Author Topic: Roth or Traditional 401k  (Read 9992 times)

zbrown22

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Roth or Traditional 401k
« on: September 09, 2018, 05:57:44 PM »
What is the general consensus on Roth vs Traditional 401k?

Much of the conversation I read online surrounds ones marginal taxation rate, and what that will be now (i.e. working years) vs what that will be in retirement. Generally, I expect lower, but taxation is not the only consideration (at least for me) when selecting the type of retirement contributions.

How do you factor in generational wealth considerations (i.e. inheritance of retirement account money)? And how about RMDs? (I know Roth 401k has RMDs, but these can be eliminated by converting to a Roth IRA once leaving ones company and beginning retirement).

Sam

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Re: Roth or Traditional 401k
« Reply #1 on: September 09, 2018, 09:55:45 PM »
Taxes are the lowest they've ever been, so going the Roth route would be the best time ever as well.

However, I'm anti-Roth b/c I'm anti giving the government money up front. As soon as I do, I give up my ability to lower my tax bill by moving to a different state, starting a business, etc.

This is my negative Roth post. It may sound crazy, but it's a different pov than normal: https://www.financialsamurai.com/disadvantages-of-the-roth-ira-not-all-is-what-it-seems/

What is the general consensus on Roth vs Traditional 401k?

Much of the conversation I read online surrounds ones marginal taxation rate, and what that will be now (i.e. working years) vs what that will be in retirement. Generally, I expect lower, but taxation is not the only consideration (at least for me) when selecting the type of retirement contributions.

How do you factor in generational wealth considerations (i.e. inheritance of retirement account money)? And how about RMDs? (I know Roth 401k has RMDs, but these can be eliminated by converting to a Roth IRA once leaving ones company and beginning retirement).
Regards,

Sam

Hayden

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Re: Roth or Traditional 401k
« Reply #2 on: September 11, 2018, 08:31:10 AM »

"However, I'm anti-Roth b/c I'm anti giving the government money up front. As soon as I do, I give up my ability to lower my tax bill by moving to a different state, starting a business, etc."


I totally agree with Sam here. Who knows what the government is going to look like 38 years from now when I can cash in my personal 401(k). I would much rather go the route of getting out of the taxes now versus banking on the fact that they won't change the 401(k) rules to make Roth less of a win 38 years from now.

I am all about lowering my tax bill as low as it will go for as long as possible. Wouldn't it be a shame if our government just changed Roth to require a tax bill when being pulled out as well. I sure wouldn't doubt it.

Very Respectfully,
Hayden

Dario33

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Re: Roth or Traditional 401k
« Reply #3 on: September 11, 2018, 11:23:18 AM »
Strong advocate of the trad 401k here for reasons already mentioned.  That said, I do contribute to a Roth IRA as well as it serves as a good tax shelter for some investment types (REITs, etc.) - but would only do so until after maxing our the trad 401k.

nycrite

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Re: Roth or Traditional 401k
« Reply #4 on: September 12, 2018, 11:30:13 AM »
I go back and forth on the pros and cons of both. When I'm feeling extra undecided, I split the retirement contribution 50/50 between both 401k options. Right now though, I am in peak earning years and would rather take a sure tax deduction today versus something more nebulous in the future.

Young And The Invested

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Re: Roth or Traditional 401k
« Reply #5 on: September 14, 2018, 08:54:10 AM »
Regardless of the account you choose, maxing out your available contributions annually is smart.  Both have their advantages and disadvantages.  Some other items to note regarding the benefits of contributing to a Roth IRA:

The ability to watch your money grow tax free for longer.  Traditional IRAs require you to take required minimum distributions (RMDs) every year once you reach age 70 ½, regardless of your need for the money.  The government never received tax revenue from those funds when you contributed them and wants to get what it’s due at some point.  RMDs accomplish this goal.  With a Roth IRA, you paid your taxes upfront and you can ignore these RMDs.  Your money can stay in the account and continue growing tax-free.

An additional benefit is leaving a tax-free inheritance to your heirs.  What do I mean by that?  The people who stand to inherit your Roth IRA when you land that great gig in the sky won’t have to pay any federal income tax on withdrawals so long as the account has been open for at least 5 years.  While you might not get to enjoy this benefit, your heirs will certainly appreciate it.

And finally, you are able to take out contributions made to the Roth IRA should a present need arise without a tax hit.

My wife and I currently reside in a lower-than-max marginal tax bracket but will quickly jump into the highest next year when she begins practicing in her field of medicine.  For now, she's a medical resident and our marginal income tax rate isn't as high as it will be.  Going forward, we may choose to contribute to Traditional IRAs and possibly not even convert to a Roth IRA using the "back door" strategy employed by some.  Just food for thought.
https://youngandtheinvested.com/

Sam

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Re: Roth or Traditional 401k
« Reply #6 on: September 14, 2018, 09:15:21 AM »
Regardless of the account you choose, maxing out your available contributions annually is smart.  Both have their advantages and disadvantages.  Some other items to note regarding the benefits of contributing to a Roth IRA:

The ability to watch your money grow tax free for longer.  Traditional IRAs require you to take required minimum distributions (RMDs) every year once you reach age 70 ½, regardless of your need for the money.  The government never received tax revenue from those funds when you contributed them and wants to get what it’s due at some point.  RMDs accomplish this goal.  With a Roth IRA, you paid your taxes upfront and you can ignore these RMDs.  Your money can stay in the account and continue growing tax-free.

