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Roth IRA & 401k tax strategy question
Posted on 3/4/14 at 2:09 pm
Posted on 3/4/14 at 2:09 pm
I have a Roth IRA and then a taxable 401K. From a tax strategy perspective, would I be better off allocating assets with probable higher capital gains (i.e. small cap stocks) in my Roth IRA with tax-free distributions while allocating assets with lower probable capital gains (i.e. large cap stocks) in my 401K that will have taxable distributions?
2
Posted on 3/4/14 at 2:13 pm to GeneralLee
I'm confused
Posted on 3/4/14 at 2:19 pm to GeneralLee
Seems fairly straightforward to me.
Are you maxing pretax contributions? I could see questions arising regarding why you are contributing to a taxable 401k if you qualify for a Roth.
Are you maxing pretax contributions? I could see questions arising regarding why you are contributing to a taxable 401k if you qualify for a Roth.
Posted on 3/4/14 at 2:23 pm to Teddy Ruxpin
In my Roth IRA and in my 401K i'm about 50/50 Vanguard S&P 500 index/ Vanguard Small Cap stocks. From a tax perspective (when i'm getting distributions in retirement), would a more optimal strategy be to put 100% of the small cap stocks in the Roth IRA account and 100% of the S&P 500 Index $ in the 401K account (taxable). With the bet being that the small cap stocks would end up having a much higher capital gains (non-taxed in my Roth IRA) than the S&P 500 index (taxed in my 401K).
Posted on 3/4/14 at 2:27 pm to LSUtigerME
401K contributions are made from my company, I can't elect to have them be after-tax otherwise i would.
Posted on 3/4/14 at 3:33 pm to LSUtigerME
are y'all putting y'alls bonds in a 401k?
Posted on 3/4/14 at 3:37 pm to GeneralLee
I am not sure I fully grasp the question, but I will take a shot. Capital gains taxes are not applicable to either situation. Distributions from a 401K are taxed as regular income regardless of the type of investment device used in the account. The amount paid as taxes is dependent only on the tax bracket you happen to fall in based on your total taxable income. Roth distributions are tax free regardless of the type of investment.
After reading the question again this is probably not what you were looking for!
After reading the question again this is probably not what you were looking for!
This post was edited on 3/4/14 at 3:43 pm
Posted on 3/4/14 at 4:31 pm to EA6B
Sorry, capital gains is probably an accurate description of the taxes here. Not sure how I can simplify this question but let me try....
Would it make sense to segregate the assets likely to generate a lower tax liability in the taxable 401K while putting the assets likely to generate a higher tax liability (if they were in a taxable account) instead in the tax free Roth IRA?
Maybe I should use an example. Let's say I have 100K today in small cap stocks and 100K today in S&P 500 index. 40 years from now when I retire, let's say the small cap stocks are now worth $1M and the S&P 500 stocks are worth $500k. Wouldn't I have a lower tax liability loading up the Roth IRA with small cap stocks instead of having a mix of both Small Cap/S&P 500 assets in both the IRA and 401K accounts?
Would it make sense to segregate the assets likely to generate a lower tax liability in the taxable 401K while putting the assets likely to generate a higher tax liability (if they were in a taxable account) instead in the tax free Roth IRA?
Maybe I should use an example. Let's say I have 100K today in small cap stocks and 100K today in S&P 500 index. 40 years from now when I retire, let's say the small cap stocks are now worth $1M and the S&P 500 stocks are worth $500k. Wouldn't I have a lower tax liability loading up the Roth IRA with small cap stocks instead of having a mix of both Small Cap/S&P 500 assets in both the IRA and 401K accounts?
This post was edited on 3/4/14 at 4:39 pm
Posted on 3/4/14 at 4:53 pm to GeneralLee
You dont know what the actual return of either investment will be in the future or the tax rates on either. Just because the Roth is tax free today has nothing to do with the future.There is already a lot of rumbling to limit how much you can have in retirement accounts. So my advice would be how you split it doesnt matter.Put money first in the 401k to get any company match. If you are young next contribute to Roth then if you still can go back to the 401k. Personally I never pay a tax that I can postpone.
Posted on 3/4/14 at 5:18 pm to GeneralLee
quote:
Distributions from a 401K are taxed as regular income regardless of the type of investment device used in the account. The amount paid as taxes is dependent only on the tax bracket you happen to fall in based on your total taxable income. Roth distributions are tax free regardless of the type of investment.
This is your answer. Although it may make things clearer to use the term "withdrawals" rather than "distributions".
The only thing that governs tax liability is the type of account the money is in, not how you achieved the balance in the account.
Posted on 3/4/14 at 5:27 pm to GeneralLee
quote:
Would it make sense to segregate the assets likely to generate a lower tax liability in the taxable 401K while putting the assets likely to generate a higher tax liability (if they were in a taxable account) instead in the tax free Roth IRA?
Yes although there could be long stretches of time where large may outperform small, growth may outperform value, fixed income may outperform equity, etc. All you can go by is current tax code and what you are saying could make sense and if you want to change the asset composition within the accounts later you can do so with no tax impact. I wouldn't be concerned about rumblings to limit tax advantaged accounts as when or if it would happen it would be at very high dollar amounts. Besides, we are already limited by the max one can contribute today.
Posted on 3/4/14 at 5:40 pm to Sigma
quote:
Distributions from a 401K are taxed as regular income regardless of the type of investment device used in the account.
This is true, but only the non-taxed portions. Since he has already paid taxes on his contributions, that portion is tax-free (similar to contributions in a Roth).
The primary difference between a Roth vs after tax 401k is the taxes on growth and contribution limits. Roth is tax free after certain requirements (age 59.5 and 5 year account life). After tax 401k distributions of earnings are taxable as income. There's also advantages for required distributions, but that's irrelevant here.
If you plan to have a split between investments that's conservative/aggressive, it seems obvious to me that the aggressive should be within the fully tax free vehicle, the Roth. There's obvious limitations such as the age restrictions, contribution limits, and salary limits for te Roth. If these are a non-factor in your "aggressive" portfolio, then stick it all there.
Again, I am not a tax/investment expert, but this is my understanding from various research.
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