % go into Roth. But really this is a big reason why providers should allow a set $ instead of %. It’s so much easier to just set your contributions at $789 / pay period. I set mine at $800 just because I like round numbers and the last one, in December  will be $500 instead of $800. 

Sometimes ignorance and fear just looks an awful lot like making it too hard.  

I set it up and upped the % because I think I was under-aiming for my > 50 cap amount where I was. Since existing savings are already lopsided traditional, I'm not seeing any reason to put any part of my future contribution in the traditional. It's still going to be added to with the employer match.

I tried to find info online whether I had to have some % contributed to after tax as a condition to get employer after tax match. I'm just assuming they match what I do w/r/t Roth... just after tax. If that is something I should investigate further based on anyone's experience, much appreciated if you let me know. Otherwise I think I'm set. 

Thanks for the motivation to do something.

Check with your provider but every one I’ve seen and from others talking about theirs, employer will match Roth contributions (but theirs goes traditional). Unfortunately it doesn’t look like this is required but it’s standard / typical. I know mine does. 

 

[NutterButter]

I’m pretty sure you keep the same % and will have the same % go into Roth. But really this is a big reason why providers should allow a set $ instead of %. It’s so much easier to just set your contributions at $789 / pay period. I set mine at $800 just because I like round numbers and the last one, in December  will be $500 instead of $800. 

Ah, didn't realize some providers didn't do this.  I'd probably just spend all my retirement targeted income on hookers and blow instead of trying to figure out the right percentage if that was me.  Math is hard.  

 

[-OZ-]

Ah, didn't realize some providers didn't do this.  I'd probably just spend all my retirement targeted income on hookers and blow instead of trying to figure out the right percentage if that was me.  Math is hard.  

worse are the employers that make you use percentage and don’t provide a true up, especially if your pay isn’t consistent.  Second to those who don’t provide a match at all and only use plans with high fees provided by “friends”.  I’d say it’s astounding that these exist but there are plenty of sharks in these waters. They do seem to be shrinking recently, but education is important. 

 

[Orange&Blue]

I've been sending my TSP contribution to Roth 401(K) for 4 years now.  Is that a mistake?  Being federal, and getting FERS pension at retirement, i thought it was more important to have that built up than what experts typically recommend.

I'm 42, GS-14 equivalent.

 

[Lion to myself]

I've been sending my TSP contribution to Roth 401(K) for 4 years now.  Is that a mistake?  Being federal, and getting FERS pension at retirement, i thought it was more important to have that built up than what experts typically recommend.

I'm 42, GS-14 equivalent.

No, not a mistake.  Given that no one knows what taxes will be in the future, it’s a great idea to have money that will not be taxed when you withdraw.  Tax diversification is a good way to protect against tax uncertainty.  
 

Pre-tax (Trad IRA and 401k), after tax/tax free (Roth/Roth 401k), “tax as you go” (bank and brokerage accounts) and no tax (HSA if available) should all be part of the equation. 

 

[-OZ-]

I've been sending my TSP contribution to Roth 401(K) for 4 years now.  Is that a mistake?  Being federal, and getting FERS pension at retirement, i thought it was more important to have that built up than what experts typically recommend.

I'm 42, GS-14 equivalent.

No, not a mistake.  Given that no one knows what taxes will be in the future, it’s a great idea to have money that will not be taxed when you withdraw.  Tax diversification is a good way to protect against tax uncertainty.  
 

Pre-tax (Trad IRA and 401k), after tax/tax free (Roth/Roth 401k), “tax as you go” (bank and brokerage accounts) and no tax (HSA if available) should all be part of the equation. 

Agreed, not a mistake. But you might benefit from truly assessing your tax situation, especially with child tax credit rules changing (if relevant)

 

[NutterButter]

worse are the employers that make you use percentage and don’t provide a true up, especially if your pay isn’t consistent.  Second to those who don’t provide a match at all and only use plans with high fees provided by “friends”.  I’d say it’s astounding that these exist but there are plenty of sharks in these waters. They do seem to be shrinking recently, but education is important. 

we don't do a true up and i had to learn that the hard way.  i like my employer but that's some real shadiness.   

