Roth 401k

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ps99472

ps99472

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Anyone opt for the Roth 401k over Traditional 401k?  My work offers both, I did Roth for a year but hated the huge tax hit come April.  Since then I went back to Traditional.  I like my current self rather than my old crusty future self.  What's your argument?
 
the general argument is that if you expect a lower tax rate when you are older/retired the do a traditional 401K. if you expect a higher tax rate when you are older/retired then do a roth 401K.  for 2013 our combined marginal tax rate was almost 43% (fed rate + CA rate tax effected for the federal tax benefit since CA taxes are deductible on 1040), i cant imagine our tax rate being higher when we are required to take the distributions. so we do a traditional 401K.
 
If you have a year with particularly low income for whatever reason I would do a Roth 401k / Roth IRA. It's good to have a combination of after-tax and before-tax money when you retire so that you can have a high monthly income but a low income tax bill.
 
Roth 401k is the way to go. But your income is not reduced like traditional 401k. If you are a baller I would go with a Roth 401k.
 
in general, when you get the option to pay now or pay later, what makes more sense? Pay later.
 
qwerty said:
in general, when you get the option to pay now or pay later, what makes more sense? Pay later.
Click to expand...

it really depend.  with Roth vs traditional scenario, you don't really get the time value of money because any earnings will be taxed as well for traditional. 

We cannot predict the tax rate in the future, so assuming it's a wash ... a better analogy would be (assuming 40% tax).
Pay 40% tax now and whatever left is your to keep for sure OR
Pay tax later but tax can be 20% - 60% with the mean average at 40%.

Personally I would take the sure thing :)

But I agree with paperboyNC.. the best is a combination (My employer does not offer, so mine is in traditional, but wife's does so hers is in Roth)


 
Doesn't Traditional also have the benefit of reducing your taxable income?

For me, I won't withdraw from my 401k until I'm retired and that would mean I am at a lower tax bracket (like 0 income :) ). I just don't see many benefits in a Roth.
 
GH said:
qwerty said:
in general, when you get the option to pay now or pay later, what makes more sense? Pay later.
Click to expand...

it really depend.  with Roth vs traditional scenario, you don't really get the time value of money because any earnings will be taxed as well for traditional. 

We cannot predict the tax rate in the future, so assuming it's a wash ... a better analogy would be (assuming 40% tax).
Pay 40% tax now and whatever left is your to keep for sure OR
Pay tax later but tax can be 20% - 60% with the mean average at 40%.

Personally I would take the sure thing :)

But I agree with paperboyNC.. the best is a combination (My employer does not offer, so mine is in traditional, but wife's does so hers is in Roth)
Click to expand...

lets say you are a married household and you make 500K, you are in the 39.6% fed tax rate (we will leave state taxes out for simplicity). if you are in a roth now, you are paying 39.6% in taxes on the contributions you just made. that same couple retires at say 60, say with a couple of million in stock and a couple of million in a traditional 401K, dont work any more, house paid off, dont have a business, so their only source of income is the 401K, you take an annual distribution of 100K that puts you in a 28% marginal tax bracket with a blended rate effective rate of probably 20%. so in this scenario a traditional 401K is way better than a roth 401K. pay 39.6% in a roth or 20% traditional? 
 
qwerty said:
lets say you are a married household and you make 500K, you are in the 39.6% fed tax rate (we will leave state taxes out for simplicity). if you are in a roth now, you are paying 39.6% in taxes on the contributions you just made. that same couple retires at say 60, say with a couple of million in stock and a couple of million in a traditional 401K, dont work any more, house paid off, dont have a business, so their only source of income is the 401K, you take an annual distribution of 100K that puts you in a 28% marginal tax bracket with a blended rate effective rate of probably 20%. so in this scenario a traditional 401K is way better than a roth 401K. pay 39.6% in a roth or 20% traditional? 
Click to expand...

That's for the 1%.. for regular people like us, the tax difference is not that much between brackets :) and that is assuming government will not significantly raise tax rates in the future.  Also, I would doubt that after years on being in the 500K income range, you can suddenly be able to live with $100K during retirement (while some expenses like mortgage are done .. you have a lot more free time to spend :)  At least for me, I would hope that my income stream during my retirement years would be the same as while I'm working :)

That's why I would agree with the combo .. younger years when income is still not peaking -- Roth, older years where your income is peaking - traditional .. I still feel young :p
 
I would suggest doing both as well.  There are obvious tax benefits now versus later for the traditional if you have a high income tax bracket today.  However, the tradition IRA/401K plans are definitely less flexible and require things like minimum distributions (unlike the Roth).  There also some difference in estate taxes should something happen to you before you get a chance to use that money.

In addition to a company sponsored 401K plan, you can also contribute to a separate traditional IRA with non-deductible dollars up to the limit and then soon after convert to a Roth IRA (back-door Roth IRA).  Do the due diligence because the conversion can be a bad idea if you have a traditional IRA.  Just some thoughts...
 
GH said:
qwerty said:
lets say you are a married household and you make 500K, you are in the 39.6% fed tax rate (we will leave state taxes out for simplicity). if you are in a roth now, you are paying 39.6% in taxes on the contributions you just made. that same couple retires at say 60, say with a couple of million in stock and a couple of million in a traditional 401K, dont work any more, house paid off, dont have a business, so their only source of income is the 401K, you take an annual distribution of 100K that puts you in a 28% marginal tax bracket with a blended rate effective rate of probably 20%. so in this scenario a traditional 401K is way better than a roth 401K. pay 39.6% in a roth or 20% traditional? 
Click to expand...

That's for the 1%.. for regular people like us, the tax difference is not that much between brackets :) and that is assuming government will not significantly raise tax rates in the future.  Also, I would doubt that after years on being in the 500K income range, you can suddenly be able to live with $100K during retirement (while some expenses like mortgage are done .. you have a lot more free time to spend :)  At least for me, I would hope that my income stream during my retirement years would be the same as while I'm working :)

That's why I would agree with the combo .. younger years when income is still not peaking -- Roth, older years where your income is peaking - traditional .. I still feel young :p
Click to expand...

While qwerty is not proposing saving in a Roth 401(k) he is proposing similar savings that are tax-free retirement income:

"couple of million in stock". Could be either tax-free if it didn't appreciate much or relatively low tax rate (currently 20% long-term cap gains rate). You can also sell a combo of winners and losers to wipe out the taxes.

"house paid off". This is another avenue of tax-free savings.

Plus social security can have a relatively low tax rate.

Let's say that you were making $500k/yr but only spending $200k/yr (45% went to taxes, 15% went to savings).

Now you have taxable income of $100k/yr plus non-taxable income of $100/yr so a total spending power of the same $200k/yr
 
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