Warning

 

Close

Confirm Action

Are you sure you wish to do this?

Confirm Cancel
BCM
User Panel

Posted: 11/17/2015 10:50:29 AM EDT
On arfcom the answer to all investment questions always seems to be Roth. I'm trying to understand if why my investment guy says no.

I'm 56, married with about 350K in 401K and IRAs combined. Our income is about 170K with few deductions. This is probably the last year of itemization
I max out my 401K at 8% with 3% match + $5500, HCE limits me. Wife contributes 18% + $5500 as well.

My investment guy says that our effective tax rate is in his opinion the highest it will ever be, therefore it doesn't make much sense to pay taxes now. I get that, but also have no crystal ball , nor does he.


My question I guess is What is the tipping point? How does one really calculate that? I feel like my guy is making a guess. I've been with him for over 10 years and I've been happy with his suggestions. Except this one, I want to question.

I'm tempted to at least invest our $5500 each into Roths just as a hedge.

Whatdya think???
Link Posted: 11/17/2015 12:15:38 PM EDT
[#1]
Of your current investments, what is the split between roth and traditional?

Typically, inside of 10 years until retirement traditional usually wins over roth.

It is really best to have a good mix of both roth and traditional.  This will allow you to decide which you want to withdrawal depending on your tax situation that year.
Link Posted: 11/17/2015 1:33:29 PM EDT
[#2]
No Roth. Roughly 60% 401K and 40% Traditional IRAs

I plan to retire from this position in 6 years. Work part-time.
Link Posted: 11/17/2015 1:39:38 PM EDT
[#3]
Why wouldn't you max out the 401k and the Roth?



What are the rules of the traditional IRA's? I'm not familiar with them.
Link Posted: 11/17/2015 2:26:23 PM EDT
[#4]
The traditional IRA were funded with 401K rollovers.
Link Posted: 11/17/2015 6:01:37 PM EDT
[#5]
Your investment guy knows more about your situation than we do.  An important question is how long will you be having the funds sit in the account before drawing?  The principal advantages of Roth accounts is 1). tax-free growth and 2). no Required Minimum Distribution.  If you plan to start drawing on these funds in just 6 years, I'd say (in my non-professional opinion) that your adviser has the right idea: better to take the sure-thing tax savings now.  6 years isn't enough time for the account to accumulate enough tax-free earnings to justify losing the deduction.

On the other hand, if you are planning on these funds to not be touched and eventually passed on to your heirs a Roth is the preferred vehicle for that.  No RMD, and heirs can get the money tax-free.
Link Posted: 11/17/2015 6:07:14 PM EDT
[#6]


Discussion ForumsJump to Quoted PostQuote History
Quoted:

Your investment guy knows more about your situation than we do. An important question is how long will you be having the funds sit in the account before drawing? The principal advantages of Roth accounts is 1). tax-free growth and 2). no Required Minimum Distribution. If you plan to start drawing on these funds in just 6 years, I'd say (in my non-professional opinion) that your adviser has the right idea: better to take the sure-thing tax savings now. 6 years isn't enough time for the account to accumulate enough tax-free earnings to justify losing the deduction.



On the other hand, if you are planning on these funds to not be touched and eventually passed on to your heirs a Roth is the preferred vehicle for that. No RMD, and heirs can get the money tax-free.
View Quote


I believe this is the correct assessment.
Link Posted: 11/17/2015 6:46:11 PM EDT
[#7]
Quoted:
On arfcom the answer to all investment questions always seems to be Roth. I'm trying to understand if why my investment guy says no.

I'm 56, married with about 350K in 401K and IRAs combined. Our income is about 170K with few deductions. This is probably the last year of itemization
I max out my 401K at 8% with 3% match + $5500, HCE limits me. Wife contributes 18% + $5500 as well.

My investment guy says that our effective tax rate is in his opinion the highest it will ever be, therefore it doesn't make much sense to pay taxes now. I get that, but also have no crystal ball , nor does he.


My question I guess is What is the tipping point? How does one really calculate that? I feel like my guy is making a guess. I've been with him for over 10 years and I've been happy with his suggestions. Except this one, I want to question.

I'm tempted to at least invest our $5500 each into Roths just as a hedge.

