Author Topic: Should I choose between 401(k) or Roth 401(k)  (Read 1227 times)

Krishna

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Should I choose between 401(k) or Roth 401(k)
« on: December 02, 2020, 10:12:48 AM »
Hello,
    I am currently moving from Texas to Oregon to take up a new job. Texas does not have an income tax but Oregon has something like 10% income tax. So, should I pick between Roth 401(k) or 401(k)? I calculated and If I max up my 401(K) - which I regularly try to do - I would save like 35% (25% federal + 10% state).

Here are a few financial information:

Current Roth IRA (rollover from previous jobs): 344K
Current IRA (rollover from previous jobs): 111K

Age: 39, wife: 35 (I am the only one who has a job), no kids.

Other investments (brokerage accounts with mutual funds): 516K
Bank account (cash): 45K.


Catbert

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #1 on: December 02, 2020, 10:53:03 AM »
The basic question to answer is what you expect your marginal tax rate will be when you start taking money out (or converting).    If it's less than the 35% you're paying now then do a traditional 401K.

I think there is also something to be said for having a variety of  account and taxable types.  If you RE maybe you'll need to fine tune taxable income in order to qualify for ACA insurance or something else. 

Gronnie

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #2 on: December 02, 2020, 11:18:26 AM »
Do you have cash available to do any conversion now while you are still in TX?

If you are in TX, have some traditional, and have some extra cash you could do a conversion to Roth while it won't have any state taxes and then choose Traditional in OR for new contributions that will have state taxes deferred.

Krishna

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #3 on: December 02, 2020, 12:38:23 PM »
The basic question to answer is what you expect your marginal tax rate will be when you start taking money out (or converting).    If it's less than the 35% you're paying now then do a traditional 401K.

I live at 50% of what I take-home and I am hoping to do that when I retire also. So, if the tax brackets and situations stays as is now when I retire (hoping to retire by 62), then my tax brackets should be lower. Now, will I be living in OR till I retire and die, not sure. I used to live there for 1 year a while back and we liked the place - cold might be a bit bummer but did not find any serious roadblocks to living there.


Quote
I think there is also something to be said for having a variety of  account and taxable types.  If you RE maybe you'll need to fine tune taxable income in order to qualify for ACA insurance or something else.

Planning to retire around 62. Can you please expand on what you said? I am new to Mr. Money Mustache so can you please tell me what you meant by fine-tune. Do I need to move somethings around?

MrThatsDifferent

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #4 on: December 02, 2020, 01:21:59 PM »
You have just shy of a million now, if you work to 62, that money alone, would grow to around $4m. Clearly you have a very well paid job, so 23 years of money added to that $4m pot will be a massive amount of money for 2 people alone. Do you need that much? If you werenít working for the next 23 years but had all your expenses covered, what would you do with your life?

Krishna

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #5 on: December 02, 2020, 01:27:19 PM »
You have just shy of a million now, if you work to 62, that money alone, would grow to around $4m. Clearly you have a very well paid job, so 23 years of money added to that $4m pot will be a massive amount of money for 2 people alone. Do you need that much? If you werenít working for the next 23 years but had all your expenses covered, what would you do with your life?

We are hoping to have a child (have had a bunch of health issue but those are slowly resolving now) or two. Regarding do I need the money, I am planning to leave a big chunk to a charity.

Catbert

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #6 on: December 03, 2020, 12:44:12 PM »
The basic question to answer is what you expect your marginal tax rate will be when you start taking money out (or converting).    If it's less than the 35% you're paying now then do a traditional 401K.

I live at 50% of what I take-home and I am hoping to do that when I retire also. So, if the tax brackets and situations stays as is now when I retire (hoping to retire by 62), then my tax brackets should be lower. Now, will I be living in OR till I retire and die, not sure. I used to live there for 1 year a while back and we liked the place - cold might be a bit bummer but did not find any serious roadblocks to living there.


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I think there is also something to be said for having a variety of  account and taxable types.  If you RE maybe you'll need to fine tune taxable income in order to qualify for ACA insurance or something else.

Planning to retire around 62. Can you please expand on what you said? I am new to Mr. Money Mustache so can you please tell me what you meant by fine-tune. Do I need to move somethings around?

