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Roth 401k - did I miss optimal time to fund?

MOXJO7282

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I hear so much about how great Roth IRAs are because you get taxed now instead of later in life when you're retiring.

I wasn't offered a Roth 401k until recent years so never really thought much of it. Finally taking the time to understand I wish I would've sooner because as great as my 401k has done over 20 years it could've been a fair about more using the same growth in a Roth it appears.

Question I have now is have I missed the boat? Does it make sense to start now? I'm in my prime salary years right now and probably have a few more good years of increases left before they think I make too much and my salary starts heading the other way so therefore in the highest tax bracket now. What is the rule of thumb on this?

Now I'm thinking I should stay the course and when I retire I'm not going to be drawing a salary so tax bracket will be low.

I can easily switch over to a Roth 401k so any insight from anyone who is a pro or has spoken to one on this matter would be appreciated.
 

sue1947

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I'm in my prime salary years right now and probably have a few more good years of increases left before they think I make too much and my salary starts heading the other way so therefore in the highest tax bracket now. What is the rule of thumb on this?

Now I'm thinking I should stay the course and when I retire I'm not going to be drawing a salary so tax bracket will be low.

I can easily switch over to a Roth 401k so any insight from anyone who is a pro or has spoken to one on this matter would be appreciated.

I'm retired and looking back in hindsight to where you are now. I wish I had done more Roths. I also thought I would be in a lower tax bracket, and I am. However, when I hit age 70.5, the required minimum distribution (RMD) will push me into a higher bracket than when I was working. Roths are not subject to the RMD. In hindsight, I would have liked about a 50/50 mix of regular and Roth.
At this point, you'll need to run the numbers based on your age and how much you have saved in regular IRA/401K to see how things work out. Your other strategy is to look at rolling over your IRA to a Roth after you retire and pay the tax at your then lower tax rate. That implies, however, taking much less money out than you may need to live on. However, if you have enough money to live on from other sources already taxed, you might be able to roll over a fair amount.

Sue
 

Sugarcubesea

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My company just this year offered a Roth along with 401K. I've got 5 years till I hit 60 but I really need to work till 65 for insurance, so I'm thinking I might put 2% of my salary into Roth this year....

I hear so much about how great Roth IRAs are because you get taxed now instead of later in life when you're retiring.

I wasn't offered a Roth 401k until recent years so never really thought much of it. Finally taking the time to understand I wish I would've sooner because as great as my 401k has done over 20 years it could've been a fair about more using the same growth in a Roth it appears.

Question I have now is have I missed the boat? Does it make sense to start now? I'm in my prime salary years right now and probably have a few more good years of increases left before they think I make too much and my salary starts heading the other way so therefore in the highest tax bracket now. What is the rule of thumb on this?

Now I'm thinking I should stay the course and when I retire I'm not going to be drawing a salary so tax bracket will be low.

I can easily switch over to a Roth 401k so any insight from anyone who is a pro or has spoken to one on this matter would be appreciated.

I'm retired and looking back in hindsight to where you are now. I wish I had done more Roths. I also thought I would be in a lower tax bracket, and I am. However, when I hit age 70.5, the required minimum distribution (RMD) will push me into a higher bracket than when I was working. Roths are not subject to the RMD. In hindsight, I would have liked about a 50/50 mix of regular and Roth.
At this point, you'll need to run the numbers based on your age and how much you have saved in regular IRA/401K to see how things work out. Your other strategy is to look at rolling over your IRA to a Roth after you retire and pay the tax at your then lower tax rate. That implies, however, taking much less money out than you may need to live on. However, if you have enough money to live on from other sources already taxed, you might be able to roll over a fair amount.

Sue
 

Bailey#1

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Another thing to look at is to max out your HSA contributions if you have that option. Pros It goes in Tax free and goes out tax fee!. I think the max is $6,500.00 a year. Cons, has to be used for medical. But, this shouldn't be a problem for most of us, especially as we age.
 
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elaine

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Roth pros-grows tax free, can use for education for kids, can rollover to heirs. Cons-contributions not pretax (can put you out in higher tax bracket now). Who knows what restrictions will come out later to diminish tax free benefits (like reducing SS benefits, higher Medicare copays, etc.) based upon counting Roth distributions (pure speculation on my part).
I started adding $5k to the "secret" convertible Roth 7 years ago and then put in some more when my work offered a Roth. The bulk still goes into 401k to offset current taxes.
You should do a Roth imho-maybe try 50% this year to see how much that affects your taxes.
 

