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Time to start contributing to a ROTH 401k?

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  • Time to start contributing to a ROTH 401k?

    The new tax brackets put the vast majority of my income in a top bracket of 24% (compared to the current 33%).  That's a generously low tax bracket for what I make.

    Seems like with such a low bracket I should be putting more money into ROTH space if possible.  I already do the backdoor ROTH IRA for my wife and I.  Should I start taking advantage of my ROTH 401k option as well?

    Can I contribute a full 18k to a traditional 401k AND the Roth 401k?  Or is it 18k combined?

  • #2
    Actually, I just looked up the rules.  It appears you can only contribute 18k to either option combined (i.e. you can't contribute the full 18k to the pre-tax 401k and another 18k to the ROTH).  So, in that scenario, if I don't contribute pre-tax dollars, then that 18k would end up being taxed at the higher rate of 32% because of the way the brackets work for my income.  So, it would be less beneficial to put it into ROTH space over pre-tax space.  Sorry, I guess I answered my own question after reading up on it


    • #3
      It's always possible to do some combination of the two. With recent changes to the tax code and the likelihood that the next iteration will be less favorable I wonder if there is an increasing benefit to putting money in a roth.


      • #4
        You have to run the numbers, but keep in mind most of us are likely to be able to withdraw most of our traditional 401k/IRA at a lifetime EFFECTIVE tax rate of 20% or less.  I don't anticipate future congresses letting the middle and lower tax brackets go up over time.  This doesn't even consider that some of your savings may be passed on to heirs to stretch at their lower brackets.  Or that in retirement you may chose to move to state that doesn't have state income tax.

        I personally don't like the Roth 401k even at the 24% bracket for this reason.  Even considering the tax free growth, I just think I'll be able to get most of it out or Roth converted at an effective rate below that.

        Big exception is if you anticipate your tax deferred accounts to approach 10M+  Now the math makes it much more difficult to get the money out at an effective rate that would win out.  By this time though you may have better estate planning alternatives.

        For me, 401k > Roth 401k unless you are only paying <20% marginal tax (fed & state).

        Other interesting counterpoint is that contributing 18K to Roth 401k is actually putting away more than 18K of traditional 401k (because you've already paid the government).