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I'm heavily diversified and want to maximize the flexibility of penalty free withdrawals on my contributions as much as possible (to aid early retirement and/or mitigate being forced to move by my company) while I have the disposable income available to me.
He might mean that if you don't do the necessary reporting of the conversion to the irs when filing your taxes, the irs will just see the conversion as a withdrawal. They're not told by your plan holder that you're in fact doing a conversion. That's your responsibility. I have learned this the hard way. Luckily the IRS was cool about me reporting this later on and didn't penalize me in any way.
Thx, this makes sense. Follow up - do they provide me the forms to do that, or I do it all on my own?
The IRS is generally very understanding of people making mistakes with qualified plans (401(k), 403(b), IRAs, etc.). I don't think I've ever seen an assessed penalty sustained on a taxpayer who made an inadvertent mistake. They really seem to realize that the average person can't make sense of all of the qualified plan tax rules and regulations. Hell, qualified plans are one of my specialties/niches and I learn something new seemingly every day. They're endlessly complicated from a tax standpoint.
? You use post-tax dollars to populate the Roth and then no taxes after that - so just make whatever investments you want to make. Hopefully something diversified like Vanguard Mkt Funds.
No doubt fees are critical. Shouldn't he focus on what would provide the most growth and therefore tax-free net?
The idea is that it's very difficult to predict future performance and past performance is a weak indicator of future success. In the long-term, fees add up significantly, and you can control them - to an extent - because funds are required to disclose them.
Given a long enough horizon (and fees, as discussed) I would try to pack the equities in the Roth, absolutely.
My thought was that since the purpose of a Roth is to get the most growth so you can earn as much as possible and not pay taxes on it - he would want to go with a growth based approach. I don't know where you got the hurdle point of 10% - bond funds have been and are expected to be very low for the foreseeable future.
Thanks - I follow you now.wilked said:
You will have a lot less control over your bracket than you think, is my guess. Very few retirees make their primary decisions over tax brackets. More to the point, who the hell knows what the tax rates will be in 30 years (forget brackets). The point is, we don't know, so estimating taxes to be roughly the same is a decent starting point. What I am doing is to try and have both pretax (401k) and post tax (Roth) savings to at least give myself options to manipulate the system in my favor as much as possible
I would do a CD ladder. You won't make much (maybe 2%) but more importantly the money is secure and there when you need it. Great work on the savings, you will be in great shape when it comes time to get that townhouse. Just don't do something stupid and spend it all on a wedding ;-)
My plan with the ADA is similar. I have index funds, but they sure are overcharging for them. I wish mine were as low as yours, mine are closer to .6%
inflation cumulatively might be worse than taxation given a long enough time horizon
For the record, I was just picking a number out of thin air re: 10%. You can change that number to something lower and my point still stands.Binky The Doormat said:
With a 20 month expenses stockpile, would it be worth it to pay off the car loan and just put what you are paying on the car back into this fund? Probably only saving the interest on a loan with a percent of 2.49 to 6 or 7?
This is the type of control I was talking about, yes. Makes sense to maximize both options and see where things go as you get closer to retirement age. I was more speaking from the perspective of people that plan to retire early. A lot of people act like you cannot get cash out of a 401k easily until traditional retirement age, which is not true.
when would it not be the case? Are you referring to employee match?
When people don't do the math and account for the differences. 401K deferral is generally a percentage, and I'd guess most don't figure out that they can put 5% into their traditional but only 3.75% into their Roth- most I know just put the same amount in either and live with the differences in their take-home.
I don't think this will work.
But, if you have contributions in a tax deductible ira, now they'll be tax consequences of the back door. If you straight up fund a roth, it doesn't matter what you have in a tax deductible.
My company gives you the option of either doing a regular 401k or a Roth 401k. Regardless of which I choose, I can defer $18,000 max (since I'm under 50.) So my balance will grow to be the same in 10, 15, 20 years no matter which one I pick. The difference, of course, is that my take home pay will be higher now if I choose the regular 401k, as it is taken out pretax. Same with individual yearly ROTH IRA. As mentioned above, I would put in $5500 (not $4125.)
My wife has a decent chunk (50k) in a Roth 401(k). Her employer is switching providers. I think what we're going to do is just roll-over that Roth 401k into an existing Roth IRA. That way the 50k can grow tax-free for 30-35 years. Then she'll sign up for the traditional 401k with her employer to get the tax deductions.
