Author Topic: Do I NEED a Roth IRA when I have a Roth 401K?  (Read 5993 times)

Tonedover

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Do I NEED a Roth IRA when I have a Roth 401K?
« on: April 20, 2015, 02:38:59 PM »
Hi -Fledgling Mustachian here. Mid-thirties in age.  i'd like some input if i need a Roth IRA.

Facts:
- I have an employer PreTax 401K AND an employer Roth 401K
- In this program i can choose from several well performing index funds for my contributions
- On the PreTax 401K they will match my contributions up to 6%. (the match goes exclusively to company stock of course)
- On the Roth 401K there is no match, but i can contribute  up to 50% of my pay.
- Currently, I contribute 6% to the 401K (to get the full match) and another 10% to the Roth 401K

Now, , im just new to the game of cutting costs and saving aggressively, but i know i can easily squeeze a few more percentage points out of my paycheck to put into another Roth product be it the Roth IRA or the Roth 401K

***The QUESTION IS - do I add my further pay i intend to start saving to the Roth 401K or open a new Roth IRA and put these further funds into that after each paycheck?

(Another way of asking - Since i can add quite a bit more to the Roth 401K before i max it out, is it even necessary for me to open a Roth IRA)

Whats the difference, if any? (BESIDES the choices in index funds)   Do they behave the same? 


(*Sorry in advance if there are other threads to this, but all i could find was discussion about PreTax401K vs Roth401K, nothing talking about all three options at once)
« Last Edit: April 20, 2015, 03:08:59 PM by Tonedover »

MDM

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Re: Do I NEED a Roth IRA when I have.....
« Reply #1 on: April 20, 2015, 02:51:44 PM »
Whats the difference, if any? (BESIDES the choices in index funds)   Do they behave the same? 
Not sure to what difference you refer.

Traditional investments are tax-free now but you pay when withdrawing.
Roth investments have been taxed now but are tax-free when withdrawing.

401k vs. IRA have no difference other than the fund choices (and corresponding fees and performance).

Tonedover

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Re: Do I NEED a Roth IRA when I have.....
« Reply #2 on: April 20, 2015, 02:57:13 PM »
Ok so its that simple of an answer - great!

Sounds like an individual such as myself with access to a ROTH 401K wouldnt need a Roth IRA unless i wanted to expand my choices in investments or if i somehow maxed my Roth401K contribution.

Thank you!

MDM

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Re: Do I NEED a Roth IRA when I have.....
« Reply #3 on: April 20, 2015, 04:36:12 PM »
Ok so its that simple of an answer - great!

Sounds like an individual such as myself with access to a ROTH 401K wouldnt need a Roth IRA unless i wanted to expand my choices in investments or if i somehow maxed my Roth401K contribution.

Thank you!

You're welcome.  Another question you might consider: "should I be using a Roth or a Traditional?"

For most (not all, but most) people who could max a 401k, the traditional would be better than the Roth, due to marginal taxes now vs. overall taxes later.

forummm

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #4 on: April 20, 2015, 05:16:25 PM »
You might be able to get cheaper funds in a Roth at Vanguard than at your employer's 401k provider.

Scandium

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #5 on: April 21, 2015, 09:34:14 AM »
Why are you using the roth over the traditional? How much do you make?

Gone Fishing

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #6 on: April 21, 2015, 10:17:22 AM »
There are plenty of caveats, but for most that are pursing early retirement, traditional accounts tend to work out better vs ROTH.  Read the first link in my signature below.

If you are over the contribution limits for a ROTH IRA, you can still contribute to the ROTH 401(k) without having to go the backdoor route. 

If you are close to the income limits, utilizing a traditional 401(k) can possibly lower your AGI enough to qualify for phase out deductions and credits, more so than an IRA.

You can flip flop your IRA contributions between Traditional and ROTH (recharacterization) if you get down to tax time and decide the other makes more sense.  You probably can't do this with a 401(k).

Whatever you decide to do, be careful not to get to heavy on stock in your own company.  I would set a pretty low limit, 5-10% or so of total liquid assets. 


Druid

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #7 on: April 21, 2015, 11:28:09 AM »
So Close has a point that you should probably also be asking yourself whether or not the traditional contributions will be a better choice.

For most people a traditional IRA is like the government matching 25 cents to every 75 cents you invest. The drawback is not having any basis in your stocks, so you will pay more taxes in the future than a roth. However in the meantime you have a quarter(depending on tax bracket) more principal that hopefully appreciates. The income deferral is more valuable the longer you plan to hold these accounts before withdrawing.

