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Roth 401k
Posted on 5/28/22 at 7:41 am
Posted on 5/28/22 at 7:41 am
Good time to increase 401K contribution (hopefully). My company now offers a Roth 401k option. I currently have a traditional 401k through work and Roth IRA that I manage separately. Does it make sense to start dumping into a Roth 401k in addition to my other 2 accounts, or should I just increase my percentage in the Traditional 401k.
34 years old with many working years ahead if that makes a diffference.
Thanks,
34 years old with many working years ahead if that makes a diffference.
Thanks,
Posted on 5/28/22 at 8:14 am to Jblac15
The total contribution limit is still what it is. The question is do you want to pay your taxes now or when you retire. It’s not a bad idea to split your 401k contribution between the two.
Posted on 5/28/22 at 9:10 am to Jblac15
Agree, buy low and build wealth!
Poster above hits it (limit is limit, tax timing)
Some light context:
Your future 72yo self will thank you for the Roth (ex, basis today’s laws, won’t have required minimum distributions (forced to withdraw to trigger taxes for all the years sheltered from taxes in traditional 401k)) on Roth balance. Your traditional 401k will have RMDs.
Your future 65yo self (ex retirement age) will thank you for traditional 401k, that grew tax-free (bigger and faster) than if you used after-tax contribution like that of Roth 401k. And your present self paid less income tax each year that you invested in traditional 401k. When you use at 65, generally you will have lower tax rate in retirement Han you do now.
I was all in to traditional 401k for these tax reasons. I am blessed to be able to do back door Roths to supplement.
Good luck!
Poster above hits it (limit is limit, tax timing)
Some light context:
Your future 72yo self will thank you for the Roth (ex, basis today’s laws, won’t have required minimum distributions (forced to withdraw to trigger taxes for all the years sheltered from taxes in traditional 401k)) on Roth balance. Your traditional 401k will have RMDs.
Your future 65yo self (ex retirement age) will thank you for traditional 401k, that grew tax-free (bigger and faster) than if you used after-tax contribution like that of Roth 401k. And your present self paid less income tax each year that you invested in traditional 401k. When you use at 65, generally you will have lower tax rate in retirement Han you do now.
I was all in to traditional 401k for these tax reasons. I am blessed to be able to do back door Roths to supplement.
Good luck!
Posted on 5/28/22 at 9:40 am to Turf Taint
Everyone says you’ll be in a lower tax rate when you retire. Maybe I just don’t fully understand taxes in retirement but I’m actually projected to be making significantly more in retirement than I do now. Should I be switching to my Roth 401k option instead?
Posted on 5/28/22 at 11:04 am to TDsngumbo
The United States has $30 trillion in debt and social security is nearly broke, I don't see taxes going down in the future.
Posted on 5/28/22 at 11:15 am to Jblac15
If married, it’s a $196,000 income max for Roth right?
This post was edited on 5/28/22 at 11:16 am
Posted on 5/28/22 at 3:14 pm to dewster
quote:
married, it’s a $196,000 income max for Roth right?
For a Roth IRA. 401k roth or traditional has no income limit.
And it's $214k max for married in 2022 roth ira. It starts phasing out at $204k butcan still contribute some up to $214k income.
This post was edited on 5/28/22 at 3:15 pm
Posted on 5/28/22 at 4:32 pm to TDsngumbo
quote:
Everyone says you’ll be in a lower tax rate when you retire. Maybe I just don’t fully understand taxes in retirement but I’m actually projected to be making significantly more in retirement than I do now. Should I be switching to my Roth 401k option instead?
You have to keep in mind that tax brackets grow with inflation too.
I’m projected to have like $12k/mth in social security in future dollar terms, and someone on just SS today wouldn’t pay a lick of federal or state income taxes.
Posted on 5/28/22 at 4:45 pm to TDsngumbo
quote:A very big consideration, at least under current law, is that you don't have to take any Required Minimum Distributions from a Roth. In my situation that is a important.
Should I be switching to my Roth 401k option instead?
I agree with a previous poster that said it is good to have both.
Posted on 5/28/22 at 4:46 pm to TDsngumbo
quote:
Making significantly more in retirement
That certainly could be the case. I speak on average and with the assumption of full retirement (ie, not working at all).
If I were projected to be in higher tax bracket in retirement, I would calculate time value growth of my tax sheltered contributions of traditional minus post retirement taxes versus time value growth of after tax contributions of Roth (minus no taxes) and factor in Roth benefits of no RMD.
