Employer 401k vs Roth 401K

That's where it gets confusing, my wife is a shareholder in a family-owned S-corp. At some point she will be sole shareholder. I would think this will raise our income; more than likely at "retirement" age. Right now, she draws a reduced salary (comparably speaking to the market she's in) just and allocates most profits back into the business.

An S-Corp flows to the owners. Meaning she can take a reduced salary but any profits are still passed down to the owners whether they want them or not. If her salary is $80k but the company makes $2 million that is passed down to the owners and they’re taxed on it.

To me, the ratio of 25% Roth to Traditional that you already have sounds about right. You will most likely be in a lower tax bracket when you retire, so you don't want to pay 24% taxes now on your Roth contributions to avoid paying 12% later, but there are other considerations, like no RMD's and early access to contributions and conversions before age 59.5

I am 60 and returned to work after taking 4 years off. I used some of my Roth IRA contributions during that time. I am now doing Roth 401K at work even though the math says I might be better off going trad and converting later, I want the flexibility of the Roth to pay for major expenses like roofs, AC, and Moldavian girlfriends.

Edit: Saw the S-Class part later. Probably changes the math. Some Roth for flexibility makes sense, but it sounds like the bulk of your taxes both now and later will depend on the S-Corp income and the only way to get around that may be traditional 401K. Your situation is probably too unique and too complex for this board.

When I say reduced, I mean it's less than what she "could" take. Overall it's a pretty good salary. Not so low that the IRS would raise a flag.

Another thing; if you intend to max out annual contribution, Roth is like putting in an additional 20+%. So you are able to build your retirement nest egg larger/quicker (future value net of taxes).

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Unless you have a massive amount of deductions you'll be in a lower tax bracket when you retire.

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$220k is a pretty low bracket right now still

24% marginal for only like $9k of that amount this year

It's a gamble, nobody knows what the future holds, but we're in the 24% boat and doing roth 401k contributions. I just would rather have the government have no say over that money in the future in the end and have no problem paying 22-24% on our higher part of our income for now. Pre-tax still being filled some with matches and whatnot. It's also better for heir(s) as well to have to deal with ROTH vs. traditional.

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but there are other considerations, like no RMD's and early access to contributions and conversions before age 59.5

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As a retirement rookie staring at tax bomb at RMD age (albeit decades away / and will be working to actively reduce via Roth conversions) and estate planning (transferring a Roth to children after death is tax free)…

That breakeven point between Traditional 401k and Roth 401k shifts a little towards Roth.

The Roth sure is beautiful from my new financial perspective.

OP, lead your decision with tax tables today vs retirement tax tables. But when in doubt, I would lean more Roth.

PS, your S Corp is wild card. Trust others’ opinions over mine on that. But rest assured, Roth at estate planning, when your descendants may be at their peak earning years (God willing), the Roth will smile upon you. …Not to get way ahead of your current decision. But…

I figure I'll retire from my job around 60, will hop over and help the wife run her business after I'm done (which I did for about a decade until the opportunity I'm at now came up). So, I guess we'll never really fully retire unless we sell her business. Same lifestyle, we live relatively modestly. We'll probably go on a few more vacations and such. AT some point she's going to hand the reigns of running the day to day to a long tenured employee who's on board now.

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You will most likely be in a lower tax bracket when you retire, so you don't want to pay 24% taxes now on your Roth contributions to avoid paying 12% later

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Would you rather save 24% on 10k or 12% on $80k?

Time value of money must also be considered.

Also we are finding that the people making these decisions are not finding themselves in the 12% bracket at retirement. Social security and RMDs are getting navy people to 22 percent. Plus state tax, depending on where you retire.