Traditional IRA's also will not be taxed to the extent of your deductions and exemptions, so a pure Roth portfolio is not tax efficient. Ideally you can pull enough money from your traditional accounts to offset your deductions and exemptions and the rest from your Roth allowing you to pay zero income tax.

Another thing to consider is traditional accounts can be converted to Roth accounts at a discount during recessions. For example you can take advantage of the tax deferral now and when the market takes a 40% dip during your retirement you can convert your traditional accounts to Roth and only pay income tax on your 60% reduced value. Then when the market appreciates back to normal levels you have a greater balance in your Roth and you were able to benefit from many years of income deferral from the traditional accounts. A more conservative approach, that is not based on market timing, is pulling money from the traditional accounts during "perceived" dips and from the Roth during more stable times.

As far as choosing to use a Roth Ira or a Roth 401k; I would choose the one with the lower expense ratios. Its also worth mentioning that being able to contribute up to 53k in a Roth 401k for someone who is not self employed is a relatively new concept and its based on how the IRS will treat these accounts currently. This may change in the future, because its not based on law enacted by Congress but an interpretation of a regulating body(which is easier to change). The Roth Ira has a longer history of favorable tax treatment, so there's a better chance of it lasting the test of time. This will probably not be an issue, but since the majority of the nation would not care if the government ended up taxing the perceived rich peoples 53k Roth plans when Social Security is crumbling it may be worth considering(I would still choose based on lower expense ratios, because the chances of this happening are remote).

As I build income I am planning to max-out the following accounts in the following order:

1. HSA account(adjustment to income going in with the potential to receive roth treatment if used for medical expenses. Becomes a traditional retirement  account at age 65.)

2. Max out traditional 401k for my whole life(job has Vanguard with low expense ratios and some matching)

3. Traditional IRA with Vanguard until income phaseout(Since I will be maxing out 401k with traditional I will not need to worry about phaseout until I am making over 80k)

4. 401k Roth(this will come before the Roth IRA mainly because I will be using the traditional IRA and I will have a lower expense ratios than Vanguards private accounts)

5. Roth IRA(I will start making contributions to this account when I no longer or partial qualify for the traditional IRA. I will probably prioritize 401k Roth since it has lower expense ratios)

6. If you are going for early retirement you will also need money in taxable accounts, so not many people can max all these out and still achieve early retirement. Roth IRAs do allow you to pull out the principal tax free(not sure about 401k roth), so the Roth account may be more favorable for an early retiree who will need money before age 65.

I am not an expert, but this is my advice based on my current knowledge.  I always welcome feedback as my retirement plan is always evolving.
« Last Edit: April 21, 2015, 11:36:38 AM by Druid »

simplified

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #8 on: April 21, 2015, 05:39:55 PM »
http://www.marketwatch.com/story/is-a-roth-ira-better-than-a-roth-401k-2014-03-21

You may not need it now, but IRA's are better after you retire or retire early.

a1smith

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #9 on: April 21, 2015, 07:34:51 PM »
One difference between Roth 401k and Roth IRA that will apply later.  Roth 401k has required minimum distributions (RMD's) whereas Roth IRA does not.  Fortunately, there is an easy answer - rollover the Roth 401k into a Roth IRA before RMD's start.

There is discussion in DC about eliminating many of these differences between options so who knows what the rule will be when you retire.

Breannee

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #10 on: April 21, 2015, 08:36:43 PM »
I would recommend the Roth 401K up to get the full employer match and the put the rest in a Roth IRA. There are many advantages to a Roth IRA over a Roth 401k.
* You can withdraw you money from a Roth IRA much earlier in retirement than you can with the 401K.
* You can withdraw your contribution amount (not the gain) anytime penalty free! This means if you retire early you can take your original contributions back. Also, this handy if you have a some sort of emergency and need the cash (but not recommended). :)
* Also, if the money can be withdrawn without penalty for education expenses (for your immediate family) OR up to $10K to use towards a first-time home buyers.

Everything I've read says to do the 401K to get the full match and then put everything else in the Roth IRA (until you max it out). Hope that helps!
« Last Edit: April 21, 2015, 08:41:06 PM by Breannee »

Wolf359

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #11 on: April 23, 2015, 08:16:14 AM »
It also depends where you are in your career, and whether or not you are actually planning for super early retirement (Mustache-style), or just having the FU (FIREd Up) option.

The earlier you are in your career, the more likely your income will grow in the future.  I maximized Roth every chance I had early on (wish they had 401k-Roth back then).  Later in your career, your income is as high as it should go.  The chance of it being higher in retirement is lower.

I think some people have the math wrong.  Traditional 401k actually equals Roth 401k if your tax rate is equal.  The real question is whether or not your tax rate will be higher now, or higher later.  Early in your career, your income is lower, so Roth makes sense then.  Later in your career, your current tax rate is higher, so traditional makes more sense. 

