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  • Roth 401k contributions

    Hi all,

    I've been listening and reading opinions on 401k contributions.  I realize it goes without saying that I should max it out, which I do.  I'm in a partnership and have a Schwab 401k mat with a Roth 401k as well.  I am definitely in my peak earnings years right now and have no idea what tax bracket I'll be in in retirement, especially if I continue to reside in California.  The benefits director for my partnership who has a bachelors in finance and has been with our group since 1992 has been advising me for the past several years to max out my 401k Roth portion...so I put 18K in each year.  Only recently as I've been reading more on this forum and WCI site have I begun to question if that is sage advice.  Intuitively it seems wise to me to have lots of Roth money in retirement since it comes out tax free and does not have RMDs.  I should also mention that the 401k has about 500k in it right now.  With my taxable income in the low/mid 200K range, I'm not sure that having an extra 18k tax deferred will make a huge difference, but I would love your opinions.

     

    So...long winded question...better to max the Roth 401k component now even though I'm in my highest earning years, or skip it for now and just put it all in my 401kmat?

     

     

     

  • #2
    I don't think a degree in finance confers any special insight. After all, LTCM almost took down the entire financial system in the late 90s and it had Nobel prize winners in economics on the board.

    Then again, I'm just an anonymous, faceless guy on the internet, but I think he is seriously miguided.

    You are already clearly in the 28% marginal tax bracket maybe or will soon be in the 33% bracket. Retirement plan contributions come out at you marginal rate, but will be withdrawn at your effective rate.

    You could argue about whether at least some contributions at a 25% margin rate might be better off Roth, but most people would use all the tax deferral the can get at 28% and certainly at 33%.

    You already have more than enough tax diversification already and that is what backdoor Roth's are for.

    My opinion and it should carry no particular weight, is that you should take advantage of every tax deferral opportunity you have.

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    • #3
      Agree with above.  Ask your finance person to explain their logic and post here.  Would be interested to see how they justify that advice.  Your decision is also dependent on your exit strategy.  Are you retiring early?  If so, I would max out the 401k and do a backdoor Roth.  You should also have residual money in a taxable account.  Lots of finagling can be done for early retirees to get your effective tax rate for the 401k very low or near zero.  Compare that to a marginal rate of 28%+ now.  most people offering the Roth 401k advice don't consider the time of retirement, that you don't necessarily pay a marginal rate on the 401k, or how to maximize your income stream using other accounts.

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      • #4
        Unfortunately, the benefits director is not your financial planner and is giving rule-of-thumb, cookie cutter advice to every employee within earshot. I shudder to think of those in higher brackets taking her blanket advice - and I'm a huge Roth proponent. Your peak earning years are the optimal time to use tax-deferred space. Hopefully, you are able to afford yourself backdoor Roth conversions annually, as  ENT Doc suggested.

        Since it appears you've already had a good head-start on your Roth account, I suggest you change gears and focus on your "traditional" 401k. Your bank account will thank you.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          Ouch. And if you leave Cali you take an extra haircut...

          Trad 401k + backdoor rIRA is the vote!

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          • #6
            Personally I would tax defer before contributing to a Roth.  By maxing out the Roth you might be missing out on some great tax savings but you aren't doing anything wrong.

            The Roth 401k contributions allow you to stuff more into retirement than traditional.  Unless you're in the zero bracket, $18k in a Roth is worth far more than $18k in a tax deferred account.  You miss out on the tax savings today but you are socking away a lot more value, even if it costs you more to put it there.

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            • #7
              Thanks for all the input.  Seems the majority believes I should not do Roth 401k contributions.  I emailed our benefits advisor and his response is equally compelling to me...thought I'd post for those of you who are interested:

              I recommend the Roth prior to age 50 because, with a $20 trillion current debt and $110 trillion in unfunded liabilities, the likelihood of future tax increases is very real, especially for upper income individuals.  Funds within the Roth would be immune from those tax increases.  The Roth also allows you to manipulate your tax rate during retirement.  For example, if you need $150,000 to live on and a lower tax bracket exists at $100,000, you can take out $50,000 from the Roth and manipulate a 3%? 5%? break in your taxes during retirement.  The lesser benefit, but still a benefit, is the time value of money after retirement.  Tax free is better than tax deferred and even if the benefit is not realized until your retirement years, it is still a benefit.  Lastly, if you are saving too much, the Roth passes through any Estate taxes to your heirs.