Icc5

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This is what I did, would do. We weren't allowed a 401k for a long time due to a union pension. Once we were it isn't matched at all by company. What I did is started taking out slowly for each of us to see financially how we were affected. Gradually we increased the amount taken out until comfortable.
Began doing Roth with extra money and continued along with doing the extra catch up amounts.
When I retired my wife was still working (she continued for 3 years). What we then did was increases her 401k to max (saving us on taxes) and kept maxing Roth. Now both retired so we can't add anymore.
My suggestion is do what is comfortable to put in. If matched at work do mamimum of match and then do Roth. We ended up with about a 75% in 401k and 25% Roth. If I had it to do over and could do what I wanted it would be a 50/50 mix so in retirement we'd have a little more flexibility.
Bart
 

PigsDad

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Background: I'm 51 so right in the middle of my prime earning years. About 8 years ago our company (both my wife and I work at the same company) started offering a Roth 401k option. We had always contributed what we could to our 401k accounts, working up to maxing them out.

When the Roth option was presented, we switched and made all contributions to the Roth 401k. With two engineer-level salaries, switching to Roth pushed us into a higher marginal tax bracket, and it was a significant hit to our take-home pay. For example, if the max contribution is $18K, that is an additional $36K of income that is taxed for both of us. Adding both federal and state tax, that resulted in more than $1K/month less in take-home pay.

We did that for a few years to boost our Roth balances, but have now switched back to non-Roth contributions for our 401k for a couple of reasons. We just decided that we had other priorities right now for the extra money we were paying in taxes and we weren't sure if that high of a tax rate now made financial sense vs. what our tax rate would be in retirement.

We also continue to contribute to our Roth IRAs (via the "backdoor" method), so between our Roth IRAs and the portion of our 401k that is Roth, we probably have around 20% of retirement funds in a Roth account. If I were to do it all over and the Roth 401k option was there early on in my career, I think the smart thing to do would be to stick to Roth in our earlier years where we wouldn't have gotten hit so hard with the marginal tax rate, and then switch over to the regular 401k in our higher-earning years for the tax savings.

Kurt
 

elaine

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concur--with PP about Roth with lower income and longer to earn. For us in our 50s, it's not so clear-cut, as the tax break can be close to 30% for pre-tax 401K. I would still recommend biting the bullet for at least a year or two and try to fund as much as you can as it can grow for 20 years+ tax free. Another option could be a personal back door Roth (if they still exist) and then put dividend paying stocks into them. The limit used to be $5K/year.
 

PigsDad

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Another option could be a personal back door Roth (if they still exist) and then put dividend paying stocks into them. The limit used to be $5K/year.
The backdoor Roth IRA is still available (current IRA limit is $5,500/year, extra $1,000 if over 50). For those who don't know what this is, it is a loophole to get around the income limits IRS sets on directly contributing to a Roth IRA. If you earn over a certain amount, you cannot contribute to a Roth IRA, but you can still contribute to a Traditional IRA (even though contributions will be with after-tax dollars). Then you can immediately convert that Traditional IRA to a Roth IRA, as there are no income limits to do conversions. If you don't have any other Traditional IRAs, this conversion does not trigger additional taxes, as all of the contributions are after-tax dollars. If you do have other Traditional IRAs, when you do the conversion the rules state you need to treat all of your Traditional IRAs as one when figuring out the percentage of the conversion that is taxable (it can get complicated).

And I agree with putting your highest dividend paying stocks in the Roth -- it makes so much sense.

Kurt
 

PigsDad

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I'm retired and looking back in hindsight to where you are now. I wish I had done more Roths. I also thought I would be in a lower tax bracket, and I am. However, when I hit age 70.5, the required minimum distribution (RMD) will push me into a higher bracket than when I was working. Roths are not subject to the RMD. In hindsight, I would have liked about a 50/50 mix of regular and Roth.
At this point, you'll need to run the numbers based on your age and how much you have saved in regular IRA/401K to see how things work out. Your other strategy is to look at rolling over your IRA to a Roth after you retire and pay the tax at your then lower tax rate. That implies, however, taking much less money out than you may need to live on. However, if you have enough money to live on from other sources already taxed, you might be able to roll over a fair amount.

