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bleger
LSU Fan
Arnaudville, LA
Member since Feb 2017
213 posts

Should I move from pre-tax to ROTH?
So my company announced that as of 8/1 that they will cease the company 401k match due to the economic downturn. Should I readjust my pre-tax amount and move to fully funding a ROTH instead once this takes effect, and then put the remainder of my allocations into pre-tax? I currently do not have a ROTH if that makes any difference.


jimbeam
USA Fan
University of LSU
Member since Oct 2011
63077 posts

re: Should I move from pre-tax to ROTH?
What’s is your current income?


ETA: A range is fine
This post was edited on 7/31 at 8:52 am


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TigerTatorTots
LSU Fan
The Safeshore
Member since Jul 2009
75546 posts
 Online 

re: Should I move from pre-tax to ROTH?
If they offer both, hedge your risk and throw some in both. If you also contribute to a ROTH IRA, then I'd go 75% pretax and 25% Roth 401.


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meansonny
Georgia Fan
ATL
Member since Sep 2012
11722 posts

re: Should I move from pre-tax to ROTH?
When the stock market is down, go Roth heavy. You are buying on sale and the easy gains wont be taxed.

When the stock market is neutral or up, you've got to do 3 questions to find out what is best for you.

1) how much taxes do you save with the pretax (what is your tax bracket)?

2) are you reinvesting the tax savings?

3) what is your expected tax bracket/rate when you withdraw?

If the answer to #2 is no, then I recommend Roth. Pretax would be convenience and not a strategy.

If the answer to #2 is yes, then it is a situation of where you are taxed today and where you expect to be taxed in retirement. Do you prepare your own taxes?


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bleger
LSU Fan
Arnaudville, LA
Member since Feb 2017
213 posts

re: Should I move from pre-tax to ROTH?
For what its worth, I contribute 10% currently to pre-tax. I made an adjustment just yesterday to throw 2% into ROTH totaling 12%. Sounds like I should do 5-6% Pre-tax and 5-6% ROTH?


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TorchtheFlyingTiger
North Carolina St. Fan
It's Germans
Member since Jan 2008
876 posts
 Online 

re: Should I move from pre-tax to ROTH?
Roth IRA offers more flexibility for early withdrawal and better option if inherited. I'd only go pre tax 401k if you are in a high bracket and prefer tax savings now. Otherwise, max Roth then fund 401k. In the 401k, if you have Roth option I'd probably use that after funding the Roth IRA or split it if you want tax diversification. But if you've already been funding traditional 401k you may already have a a good bit pretax.


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LSUFanHouston
LSU Fan
NOLA
Member since Jul 2009
21761 posts

re: Should I move from pre-tax to ROTH?
If your income is down, a Roth (either straight-up or back-door) is something to consider.

I still firmly believe we are at a relatively low-point in terms of marginal tax rates. Depending on when you plan to start taking distributions, and your projected income at that time, taxes will likely be higher, and could be much higher, than they are today.

If you have the capacity to pay the tax bill without reducing your investment, I would absolutely consider that. If you have to liquidate some to pay the tax, run the numbers and see.


notsince98
Missouri Fan
KC, MO
Member since Oct 2012
12689 posts

re: Should I move from pre-tax to ROTH?
quote:

still firmly believe we are at a relatively low-point in terms of marginal tax rates. Depending on when you plan to start taking distributions, and your projected income at that time, taxes will likely be higher, and could be much higher, than they are today.


Even if that is correct you are paying full marginal tax on Roth contributions. You will only pay effective tax rate on traditional withdrawals and that is usually much less than marginal tax rates.


RedlandsTiger
LSU Fan
Redlands, CA
Member since Jan 2008
2524 posts

re: Should I move from pre-tax to ROTH?
If you are young, put it in a a Roth aggressive growth fund and let it ride.


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Belly
LSU Fan
Member since Dec 2016
234 posts

re: Should I move from pre-tax to ROTH?
Agreed on the Roth being taxed at marginal rate, but why would the traditional withdrawals down the road be taxed at the effective rate instead of marginal like Roth?


buckeye_vol
Ohio State Fan
Member since Jul 2014
33392 posts
 Online 

re: Should I move from pre-tax to ROTH?
It seems to me that a lot of people are 100% for putting all money in a post-tax account (Roth IRA or Roth 401k if offered) because they argue that (a) you’ll likely be in a higher tax bracket when one retires and/or (b) taxes are likely to go up in the future so the tax savings at retirement are likely . I think these are both valid views, but I think there are some benefits and nuance to it that gets overlooked and I think a hybrid approach with pre-tax going to the 401k and post-tax going to the IRA has some benefits.

1. Pre-tax 401k contributions lowers ones AGI and MAGI, and there are a number of reasons why one may want to lower his/her AGI/MAGI such as qualifying for certain tax credits (like the stimulus cut-offs and reductions), lowers income-based student loan repayments (especially if one qualifies for a forgiveness plan), meet income thresholds for a Roth IRA, increased likelihood children will get more ideal financial aid grants or loans (like a subsidized loan), etc. Even through a regular IRA lowers ones AGI, it’s added back in for MAGI calculations. So it’s better to be able to have it lowered for both.

