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Roth 401k even as a high earner?

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  • Roth 401k even as a high earner?

    I am seriously considering switching over my solo 401k for my side gig, which is currently traditional pre-tax, to a Roth 401k. My reasoning is I am already maxing out my W2 employment profit sharing 401k (57k pretax), and I can only contribute 6k yearly in Roth. So over time, it will end up being heavily skewed towards the pre-tax account in retirement. It would be nice to have additional Roth money outside my smaller Roth IRA, for tax diversification purposes.

    Has anyone considered doing this? Does it make sense for high tax bracket people? I'm currently at 37 federal 12.3 state marginal rates.

    The other alternative is maybe putting 1/2 in Roth and 1/2 in traditional. I just want more Roth space, in general.

  • #2
    For a high earner it likely isn't the best move. Do you expect to be in a higher tax bracket in retirement?

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    • #3
      Originally posted by CordMcNally View Post
      For a high earner it likely isn't the best move. Do you expect to be in a higher tax bracket in retirement?
      If things work out the way I would like to, then yes, most definitely. I still have 30 years left until retirement age, so no way to know. But assuming yes.

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      • #4
        It depends on the marginal tax rates now and the presumed marginal tax rate on withdrawal of the money in question. This will be dependent on how much you have in what tax spaces and your draw down strategy. Also how much time to retirement. The only situation I saw where someone posted where Roth 401k was a no brainer was a military doc who was due a significant pension, which automatically vaulted him into a higher tax bracket in the future.

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        • #5
          Aren't you in California?

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          • #6
            Originally posted by Lithium View Post
            Aren't you in California?
            yes i edited the original post to list my marginal rates. assume i stay in same state my whole life.

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            • #7
              It is skewed until you do Roth conversions if/when you stop having W2/1099 income.

              You could argue doing it now is a hedge for future higher taxes.

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              • #8
                Looks like you are easily in the top 1% of earners. I'd prefer to contribute pre-tax and do Roth conversions for 20+ years before tapping RMD's, but if that is not a good option because you don't expect a drop in income then I wouldn't blame you for maybe doing half and half.

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                • #9
                  50% savings off the top is tough to say no to. You don't know what your taxes in retirement will be while 50% is a sure thing now. If your taxes are really higher in retirement then 'who cares?' you've likely got it made.

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                  • #10
                    I don’t know how doing a Roth 401k makes sense. Then again, it is California.

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                    • #11
                      Obviously I know it doesn't make sense (currently), but it's really more of a hedge against future tax increases. We are currently living in the era of historically low marginal tax rates (federally). So it's only a matter of time until they go up. When, not if.

                      Also, if I ever hit that sweet 7 figure income and am still here in CA, then the marginal rates would be even higher in the future (with possible wealth tax).

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                      • #12
                        Are you going to be working until your 70? They keep talking about pushing RMD age higher, so even retiring at 60 would give many years of conversions.

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                        • #13
                          How far away from retirement are you? There will likely be many different administrations and tax ideas going through the Whitehouse/Congress until then.

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                          • #14
                            I did it. I read a Vanguard white paper around 2005 and decided I wanted the tax diversification. More of my money will be coming tax free, potentially lowering my effective rate in retirement. A financial advisor ran the numbers about 5 years ago and agreed.

                            my profit sharing is deposited as a traditional 401k contribution so I have less than 40% of my balance in Roth. I think I will switch to all traditional next year, as I get closer to being done accumulating.

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                            • #15
                              Originally posted by xraygoggles View Post
                              Obviously I know it doesn't make sense (currently), but it's really more of a hedge against future tax increases. We are currently living in the era of historically low marginal tax rates (federally). So it's only a matter of time until they go up. When, not if.

                              Also, if I ever hit that sweet 7 figure income and am still here in CA, then the marginal rates would be even higher in the future (with possible wealth tax).
                              First, that’s historically inaccurate. Federal income tax wasn’t a thing for nearly the first century of our country.

                              Second, who cares if you do hit that 7 figure income? The question is still the same - is the marginal tax rate now better/worse than the marginal rate on withdrawal of that specific money you are talking about.

                              Third, let’s assume CA and our country at the federal level continue down their paths of fiscal irresponsibility and progressive taxation. Project a little for me and let me know what level of income you think would garner a 50% marginal federal/state tax rate. $100,000? $250,000?

                              What is your projected draw-down in retirement BTW and does that coincide with your above answer?

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