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Employer Offering Roth 401K
Posted on 7/12/23 at 6:48 pm
Posted on 7/12/23 at 6:48 pm
I understand Roth 401k money is post tax, however the contribution limit is the same for Roth and traditional. Is the Roth limit $22,500 pre-tax then that amount gets taxed per income and I end up with the after tax amount to grow tax free?
Or is it $22,500 limit after I’ve paid the tax? That would mean I’m contributing more to retirement than a traditional right?
Or is it $22,500 limit after I’ve paid the tax? That would mean I’m contributing more to retirement than a traditional right?
3
Posted on 7/12/23 at 6:52 pm to JusTrollin
No matter how you slice it 22.5K goes in to the account.
Posted on 7/12/23 at 7:01 pm to La Place Mike
So you’re saying I’m saving more by doing the Roth since it’s all my money and I won’t lose any to tax upon withdrawal?
Posted on 7/12/23 at 7:13 pm to JusTrollin
You will not have to pay taxes on withdrawal, but you will pay more in taxes now. Therefore, it will take up more of your salary currently, but will grow tax free overtime. It depends on your tax bracket to know which one makes more sense.
Posted on 7/12/23 at 7:24 pm to JusTrollin
Without knowing your tax bracket now or in the future it is hard to say. It comes down to paying the tax man now or later. Either way 22,500 is invested in your account.
This post was edited on 7/12/23 at 7:25 pm
Posted on 7/12/23 at 7:24 pm to JusTrollin
quote:
So you’re saying I’m saving more by doing the Roth since it’s all my money and I won’t lose any to tax upon withdrawal?
Not that simple.
https://thefinancebuff.com/case-against-roth-401k.html
Posted on 7/12/23 at 7:30 pm to gpburdell
Also many people don't realize that if you go trad 401k; you can still convert that to Roth in the future. Which is really good option, if you can do it in low income years/retiring early.
Posted on 7/12/23 at 8:10 pm to gpburdell
Wife and I do about 250k combined currently. I max out a traditional 401k. She maxes an hsa and does about 8-9k in a Roth 401k.
Posted on 7/12/23 at 9:00 pm to La Place Mike
quote:
Without knowing your tax bracket now or in the future it is hard to say.
Exactly.
You'll likely be in a lower tax bracket when you retire, but there's no way to be sure.
Posted on 7/13/23 at 7:40 am to Bestbank Tiger
Not to highjack this thread but I moved to the roth 401k option a couple years ago with the mindset if I can afford the taxes now I might as well to get the tax free growth and no other info other than that.
40 years old, AGI last year was 161k. I'll have a pension that will be worth somewhere between $70-80k a year, so that combined with my 401k I'm projected to be somewhere in the 180-190k/year range come my projected retirement at 60. That doesn't include my va disability which is another $25k a year.
All that being said is roth the right option for me or should I go traditional and contribute a little more from those tax savings?
40 years old, AGI last year was 161k. I'll have a pension that will be worth somewhere between $70-80k a year, so that combined with my 401k I'm projected to be somewhere in the 180-190k/year range come my projected retirement at 60. That doesn't include my va disability which is another $25k a year.
All that being said is roth the right option for me or should I go traditional and contribute a little more from those tax savings?
Posted on 7/13/23 at 8:08 am to GeauxTigers777
quote:
You will not have to pay taxes on withdrawal, but you will pay more in taxes now. Therefore, it will take up more of your salary currently, but will grow tax free overtime. It depends on your tax bracket to know which one makes more sense.
So help me understand this part. You assume your salary is going to go up. But with the future being ambiguous, is it not a smarter strategy to invest in a ROTH account while your income level allows it, and if/once your income gets too high, move to a traditional IRA/401K? Seems like a hedged bet in the future without knowing what the future looks like.
Posted on 7/13/23 at 8:27 am to WhiskeyThrottle
quote:
So help me understand this part. You assume your salary is going to go up. But with the future being ambiguous, is it not a smarter strategy to invest in a ROTH account while your income level allows it, and if/once your income gets too high, move to a traditional IRA/401K? Seems like a hedged bet in the future without knowing what the future looks like.
This is my understanding. I started a job five years ago with a Roth 401k option. Prior jobs my only option was traditional. I'm currently 33 years old. My salary has increased year-to-year. I would rather pay the taxes now than later when I am presumably in a much higher tax bracket. Then I could switch to a traditional.