Whatdya think???
View Quote


This is why, and he is probably right. Would you rather pay taxes on the $5500 now when you make $170k or in retirement when you are drawing less than $170k.
Link Posted: 11/18/2015 10:42:18 AM EDT
[#8]
Discussion ForumsJump to Quoted PostQuote History
Quoted:

I believe this is the correct assessment.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
Your investment guy knows more about your situation than we do. An important question is how long will you be having the funds sit in the account before drawing? The principal advantages of Roth accounts is 1). tax-free growth and 2). no Required Minimum Distribution. If you plan to start drawing on these funds in just 6 years, I'd say (in my non-professional opinion) that your adviser has the right idea: better to take the sure-thing tax savings now. 6 years isn't enough time for the account to accumulate enough tax-free earnings to justify losing the deduction.

On the other hand, if you are planning on these funds to not be touched and eventually passed on to your heirs a Roth is the preferred vehicle for that. No RMD, and heirs can get the money tax-free.

I believe this is the correct assessment.

Yes.

Roth wins in the long term game. The tax free compounded earnings is what's beneficial. In your situation, I would tend to agree with your advisor. I assume you will earn/withdraw less than $170k/year in retirement. You will possibly drop down a tax bracket too. Better to save the taxes now since you don't have much time for the compound earnings to grow. Unless you don't plan to start withdrwaing from the Roth IRA for many years, traditional is the way to go.
Link Posted: 11/18/2015 12:46:24 PM EDT
[#9]
Discussion ForumsJump to Quoted PostQuote History
Quoted:

Yes.

Roth wins in the long term game. The tax free compounded earnings is what's beneficial. In your situation, I would tend to agree with your advisor. I assume you will earn/withdraw less than $170k/year in retirement. You will possibly drop down a tax bracket too. Better to save the taxes now since you don't have much time for the compound earnings to grow. Unless you don't plan to start withdrwaing from the Roth IRA for many years, traditional is the way to go.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
Quoted:
Your investment guy knows more about your situation than we do. An important question is how long will you be having the funds sit in the account before drawing? The principal advantages of Roth accounts is 1). tax-free growth and 2). no Required Minimum Distribution. If you plan to start drawing on these funds in just 6 years, I'd say (in my non-professional opinion) that your adviser has the right idea: better to take the sure-thing tax savings now. 6 years isn't enough time for the account to accumulate enough tax-free earnings to justify losing the deduction.

On the other hand, if you are planning on these funds to not be touched and eventually passed on to your heirs a Roth is the preferred vehicle for that. No RMD, and heirs can get the money tax-free.

I believe this is the correct assessment.

Yes.

Roth wins in the long term game. The tax free compounded earnings is what's beneficial. In your situation, I would tend to agree with your advisor. I assume you will earn/withdraw less than $170k/year in retirement. You will possibly drop down a tax bracket too. Better to save the taxes now since you don't have much time for the compound earnings to grow. Unless you don't plan to start withdrwaing from the Roth IRA for many years, traditional is the way to go.


I don't understand this assessment completely. The part about the tax free compounded earnings. Unless I crunched my numbers wrong, IF (not the op's case, but in general) you stay at the same tax bracket. I came out with the return being identical if you pay tax now, or later.

I figured it at 6% return on 100k for 10 years, no additional money for ease of figures.

I don't see that the tax free earnings have any benefit unless I misunderstand it?

Can you show me what I'm missing?
Link Posted: 11/18/2015 3:51:38 PM EDT
[#10]
Discussion ForumsJump to Quoted PostQuote History
Quoted:


I don't understand this assessment completely. The part about the tax free compounded earnings. Unless I crunched my numbers wrong, IF (not the op's case, but in general) you stay at the same tax bracket. I came out with the return being identical if you pay tax now, or later.

I figured it at 6% return on 100k for 10 years, no additional money for ease of figures.

I don't see that the tax free earnings have any benefit unless I misunderstand it?

Can you show me what I'm missing?
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
Quoted:
Quoted:
Your investment guy knows more about your situation than we do. An important question is how long will you be having the funds sit in the account before drawing? The principal advantages of Roth accounts is 1). tax-free growth and 2). no Required Minimum Distribution. If you plan to start drawing on these funds in just 6 years, I'd say (in my non-professional opinion) that your adviser has the right idea: better to take the sure-thing tax savings now. 6 years isn't enough time for the account to accumulate enough tax-free earnings to justify losing the deduction.

On the other hand, if you are planning on these funds to not be touched and eventually passed on to your heirs a Roth is the preferred vehicle for that. No RMD, and heirs can get the money tax-free.

I believe this is the correct assessment.

Yes.

