One more MM201: Roth vs. Trad 401(k) contributions

[y4m]

Jul 5, 2012 15:27:43 GMT -5 v said:

If I'm in a high tax bracket, don't own property, don't have kids, always pay AMT, and my 401(k) has both Roth and non-Roth contribution options, what should I do?

Another possible wrinkle: my employer contributes a nice amount to my 401(k) each year, and that contribution matches whatever my overall traditional vs. Roth blend is. (Not sure if that figures in, because I think it gets taxed accordingly.)

I've never been able to figure out what I should be doing, and the IRA discussion is making me second-guess it.

Thanks!

I'm in this situation, and we're not doing the Roth, but I'm not sure that's the smartest solution, so thanks for asking.

Are you sure about the second paragraph though? When I was doing the Roth 401K, I had to also have a traditional 401K account for my employer contribution--they told me they couldn't contribute to a Roth 401K.

[SJ]

I have read a lot of recommendations to split it 50/50.

We don't have a Roth option in our 401K plan, so that makes my decision easy

[ReenaP]

This is based on many articles I have read:

IRA: Roth > Traditional
401k: Traditional > Roth

Here is one article that explains why the Roth 401k is not a great option:

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

[y4m]

Jul 5, 2012 15:35:42 GMT -5 ReenaP said:

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

Very interesting. These are good threads!

[y4m]

Jul 5, 2012 15:38:54 GMT -5 v said:

Jul 5, 2012 15:33:50 GMT -5 kooshball said:

You should take the only tax benefit you can get which is non-roth 401K. I can't see how you would pay AMT if you have no deductions though.

About 10% of our income goes to state and local taxes, which are deducted from our federal income tax. I think that does it? But I will never pretend to understand anything about AMT except that it shows up at the sad part of TurboTaxing where at one click of the mouse the amount we owe becomes much, much bigger.

Yep--we also paid AMT this year, with no dependents or house or other deductions except that we itemized our state tax. We owed less itemizing and paying AMT than we would have taking the standard deduction because CA's tax rate is so high. Not sure if it will be the same in VA though.

[atouchofklasse]

Excellent article, thanks for posting.

[Deleted]

Jul 5, 2012 15:35:42 GMT -5 ReenaP said:

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

thanks for posting this!

[Deleted]

I split 50/50 based on what volenti told me to do. Lol

[80sjunkie]

I feel like this is the kind of decision that requires some guesstimating for the future. In your shoes (as a high-earning NYC couple that isn't likely to move or make less money in the near future) I would probably skip the Roth option.

I am lucky in that I have a deferred comp option (which is obv pre-tax) and employee contributions that are more than that, so I have chosen the Roth 401k option for the last few years. However, we have a house that we haven't had for very long (so the tax deduction is significant) and my salary should increase significantly in a few years. Once we get to the point where our mortgage interest does not impact our tax liability and my salary has increased (and I am guessing that tax rates will have increased as well), I am probably going to switch from the Roth 401k to a pre-tax account.

ETA: I assumed you weren't expecting significant salary increases, if you are, then my answer might change.

[niemand88f]

Jul 5, 2012 15:35:42 GMT -5 ReenaP said:

This is based on many articles I have read:

IRA: Roth > Traditional
401k: Traditional > Roth

Here is one article that explains why the Roth 401k is not a great option:

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

Maybe I missed it or don't understand Roth 401ks, but this article wasn't very clear about what I thought was the biggest advantage of a Roth 401k. The fact that all retirement withdrawals will be tax-free- the original contribution was taxed, but essentially all of the investment gains are free.

I'm not earning much right now so I was contributing to a Roth 401k, but I'm about to get a big (25%) promotion and I'm trying to figure out if I should switch to traditional (then even later when I finish my MS I expect to make at least 40% more than that). So is there a "like-I'm-5" explanation of how to determine if the traditional deferred tax is more beneficial than the roth tax-free returns?

[y4m]

In most cases, if you qualify for a Roth IRA based on the income requirements, you should use it. Most of us in these threads do not, so we're talking about workarounds.

[gt7301b]

Jul 5, 2012 21:41:12 GMT -5 niemand88f said:

Jul 5, 2012 15:35:42 GMT -5 ReenaP said:

This is based on many articles I have read:

IRA: Roth > Traditional
401k: Traditional > Roth

Here is one article that explains why the Roth 401k is not a great option:

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

Maybe I missed it or don't understand Roth 401ks, but this article wasn't very clear about what I thought was the biggest advantage of a Roth 401k. The fact that all retirement withdrawals will be tax-free- the original contribution was taxed, but essentially all of the investment gains are free.

I'm not earning much right now so I was contributing to a Roth 401k, but I'm about to get a big (25%) promotion and I'm trying to figure out if I should switch to traditional (then even later when I finish my MS I expect to make at least 40% more than that). So is there a "like-I'm-5" explanation of how to determine if the traditional deferred tax is more beneficial than the roth tax-free returns?

The article basically says that the fact that your earnings aren't taxed may not be that big of a benefit in retirement because (in today's dollars) you get $17,900 in income won't be taxed in retirement anyway. So if all of your retirement $$ comes from the Roth you are missing out on the marginal benefit of that $17,900 in tax free income. If you have other sources of income that will eventually be taxed the Roth option is more beneficial for you.

The author also mentions that "A Roth 401(k) is good for people in low paying jobs now but expect to have high paying jobs later. Medical doctors in residence programs fit that description very well." So if you expect to increase your income significantly the Roth 401k(k) is a good option.

[Deleted]

This thread has been helpful. Especially the last part about if you are lower income now and expect a higher income later, then the Roth 401K may be a good idea.

While we have a high income (not BigDog but not eligible for Roth IRAs either), we actually do expect to have higher incomes in the future. So for now, I think doing the 50/50 split is still a good idea.

I wish volenti still posted on here. I dont remember if I asked her on TN or elsewhere about this, but I definitely remember her saying that she did a 50/50 split and recommended that course of action.

[Deleted]

Found it- community.thenest.com/cs/ks/forums/thread/50621021.aspx

[Deleted]

Yeah, i see that now, I was focusing on her advice to me, not so much what she did.