Author Topic: Roth 401K Question  (Read 613 times)

politenessman

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Roth 401K Question
« on: October 27, 2019, 01:35:07 PM »
Just recently my employer changed our 401K to a Roth 401k.
I am trying to figure out if this allows me to accelerate my savings.

The 401k is with Fidelity. I am 54 and contribute the max to the 401k at the moment ($25,000 for 2019)
From the blurb I got from HR:

Quote
Match:
For Non-Highly Compensated Employees, will match 50% of the first 4% of pay you
contribute, up to a maximum of 2%.

Roth 401(k):
Also effective January 1, 2019, in addition to being able to make pretax contributions, you will now also be able to make Roth 401(k) contributions. The Roth 401(k) contribution option lets you contribute to the plan on an after-tax basis and make potentially tax-free withdrawals in retirement. The plan will also begin accepting rollovers of Roth 401(k), Roth 403(b), and Roth 457(b) plans.

Roth In-Plan Conversion:
This new feature will give you the option to potentially reduce future income taxes on money eligible to be withdrawn by allowing you to change some of your pretax dollars into Roth after-tax dollars. By using this feature, you can:
Diversify your retirement assets between Roth and non-Roth accounts
Receive potentially federally tax-free earnings and withdrawals

Contribution Limits:
You can contribute 1%60% of your eligible pay as pretax and/or Roth 401(k) contributions, up to the annual IRS dollar limit of $19,000 for 2019. If you have reached age 50 or will reach 50 during the calendar year January 1 to December 31 and are making the maximum plan or IRS pretax and/or Roth contribution, you may contribute up to $25,000.

The confusing part for me is that the plan says the limit is $25k which I will hit at the end of the year with pre tax contributions. So where do the after-tax contributions come in?
Also how does that roll over work?
Is there any impact because I already have a Roth IRA?

HR and the plan administrators seem to have no idea how all this works. All I have been able to get out of them is that I cannot contribute more than $25k.

Does anyone else have one of these and how does this make things better for me?

AnxietyFly

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Re: Roth 401K Question
« Reply #1 on: October 27, 2019, 01:44:34 PM »
The roth 401k is a better option if you are trying to accelerate. 25k limit is already taxing you on the front end which depending on your tax bracket you are really allocating 31k to your 401k.  The only problem you will have is that you might be in a high tax bracket now. Ideally, you want to allocate to a roth earlier in your career since you are in a lower tax bracket early on.

AnxietyFly

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Re: Roth 401K Question
« Reply #2 on: October 27, 2019, 01:49:19 PM »
I get taxed on roll-overs at the end of the year. If you have the option, I would roll your pre-tax into a roth-ira outside of your 401k. The options are better and a roth ira is better than a roth 401k in terms of flexibility. It sounds like your plan is different but my paychecks take the contribution out including tax. 

politenessman

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Re: Roth 401K Question
« Reply #3 on: October 27, 2019, 02:03:12 PM »
One of the problems I see is that our current combined income puts us right in the middle of the 24% tax bracket (married, jointly, etc) and we use our 401k contributions to reduce our tax burden as much as possible.

We figure that at retirement, we will be in the 12% bracket, pushing into the 22% a few years after retirement when SS kicks in.
To me, and bearing mind that I have a short investing time horizon, the benefits in reducing our tax burden now outweigh the benefits of the Roth 401k, but I can't quantify that with numbers because I have no idea how to even start that calculation.

And the whole roll over thing ... what do I do with that?

AnxietyFly

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Re: Roth 401K Question
« Reply #4 on: October 27, 2019, 02:41:01 PM »
I would stay in the pretax I think in your case. You pretty much have a pretty good idea the tax rate since you are close to retirement.   Wait until you retire and your income drops before doing any transfers.

politenessman

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Re: Roth 401K Question
« Reply #5 on: October 27, 2019, 02:47:13 PM »
That's my feeling too, I just need a sanity check that I am not missing something.

MDM

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Re: Roth 401K Question
« Reply #6 on: October 27, 2019, 03:07:10 PM »
Just recently my employer changed our 401K to a Roth 401k.
I am trying to figure out if this allows me to accelerate my savings.
From the blurb, it isn't a change, it's an additional option.

As to whether traditional or Roth is a better choice for you now, see Traditional versus Roth - Bogleheads.  It really depends on your specific situation.