Roth wins in the long term game. The tax free compounded earnings is what's beneficial. In your situation, I would tend to agree with your advisor. I assume you will earn/withdraw less than $170k/year in retirement. You will possibly drop down a tax bracket too. Better to save the taxes now since you don't have much time for the compound earnings to grow. Unless you don't plan to start withdrwaing from the Roth IRA for many years, traditional is the way to go.


I don't understand this assessment completely. The part about the tax free compounded earnings. Unless I crunched my numbers wrong, IF (not the op's case, but in general) you stay at the same tax bracket. I came out with the return being identical if you pay tax now, or later.

I figured it at 6% return on 100k for 10 years, no additional money for ease of figures.

I don't see that the tax free earnings have any benefit unless I misunderstand it?

Can you show me what I'm missing?

In a Roth you pay no tax on the accumulated earnings when they are drawn.  You invest $100,000, 20 years later you draw the whole account of $260,000 (just for illustration).  You only pay tax on the original $100,000 (back at time of investment, because you didn't get a deduction for your contribution), and $160,000 tax-free.

In a Traditional, you pay tax on the earnings.  You invest $100,000 (and get a current deduction), 20 years later you draw the whole account of $260,000.  You effectively pay tax on $160,000 (260,000-100,000 deducted in prior years, assuming tax rates didn't change).  

The disparity increases over time, and of course depends on your return.  In general, the longer the funds are held in a Roth account the more advantageous it is.
Link Posted: 11/18/2015 4:56:21 PM EDT
[#11]
Discussion ForumsJump to Quoted PostQuote History
Quoted:

In a Roth you pay no tax on the accumulated earnings when they are drawn.  You invest $100,000, 20 years later you draw the whole account of $260,000 (just for illustration).  You only pay tax on the original $100,000 (back at time of investment, because you didn't get a deduction for your contribution), and $160,000 tax-free.

In a Traditional, you pay tax on the earnings.  You invest $100,000 (and get a current deduction), 20 years later you draw the whole account of $260,000.  You effectively pay tax on $160,000 (260,000-100,000 deducted in prior years, assuming tax rates didn't change).  

The disparity increases over time, and of course depends on your return.  In general, the longer the funds are held in a Roth account the more advantageous it is.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
Quoted:
Quoted:
Quoted:
Your investment guy knows more about your situation than we do. An important question is how long will you be having the funds sit in the account before drawing? The principal advantages of Roth accounts is 1). tax-free growth and 2). no Required Minimum Distribution. If you plan to start drawing on these funds in just 6 years, I'd say (in my non-professional opinion) that your adviser has the right idea: better to take the sure-thing tax savings now. 6 years isn't enough time for the account to accumulate enough tax-free earnings to justify losing the deduction.

On the other hand, if you are planning on these funds to not be touched and eventually passed on to your heirs a Roth is the preferred vehicle for that. No RMD, and heirs can get the money tax-free.

I believe this is the correct assessment.

Yes.

Roth wins in the long term game. The tax free compounded earnings is what's beneficial. In your situation, I would tend to agree with your advisor. I assume you will earn/withdraw less than $170k/year in retirement. You will possibly drop down a tax bracket too. Better to save the taxes now since you don't have much time for the compound earnings to grow. Unless you don't plan to start withdrwaing from the Roth IRA for many years, traditional is the way to go.


I don't understand this assessment completely. The part about the tax free compounded earnings. Unless I crunched my numbers wrong, IF (not the op's case, but in general) you stay at the same tax bracket. I came out with the return being identical if you pay tax now, or later.

I figured it at 6% return on 100k for 10 years, no additional money for ease of figures.

I don't see that the tax free earnings have any benefit unless I misunderstand it?

Can you show me what I'm missing?

In a Roth you pay no tax on the accumulated earnings when they are drawn.  You invest $100,000, 20 years later you draw the whole account of $260,000 (just for illustration).  You only pay tax on the original $100,000 (back at time of investment, because you didn't get a deduction for your contribution), and $160,000 tax-free.

In a Traditional, you pay tax on the earnings.  You invest $100,000 (and get a current deduction), 20 years later you draw the whole account of $260,000.  You effectively pay tax on $160,000 (260,000-100,000 deducted in prior years, assuming tax rates didn't change).  

The disparity increases over time, and of course depends on your return.  In general, the longer the funds are held in a Roth account the more advantageous it is.