Posted on 7/13/23 at 9:16 am to Dav
Look at your present top marginal tax rate and your expected top marginal tax rate in retirement. IF you are in a 32% tax bracket now but expect to be in a 22% tax bracket in retirement, put most of your money in a traditional 401K and a little in a Roth. If you put it all in a Roth, you are paying 32% (or more) now to avoid paying 22% later.
This is the way it works for most people, but some people have different situations.
Roth's offer tax flexibility, but it may come with a price as shown above, but it would seem like a good thing to have some Roth assets so that if you decide you want a new car when you are 80, pulling 100K out of the Roth to pay for it won't drive you up to a higher tax bracket.
So in my opinion, for most people, plan on saving in traditional 401K to provide retirement income and plan on Roth for unplanned or unscheduled or otherwise irregular large retirement expenditures.
Maybe a 70/30 % split between the two would be best for most people. Some people have totally different situations.
This is the way it works for most people, but some people have different situations.
Roth's offer tax flexibility, but it may come with a price as shown above, but it would seem like a good thing to have some Roth assets so that if you decide you want a new car when you are 80, pulling 100K out of the Roth to pay for it won't drive you up to a higher tax bracket.
So in my opinion, for most people, plan on saving in traditional 401K to provide retirement income and plan on Roth for unplanned or unscheduled or otherwise irregular large retirement expenditures.
Maybe a 70/30 % split between the two would be best for most people. Some people have totally different situations.
Posted on 7/13/23 at 11:22 am to CharlesUFarley
I expect that I'm in a higher tax bracket now than in retirement.
However, I use every economic downturn to thrust money into Roth.
I call it buying on-sale with funds growing tax free with a quick 20%+ bump in equity.
I also increase my contribution percentage until the market recovers (or I max out).
However, I use every economic downturn to thrust money into Roth.
I call it buying on-sale with funds growing tax free with a quick 20%+ bump in equity.
I also increase my contribution percentage until the market recovers (or I max out).
Posted on 7/14/23 at 8:12 am to CharlesUFarley
Good advice. Having tax flexibility is important. Many unknowns in the future. I am retired from working, but an active investor. I wish I had more Roth money now. Going to get slammed this year because of a large purchase being funded with a chunk of standard 401k money.
Posted on 7/14/23 at 8:44 am to CharlesUFarley
quote:
Maybe a 70/30 % split between the two would be best for most people.
And when considering this split, be mindful that any company match is typically in a traditional since you are not paying taxes on the match.
Also, when considering the tax bracket questions/concerns now vs when you retire; I have been advised you can't just look at the tax rate that may be applicable on those funds. If you are going to receive SS benefits, the amount of those benefits you will be taxed on will be affected by your taxable income. Your healthcare options/costs are also affected by your taxable income. And Roth plans are not subjected to required minimum distribution amounts.
Posted on 7/14/23 at 9:31 am to Weekend Warrior79
quote:
And Roth plans are not subjected to required minimum distribution amounts.
I'm glad you mentioned this because it is an important point that isn't always bought up in these discussions. Having to take more in RMDs than you want to can put you in a higher marginal tax bracket. Your other points are spot on as well.
Posted on 7/14/23 at 10:26 am to KWL85
quote:
I wish I had more Roth money now. Going to get slammed this year because of a large purchase being funded with a chunk of standard 401k money.
I split my contributions in both, with the thinking that I’d pull from my Roth in years where I make big purchases and pull more Roth money in December to fund living expenses for the following year. The next year, I’ll only pull traditional money to remain in the lower tax brackets.
Am I thinking of this the correct way?
Posted on 7/14/23 at 11:57 am to Tifway419
I think you are stating the plan backwards.
Posted on 7/14/23 at 12:17 pm to Tifway419
quote:
pull more Roth money in December to fund living expenses for the following year.
Generally, the thought is to pull from traditional to cap out the current tax bracket (funds can be used for the following years).
If you won't use the funds in 5 years, the thought is to do rollover from traditional into Roth to cap out income within the current tax bracket.
quote:
The next year, I’ll only pull traditional money to remain in the lower tax brackets.
The Roth doesn't show on income tax statements, so it is generally used to remain in low tax brackets.
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