Author Topic: ROTH 401K??? who knew? totally confused  (Read 4693 times)

h2ogal

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ROTH 401K??? who knew? totally confused
« on: December 12, 2014, 01:19:20 PM »
Hello! 

Hope one of you folks can help!  My company added an new option, a ROTH 401K!   I thought that my income was too high for a ROTH ($150K or so), but the administrator said that income limits don't apply to our ROTH 401k.

So, now I'm wondering how to figure out how much to put in ROTH 401K vs. Regular 401K. 
Both types of accounts have the same investment choices.  I'm currently buying SSgA 500 index (90%) and SSgA Global Index (10%).

This year I already contributed the max to the regular 401K, but Im wondering what to set up for next year?

I don't have many real tax deductions anymore, except property tax ($6K/yr), some employment expenses...I live in a high tax state (NY).

Anyone suggest calculation that would help me find the optimal % for each?
Anyone have any general suggestions?

FarmerPete

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Re: ROTH 401K??? who knew? totally confused
« Reply #1 on: December 12, 2014, 01:28:02 PM »
I feel like I may be wrong, but I believe my company said that a 401k and a Roth 401k go against the same maximum cap.  In other words, if you are maxing out your current 401k, you can't add anything to your Roth 401k.  I certainly defer to any guidance you have gotten from your HR.

Cromacster

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Re: ROTH 401K??? who knew? totally confused
« Reply #2 on: December 12, 2014, 01:29:53 PM »
For such a high income (high tax rate) I would take all of the deductions that I could get.  Stick with the traditional 401(k).

I feel like I may be wrong, but I believe my company said that a 401k and a Roth 401k go against the same maximum cap.  In other words, if you are maxing out your current 401k, you can't add anything to your Roth 401k.  I certainly defer to any guidance you have gotten from your HR.

Yes, FarmerPete, you are correct.  You have 17,500 18,000 (2015) total between the two.
« Last Edit: December 12, 2014, 01:34:23 PM by Cromacster »

h2ogal

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Re: ROTH 401K??? who knew? totally confused
« Reply #3 on: December 12, 2014, 01:37:38 PM »
Yes, this year I maxed out in the regular 401k so nothing for the ROTH.  But next year I can do a mix of some in each account, as long as the TOTAL is less than the max. 

I'm wondering if I should just wait til I retire (or transition to part-time work), and then when my income is lower, backdoor from my one of my IRAs to a Roth IRA (although that whole process is also a bit confusing to me).

chucklesmcgee

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Re: ROTH 401K??? who knew? totally confused
« Reply #4 on: December 12, 2014, 01:43:38 PM »
For such a high income (high tax rate) I would take all of the deductions that I could get.  Stick with the traditional 401(k).

It depends on your personal estimates and preferences. I have a very high income ($300k+) and continue to contribute to a Roth 401k. Why? Because I anticipate top marginal tax rates are going to be closer to Carter-Regan era rates (50-70%) than Clinton-GWBush era rates in 40+ years, considering the ever-growing debt. I also anticipate income from my other pursuits and ventures will keep me near these top brackets in retirement.

frugaliknowit

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Re: ROTH 401K??? who knew? totally confused
« Reply #5 on: December 12, 2014, 01:58:20 PM »
You didn't say whether you get a match and whether that base amount can be in either the roth or traditional...?   Either way, make sure you max the match.

Mustachianism says:  100% traditional.  Employ laddered conversions (a lot has to go right to win with this). 
Suze Orman say (I believe):  Tax rates are historically low and going up, go Roth.

Prudent moderates say:  Use "Tax Diversification" (google it).   Basically have different "buckets of money".

be

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Re: ROTH 401K??? who knew? totally confused
« Reply #6 on: December 12, 2014, 02:04:16 PM »
I realize this comment doesn't apply to OP because of income, but for any readers out there who do qualify for a Roth IRA, you may do both a 401k Roth and a Roth IRA.