Traditional
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)
$179,084.77 x .80 = $143,267.82 (tax)

Roth
$100,000 x .80 = $80,000 (tax)
$80,000 x 1.06^10 = $143,267.82 (return after 10 years)

Where am I figuring it wrong? I used flat tax just to make it easier, and didn't add money after the first year.

You don't pay tax on the earnings but you don't have 20% (or whatever %) right off the bat to compound and earn more return.
Link Posted: 11/18/2015 5:04:52 PM EDT
[#12]


Discussion ForumsJump to Quoted PostQuote History
Quoted:
Traditional

$100,000 x 1.06^10 = $179,084.77 (return after 10 years)

$179,084.77 x .80 = $143,267.82 (tax)



Roth

$100,000 x .80 = $80,000 (tax)

$80,000 x 1.06^10 = $143,267.82 (return after 10 years)



Where am I figuring it wrong? I used flat tax just to make it easier, and didn't add money after the first year.



You don't pay tax on the earnings but you don't have 20% (or whatever %) right off the bat to compound and earn more return.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:



Quoted:



Quoted:



SNIP


In a Roth you pay no tax on the accumulated earnings when they are drawn. You invest $100,000, 20 years later you draw the whole account of $260,000 (just for illustration). You only pay tax on the original $100,000 (back at time of investment, because you didn't get a deduction for your contribution), and $160,000 tax-free.



In a Traditional, you pay tax on the earnings. You invest $100,000 (and get a current deduction), 20 years later you draw the whole account of $260,000. You effectively pay tax on $160,000 (260,000-100,000 deducted in prior years, assuming tax rates didn't change).



The disparity increases over time, and of course depends on your return. In general, the longer the funds are held in a Roth account the more advantageous it is.




Traditional

$100,000 x 1.06^10 = $179,084.77 (return after 10 years)

$179,084.77 x .80 = $143,267.82 (tax)



Roth

$100,000 x .80 = $80,000 (tax)

$80,000 x 1.06^10 = $143,267.82 (return after 10 years)



Where am I figuring it wrong? I used flat tax just to make it easier, and didn't add money after the first year.



You don't pay tax on the earnings but you don't have 20% (or whatever %) right off the bat to compound and earn more return.


If your tax rate remains the same it comes out the same. Tax rates won't remain the same though. The best return will come from using pre-tax and post tax accounts. After you retire, withdraw from the pre-tax account until you start breaking into the next tax bracket and pull the rest you need for the year from the post tax account. This strategy should let you keep the maximum amount of money.



The biggest point is that if your currently getting taxed at 30%, and you anticipate only being taxed around 20% after retirement, you want to maximize those 401k deductions so taxes come later at the 25% rate.
Link Posted: 11/18/2015 5:06:48 PM EDT
[#13]
Discussion ForumsJump to Quoted PostQuote History
Quoted:

If your tax rate remains the same it comes out the same.  Tax rates won't remain the same though.  The best return will come from using pre-tax and post tax accounts.  After you retire, withdraw from the pre-tax account until you start braking into the next tax bracket and pull the rest you need for the year from the post tax account.  This strategy should let you keep the maximum amount of money.

The biggest point is that if your currently getting taxed at 30%, and you anticipate only being taxed around 20% after retirement, you want to maximize those 401k deductions so taxes come later at the 25% rate.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
Quoted:
Quoted:
SNIP

In a Roth you pay no tax on the accumulated earnings when they are drawn. You invest $100,000, 20 years later you draw the whole account of $260,000 (just for illustration). You only pay tax on the original $100,000 (back at time of investment, because you didn't get a deduction for your contribution), and $160,000 tax-free.

In a Traditional, you pay tax on the earnings. You invest $100,000 (and get a current deduction), 20 years later you draw the whole account of $260,000. You effectively pay tax on $160,000 (260,000-100,000 deducted in prior years, assuming tax rates didn't change).

The disparity increases over time, and of course depends on your return. In general, the longer the funds are held in a Roth account the more advantageous it is.


Traditional
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)
$179,084.77 x .80 = $143,267.82 (tax)

Roth
$100,000 x .80 = $80,000 (tax)
$80,000 x 1.06^10 = $143,267.82 (return after 10 years)

Where am I figuring it wrong? I used flat tax just to make it easier, and didn't add money after the first year.

You don't pay tax on the earnings but you don't have 20% (or whatever %) right off the bat to compound and earn more return.

If your tax rate remains the same it comes out the same.  Tax rates won't remain the same though.  The best return will come from using pre-tax and post tax accounts.  After you retire, withdraw from the pre-tax account until you start braking into the next tax bracket and pull the rest you need for the year from the post tax account.  This strategy should let you keep the maximum amount of money.

