Regular or Roth 401K?

[krystee]

Back before I realized just how big of a dirtbag DR is, I followed some of his advice, including making all retirement contributions after tax. I still think that’s probably smart a lot of the time, but wanted to get your take:
-We make more now than we plan to draw in retirement
-After this year, we won’t have dependent care FSAs, which reduced our taxable income by $5K.
-My company messed up my FSA this year and I won’t have that to reduce taxable income either.
-We don’t itemize

Should we split our investments between the two to take advantage of after tax growth but also reduce our taxable income now? Or keep as is?

[chpmnk1015]

I just met w a new financial advisor and still waiting for our plan. But I had mentioned that I had the option for both and had that week before split it between regular and roth (had been doing 10 so 5 and 5) I did go in and adjust on my own this week when I realized I needed to get my taxable income down a bit more. But, again waiting for him and he sa9d I should Def be taking advantage of the roth. So I'm curious to hear others thoughts as well

[Poppy]

It will probably make sense to have a fair amount in traditional accounts, given that tax rates are graduated.
It kind of depends on what sources of income you think you will have. But if you have a large balance in Roth already, you probably want to build some up in traditional accounts. This is a great explanation:

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

(One caveat is that if you are maxing, Roth can allow you to effectively tax shelter more money since the money is post tax. But it is a big benefit to spread your table income over your lifetime rather than concentrate it in your working years, kind of like the inverse of the deduction bunching.)

[bee20]

When they were first announced I did 50/50. Now I do 100% to pre-tax 401k, and then max a mega-backdoor roth. My retirement draw will be lower than my income, and even if taxes go up closer to historical levels I still anticipate not having a ton of tax liability in retirement given I'll have my house paid off and pretty low expenses.

[janegold]

I had been putting a majority in my Roth 401k, but my CPA recommended last year that I switch to a more even split between Roth and traditional, so that's what I'm doing now.

[steph2008]

Jul 18, 2023 10:13:09 GMT -5 janegold said:

I had been putting a majority in my Roth 401k, but my CPA recommended last year that I switch to a more even split between Roth and traditional, so that's what I'm doing now.

Did they specify why? We had been putting everything into traditional accounts, but my husband got a new job and we had him start a Roth 401k so we could diversify. I know the details are all dependent on income, but I just thought it might benefit us to have a small pot that was Roth... I guess I'll see how our 2023 taxes pan out and possibly stop the Roth if it doesn't benefit us.

[midwestmama]

I was just talking with one of my uncles about this, and he is a financial advisor. His recommendation to me was to split and contribute some (at least to receive the max match) to a traditional 401k and some to a Roth 401k. We didn't talk about it in detail, so we didn't go into how to make the change (because it would have tax implications if I reduced my traditional 401k contributions right now), but I plan to follow up with him to talk about what that transition would look like.

[janegold]

Jul 26, 2023 20:23:32 GMT -5 steph2008 said:

Jul 18, 2023 10:13:09 GMT -5 janegold said:

I had been putting a majority in my Roth 401k, but my CPA recommended last year that I switch to a more even split between Roth and traditional, so that's what I'm doing now.

Did they specify why? We had been putting everything into traditional accounts, but my husband got a new job and we had him start a Roth 401k so we could diversify. I know the details are all dependent on income, but I just thought it might benefit us to have a small pot that was Roth... I guess I'll see how our 2023 taxes pan out and possibly stop the Roth if it doesn't benefit us.

Well I think diversification was his point.  I was putting the vast majority in Roth and he thought we should be more evenly split between the two.  (Plus we were paying a TON in taxes every year, and I think he was trying to ease our current tax burden a bit.)

[simpsongal]

krystee, I just wanted to flag that you can use the DC FSA for summery camp too. And camps are pricey!

[marathon55]

I was just coming on here to post about this. Many years ago when we started our careers it was always contribute up to the match and then max about the Roth IRA was the mantra. Our income went up over time and now we are close to $470k a year with salaries, bonus, and dividends and interest. We have just maxed out our 401k year in and year out. Since we didn’t qualify for a Roth for 15 years or so. The idea was we live modestly (expect for our kids travel sports..another topic for another day) and since our tax rate is high now, let’s keep that down, and when we retire we can just withdraw money we need to live on which will almost definitely be in a lower tax bracket. Does this idea hold?

Also, what are these mega back door Roths folks talk about? Can you do that if you max out 401ks?

[hbomdiggity]

Are you losing the DCFSA benefit?

I’d do traditional to reduce my taxable income now.

[wildrice]

I have both options, and decided to do traditional. I can see the argument for paying taxes now and having it tax free in retirement, but like you I think our income will be a lot lower in retirement than it is now so I think our tax rate will be lower (adjusted for inflation of course). We also don't have a lot of ways to reduce our taxable income right now - especially since our mortgage interest isn't enough to itemize - so I think for us it makes sense to do traditional.

[shaynaatl]

Jul 30, 2023 18:33:31 GMT -5 marathon55 said:

I was just coming on here to post about this. Many years ago when we started our careers it was always contribute up to the match and then max about the Roth IRA was the mantra. Our income went up over time and now we are close to $470k a year with salaries, bonus, and dividends and interest. We have just maxed out our 401k year in and year out. Since we didn’t qualify for a Roth for 15 years or so. The idea was we live modestly (expect for our kids travel sports..another topic for another day) and since our tax rate is high now, let’s keep that down, and when we retire we can just withdraw money we need to live on which will almost definitely be in a lower tax bracket. Does this idea hold?

Also, what are these mega back door Roths folks talk about? Can you do that if you max out 401ks?

We have similar income as you and have decided to go fully traditional 401k for now. However, we do contribute to a Backdoor Roth IRA. Have you looked into that? I think it's important to have some tax diversification in your portfolio (mix of pre-tax and post-tax money). 

The Mega backdoor Roth is another great option, if your employer's plan allows it. You can put a huge amount into that. 


thecollegeinvestor.com/17561/understanding-the-mega-backdoor-roth-ira/