You brought up some very thought provoking points that I hadn't fully sorted through. Due to the RMD of the Traditional 401k accounts, do you recommend first pulling retirement funds out of those accounts vs. Roth accounts when you first retire, in order to draw down those balances before you hit age 70.5 (and therefore lowering the RMD amounts)?

Also, doing Roth conversions of pre-tax 401k amounts after you retire (and you are in a lower tax bracket) seems like a good idea. Question: if you convert, say $100K and taxes will be $25K on that amount, do you have a choice of where the $25K tax is funded from? In this example, would you only be able to put $75K of the converted pre-tax 401k dollars into the Roth account, or could you pay the $25K from other sources and put the full $100K into the Roth?

Retirement is a few years down the road for me yet, but I find myself thinking about this more and more with each passing day. :cool:

Kurt
 

sue1947

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You brought up some very thought provoking points that I hadn't fully sorted through. Due to the RMD of the Traditional 401k accounts, do you recommend first pulling retirement funds out of those accounts vs. Roth accounts when you first retire, in order to draw down those balances before you hit age 70.5 (and therefore lowering the RMD amounts)?

Also, doing Roth conversions of pre-tax 401k amounts after you retire (and you are in a lower tax bracket) seems like a good idea. Question: if you convert, say $100K and taxes will be $25K on that amount, do you have a choice of where the $25K tax is funded from? In this example, would you only be able to put $75K of the converted pre-tax 401k dollars into the Roth account, or could you pay the $25K from other sources and put the full $100K into the Roth?

Retirement is a few years down the road for me yet, but I find myself thinking about this more and more with each passing day. :cool:

Kurt

Yes on pulling from the traditional accounts first and to paying from other sources: Here's my thinking:
When you first retire and before age 70.5, you have the most control over how much to pull out. After 70.5, you have to pull out money based on the RMD (required min distribution) formula, even if you don't need that much. Before that age, you can pull out just enough to keep you in a lower tax bracket and possibly use other sources of after tax money to supplement or learn to live on less. When you are older, in addition to the RMD you are more likely to have larger expenses related to health issues that may force you to take more out than you want. In addition, with gains being non-taxed in Roth accounts, I'll let that money ride and pay the taxes on the traditional accounts first.
On the second issue: I want all my retirement money to be working for me so I pay the taxes with other money and keep the rollover amount whole. In addition, I try to rollover when the market is at a low point so more shares are converted and there is more growth potential. Note that this implies a belief on my part that the market will come back up.
Note: investment essentials such as where you think the market is heading, choosing good investments, etc are always more important than taxes. However, I like to pay as little as possible and I realized, when I first retired, that I was going to get slammed with taxes when I hit the RMD. Truthfully, that's a good problem in that I was able to save enough and still retire at age 53. However, I really want to keep as much as possible so looking ahead to the RMD and taking some steps to mitigate is a good idea. Personally, I take out enough to keep me in the 15% bracket.
If you run the numbers, in general, traditional IRA/401K are better if you will pay less taxes after retirement and Roths are better in the reverse situation. If your tax bracket is the same when you put it in and take out, it breaks even. However, with a Roth, you have more flexibility which is why I'd go with a 50/50 or so blend. In addition, I also strongly agree with the previous post that doing a Roth when you are young and then switching to a regular later is a good strategy.
Bottom line: whichever method works, save as much as possible, as early as possible and then be happy if you have a problem paying too much taxes. That type of problem still means you have a choice in whether to retire or continue working; a choice that way too many others don't have.

Sue
 

planzfortomorrow

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To the original poster, I don't think you've missed out on anything. For us, it's more painful to pay the taxes now and hope for some distant, fuzzy benefit that may or may not happen later. Every time I've done the math-and we have--it comes up either a wash or actually better for us to delay paying taxes. It's been 10 years ago that I really looked into it, when we were about ½ way through our careers. I've now got at least 17 years until retirement, and the husband has at least 7, and nothing has changed. My husband and I have had very in-depth conversations about this-we're both engineers-but everyone's situation will be different.