In order to get ACA subsidized insurance you have to have a minimum amount of taxable income.  Below that figure you're on Medicaid which you may not want.  But also once you make enough to qualify for ACA the lower your taxable income the higher the government subsidy.  So, for example, (and I'm just completely making up numbers here) you want $50K to live.  To avoid Medicaid you need more than 20K taxable income so you could withdraw at least 21K from traditional taxable 401k/IRA and the remainer from Roths.  Or maybe you're fine being being on Medicaid and only withdraw 19K from taxable sources and the remainder from non-taxable.

There could be other reasons for wanting to keep taxable below or above certain limits.  Not to mention how they randomly change tax laws which is hard to predict far in the future.

A bit of variety is always good.
 

zolotiyeruki

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #7 on: December 03, 2020, 02:21:53 PM »
Go traditional 401k.  If you're not planning on retiring until age 62, you won't need to worry about early withdrawal penalties for either traditional or Roth accounts.  Your income is high, and your spending much lower, so for tax-minimization purposes, I'd advise you to max out your tax-deferred (traditional) 401k contributions.

You live on half your earnings now.  In retirement, you'll draw on your Roth accounts, taxable accounts, and tax-deferred accounts (traditional 401k/IRA), which means that your taxable income will be even lower, assuming the same spending rate.  That means that you'll almost certainly be paying a lower marginal rate when you retire, and likely a much lower marginal rate.  That means that the traditional 401k is easily the best option for you, from a tax perspective.

G-dog

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #8 on: December 03, 2020, 02:54:34 PM »
I would put enough I the 491k to get any company match, and the rest in the Roth 401k (which company canít match as AFAIK).

Krishna

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #9 on: December 03, 2020, 04:59:17 PM »
I would put enough I the 491k to get any company match, and the rest in the Roth 401k (which company canít match as AFAIK).

I thought 401(k) is through a job? From what I read from HR manual, I have to pick either 401(k) or Roth 401(k), I cant put money in both. Also, unfortunately the company I am planning to take up employment does not have a company match.

Do you mean I should contribute to a Roth IRA?

Krishna

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #10 on: December 03, 2020, 05:07:51 PM »

Quote
In order to get ACA subsidized insurance you have to have a minimum amount of taxable income.  Below that figure you're on Medicaid which you may not want.  But also once you make enough to qualify for ACA the lower your taxable income the higher the government subsidy.  So, for example, (and I'm just completely making up numbers here) you want $50K to live.  To avoid Medicaid you need more than 20K taxable income so you could withdraw at least 21K from traditional taxable 401k/IRA and the remainer from Roths.  Or maybe you're fine being being on Medicaid and only withdraw 19K from taxable sources and the remainder from non-taxable.

There could be other reasons for wanting to keep taxable below or above certain limits.  Not to mention how they randomly change tax laws which is hard to predict far in the future.

A bit of variety is always good.
 

Thanks for letting me know about this. So, does this mean I should always have some taxable income > 20K, if I want to remain out of medicaid? I have heard Medicaid insurance is a bit mediocre and the nursing homes they put you in is also not that great. Medicaid is same as welfare, am I correct?

G-dog

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #11 on: December 03, 2020, 05:27:05 PM »
I would put enough I the 491k to get any company match, and the rest in the Roth 401k (which company canít match as AFAIK).

I thought 401(k) is through a job? From what I read from HR manual, I have to pick either 401(k) or Roth 401(k), I cant put money in both. Also, unfortunately the company I am planning to take up employment does not have a company match.

Do you mean I should contribute to a Roth IRA?

Ah - I was on my phone and often type a ď9Ē instead of a ď0Ē.  Sorry about that.

Yes - 401k (traditional or Roth) are through a job.  At my last employer we did have a match for the traditional 401k, but could split contributions between the traditional 401k and the Roth 401k. 

If there is no match, then the benefit of a traditional 401k is the pre-tax treatment of your contribution (save some money on taxes now).  The Roth 401k contributions will not be pre-tax, but the gains will be tax-free. 

Seems you will have a lot saved up for retirement - that tax-free growth may be more valuable long-term.  I think Rothís also do not trigger RMDs. So reducing the amount of future RMDs may be a good long-term tax hedge too.

