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

[dioxide45]

Growth in trad 401k is indeed tax free.

You get taxed on withdrawals, not growth.

It is tax free until you start to withdrawal. However, when you start to withdraw, you are withdrawing both contributions and growth. So you are also paying tax on the growth at withdrawal.

With a Roth, only your contributions are taxed when it goes in. When you withdrawal, you pay no tax. So that growth is tax free.

 

[geekette]

You will have penalties and taxes if you use it differently. Check this site out for valid withdrawals. http://www.bcbsm.com/index/health-i.../health-spending-accounts/how-to-use-hsa.html

I prefer IRS as authority vs insurance co, found in their pub 969:
Exceptions. There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.

 

[geekette]

It is tax free until you start to withdrawal. However, when you start to withdraw, you are withdrawing both contributions and growth. So you are also paying tax on the growth at withdrawal.

With a Roth, only your contributions are taxed when it goes in. When you withdrawal, you pay no tax. So that growth is tax free.

The tax is on withdrawn dollars. There is no distinction on what kind of dollar it is. Most of my withdraws will be dividends. Is that contribution or growth? Neither, just a withdrawn dollar. Retirement accounts do not distinguish what kind of dollar withdrawn.

 

[rapmarks]

I have just finished my sisters tax return, she has lost her job, prospects are not good for another one. I was just thinking perhaps she should move her iras into Roth IRAs. But , she will never be high income, so it might not be worth it.


Sent from my iPad using Tapatalk

 

[geekette]

I have just finished my sisters tax return, she has lost her job, prospects are not good for another one. I was just thinking perhaps she should move her iras into Roth IRAs. But , she will never be high income, so it might not be worth it.

If she just lost her job, paying the tax to convert seems like a dicey proposition. Wouldn't she want to keep the cash to maybe live on? Further, I believe that each Trad IRA > Roth has it's own 5 year "hold". Not sure that's worse than cracking out of IRA before age 59.5 but I'd weigh those. If she was never high income, then the pre-tax of 401k or tax deductibility of IRA has already been in her favor. Not sure what is gained by hurrying up a tax bill that could wait for many many years.

I get that everyone is in favor of tax free income, but for me there is no sense in making large tax payments ahead of time. When she is employed again, contributing to a Roth gets here there less painfully.

 

[dioxide45]

The tax is on withdrawn dollars. There is no distinction on what kind of dollar it is. Most of my withdraws will be dividends. Is that contribution or growth? Neither, just a withdrawn dollar. Retirement accounts do not distinguish what kind of dollar withdrawn.

The dividends are not neither, they would be growth. In a regular 401K you are paying taxes on those at withdrawal. In a Roth, you are not.

Break it down, $50,000 contributed to both with 100% growth before withdrawal. Each is subject to 15% tax bracket.

Roth 401K: $50,000 on contributions, you pay $7,500 in taxes on the contributions. When you withdrawal the $100,000, you pay $0 in taxes.
Traditional 401K: $50,000 on contributions, you pay $0 on those contributions. When you withdrawal you pay $15,000 in taxes on the $100,000.

 

[geekette]

The dividends are not neither, they would be growth. In a regular 401K you are paying taxes on those at withdrawal. In a Roth, you are not.

Break it down, $50,000 contributed to both with 100% growth before withdrawal. Each is subject to 15% tax bracket.

Roth 401K: $50,000 on contributions, you pay $7,500 in taxes on the contributions. When you withdrawal the $100,000, you pay $0 in taxes.
Traditional 401K: $50,000 on contributions, you pay $0 on those contributions. When you withdrawal you pay $15,000 in taxes on the $100,000.

You miss the part about 401k being pre-tax, not only am I not paying tax on those contributions, but they lower my AGI, as if I never earned those dollars, creating a larger upfront tax break than just the contribution. I also get match and employer kick-in, it will be much more than 100k in this example as that takes me only to match. Paying tax on dollars that I didn't even contribute is just not something I'll whine about. Further, the sequencing of when dollars are earned vs invested vs withdrawn makes a difference. Simple equations do not reflect a lifetime of investing in 401k.

Besides, I have a Roth, also, begun much later than the 401k. And a taxable portfolio, begun before either of them. And of course, cash and a house. A person doesn't have to cling to one thing or the other, and in fact to decrease my future risks I spread it around. I'll drain the taxable before trad IRA before using Roth but could take a bit of Roth here and there. The tax chips will fall where they may but having multiple buckets to pull from is to my advantage in managing tax implications. Sure, RMD becomes an issue, but the mandate is withdrawing the money, there is no rule against re-investing outside shelter or even moving positions in-kind to taxable portfolio and getting stepped-up basis (this is my plan; keep my companies growing as long as possible without sales). If I feel like working in retirement, it would be Roth money (account begun late and dramatically low annual max contributions).

Nobody knows what tax, interest or inflation rates will be in the future so I have built the flexibility to adjust. I could conceivably live off IRA with little enough $ to not have a tax liability.