Sorry this is so difficult to read, but there's not an easy way to present the numbers. For rough numbers, we make around $150K after adjusted gross income (AGI). This is with putting the full $36,000 in 401(k)'s. To pay taxes on that amount (taxes on $36K at 25% is $9K of taxes) is significant, AND it would raise us into a higher tax bracket-so another $1200 or so for that, and we'd probably lose other deductions. Such as, we have a rental house, that you cannot deduct losses (such as depreciation) if you make over $150K AGI unless your primary job is in real estate (it's not). So, we'd "lose" (or rather, delay) another $3500 tax benefit from that. So let's say to save the same amount in a roth401k vs 401 it costs $12K/year more in taxes.


We assume we'd have the same or higher taxes in retirement. Maybe we'll have less taxable pay, but less deductions too. Right now we've had college, day care, mortgage interest + whatever else that we won't have in the future.


Roth 401(k)'s do transfer to the heirs tax free, which would be a great benefit (and harder for me to assign a defined # benefit). And the other benefit NOT mentioned here is that if you do a large withdrawal you don't get the tax bump from it. I know in talking with other people that if you want $20K to 150K or more in one lump sum that's a heck of a tax hit. This might be for a vacation, buying a car, or putting a deposit/paying for a new house while still living in the old one, etc. So this is certainly not outside the norm for any retiree, and is fairly like to happen at least once or twice in retirement. If you withdraw $150K (in addition to your normal withdraw rate), at a 25% tax rate, that's $30K in taxes on just that. If you assume that causes a 3% higher tax bracket, that's an additional $7500 tax charge just to get your money out in that lump sum. (25% tax rate raised to 28%)


Our solution-better for us to stay the course with traditional 401k's & get the upfront tax benefit, and fund our Roth's. If we do the $5K each, starting right now that comes to $120,000 for us until our respective retirements-plus whatever market gains (or losses). And we could do catch ups if that's not enough. That's enough money for us in case we need to withdraw a large lump sum. And this would essentially be the same as paying the $10K we'd pay in increased taxes to do the roth 401k, and this way we'd still get some of the same benefits with none of the painful tax bite now.


If anyone out there can do the full $36K (and catch up contributions if 50 yrs old or older), then the full $5K/year (and the catchups for Roths), AND you still have money to invest, then just put it in a regular stock broker account. You can always access it, you only pay 15% capital gains, and you've got MUCH greater control over it than in a 401(k) account. And, heaven forbid, if it loses money, you can count it off your taxes. Can't do that for your roth or 401(k).


In retirement, we'd use pension, social security, 401(k) withdraws, and Roth's last & only if needed. So, we'd pay taxes along the way on the 401(k), and when we die, who knows how much would be left for the heirs to pay taxes on? Maybe nothing..maybe $1M. If it's $1M, and the heirs pay higher taxes at 39.5% tax rate, that's 15% higher taxes. Comes to $150K more, or 12.5 years payback time. (ie, if I save 10K/year, after 12.5 years it's better to delay paying taxes). I haven't really factored in the alternate minimum withdraws at age 70 ½, but I suspect that it doesn't change my conclusion any.


It's always interesting to see if someone can sway me to do a roth 401(k), as maybe I've overlooked something.
 

rapmarks

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I wish we had moved what we could to a Roth, we are doing rmd and paying a lot of taxes, more than we did when we were working


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dioxide45

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Our company just started offering a Roth 401K, I switched all of our contributions to this. One important thing to remember is that the growth is also tax free, where in a traditional 401K, it is not. So if over time your Roth doubles from what you contributed, all that growth can be taken out tax free. If your 401K offers some good investment options (index funds), then you may be better putting your contributions to the Roth 401K instead of a Roth IRA since the contribution limit is so much higher in a 401K.
 

Sugarcubesea

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Another thing to look at is to max out your HSA contributions if you have that option. Pros It goes in Tax free and goes out tax fee!. I think the max is $6,500.00 a year. Cons, has to be used for medical. But, this shouldn't be a problem for most of us, especially as we age.
That is why I love the HSA, I'm contributing my max of $7,750.00 --- employer + employee (company contributes $2k and I can contribute $5,750) in my H.S.A. and I put in $2,600 in for my Limited F.S.A to use for Dental and Vision.
 

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I'm in the process of moving as much 401k to Roth IRA each year before age 70 when I start taking SS and RMDs kick in. I retired at 58 and sold the main home, just rent for now and use the excluded cap gain to supplement income so I can move funds to Roth. I figure out just how much I can move every year and stay in 15% bracket.

We decided to liquidate all that equity tied up in the house and move around in our 60s and enjoy life. We think having a home with a mortgage paid off in retirement is over rated. We dont want to spend our retirement years sitting on equity and tending to possessions.