 

[Warrior]

In the end (retirement, whenever that is) it would be optimal to have as much monies as possible in Roth IRA/401k, 

This is wrong in many cases, for many people

 

[BigJim®]

Any difference in taxation on inherited traditional vs Roth 401k? Taxing inherited traditional as income makes sense as taxes had not been paid. Would seem like a double whammy if one pays taxes on contribution, if inheritance recipient must then treat as taxable income.

 

[-OZ-]

Any difference in taxation on inherited traditional vs Roth 401k? Taxing inherited traditional as income makes sense as taxes had not been paid. Would seem like a double whammy if one pays taxes on contribution, if inheritance recipient must then treat as taxable income.

Yes, it looks like that’s how it works. (Traditional taxed, Roth not)
https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp

 

[James Daulton]

Question that I think I know the answer to but I'll ask anyway.  If you retire and pull money from your Roth, that still counts as income, yes?  Or does it depend on the state?  Trying to think about how best to tax plan for when the job ends and retirement starts.  

 

[supermike80]

Question that I think I know the answer to but I'll ask anyway.  If you retire and pull money from your Roth, that still counts as income, yes?  Or does it depend on the state?  Trying to think about how best to tax plan for when the job ends and retirement starts.  

I don't know a lot about Roth's but I dont think it counts as income.  Reason is you have already paid taxes on it.  Otherwise it's no different than a 401k, which you have to pay taxes on when you pull it.

 

[Sand]

Question that I think I know the answer to but I'll ask anyway.  If you retire and pull money from your Roth, that still counts as income, yes?  Or does it depend on the state?  Trying to think about how best to tax plan for when the job ends and retirement starts.  

Not income.  In fact, you can pull your contributions any time for any reason at any age with no consequences.  Profits from a Roth have a penalty and tax attached if you pull those before 59.5.

As far as I've seen no state taxes, though if you live in a high tax state (Cali, NY, etc.) best to check.

 

[James Daulton]

Not income.  In fact, you can pull your contributions any time for any reason at any age with no consequences.  Profits from a Roth have a penalty and tax attached if you pull those before 59.5.

As far as I've seen no state taxes, though if you live in a high tax state (Cali, NY, etc.) best to check.

Huh, so living off your Roth savings for a year after retirement will really bring your income down when you want to pull your non-Roth savings out.  Do I have that right?

 

[matttyl]

This is wrong in many cases, for many people

Do you just mean that mathematically for someone it would be better to do a traditional Ira/401k to get the upfront tax break and be in a lower tax bracket when making distributions?

I just meant that if given the choice when retiring it’s better to have $100k in a Roth IRA rather than the same amount in a traditional, if only for the tax circumstances.  How you arrived at each of those situations is a different story.  

 

[stbugs]

Do you just mean that mathematically for someone it would be better to do a traditional Ira/401k to get the upfront tax break and be in a lower tax bracket when making distributions?

I just meant that if given the choice when retiring it’s better to have $100k in a Roth IRA rather than the same amount in a traditional, if only for the tax circumstances.  How you arrived at each of those situations is a different story.  

I assume that’s what he means and you can’t just use $100k in each without also including the tax savings. I’m in a weird bubble where I wished I saved more early but my wife stopped working for many years with the 3 boys and then got a fantastic opportunity so we went to a big income jump where pre-tax is what I want to max. If I moved everything over from traditional to Roth, your example would be invest $100k pre tax or $60k Roth.

