Author Topic: 401(k) Traditional vs. Roth Top Out  (Read 1131 times)

wklambert

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401(k) Traditional vs. Roth Top Out
« on: February 05, 2020, 03:33:42 PM »
I am very close to maxing my contributions to my 401(k). I have only 6% left. During the course of the last year, I learned that my company sponsors a Roth 401(k) along with the traditional. I put 2% there, just to establish the account, while I figure out if I should split the contributions at a logical level. The caveats are a) my investment selections do not designate the difference between the two accounts. What I choose for one, affects the other. and b) company match is split between accounts. I am getting the max match, but it is splitting that match between the two accounts (on a percentage basis.) I need some Mustachian expertise here, as to if I should finish my max, by putting the remainder of my contributions to the Roth (lowering my match on the traditional, but upping my match on the roth) or, if I should back out of that roth, and put it all in the traditional. Regardless of the choice, I am looking at maxing a Roth IRA contribution by the end of this year.

Boofinator

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Re: 401(k) Traditional vs. Roth Top Out
« Reply #1 on: February 05, 2020, 03:39:56 PM »
Interesting. So you are saying that if you contribute to Roth, your company will match in Roth? In my (admittedly very limited) experience, companies typically match only in Traditional, whether or not you contribute to Roth.

I would probably still contribute 100% to Traditional, except perhaps if you are in an extremely low tax bracket.

terran

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Re: 401(k) Traditional vs. Roth Top Out
« Reply #2 on: February 05, 2020, 04:06:11 PM »
I think you understand this, but just to make sure: the maximum that can be contributed between both Roth and Traditional 401(k) is $19.5k in 2020. If your understanding is that you can contribute more than that it's possible you've actually been told you can contribute to After-tax (not Roth). Report back if this is the case because it can be a useful feature, but a few other things are required to make it especially useful, so you should look into that if this turns out to be what you're able to contribute to.

All employer contributions are to traditional. They may match Roth and/or After-tax contributions, but the employer contributions can't go to Roth regardless of what you're contributing to as an employee.

wklambert

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Re: 401(k) Traditional vs. Roth Top Out
« Reply #3 on: February 05, 2020, 04:37:16 PM »
Thank you for your replies. I am currently in the 22% bracket.

From what I understand, my max is still 19.5k (combined). I need to look at the fine print to see exactly how they are contributing to the Roth. You bring up some interesting points that I do not have answers to at the moment. But, I will be studying that fine print this evening.

ixtap

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Re: 401(k) Traditional vs. Roth Top Out
« Reply #4 on: February 05, 2020, 04:47:22 PM »
Thank you for your replies. I am currently in the 22% bracket.

From what I understand, my max is still 19.5k (combined). I need to look at the fine print to see exactly how they are contributing to the Roth. You bring up some interesting points that I do not have answers to at the moment. But, I will be studying that fine print this evening.

Your company cannot contribute to Roth, only you can.

They can match your Roth contributions, but those funds will go into an tax deferred sub account. There should be a way for you to see the current breakdown. You should have 3 sub accounts or sources:

-Roth contributions/ deferrals
-pre-tax/ traditional contributions/ deferrals
-employer match/contributions

wklambert

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Re: 401(k) Traditional vs. Roth Top Out
« Reply #5 on: February 05, 2020, 06:45:23 PM »
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They can match your Roth contributions, but those funds will go into an tax deferred sub account. There should be a way for you to see the current breakdown. You should have 3 sub accounts or sources:

-Roth contributions/ deferrals
-pre-tax/ traditional contributions/ deferrals
-employer match/contributions

That is exactly what I see on the plan administrator's site.

I *think* I see what they are doing now. On my pay stub, they are separate line items. (For accounting purposes?) In my retirement account, a single amount is shown (the sum of both line items in my stub) as "401(k) matching account." With both accounts being managed as one, both Roth and Traditional are in a single investment account. I have sent an email to the plan administrator to clear it up for me, but it looks like one account. With this being the case, I am thinking I should reset my contributions for 100% 401(k) Traditional, and roll the Roth 401(k) into a Roth IRA. (Keeping this post with the "Tax" Subforum, my goal is to reduce my AGI as much as I possibly can. Next year, I will be able to take advantage of the catch-up, so I am actually looking forward to that.

MDM

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Re: 401(k) Traditional vs. Roth Top Out
« Reply #6 on: February 05, 2020, 09:24:01 PM »
Might be worth looking through Investment Order and links therein for some generic thoughts.

Elle 8

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Re: 401(k) Traditional vs. Roth Top Out
« Reply #7 on: February 06, 2020, 05:08:45 AM »
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...On my pay stub, they are separate line items. (For accounting purposes?)...

Since one is a before-tax deduction and one is an after-tax deduction they need to be kept separate on your pay check in order to correctly calculate taxes to be withheld.

I just looked at my own account and just as ixtap said, I have three sources; Traditional, Roth and Match.

Boofinator

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Re: 401(k) Traditional vs. Roth Top Out
« Reply #8 on: February 06, 2020, 07:17:10 AM »
With this being the case, I am thinking I should reset my contributions for 100% 401(k) Traditional, and roll the Roth 401(k) into a Roth IRA.

I agree you should go 100% Traditional, but I'm not sure you'll be able to rollover your Roth 401k into an IRA while still employed with that company. Some of the more tax-savvy forum members might have a more definitive answer here, but I would just leave it in the 401k (and consider rolling it over after you leave employment with that company).

terran

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Re: 401(k) Traditional vs. Roth Top Out
« Reply #9 on: February 06, 2020, 08:32:27 AM »
With this being the case, I am thinking I should reset my contributions for 100% 401(k) Traditional, and roll the Roth 401(k) into a Roth IRA.

I agree you should go 100% Traditional, but I'm not sure you'll be able to rollover your Roth 401k into an IRA while still employed with that company. Some of the more tax-savvy forum members might have a more definitive answer here, but I would just leave it in the 401k (and consider rolling it over after you leave employment with that company).

Some employers allow in-service (while working) withdrawals/rollovers, others don't. The only advantage to doing so, even if allowed, that I can think of is if the investment options in the 401(k) are worse than those allowed in an IRA.

wklambert

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Re: 401(k) Traditional vs. Roth Top Out
« Reply #10 on: February 06, 2020, 01:06:09 PM »
Great discussion, I really appreciate all the input. Being new at paying attention to the work my money is doing, I will take all the sound advice I can get.

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The only advantage to doing so, even if allowed, that I can think of is if the investment options in the 401(k) are worse than those allowed in an IRA.

The main thought behind this approach is that there is no distinction in my 401(k) between Traditional funds, and Roth funds. They are put into the same allocations. If I want to take more risk with my Roth (and I do) I cannot do that without putting my entire portfolio into the same risk pool. I don't think that is the best approach for me. I am going to look for rules on in-service rollovers. I did not realize that was a constraint. Thanks again all!