Depending on your employer, you may be able to roll money out of your 401k and into a Roth. My former company allowed that also, I never did it, so I am not sure if that could still be an option or what requirements there may be (like age, vesting / waiting period, frequency).

seattlecyclone

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #12 on: December 03, 2020, 06:07:50 PM »
I would put enough I the 491k to get any company match, and the rest in the Roth 401k (which company canít match as AFAIK).

I thought 401(k) is through a job? From what I read from HR manual, I have to pick either 401(k) or Roth 401(k), I cant put money in both.

The law lets you contribute to both. The total limit applies to the sum of your pre-tax and Roth contributions. Every dollar you put into pre-tax is one less dollar you're allowed to put into Roth, and vice versa. Whether your employer's plan would prohibit you from contributing to both, I guess that's possible, but I've never heard of a company that had this rule.

Thanks for letting me know about this. So, does this mean I should always have some taxable income > 20K, if I want to remain out of medicaid?

The exact threshold depends on your family size, because it's a multiple of the federal poverty level. For a single person the threshold is roughly $17k, while it's more like $35k for a family of four.

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I have heard Medicaid insurance is a bit mediocre and the nursing homes they put you in is also not that great. Medicaid is same as welfare, am I correct?

The quality can vary greatly depending on where you live. My family is on this coverage in Washington and we're mostly happy with it, but we also tend not to need much medical care. "Welfare" is something of a broad term, but Medicaid is one of several government programs that could be described in that way.

zolotiyeruki

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #13 on: December 04, 2020, 08:33:30 AM »
I would put enough I the 491k to get any company match, and the rest in the Roth 401k (which company canít match as AFAIK).
No, I would not do this.  Generally, you want to contribute to Roth 401k's and Roth IRA's when you expect that your current marginal tax rate is lower than your expected marginal tax rate in retirement.  That's usually the same as "you want to contribute to Roth accounts when your current income is lower than your expected retirement income" and does not apply to you.  Your current income is waaaaay higher than I'd expect your retirement income to be. 

Unless you're looking to make a charitable contribution to the federal government, it will be to your advantage to maximize your contributions to a traditional 401k and IRA, in order to reduce your current taxable income.

Krishna

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #14 on: December 04, 2020, 10:06:53 AM »
I would put enough I the 491k to get any company match, and the rest in the Roth 401k (which company canít match as AFAIK).
No, I would not do this.  Generally, you want to contribute to Roth 401k's and Roth IRA's when you expect that your current marginal tax rate is lower than your expected marginal tax rate in retirement.  That's usually the same as "you want to contribute to Roth accounts when your current income is lower than your expected retirement income" and does not apply to you.  Your current income is waaaaay higher than I'd expect your retirement income to be. 

Unless you're looking to make a charitable contribution to the federal government, it will be to your advantage to maximize your contributions to a traditional 401k and IRA, in order to reduce your current taxable income.

Yes you are correct. I would expect my retirement income to be less than what I make now. Yes, I would definitely like to save some on taxes. So, I will choose the 401(k) option (non-roth).

thesis

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #15 on: December 04, 2020, 11:22:48 AM »
I think there is also something to be said for having a variety of  account and taxable types.

+1

I do like to tax diversify, so although the money I put in my 401(k) is 100% Traditional, I also contribute to a Roth IRA. Granted, I earn well under $124k (or whatever that limit is), so I get to put the full contribution amount in. But I do love having a huge bucket of Traditional 401(k) money, a smaller bucket of Roth IRA money, and then some cash and taxable investments. It's just a nice contingency structure, IMO

I'm surprised nobody has posted the MadFientist link on this subject: https://www.madfientist.com/traditional-ira-vs-roth-ira/ . I think it does a great job showing how the differences between traditional and roth make a difference over time.

MDM

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #16 on: December 04, 2020, 11:42:00 PM »
... I would save like 35% (25% federal + 10% state).
If you are in the 24% federal bracket (there is no 25% bracket), you are ineligible to deduct traditional IRA contributions so that makes the IRA choice easy: use Roth.  Depending on your exact income, your spouse may or may not be able to deduct traditional contributions.  See IRA Deduction Limits | Internal Revenue Service.