You got the nuances of the Roth IRA and the Roth 401k correct, and have a good stance for how to use them.

MDM

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #12 on: April 23, 2015, 03:37:54 PM »
I think some people have the math wrong.  Traditional 401k actually equals Roth 401k if your tax rate is equal.  The real question is whether or not your tax rate will be higher now, or higher later.

Some things:
- Need to define "tax rate" carefully.  It is the marginal tax rate now vs. the marginal tax rate expected when withdrawing the 401k money. 
- Even if the rates are equal, Roth is better if you can make the maximum contribution to either Roth or Traditional.  See http://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758 for the details.
   
« Last Edit: April 28, 2015, 03:04:37 AM by MDM »

kpd905

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #13 on: April 23, 2015, 04:59:03 PM »
- On the PreTax 401K they will match my contributions up to 6%. (the match goes exclusively to company stock of course)

Does it have to go to company stock?  And does it have to stay there?  I'd keep as little company stock as possible.

What is your income now, and what do you think your expenses will be in retirement?  You might be better off going with a traditional 401k over the Roth option.

mrpercentage

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #14 on: April 23, 2015, 06:23:41 PM »
Depending on where your IRA is at you can buy strait stock. Way more control. You can even trade with it I believe. Worth looking into if that is your thing

Threshkin

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #15 on: April 27, 2015, 06:46:02 PM »
One difference between Roth 401k and Roth IRA that will apply later.  Roth 401k has required minimum distributions (RMD's) whereas Roth IRA does not.  Fortunately, there is an easy answer - rollover the Roth 401k into a Roth IRA before RMD's start.

There is discussion in DC about eliminating many of these differences between options so who knows what the rule will be when you retire.

You might want to double check this a1.  As I understand it, all Roth accounts, 401k or IRA, have no RMD requirement since you have already paid taxes on the money invested.  Traditional IRA or 401k accounts are the only ones that have RMD requirements.

MDM

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #16 on: April 27, 2015, 07:06:54 PM »
You might want to double check this a1.  As I understand it, all Roth accounts, 401k or IRA, have no RMD requirement since you have already paid taxes on the money invested.  Traditional IRA or 401k accounts are the only ones that have RMD requirements.

From http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions:

Quote
What types of retirement plans require minimum distributions?

The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive.

Threshkin

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #17 on: April 27, 2015, 08:03:30 PM »
You might want to double check this a1.  As I understand it, all Roth accounts, 401k or IRA, have no RMD requirement since you have already paid taxes on the money invested.  Traditional IRA or 401k accounts are the only ones that have RMD requirements.

From http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions:

Quote
What types of retirement plans require minimum distributions?

The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive.

I am always learning here!  But can I convert from a Roth 401k to a Roth IRA without penalty?

rmendpara

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Re: Do I NEED a Roth IRA when I have a Roth 401K?
« Reply #18 on: April 27, 2015, 09:14:24 PM »
Hi -Fledgling Mustachian here. Mid-thirties in age.  i'd like some input if i need a Roth IRA.

Facts:
- I have an employer PreTax 401K AND an employer Roth 401K
- In this program i can choose from several well performing index funds for my contributions
- On the PreTax 401K they will match my contributions up to 6%. (the match goes exclusively to company stock of course)
- On the Roth 401K there is no match, but i can contribute  up to 50% of my pay.
- Currently, I contribute 6% to the 401K (to get the full match) and another 10% to the Roth 401K

Now, , im just new to the game of cutting costs and saving aggressively, but i know i can easily squeeze a few more percentage points out of my paycheck to put into another Roth product be it the Roth IRA or the Roth 401K

***The QUESTION IS - do I add my further pay i intend to start saving to the Roth 401K or open a new Roth IRA and put these further funds into that after each paycheck?

(Another way of asking - Since i can add quite a bit more to the Roth 401K before i max it out, is it even necessary for me to open a Roth IRA)

Whats the difference, if any? (BESIDES the choices in index funds)   Do they behave the same? 


(*Sorry in advance if there are other threads to this, but all i could find was discussion about PreTax401K vs Roth401K, nothing talking about all three options at once)

Already answered above, but if I were you, I'd max out the traditional 401k, and then open a Roth IRA (assuming you are within the income limits).

This way you get 23.5k of tax deferred assets each yr instead of just 18k. You didn't mention any other information, but unless you are in the 15% federal bracket, it's very unlikely that a Roth 401k is a better choice than a traditional 401k.

I encourage you to post more details on income, savings, budget, and tax information to help us give a more accurate answer, otherwise it's just generalizations.