Author Topic: Switched Roth 401k for Pre-tax 401k  (Read 1702 times)

smacpa

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Switched Roth 401k for Pre-tax 401k
« on: January 25, 2017, 04:42:58 PM »
I recently got my W-2 and did some quick math to see I would owe $1000 on April 15th.

I was reading through the Collins stock series here http://jlcollinsnh.com/2015/06/02/stocks-part-viii-the-401k-403b-tsp-ira-roth-buckets/ they have a great conversation about Roth vs. Pre-tax (traditional) retirement savings.

It seems that traditional can out-pace Roth if you invest the extra saved in taxes and assuming that tax rates stay consistent.  I don't know if the second assumption is a good one so I have switched to pre-tax 401k contributions but will still fund Roth IRAs for my wife and I.

But this article did get me thinking and considering alternatives to long ago advice.  Swapping to the pre-tax 401k is going to allow me to fully fund my HSA for the year off of the tax savings.  This should also get the HSA funds up to a level where I can now deploy them into some index funds.

SeattleCPA

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Re: Switched Roth 401k for Pre-tax 401k
« Reply #1 on: January 25, 2017, 04:49:30 PM »
That doesn't surprise me. I think most of the Roth fanatics don't or can't do the math...

I've blogged a bunch on this trying to point out that Roths are overrated...

http://evergreensmallbusiness.com/are-roth-iras-and-roth-401ks-really-a-good-deal/

beastykato

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Re: Switched Roth 401k for Pre-tax 401k
« Reply #2 on: January 25, 2017, 05:20:45 PM »
Much like the stock market, no one knows what taxes will be in the future.  So, saying one is better than the other is really just a guess. 

Based on your current tax bracket you need to make an educated guess as to whether or not saving taxes upfront is more beneficial or not.

I'm in the 25% tax bracket, so I think that the traditional route is best for me, for both my 401k and IRA. I do contribute to a Roth IRA when I enter the phase out range for the IRA deduction.

My girlfriend on the other hand is only in the 15% bracket.  So, its much more likely that a Roth will be of much more benefit to her than me.  She also has less expendable income than me and contributes 7%, 6% for employer match and 1% to get the full savers credit, and we split that 4% to pre-tax 401k and 3% to her Roth 401k. 

I think it's appropriate for everyone to have a little of both to maintain flexibility in retirement.  And edge more toward Roth for low-income brackets. 

JMHO

Middlesbrough

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Re: Switched Roth 401k for Pre-tax 401k
« Reply #3 on: January 25, 2017, 05:26:30 PM »
Depends on your situation. I live in the wonderful world of maxing all accounts with t401k doesn't get me any saver's credits, but all Roth 401k leaves me in the 25% marginal rate. So every year I do my best to get my last dollar out of the 25% margin and the rest is Roth.

They both serve different purposes for different people in different situations.

Eric

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Re: Switched Roth 401k for Pre-tax 401k
« Reply #4 on: January 25, 2017, 05:42:47 PM »
It seems that traditional can out-pace Roth if you invest the extra saved in taxes and assuming that tax rates stay consistent. I don't know if the second assumption is a good one so I have switched to pre-tax 401k contributions but will still fund Roth IRAs for my wife and I.

Tax rates could rise a bunch and you could still come out ahead with Traditional pre-tax.  This is because your income will be a lot lower when it's time to access that pre-tax money.  The assumption is really that you're planning to spend the same amount or less as you do now when you retire.  If so, then traditional will always win.  Because when you're retired, your spending amount is your income.  However, if you plan to drastically increase your spending upon retirement, then you may get a different answer.

MDM

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Re: Switched Roth 401k for Pre-tax 401k
« Reply #5 on: January 26, 2017, 12:20:23 AM »
See https://www.bogleheads.org/wiki/Traditional_versus_Roth for an excellent (albeit detailed) article on this topic.

MDM

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Re: Switched Roth 401k for Pre-tax 401k
« Reply #6 on: January 26, 2017, 12:26:49 AM »
That doesn't surprise me. I think most of the Roth fanatics don't or can't do the math...

I've blogged a bunch on this trying to point out that Roths are overrated...

http://evergreensmallbusiness.com/are-roth-iras-and-roth-401ks-really-a-good-deal/

The article itself is good (e.g., "The decision to use or not use a Roth-style account rests almost entirely on the top tax rate you pay today versus the top tax rate you will pay in retirement.")

The comments section contains incorrect information: it really is the marginal rate, both for contributions and withdrawals, that determines whether traditional or Roth is better.

See this and subsequent posts for more details.  Happy to discuss if it isn't clear.