For the 401k, based on what you have presented, using traditional is likely best.  See Traditional versus Roth - Bogleheads for gory details.

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #17 on: December 05, 2020, 06:43:44 AM »
If you are planning to give you to charity, then 401k.  I'm pretty sure if you donate to a charity that your 401k donations will not be taxed, so you're getting the benefit of tax free growth as well as them getting tax free withdrawal.  I just glanced over an article years ago and did a quick google search, so obviously there are restrictions, but depending on your pot of money to charity, and what kind of charity and if they can accept this gift, then I would say whatever your "charity" amount will be should be coming in the form of a 401k, as it benefits you as well as them.  I don't know the rules so you'll have to check it out.  I could be wrong about that though, so don't take my word, I'm sure others will correct me if I'm wrong.

Catbert

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #18 on: December 05, 2020, 11:12:55 AM »
If you are planning to give you to charity, then 401k.  I'm pretty sure if you donate to a charity that your 401k donations will not be taxed, so you're getting the benefit of tax free growth as well as them getting tax free withdrawal.  I just glanced over an article years ago and did a quick google search, so obviously there are restrictions, but depending on your pot of money to charity, and what kind of charity and if they can accept this gift, then I would say whatever your "charity" amount will be should be coming in the form of a 401k, as it benefits you as well as them.  I don't know the rules so you'll have to check it out.  I could be wrong about that though, so don't take my word, I'm sure others will correct me if I'm wrong.

You certainly can do this with IRA RMDs.  But only RMDs which don't kick in until 72 years old now.  And it has to do directly from the IRA to the charity.  It can be all or part of the RMD.  Not sure if it applies to a 401k but 401k can easily be converted to a IRA.  Can be useful (once you reach the age) since you essentially "deduct"* charitable donations even if you file using standard deduction.

*Of course you don't technically deduct it but your taxable income is less by the amount you give to charity.

seattlecyclone

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #19 on: December 05, 2020, 12:15:20 PM »
If you are planning to give you to charity, then 401k.  I'm pretty sure if you donate to a charity that your 401k donations will not be taxed, so you're getting the benefit of tax free growth as well as them getting tax free withdrawal.  I just glanced over an article years ago and did a quick google search, so obviously there are restrictions, but depending on your pot of money to charity, and what kind of charity and if they can accept this gift, then I would say whatever your "charity" amount will be should be coming in the form of a 401k, as it benefits you as well as them.  I don't know the rules so you'll have to check it out.  I could be wrong about that though, so don't take my word, I'm sure others will correct me if I'm wrong.

You certainly can do this with IRA RMDs.  But only RMDs which don't kick in until 72 years old now.  And it has to do directly from the IRA to the charity.  It can be all or part of the RMD.  Not sure if it applies to a 401k but 401k can easily be converted to a IRA.  Can be useful (once you reach the age) since you essentially "deduct"* charitable donations even if you file using standard deduction.

*Of course you don't technically deduct it but your taxable income is less by the amount you give to charity.

These distributions can be an amazing option for people who want to give to charity when they get older. The amounts are excluded from income. This is better than an itemized deduction in a few ways. First, if you weren't itemizing before your charitable donations, you can still take the standard deduction and avoid tax on the entire amount you give to charity. Second, the excluded amount doesn't count toward your AGI, which can have an effect on things like social security taxation and Medicare premiums. Thirdly, these distributions are limited to $100k per year regardless of your income, while itemized deductions are limited to half your AGI.

MDM

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #20 on: December 05, 2020, 02:38:53 PM »
But only RMDs which don't kick in until 72 years old now.
Good points on all the rest, but a QCD does not need to come from an RMD.

If you are age 70.5 or older, you may make a QCD from any IRA distribution, subject to all the other QCD constraints mentioned.

In other words, a QCD may be used to satisfy one's RMD, but an RMD is not a prerequisite for doing a QCD.

Catbert

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Re: Should I choose between 401(k) or Roth 401(k)
« Reply #21 on: December 07, 2020, 10:07:54 AM »
^^^Thanks for the correction and the reminder of how our tax code gets so convoluted.