Eric

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Re: ROTH 401K??? who knew? totally confused
« Reply #7 on: December 12, 2014, 02:27:13 PM »
You didn't say whether you get a match and whether that base amount can be in either the roth or traditional...?   Either way, make sure you max the match.

Mustachianism says:  100% traditional.  Employ laddered conversions (a lot has to go right to win with this). 
Suze Orman say (I believe):  Tax rates are historically low and going up, go Roth.

Prudent moderates say:  Use "Tax Diversification" (google it).   Basically have different "buckets of money".

I'm wondering what you think has to "go right to win" to use 100% traditional?  Because about the only things I can think of are that you have to spend less money in retirement than you make prior and you have to be able to fund the first 5 years through non-401k/tIRA methods.  Seems pretty simple to me, but maybe I'm missing something.

h2ogal -- I think that 100% traditional is essentially a no brainer, assuming that you're planning on being in a lower tax bracket upon retirement.

TN_Steve

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Re: ROTH 401K??? who knew? totally confused
« Reply #8 on: December 12, 2014, 04:25:03 PM »
You didn't say whether you get a match and whether that base amount can be in either the roth or traditional...?   Either way, make sure you max the match.

Mustachianism says:  100% traditional.  Employ laddered conversions (a lot has to go right to win with this). 
Suze Orman say (I believe):  Tax rates are historically low and going up, go Roth.

Prudent moderates say:  Use "Tax Diversification" (google it).   Basically have different "buckets of money".

Employer Match is is required to be pretax/traditional for everyone:  http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts#10

Agree that tax diversification is something to be desired, if all else is equal!

OP, if your AGI is 150,000 or so, it could be a tough call.  Unlike Chucklesmcgee, I do not go the Roth 401k route, as we are in the >40% marginal bracket, 3-4 years from retirement, and our retirement income will never be more than half of what we make now; thus, later roth conversions (or just pulling it out to live on) will be cheaper than putting it in Roth now.  OTOH, if you are young, expect your income in retirement (and/or the brackets) to put you in a higher rate, it is a different call.

shuffler

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Re: ROTH 401K??? who knew? totally confused
« Reply #9 on: December 12, 2014, 04:25:35 PM »
My company added an new option, a ROTH 401K!
...
So, now I'm wondering how to figure out how much to put in ROTH 401K vs. Regular 401K. 
...
Anyone have any general suggestions?
In the "general suggestions" category, I recommend that you also ask about your company 401k's support for "in service" withdrawals and/or conversions.
If the plan supports these, then you can potentially contribute much more ($20k in my case) Roth-style money to your 401k. That is in addition to the $18k limit for 2015.  (In my case I will contribute $20k + $18k = $38k in 2015.)

Here's some more reading:  http://www.madfientist.com/after-tax-contributions/

Gone Fishing

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Re: ROTH 401K??? who knew? totally confused
« Reply #10 on: December 12, 2014, 08:32:31 PM »
For such a high income (high tax rate) I would take all of the deductions that I could get.  Stick with the traditional 401(k).

It depends on your personal estimates and preferences. I have a very high income ($300k+) and continue to contribute to a Roth 401k. Why? Because I anticipate top marginal tax rates are going to be closer to Carter-Regan era rates (50-70%) than Clinton-GWBush era rates in 40+ years, considering the ever-growing debt. I also anticipate income from my other pursuits and ventures will keep me near these top brackets in retirement.

OP, It might be beneficial to know what your projected FIRE date is and what your spending requirement will be.  This will help determine which side of the previous quotes you may fall.

forummm

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Re: ROTH 401K??? who knew? totally confused
« Reply #11 on: December 14, 2014, 08:35:39 AM »
My employer added a ROTH 401k and I was very excited to use it. Then I realized that it was better for  me to stay with a traditional (deductible) account. I expect to pay almost nothing in taxes later when I pull it out due to having a low retirement income. So I can do no taxes now and no taxes later. Your situation may be different.