S/o 401(k) wisdom -- can we discuss Roth v. Traditional?

[Deleted]

Since we were talking about 401(k)s earlier, I've been thinking about my constant agony over what mix of Traditional versus Roth 401(k) contributions is right for us.

I know there are a ton of variables, but do any of you have particularly strong opinions on how to come up with the right mix/when Roth contributions make sense?

Note: I acknowledge that this is a terribly worded OP.  I'm not looking for specific advice for me -- just looking to start a discussion on the topic generally.

[Deleted]

I have no idea. I am interested in what sarajoy and rock-n-voll will have to say.

Right now we're trying to balance short-term tax strategy for the first time (does this mean we've "made it"?) and knowing our tax bracket in retirement will be higher than it is now.

[FWP]

I've been thinking of this today too. Unfortunately we don't have a crystal ball about what tax rates will be in retirement.

Because of the way that the money is taxed when you pull it out (traditional will be charged at lowest marginal rates first, then higher as you take out more, akin to earned income now). This is tax efficient because you avoid higher tax rates now and you get lower tax rates when you take it out.

However, at some point you do hit those higher marginal rates. So ideally you want to start drawing Roth at that point. So, IMO, higher retirement balances and higher retirement income needs -> higher percentage of Roth investments. Again, not an exact science due to unknown future tax rates (and unknown portfolio growth rates).

Not all that helpful, eh? Hehe.

[lys]

I like to see a ROTH funded for as long as you qualify. Funded with after tax money, but you have access to the original contributions without penalty should you need to withdraw before age 59. All withdrawals are tax free at retirement

First fund the 401K to your employer's match, then fund the ROTH to max. If you still have money, then go back and fund 401K to max.
I like to convert traditional IRA's to ROTH's a little at a time (you pay taxes on the amount converted)

[Deleted]

Aug 7, 2013 15:29:36 GMT -5 lys said:

I like to see a ROTH funded for as long as you qualify. Funded with after tax money, but you have access to the original contributions without penalty should you need to withdraw before age 59. All withdrawals are tax free at retirement

First fund the 401K to your employer's match, then fund the ROTH to max. If you still have money, then go back and fund 401K to max.
I like to convert traditional IRA's to ROTH's a little at a time (you pay taxes on the amount converted)

We are talking about 401(k)s, not IRAs.

[kadams767]

Aug 7, 2013 15:29:36 GMT -5 lys said:

I like to see a ROTH funded for as long as you qualify. Funded with after tax money, but you have access to the original contributions without penalty should you need to withdraw before age 59. All withdrawals are tax free at retirement

First fund the 401K to your employer's match, then fund the ROTH to max. If you still have money, then go back and fund 401K to max.
I like to convert traditional IRA's to ROTH's a little at a time (you pay taxes on the amount converted)

Do you just have a google alert for anytime someone on here uses key words like Roth and then you blurt out a form response?  This has nothing to do with OPs question. 

[Deleted]

I contribute 50% to traditional and 50% to Roth. I came up with this as I wanted to lower my taxable income but I also wanted to take advantage of the Roth. I'm not sure if this is the right mix or not.

[kadams767]

I'd like to hear some solid wisdom on this as well. I think I am in a weird opposite situation where my tax rate may be lower in retirement than now, so I am currently contributing only to my traditional 401(k), especially because I need the benefit of pre-tax deferral for tax purposes right now. I am wondering at what point it would be beneficial for me to contribute a mix of Roth 401(k) and traditional, though.

[cosmos]

We switched back to all traditional. No real reason, other than who knows what the future holds, so let me get my tax benefit now.

[Susie]

Aug 7, 2013 15:32:39 GMT -5 kadams767 said:

Aug 7, 2013 15:29:36 GMT -5 lys said:

I like to see a ROTH funded for as long as you qualify. Funded with after tax money, but you have access to the original contributions without penalty should you need to withdraw before age 59. All withdrawals are tax free at retirement

First fund the 401K to your employer's match, then fund the ROTH to max. If you still have money, then go back and fund 401K to max.
I like to convert traditional IRA's to ROTH's a little at a time (you pay taxes on the amount converted)

Do you just have a google alert for anytime someone on here uses key words like Roth and then you blurt out a form response?  This has nothing to do with OPs question. 

lol.  It's a good thing google alerts aren't case sensitive

[jene]

I am curious about this as well. We max both of our traditional 401(k), but I wonder if we should switch to a 50/50 model since we have quite a bit in pretax funds.

[Deleted]

We are 100% Roth because our income is as low or lower than we expect to be living on in retirement, and tax rates are historically low. I don't know that this is the "right" thing to be doing, though.

And then there's the stuff FWP mentioned that I don't fully understand.  :-#

[cosmos]

Aug 7, 2013 15:39:37 GMT -5 ribollita said:

Ever since I read that if you live in a high tax state but may retire to a low/no tax state you should do traditional, I've done traditional only.

This is sort of my thinking as well. Moving to a no tax state for retirement is a big possibility for us.

[gt7301b]

I split my contributions 50/50 between the two. I don't have any solid numbers to back it up other than I actually expect us to have a fairly sizable income in retirement as we both have pensions and expect we will inherit a significant amount of money someday (hopefully far) in the future.