An additional benefit is leaving a tax-free inheritance to your heirs.  What do I mean by that?  The people who stand to inherit your Roth IRA when you land that great gig in the sky won’t have to pay any federal income tax on withdrawals so long as the account has been open for at least 5 years.  While you might not get to enjoy this benefit, your heirs will certainly appreciate it.

And finally, you are able to take out contributions made to the Roth IRA should a present need arise without a tax hit.

I agree with this. Diversify your tax advantaged accounts, especially if you can, and you have maxed one out but not another.

What bummed me out was the income limits they put in place to utilize the IRA and Roth IRA retirement accounts. It didn't feel fair to get excluded from contributing when I was younger, while others could. So if you can do it, take advantage, b/c not everyone can.
Regards,

Sam

numbers

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Re: Roth or Traditional 401k
« Reply #7 on: September 15, 2018, 06:09:46 PM »
Seems to me, those registered on this site should not expect their tax rate to decline in retirement.  If you're a saver, especially a young one, it should be relatively easy to have the same income in retirement as when working, and when RMD's start you will probably be reporting more annual income than was earned while working.

Tax rates are not going down, someone has to pay the Government debt. 

Hayden

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Re: Roth or Traditional 401k
« Reply #8 on: September 15, 2018, 08:08:11 PM »
Seems to me, those registered on this site should not expect their tax rate to decline in retirement.  If you're a saver, especially a young one, it should be relatively easy to have the same income in retirement as when working, and when RMD's start you will probably be reporting more annual income than was earned while working.

Tax rates are not going down, someone has to pay the Government debt.

I agree that tax rates might not go down in the long run. I still stand behind avoiding the biggest expense any of us will have in our entire life.. taxes.. as much as humanly possible for as long as I possibly and legally can. I think that there is a huge advantage for learning how to bring town your taxable income at all costs throughout your strong earning years in your life.
Very Respectfully,
Hayden

Sam

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Re: Roth or Traditional 401k
« Reply #9 on: September 15, 2018, 08:34:05 PM »
Seems to me, those registered on this site should not expect their tax rate to decline in retirement.  If you're a saver, especially a young one, it should be relatively easy to have the same income in retirement as when working, and when RMD's start you will probably be reporting more annual income than was earned while working.

Tax rates are not going down, someone has to pay the Government debt.

I believe a VAST majority of folks will have less income in retirement, than while working. Let's say you make $100,000 a year while working. You need to have at least $2,500,000 liquid at a reasonable, but not risk-free, 4% rate of return to match that income

Given the average retirement savings for a 50-65 year old is around $200,000..... this is unlikely to happen.

But of course, if you decide to take on a new venture in retirement that makes money. Maybe.

Regards,

Sam

numbers

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Re: Roth or Traditional 401k
« Reply #10 on: September 15, 2018, 08:44:50 PM »
Please opine on this
I have several years to go before RMD's kick in.
Over those years I am going to do significant Roth conversions each year (I will be keeping my income at the level it was when I was working even though I don't need the money to live on, filling up my marginal tax bracket). Then, at least in the early years of RMD's I might be able to keep my income the same as when I was working, and not be in a higher bracket. Pay now for a few years to avoid a higher bracket for a longer period down the road.

Additional benefit will accrue to my heirs particularly if the stretch IRA is eliminated (the proposal has passed in the senate finance committee year after year but so far has not made it to a full vote) Orin Hatch was pushing it but now he is retiring maybe it will die as an issue for now. But sooner or later it will probably be back because the Govt wants their money.
Thanks
 


 

numbers

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Re: Roth or Traditional 401k
« Reply #11 on: September 15, 2018, 08:55:04 PM »


Agree, the vast majority will have less, but probably not as high a percentage of those registered here - that's all i was saying.
On the $100K example, most will get social security which will reduce the amount, although not by much, that needs to be saved.
$25,000 in SS benefit is 600+k that does not need to be saved.

surpass

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Re: Roth or Traditional 401k
« Reply #12 on: September 17, 2018, 10:37:23 AM »
I try and max out both my 401k and Roth IRA.  I like the idea of not paying taxing on appreciation of my positions in the ROTH.  Then when you're ready to retire you can figure out which ones makes sense tax wise to withdraw from at that time.  Also with the ROTH if for whatever reason I believe after 5 years of the contribution you can take out your principle without paying a penalty.  Since you already paid taxes on it.. so in a way its a good emergency fund, but as a last resort. 

If you can't do both, maybe contribute in your 401k until you get an employer match, then do the ROTH and if you max that out then go back to maxing your 401k.  Also, if you own a business you can do a SEP IRA, (up to 25% of your profits) in addition to the 401k/Roth.  I also like the HSA account as another type of retirement account if you don't use it for medical expenses.