May want to consider Roth over traditional if tax deferred value is not there for you.
Posted on 5/28/22 at 5:34 pm to TDsngumbo
quote:
Everyone says you’ll be in a lower tax rate when you retire. Maybe I just don’t fully understand taxes in retirement but I’m actually projected to be making significantly more in retirement than I do now.
The first 80k+ of ltcg is taxed at 0%.
Add in the standard deduction and you can withdraw significantly into the 6 figures every year before paying taxes. Even more if you have roth accounts in addition to taxable.
Depending on your account allocation, you might only take a relatively small amount out of your traditional 401k in a year. That’s the only money you pay taxes on as if it were regular income
This post was edited on 5/28/22 at 6:11 pm
Posted on 5/28/22 at 5:59 pm to PlanoPrivateer
quote:
Should I be switching to my Roth 401k option instead? A very big consideration, at least under current law, is that you don't have to take any Required Minimum Distributions from a Roth. In my situation that is a important.
Roth IRAs don’t have RMDs, however Roth 401Ks are subject to the same RMD requirements that traditional 401Ks are.
Posted on 5/28/22 at 7:13 pm to buffbraz
Thanks for all the feedback.
I’ve decided to do 10% traditional and 5% Roth, plus funding Roth IRA separately.
I’ve decided to do 10% traditional and 5% Roth, plus funding Roth IRA separately.
Posted on 5/28/22 at 10:01 pm to PlanoPrivateer
Roth 401(k) accounts are subject to the same required minimum distribution (RMD) rules that apply to traditional 401(k) accounts.
Roth IRA’s have no RMD requirements.
Roth IRA’s have no RMD requirements.
Posted on 5/28/22 at 10:19 pm to Doink
quote:
Roth 401(k) accounts are subject to the same required minimum distribution (RMD) rules that apply to traditional 401(k) accounts.
Roth IRA’s have no RMD requirements.
And upon leaving the company, you can roll your Roth 401k into a Roth IRA for a grand total of $0 while taking advantage of lower fees and broader investment opportunities in addition to the No RMD rule.
Posted on 5/28/22 at 10:31 pm to dewster
quote:
If married, it’s a $196,000 income max for Roth right?
You start to phase out of contributions to a Roth IRA there.
But you can contribute to a traditional IRA. You won’t be eligible for a deduction on that money since you’re covered by a qualified pension (your 401k).
You may contribute the maximum allowed to a traditional IRA ($6,000 for 2022 for the young crowd, and an additional $6,000 for a spousal IRA, regardless of whether they have an income- different rule than for a 401k here).
You can then take that money that you didn’t get a deduction for and do one of two things:
1) Let it grow with basis
2) convert some or all (please don’t do just some of it) into Roth
It gets screwy if you have any other account ending in “IRA” (SEP, SIMPLE, or a big traditional)- you’ll lose a fair amount of the benefit while gaining a roughly similar amount of headache if you aren’t willing/able to convert all of it and pay the associated tax bill if you have one of these other accounts.
Fun scenario: let’s say you do have $100,000 in a traditional/SEP/SIMPLE IRA that is tax deferred but you want to start making Roth contributions “through the back door” as above, but you don’t want to be subject to the pro rata rule in retirement but can’t afford taxes on $100,000 of additional income. You can:
1) apply for an EIN
2) make some income by taking online surveys, cutting your neighbors’ yard for $20, nude modeling, etc
3) file a tax return for the business
4) open a solo 401k for the business that has $10 of book income. Make sure you do it at a brokerage that allows 401k rollovers
5) roll the old tax-deferred IRA into this account
6) do the above backdoor Roth contribution strategy.
Rules are fun.
Posted on 5/29/22 at 12:38 am to dewster
This post was edited on 5/29/22 at 12:42 am
Posted on 5/29/22 at 10:00 am to Hopeful Doc
quote:
open a solo 401k for the business that has $10 of book income. Make sure you do it at a brokerage that allows 401k rollovers
Which national brokerages (if any) are you partial to? Fees and service experience?
Posted on 5/29/22 at 11:08 am to Hopeful Doc
When rolling over a Roth 401k to a Roth IRA, the Roth IRA must be open for 5 years before you start making withdrawals on earnings. To my understanding, you can withdraw contributions, but it isn’t a clear cut roll over and start withdrawing it when the person is over 59 1/2.
Posted on 5/29/22 at 11:24 am to slackster
quote:
I’m projected to have like $12k/mth in social security in future dollar terms,
How does one make this calculation?
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