If we got to the point where a Roth 401k kept us from contributing to a Roth I'd swing back to a traditional 401k because I like Roths better than Roth 401ks.

[kadams767]

Aug 7, 2013 15:43:14 GMT -5 Susie said:

Aug 7, 2013 15:32:39 GMT -5 kadams767 said:

Do you just have a google alert for anytime someone on here uses key words like Roth and then you blurt out a form response?  This has nothing to do with OPs question. 

lol.  It's a good thing google alerts aren't case sensitive

LOL! 

[Deleted]

DH and I discussed this with our tax guy back when the loophole was made available. It came down to the fact that we expected to be in lower marginal tax bracket in retirement, so doing traditional made the most sense. Alas, that was many moons ago when we were both earning the same amount and our HHI was pretty high.

We are down a notch in the tax rate schedule for 2013 but I still think it makes sense to continue with traditional before looking elsewhere.

[Deleted]

My worry about traditional anything - IRAs or 401ks - are the RMDs. DH is 6 years older than I am so his RMDs will hit before I am even 65.

[catbus]

I have thus far only contributed to a Roth 401(k), assuming that A. our HHI will only increase, putting us in a higher tax bracket at retirement, and B. tax rates will increase by retirement, anyway. 

If/when our HHI is closer to $150k, I'll rethink my strategy and do a blend or switch to traditional, but for now (HHI ~$110k) I think my choice is good. 

[catbus]

Aug 7, 2013 15:39:37 GMT -5 ribollita said:

Ever since I read that if you live in a high tax state but may retire to a low/no tax state you should do traditional, I've done traditional only.

This makes sense, for sure. We are in a no-[income] tax state and assume that will not always be the case, so that's another reason I chose Roth. 

[Deleted]

Can anyone do a RMDs for dummies blurb? They are something that I've admittedly thought nothing about.

Right now our retirement savings are about 15% Roth (all of which is in some sort of IRA or another) and 85% Traditional (mix of IRAs and 401(k)s). We've been very lucky to both have had the Roth 401(k) option for about 8 years now, but we've left it unused for at least 5 years.  But this is something that always bothers me.  On the one hand, our effective tax rate now is ridiculous because we're non-breeding non-homeowners in a high income tax state with high local taxes, but also, who knows what the future will bring (quite possibly continuing to not breed and not homeown in a high income tax state with high local taxes, but that could change).

[shaynaatl]

I always refer to this column by The Finance Buff:

thefinancebuff.com/case-against-roth-401k.html

I switched to 100% traditional after reading this.

[Deleted]

v I posted a chart a few weeks ago. You can probably find it if you search my sn pandce.proboards.com rmd on google.

[Deleted]

Found it, thanks!

Here's the link for anyone else who is interested: pandce.proboards.com/thread/204854/possibly-stupid-retirement-income-question

[catbus]

Aug 7, 2013 16:07:15 GMT -5 @mrsspunky said:

v I posted a chart a few weeks ago. You can probably find it if you search my sn pandce.proboards.com rmd on google.

Jul 23, 2013 10:51:27 GMT -5 @mrsspunky said:

www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

ETA: For a $1MM IRA balance at age 70, that's ~$36,500

Found the post; here's the chart: 
www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

[Deleted]

Aug 7, 2013 16:08:59 GMT -5 ribollita said:

Aug 7, 2013 15:55:47 GMT -5 @mrsspunky said:

My worry about traditional anything - IRAs or 401ks - are the RMDs. DH is 6 years older than I am so his RMDs will hit before I am even 65.

does this matter if you would retire before 65?

I'm planning on retiring when DH is 65, at the latest. But still so many people base retirement on age 65, it seems crazy to think about HAVING to take money out before that age. They adjust if one spouse is 10+ years older but that's a big gap.

[Deleted]

Aug 7, 2013 16:18:41 GMT -5 kooshball said:

Ha, I don't think I have to worry about RMD.

I might be missing something, but why?

[niq]

Aug 7, 2013 16:06:22 GMT -5 shaynaatl said:

I always refer to this column by The Finance Buff:

thefinancebuff.com/case-against-roth-401k.html

I switched to 100% traditional after reading this.

I hadn't even thought about the AMT consequences. I guess that means 100% traditional for me because of RSUs and other stock-based compensation. #techworldproblems

[Deleted]

RMD kicks in whether you have your money in a Roth 401K or a traditional 401K or a traditional IRA. I can't imagine our HHI being higher in retirement when we'll be living off investment returns and RMDs.

[Deleted]

But the RMD only goes up as years progress bc your lifespan is shorter. If you turned 71 in 2009, your RMD was low but now the market has rebounded and that $40k/yr might now be $65k and you didn't actually DO anything except sit on your $$ and get older.


ETA: this happened to my aunt, who is now 75.

[Deleted]

Aug 7, 2013 16:30:07 GMT -5 @choco said:

RMD kicks in whether you have your money in a Roth 401K or a traditional 401K or a traditional IRA. I can't imagine our HHI being higher in retirement when we'll be living off investment returns and RMDs.

Even if you've rolled Roth 401k to Roth IRA?