Irish247

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Re: Roth or Traditional 401k
« Reply #13 on: September 19, 2018, 04:26:16 PM »

What bummed me out was the income limits they put in place to utilize the IRA and Roth IRA retirement accounts. It didn't feel fair to get excluded from contributing when I was younger, while others could. So if you can do it, take advantage, b/c not everyone can.
[/quote]

I agree on this. I’m not clear why there is a limit and at a relatively low level at that. Especially when they restrict it further with married.

Though I think overall traditional 401k is the way to go.

Jsmith

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Re: Roth or Traditional 401k
« Reply #14 on: September 20, 2018, 07:27:41 AM »
I'm still extremely new into my career (just 3 months right now), but my current strategy has been to pump as much into my traditional 401k as I can right off the bat but then also max out my roth IRA while I'm still at a relatively lower income tax rate.

The reason I want to fund some money in my roth early in my career is obviously because I believe I'll be taxed higher for a majority of the rest of my career but also for investing purposes (and tax diversity). In my 401k and other investment accounts, I plan to stick to the mutual and index funds approach and just let time and compound interest do its thing.

However, I'm going to use the smaller amount of money in my roth to play around with picking individual growth stocks in case I hit one big like Sam did early in his career (too bad I didn't get Tilray a few weeks ago, right? lol) But that way, if I do end up making a huge multiple on a few stocks over my lifetime, then I get to keep all the gains tax-free.

 I may be overlooking something with this approach, but it seemed like a good strategy for the time being. Would love to hear some thoughts on this.

numbers

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Re: Roth or Traditional 401k
« Reply #15 on: September 20, 2018, 12:24:41 PM »
Here you go from Kitces web site.
This is what I referred to in my Sept 15th post above, and why Roths are so important...

"Meanwhile, what hasn’t received much attention at all is a far more important proposal buried in the Retirement Enhancement and Savings Act of 2018 (RESA), currently under consideration in the Senate, which would eliminate the stretch IRA for most non-spouse beneficiaries, who would then be subject to the far-harsher 5-year rule instead!"

This will kill, tax wise, you non spouse heirs!
I have written to Hatch and my two Senators about this.

eblau

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Re: Roth or Traditional 401k
« Reply #16 on: September 25, 2018, 07:15:28 AM »
I'm curious as to what the consensus is if you plan to max out your annual 401k contribution each year. Is it better to switch to a Roth 401k to contribute the maximum in after-tax dollars that will be capital gains tax-free as opposed to pre-tax dollars that will be subject to taxation as ordinary income on withdrawal? Obviously $18,500 in pre-tax dollars is ultimately worth a lot less than $18,500 in after-tax dollars in retirement. Income limits on Roth IRAs take that option off the table for me.

I'm leaning towards contributing the maximum to a traditional 401k and using the tax savings to augment my savings because, like others, I don't entirely trust the government not to go back on its Roth promises. What do others think?
« Last Edit: September 26, 2018, 05:43:04 AM by eblau »

nycrite

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Re: Roth or Traditional 401k
« Reply #17 on: September 25, 2018, 02:17:58 PM »
I'm curious, are there examples of the government going back on its promises with reference to retirement planning, such as Medicare, Social Security, etc.? I ask, because I can't think of any. That doesn't mean it won't happen, and it doesn't mean there aren't already good examples throughout history. However, I never used government flakiness as a reason NOT to contribute to a Roth IRA or Roth 401k. The advantages are obvious for Roth vehicles. Tax free withdrawals at retirement is just another way to diversify against an uncertain tax future.


numbers

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Re: Roth or Traditional 401k
« Reply #18 on: September 25, 2018, 04:18:30 PM »
Well, as I said below the government is poised to go back on the stretch IRA provisions for Traditional IRA's.
This means that if you leave a significant traditional IRA to non-spouse heirs (your children)  they will pay taxes through the nose.
In my case my children will have to pay at the highest marginal tax rate.
Through my working years although I paid more than my share of taxes, I never paid at the highest marginal tax rate. Had I contributed some to a Roth my taxes would have been higher still but not the maximum marginal tax rate that my kids will pay on their inheritance.
Consider allocating IRA contributions to both a traditional and Roth  IRA, for diversification.
I am doing significant Roth conversions, before RMD's kick in for me - still it wont be enough to protect my kids from maximum tax rates.



 

Derrick

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Re: Roth or Traditional 401k
« Reply #19 on: October 29, 2018, 07:20:47 PM »
My prior employer only offered traditional 401ks so I did not have a roth option.  I contributed for 13 years.  Recently I switched employers and the new one offers traditional and roth 401ks. 

I chose the roth, contributions from my employer go into the traditional. I figured my original 401k plus the new employer contributions are a decent amount for the traditional side. 

Having my money go into a roth gives me options in retirement.

Ideally you should have both, it give you options in retirement on where to pull the money from whichever account based on the tax advantages at the time. 

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