              I understand that the greatest advantage to the Roth is based on something that has not occurred (tax increases) but even if it doesn’t, there is an advantage to saving both Roth and traditional so you can manipulate your tax advantage during retirement.  There are exceptions.  For instance, if you go on sabbatical and your income for that year is lower, put every dollar you can into Roth.  On the flip side, if you are behind in your savings and you’re trying to catch up, there is merit to ignoring the Roth because you are compressing a higher amount of savings in a shorter amount of time.

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              • #8
                The only thing I can say is wow. You can make you retirement plan contributions based on astrology too. Nobody knows what the future of tax brackets will be.You should make decisions on what you know to be true now.

                There is validity to some degree of tax diversification (tax deferred vs. tax free). This allows you to deal with certain things that are based on cliffs, such as IRMAA Medicare premiums. So it is good to have tax-free accounts, taxable accounts subject to more favorable capital gains tax rates and tax deferred accounts taxed at ordinary income tax rates.

                However, as I and others said, Roths are great for early lower income years and backdoor Roths. Tax deferred is great for higher income years. You will get another chance before Medicare and/or Social Security to do Roth conversions at hopefully a lower tax rate. I like Johanna believe in Roth assets, just at the right price.

                How does he know that Roth distributions will always be tax-free. After all, Social Security was always promised to be tax-free until it wasn't. Or maybe they won't be taxed, but will be included in MAGIs like other tax exempt income is now.

                The answer is you don't. You make decisions on what you know, not what somebody thinks might happen. The same thing goes people who want to change what their doing because of what might happen in this administration. They are both fools missions. Deal with what you know, when you know it.

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                • #9




                  Hi all,

                  I’ve been listening and reading opinions on 401k contributions.  I realize it goes without saying that I should max it out, which I do.  I’m in a partnership and have a Schwab 401k mat with a Roth 401k as well.  I am definitely in my peak earnings years right now and have no idea what tax bracket I’ll be in in retirement, especially if I continue to reside in California.  The benefits director for my partnership who has a bachelors in finance and has been with our group since 1992 has been advising me for the past several years to max out my 401k Roth portion…so I put 18K in each year.  Only recently as I’ve been reading more on this forum and WCI site have I begun to question if that is sage advice.  Intuitively it seems wise to me to have lots of Roth money in retirement since it comes out tax free and does not have RMDs.  I should also mention that the 401k has about 500k in it right now.  With my taxable income in the low/mid 200K range, I’m not sure that having an extra 18k tax deferred will make a huge difference, but I would love your opinions.

                   

                  So…long winded question…better to max the Roth 401k component now even though I’m in my highest earning years, or skip it for now and just put it all in my 401kmat?

                   

                   

                   
                  Click to expand...


                  I think WCI posted an article about this before: https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/

                  FWIW, I do contribute to a Roth 401k as well and agree with some of the points made by your benefits advisor:

                  - if you feel tax rates are only going to increase, contributing to a Roth 401k may be a good idea

                  - if you plan on using the account as more of an estate planning vehicle instead of a retirement account, contributing to a Roth 401k may be a good idea

                  - if you are limited as to what tax and asset protected accounts you have, you are technically getting more money (on an after-tax basis) into the account, so contributing to a Roth 401k may be a good idea

                  - my husband and I are in the opposite boat. We are doing a "financial fellowship" in a state with no income tax. We plan on returning to California or New York for retirement, two states with larger state tax burdens, contributing to a Roth 401k in that instance may be a good idea

                   

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                  • #10
                    Everyone, including your friend have valid points. I favor a mixture of both so that you can control your tax rate at retirement. I strive for 50% of each.

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