Simple math with all things equal means that if tax rates are the same front and back, Roth and traditional are the same. If my income was much lower, I’d love a Roth thinking that my tax savings now are minimal but they aren’t. My tax savings for 401k are at our top bracket so I want to maximize that as I believe we will be at a lower rate when we retire. I mean, I’ll take it if our savings are earning enough taxable money to equate to our current pay. I’ll deal with high taxes then because we’ll be rolling but he’s right in some cases.

 

[BigJim®]

My tax savings for 401k are at our top bracket so I want to maximize that as I believe we will be at a lower rate when we retire. I mean, I’ll take it if our savings are earning enough taxable money to equate to our current pay. I’ll deal with high taxes then because we’ll be rolling but he’s right in some cases.

This is what constantly turns me around talking about Roth. However, just out of curiosity, aren't you fixating on the tax impact on principle investment and ignoring growth? For example, what you say may be right about the $200K you contribute, but how does this math look re: the $400K you stand to have one day via investment growth?

 

[matttyl]

This is what constantly turns me around talking about Roth. However, just out of curiosity, aren't you fixating on the tax impact on principle investment and ignoring growth? For example, what you say may be right about the $200K you contribute, but how does this math look re: the $400K you stand to have one day via investment growth?

If I understand your question, it’s the exact same.  Say you earn $100k married filing jointly.  You put 10k a year into a traditional, thus lowering your taxable income and it grow a at 7% compounded over 25 years.  Account grows to $700k+.  Or you put the equivalent amount in a ROTH ($7800 a year to keep your after tax/after contribution take home income the same).  If it grows at the same 7% annually it will only grow to $500k+.  At the same tax bracket (22%), it’s the exact same on the back end.  

 

[BigJim®]

If I understand your question, it’s the exact same.  Say you earn $100k married filing jointly.  You put 10k a year into a traditional, thus lowering your taxable income and it grow a at 7% compounded over 25 years.  Account grows to $700k+.  Or you put the equivalent amount in a ROTH ($7800 a year to keep your after tax/after contribution take home income the same).  If it grows at the same 7% annually it will only grow to $500k+.  At the same tax bracket (22%), it’s the exact same on the back end.  

I'm not sure that is my question. Months ago I'd asked a similar "Why pay tax contributing to Roth now when my tax rate is much higher than I'd expect it to be when I'm receiving retirement funds?" That math clearly doesn't support Roth. I *think* I understood a response that while you pay tax on Roth contributions, both the contributions and growth resulting from the investment become untaxed. So, my comparing taxation of my contribution amount was only part of the math. Am I still misunderstanding?   

 

[gruecd]

Pretty cool update to my company's 401(k) plan for 2022.  In addition to contributing the max $20,500 into the Roth 401(k), we're now allowed to contribute up to 8% of our pay via non-Roth after-tax contributions, which can then be converted in-plan to the Roth 401(k).  There's no limit to the number of conversions we can do per year, so I'll just do regular conversions in order to minimize/eliminate any taxable gains.  This is the "Mega Roth 401(k)" that the Dems are trying to get rid of.  I can only hope that they don't succeed.

 

[Sand]

I'm not sure that is my question. Months ago I'd asked a similar "Why pay tax contributing to Roth now when my tax rate is much higher than I'd expect it to be when I'm receiving retirement funds?" That math clearly doesn't support Roth.

This is correct.  If you expect a lower tax rate in retirement a traditional mathematically makes more sense.  If you stay at the same tax rate until death then it doesn't matter - the math ends up at the same spot.

There are some other advantages to a Roth - it's much nicer to your descendants with the new 10 year rule.  This will lead me to converting traditional to Roth over a number of years.  It should have some tax advantages (though they may not be huge), but if my kids do inherit it works better there.

 I *think* I understood a response that while you pay tax on Roth contributions, both the contributions and growth resulting from the investment become untaxed. So, my comparing taxation of my contribution amount was only part of the math. Am I still misunderstanding?   

This is true, but in both cases you get growth in a tax free environment.  The math does work out to be equal if your tax rate stays constant.