2. Post-tax in a Roth IRA provides the unique advantage of being able to take early withdrawals for any reason from the contributions without paying a penalty or taxes. You can’t do that with a either a regular IRA or any type of 401k (regular or Roth). So just as pre-tax 401k contributions have benefits over a regular IRA (lowers both AGI/MAGI; can borrow against it) post-tax IRA have benefits a Roth 401k doesn’t (except borrowing against it, but one can with a regular 401k).

3. Differences in state and/or local taxes pre-retirement and post-retirement can make the tax advantages more beneficial at one point or the other. For example, earning income in a state with high state income taxes (if they can be reduced) but retiring in a state with low or no state income taxes, would provide extra savings now that are not needed in retirement. And the opposite would be true if one went for low/no state taxes to high state taxes during retirement.

4. Assuming one’s income in retirement is solely from retirement income (different is still earning income), then even if one is in a higher marginal tax bracket, because of deductions and progressive brackets (which increase with inflation), the marginal savings pre-tax may be greater than the EFFECTIVE savings at retirement. In addition, you can then use today’s savings to more easily put towards a post-tax account.

Here is an example using today’s brackets (since who knows what the future will hold) for someone married filing jointly. Let’s assume a 30 year old puts $12,000 pre-tax into your 401k, for 35 years with 9.5% annualized growth (historical growth of a 90/10 portfolio) all of which is in the 22% bracket. He then reinvests the $2,640 in tax savings in a Roth account.

He also plans for retirement income for 30 years (65 to 95 to be plenty safe) with a 6.5% growth during retirement. And assuming a long run inflation of 2% (which puts the midpoint halfway through retirement, 50 years from now) and the tax brackets and deductions move accordingly with income.

For 30 years, he’ll be able to draw out about $271,000, about $222,000 from the pre-tax account and $49,000 for the Roth; however, adjust for inflation, that is about $100,650 with $82,500 from the pre-tax account and $18,150 from the Roth.

Using those inflation adjusted figures, he’ll roughly owe $6,587 per year in federal taxes, about 6.5% of his retirement income, with a net of over 94,060 per year. That is $11,563 (or 14%) more than if he had put all $12,000 toward the Roth but didn’t have the tax savings to invest more.

And if he really wanted to get nuanced, he get allocate his investments to be more aggressive in the Roth and a bit more moderate in the pre-tax while still maintaining his targets pre-retirement, which would ideally mean the Roth income represents a greater proportion (thus minimize taxes). He could even tailor his withdraws to minimize tax benefits as well (e.g., withdraw more from pre-tax on dips during retirement, or even convert some over) which may mean more aggressive in pre-tax post-retirement.

Of course this is a simple example, and obviously the benefits chance of the marginal tax savings jumps down to 12% (the biggest incremental bracket change), and/or the tax laws change.

But all else being equal, I think some health percentage in both range from 30/70 to 70/30, tailoring both contributions (e.g., more pre-tax when in a higher bracket, or more pre-tax when a lower AGI is needed), withdrawals (pull from pre-tax on downturns), and allocations (more aggressive in one or the other, maybe even more aggressive in Roth pre-retirement and less aggressive post-retirement) can maximize benefits and minimizes risks.
This post was edited on 8/1 at 12:36 am


notsince98
Missouri Fan
KC, MO
Member since Oct 2012
12689 posts

re: Should I move from pre-tax to ROTH?
quote:

Agreed on the Roth being taxed at marginal rate, but why would the traditional withdrawals down the road be taxed at the effective rate instead of marginal like Roth?


Because in retirement, the 401k withdrawal is your "income." The first $12k or so will be taxed at 0% because of standard deduction. The next $20k is taxed at 10%. The next $60k is 12%.

So lets say you are withdrawing $92k/yr in retirement. When you add up the tax you pay and divide by $92k, you will end up paying just 10% effective tax rate in retirement.

If you were to be pulling $92k out of a roth, you would have paid a full 22% most likely in all your contributions. Now to be fair, it takes less roth money in retirement to equal traditional monies. That needs to be accounted for.

This is just one thing to consider when evaluating roth vs traditional but it is a BIG aspect that doesn't get much focus in these discussions. You will need to make a LOT more income in retirement to justify the roth for a lot of folks out there.
This post was edited on 8/2 at 10:54 am


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max_work
LSU Fan
Member since Sep 2018
1 post

re: Should I move from pre-tax to ROTH?
Are you certain that early withdrawals against contributions are not allowed in a Roth 401k?

I’m finding answers both ways searching google.

OP- I agree w funding both. I think the flexibility it provides later on is worth more than we realize. Buckeye_vol’s post is an excellent leaping off point.


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