Author Topic: Switching my 401k from Pre-Tax to Roth Question  (Read 379 times)

ryantids

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Switching my 401k from Pre-Tax to Roth Question
« on: July 11, 2019, 08:46:41 AM »
Good am.

I have about 200k in my 401k-Pre-Tax and am looking at what implications switching future contributions to Roth 401k would make. Would I have 2 balances in my 401k say the 200k I have saved so far and another separate balance in my Roth 401k as it builds, or would the entire balance be moved under the Roth 401k account?  How about tax implications down the road, does it give you flexibility tax wise?  Thanks for the thoughts.

JLee

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Re: Switching my 401k from Pre-Tax to Roth Question
« Reply #1 on: July 11, 2019, 09:32:41 AM »
Yes, you would have traditional balance and Roth balance.  Why would you switch?

ryantids

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Re: Switching my 401k from Pre-Tax to Roth Question
« Reply #2 on: July 11, 2019, 09:50:09 AM »
What is your advice as why not to switch?  Thanks!

JLee

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Re: Switching my 401k from Pre-Tax to Roth Question
« Reply #3 on: July 11, 2019, 09:51:55 AM »
What is your advice as why not to switch?  Thanks!

You have not given us nearly enough information to make that decision.  What's your income and tax picture?

terran

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Re: Switching my 401k from Pre-Tax to Roth Question
« Reply #4 on: July 11, 2019, 10:07:27 AM »
Here's some information of traditional vs Roth: https://www.bogleheads.org/wiki/Traditional_versus_Roth

The cliff notes version is that it all comes down to marginal tax bracket now vs marginal tax bracket at withdrawal. If you have high income now and plan to have low spending in retirement, then traditional is almost definitely the right choice. State taxes and the need to come under income limits for things like ACA health insurance subsidies can skew those results.

ryantids

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Re: Switching my 401k from Pre-Tax to Roth Question
« Reply #5 on: July 11, 2019, 10:12:15 AM »
I am single with no kids 32% tax bracket 160000 income.

ryantids

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Re: Switching my 401k from Pre-Tax to Roth Question
« Reply #6 on: July 11, 2019, 10:14:28 AM »
I am still deciding what kind of spending I will be at in retirement...

TheAnonOne

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Re: Switching my 401k from Pre-Tax to Roth Question
« Reply #7 on: July 11, 2019, 10:15:07 AM »
I am single with no kids 32% tax bracket 160000 income.

You should probably stay traditional.

$19,000 into a 401k ROTH is $19,000 out of your paychecks
$19,000 into a 401k TRAD is $12,900 out of your paychecks.

Take the extra savings and invest that as well <-- THIS IS A OFTEN OVERLOOKED STEP

You will fire sooner, and then withdraw the money during years with NO INCOME AT ALL and basically pay little to nothing in taxes.

ryantids

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Re: Switching my 401k from Pre-Tax to Roth Question
« Reply #8 on: July 11, 2019, 10:52:22 AM »
Thanks for the info, I just read gocurrycrackers post about paying no tax in retirement and am starting to understand the big picture more.

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smallstache

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Re: Switching my 401k from Pre-Tax to Roth Question
« Reply #9 on: July 11, 2019, 08:27:05 PM »
Itís not so easy.

$19,000 in ROTH is $25,080 out of your paychecks
$19,000 in TRAD is $19,000 out of your paychecks.

If you arenít disciplined enough to invest the $6,080 difference you will come out behind.

With the Roth option, that amount is essentially invested automatically at the same rate of return as your account. You only come out behind if your tax rate in retirement is substantially less than it is now. I donít think even FIRE individuals have low enough income to lower their tax rate that much, especially when you consider that individual rates are going back up to pre-TCJA levels in 6 years. Of course, I could be mistaken if FIRE-ers find ways to not report income.

SeattleCPA

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Re: Switching my 401k from Pre-Tax to Roth Question
« Reply #10 on: July 12, 2019, 08:52:25 AM »
Itís not so easy.

$19,000 in ROTH is $25,080 out of your paychecks
$19,000 in TRAD is $19,000 out of your paychecks.

If you arenít disciplined enough to invest the $6,080 difference you will come out behind.

With the Roth option, that amount is essentially invested automatically at the same rate of return as your account. You only come out behind if your tax rate in retirement is substantially less than it is now. I donít think even FIRE individuals have low enough income to lower their tax rate that much, especially when you consider that individual rates are going back up to pre-TCJA levels in 6 years. Of course, I could be mistaken if FIRE-ers find ways to not report income.

I think the math above is probably wrong. I would look at this a couple of other, different ways.

First, for example, easiest way to look at it: @ryantids has $19K of pretax income on which he'll pay 32% tax rate. He can put that $19K into traditional 401(k)... or he can pay the 32% tax and put the leftover amount $12,920 into Roth 401(k). Which of these options is best depends on whether his marginal rate in retirement is less than, equal to or greater than 32%. If rates equal, it's a wash. If rate is less in retirement--almost surely the case--the Roth route costs him money. Only if retirement tax rate higher than working years tax rate does Roth win.

Another way to look at this. Ryan has $27941 of pretax money to invest. He can go the Roth route which means he'll pay the 32% tax, end up with $19000 and invest that into Roth 401(k)... or he can take the first $19K and invest in a traditional 401(k)... and then with that leftover $8941(the $27941 minus the $19000), he can pay the 32% tax, end up with $6080 and invest that in something. Whether Roth beats traditional or vice versa gets a little more complicated to determine. You need to do a bit of spreadsheeting. But if the retirement marginal tax rate is lower, it's pretty hard to call the Roth the winner.

P.S. If you're interested, you might get benefit from a multi-post series I did on Roths. First post appears here: https://evergreensmallbusiness.com/are-roth-iras-and-roth-401ks-really-a-good-deal/

MDM

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Re: Switching my 401k from Pre-Tax to Roth Question
« Reply #11 on: July 12, 2019, 10:29:49 AM »
I am single with no kids 32% tax bracket 160000 income.
Do you pay 8% state tax?

$160K gross puts you in the 24% federal bracket.