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VacationForever

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I'm in the process of moving as much 401k to Roth IRA each year before age 70 when I start taking SS and RMDs kick in. I retired at 58 and sold the main home, just rent for now and use the excluded cap gain to supplement income so I can move funds to Roth. I figure out just how much I can move every year and stay in 15% bracket.

We decided to liquidate all that equity tied up in the house and move around in our 60s and enjoy life. We think having a home with a mortgage paid off in retirement is over rated. We dont want to spend our retirement years sitting on equity and tending to possessions.


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I believe you have to be still working to be able to contribute to Roth IRA - earned income requirement. When I was working, I made too much money to contribute to Roth IRA. Now that I am not working, I am also ineligible to contribute to Roth IRA. If my understanding is wrong, then I would be delighted because I would love to move money into Roth IRA.
 

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I believe you have to be still working to be able to contribute to Roth IRA - earned income requirement. When I was working, I made too much money to contribute to Roth IRA. Now that I am not working, I am also ineligible to contribute to Roth IRA. If my understanding is wrong, then I would be delighted because I would love to move money into Roth IRA.

You can do a Roth conversion.
 

SmithOp

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I believe you have to be still working to be able to contribute to Roth IRA - earned income requirement. When I was working, I made too much money to contribute to Roth IRA. Now that I am not working, I am also ineligible to contribute to Roth IRA. If my understanding is wrong, then I would be delighted because I would love to move money into Roth IRA.

Its true you cannot contribute new money without earned income. You can do a rollover conversion from 401k though, its a taxable event so it will be added to your annual income. My employer 401k is with Fidelity, so I went in the office and it took 30 minutes to set up the new account and do the direct rollover. I figured out the tax liability and made estimated payments last year. I'm getting ready to move more this year.

http://www.rothira.com/how-convert-to-a-roth-ira

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cgeidl

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My wife and I are 77 this year. We moved half of her IRA to a Roth IRA about 5 years ago and paid the large taxes. About $180000 remains in her Roth. This year we are moving into a continuing care community where we will have a 40% deduction of our move in cost that is classified as a medical expense. We will be able to transfer the dollars with little or no tax consequence. Now there is my IRA to work on next. Possibly transfer all out over 10 years if I am still around. If not I won't be worried about it. It is very complicated to figure out far ahead about transfers to Roth IRAs without making assumptions which may or may not be close to accurate.We have simplified our estate and have no timeshares and soon no real estate property directly owned. It is a good feeling to be able to leave our estate to our children,grandchildren, and charities knowing it will be very simple for them. We plan on moving in June or July.I understand that a charity can receive $100,000 from an IRA with no tax consequences so I will keep that minimum in mine as long as the laws remain the same. I have taken out 8 times from my IRA about 4% per year but with the rising market my IRA is almost double where it was when I turned 70. I like the FANG Stocks --
FAcebook,Amazon,Netflix, and Google.
 

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You don't have to have a Roth 401k to have a Roth. I began my Roth in 2010 and in 2014 changed jobs and now have a Roth 401k.

For me, the tax break to 401k has meant keeping more of what I earn today and it remains where most of my savings goes. I do contribute to Roth 401k and Roth.

It's never too late to start growing another pot of dough, and I am in favor of holdings with variying taxation (pre-tax 401k, taxable portfolio and Roth). I plan to not touch my Roth(s) for another 20 years as the first 10 years of retirement I will tap IRA (401k rollover) and age 70 do SS so even tho my Roths came late to me, they fit my later life scenario.
 

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Our company just started offering a Roth 401K, I switched all of our contributions to this. One important thing to remember is that the growth is also tax free, where in a traditional 401K, it is not. So if over time your Roth doubles from what you contributed, all that growth can be taken out tax free. If your 401K offers some good investment options (index funds), then you may be better putting your contributions to the Roth 401K instead of a Roth IRA since the contribution limit is so much higher in a 401K.
Growth in trad 401k is indeed tax free.

You get taxed on withdrawals, not growth.
 

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Another thing to look at is to max out your HSA contributions if you have that option. Pros It goes in Tax free and goes out tax fee!. I think the max is $6,500.00 a year. Cons, has to be used for medical. But, this shouldn't be a problem for most of us, especially as we age.
Past a certain age (60?) funds can be used for any purpose.
 
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