In-plan Employer 401k contributions to Roth Contributions

[chucklesmcgee]

Can't get enough Roth? GOOD NEWS EVERYONE! Recent tax changes allow you to convert any 401k contributions into Roth contributions at any time, including employer contributions! Previous requirements that you be over a certain age, have quit your job, etc, are all out the door.

The only minor caveats on these conversions are:

1. Your plan must allow it: Pretty likely depending on your plan administrator's timeliness.

2. You have to pay taxes on your conversion: But you were expecting that, right?

[clutchy]

I'm honestly somewhat confused on why people get so pumped about Roth IRA's and Roth 401ks.

considering the scope of this blog is about living on very little your taxable income would be negligible negating the positive effects of a Roth anything.

My wife and I decided to split/hedge the difference and she does a trad and I do a Roth 401k.  Honestly though I would think most would do better saving the tax now if you're planning on living on <$30k a year.

[sherr]

I'm honestly somewhat confused on why people get so pumped about Roth IRA's and Roth 401ks.

considering the scope of this blog is about living on very little your taxable income would be negligible negating the positive effects of a Roth anything.

My wife and I decided to split/hedge the difference and she does a trad and I do a Roth 401k.  Honestly though I would think most would do better saving the tax now if you're planning on living on <$30k a year.

If you are in a low (15% or less) tax bracket then a Roth is probably a great idea for you. There is also a lot of hype out there by bad financial planners / advice givers who get all starry-eyed about "tax-free growth" instead of a Traditional "tax-deferred growth" without ever doing the math and finding out that for equal tax rates they are equivalent. You are correct, for anyone in a 25% or higher tax bracket a Traditional account is almost certainly better. I used to split the difference same as you and contribute to both, but then I did the ER / expected income / expected tax level math. Now I contribute solely to Traditional accounts when I can, Roth accounts only if my Traditional contribution will not be tax-deductible.

[MrMetalMoney]

Been noodling on this myself. Many of the crappy calculators out there are wildly wrong, in favor of Roth. Just crazy wrong. It seems as though there's a conspiracy by the brokerages. Or maybe the IRS to get the tax money now rather than later. I wondered if we were all being played.

But what about these two items
1. what if 20 years from now, the US goes to complete collectivism and tax rates go to European socialist levels? At that point, I think I'd be happy I had a Roth. Who actually believes tax rates in the US will decline over the coming decades? Increase? They are pretty low compared to what our parents were paying. http://qz.com/74271/income-tax-rates-since-1913/

2. RMDs are not required for Roth during the owner's lifetime. If I hit age 70.5 with millions in my traditional IRA, I'm going to be drawing down significant numbers. Probably more than I can spend, and enough to hit 20-25% tax rates by today's code!

Perhaps #2 is an argument for not going whole-hog on tax-advantaged accounts in the first place, but #2 did convince me to start diverting my future contribs to my 401k into the Roth option.

[couponvan]

My personal plan is to have 5 years worth of after tax savings to live on while I build a ladder to convert my Roth.  I really plan to use the tax free gains in equity in my primary residence, and some smaller Roths  to build that ladder.  Then it's $80K/yr moving on down the line.  Our luck they will close this awesome loophole the year we begin to use it in 2023-2026.  We are always a day late and a dollar short to the party.  Good thing we live below our means most of the time....

[Blackbeard]

I've thought about the loophole closing a lot as I get my finances in order for FIRE in a few years.  For my situation we will have roughly 50/50 taxable non taxable by the time we quit.  But hypothetically let's say everything is in tax deferred 401k. 

If I pull out of my 401k early (non-emergency) I have to pay a 10% penalty Plus any taxes due.  If I manage this properly my monthly withdrawl would keep me in the 0% income tax bracket.  So effectively I would be paying 10% tax correct on the monthly withdrawl???  I think this will make me sleep better at night knowing if this answer is correct.  If it is correct I would still be way better ahead as I am in the 25% right now.  So it would essentially still be a 15% savings. 

Not ideal but this could be an emergency option if something changed with the law or my taxable account did a header...

[StreetCat]

I'm honestly somewhat confused on why people get so pumped about Roth IRA's and Roth 401ks.

considering the scope of this blog is about living on very little your taxable income would be negligible negating the positive effects of a Roth anything.

I make use use of this conversion in my 401k.  If I didn't max out the Roth, then that money would go into taxable accounts instead.  Even if I assume 5% growth per year, paying tax on the growth for 20-30 years while I am still working and my tax bracket is high is a big deal versus not paying tax on the growth.

[jmusic]

I think what a lot of people forget about is the effect of taxes on your contributions.  Say you're in the 25% bracket, as I am: 

$18K in Roth * .25 current tax rate = a $22,500 theoretical Traditional contribution.  In effect, you have more money in the plan with a Roth, but how much that works out to depends entirely on your unknown future tax rate.

So in effect it's impossible to fairly compare them because it is an investment decision just as much as your choice of funds.