The biggest point is that if your currently getting taxed at 30%, and you anticipate only being taxed around 20% after retirement, you want to maximize those 401k deductions so taxes come later at the 25% rate.


That's what I thought, from what the above poster said, it sounded like there was some benefit to it other than just a possibly lower tax rate later on.

I may be wrong but I am guessing that my tax rate will likely be the same when I retire, barring major revolution or rebel coup.
Link Posted: 11/19/2015 11:08:04 AM EDT
[#14]
Discussion ForumsJump to Quoted PostQuote History
Quoted:


That's what I thought, from what the above poster said, it sounded like there was some benefit to it other than just a possibly lower tax rate later on.

I may be wrong but I am guessing that my tax rate will likely be the same when I retire, barring major revolution or rebel coup.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
Quoted:
Quoted:

In a Roth you pay no tax on the accumulated earnings when they are drawn. You invest $100,000, 20 years later you draw the whole account of $260,000 (just for illustration). You only pay tax on the original $100,000 (back at time of investment, because you didn't get a deduction for your contribution), and $160,000 tax-free.

In a Traditional, you pay tax on the earnings. You invest $100,000 (and get a current deduction), 20 years later you draw the whole account of $260,000. You effectively pay tax on $160,000 (260,000-100,000 deducted in prior years, assuming tax rates didn't change).

The disparity increases over time, and of course depends on your return. In general, the longer the funds are held in a Roth account the more advantageous it is.


Traditional
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)
$179,084.77 x .80 = $143,267.82 (tax)

Roth
$100,000 x .80 = $80,000 (tax)
$80,000 x 1.06^10 = $143,267.82 (return after 10 years)

Where am I figuring it wrong? I used flat tax just to make it easier, and didn't add money after the first year.

You don't pay tax on the earnings but you don't have 20% (or whatever %) right off the bat to compound and earn more return.

If your tax rate remains the same it comes out the same.  Tax rates won't remain the same though.  The best return will come from using pre-tax and post tax accounts.  After you retire, withdraw from the pre-tax account until you start braking into the next tax bracket and pull the rest you need for the year from the post tax account.  This strategy should let you keep the maximum amount of money.

The biggest point is that if your currently getting taxed at 30%, and you anticipate only being taxed around 20% after retirement, you want to maximize those 401k deductions so taxes come later at the 25% rate.


That's what I thought, from what the above poster said, it sounded like there was some benefit to it other than just a possibly lower tax rate later on.

I may be wrong but I am guessing that my tax rate will likely be the same when I retire, barring major revolution or rebel coup.

If your tax rate doesn't change, then the primary advantage is that there is no RMD requirement.  A traditional IRA will have a draw-down starting at age 70.5, whereas a Roth can continue to compound.

EDIT: You can also access the principal of a Roth account without early withdrawal penalty, though you will obviously lose the gain potential on those funds.
Link Posted: 11/19/2015 12:24:21 PM EDT
[#15]
Discussion ForumsJump to Quoted PostQuote History
Quoted:

If your tax rate doesn't change, then the primary advantage is that there is no RMD requirement.  A traditional IRA will have a draw-down starting at age 70.5, whereas a Roth can continue to compound.

EDIT: You can also access the principal of a Roth account without early withdrawal penalty, though you will obviously lose the gain potential on those funds.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
Quoted:
Quoted:
Quoted:

In a Roth you pay no tax on the accumulated earnings when they are drawn. You invest $100,000, 20 years later you draw the whole account of $260,000 (just for illustration). You only pay tax on the original $100,000 (back at time of investment, because you didn't get a deduction for your contribution), and $160,000 tax-free.

In a Traditional, you pay tax on the earnings. You invest $100,000 (and get a current deduction), 20 years later you draw the whole account of $260,000. You effectively pay tax on $160,000 (260,000-100,000 deducted in prior years, assuming tax rates didn't change).

The disparity increases over time, and of course depends on your return. In general, the longer the funds are held in a Roth account the more advantageous it is.


Traditional
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)
$179,084.77 x .80 = $143,267.82 (tax)

Roth
$100,000 x .80 = $80,000 (tax)
$80,000 x 1.06^10 = $143,267.82 (return after 10 years)

Where am I figuring it wrong? I used flat tax just to make it easier, and didn't add money after the first year.

You don't pay tax on the earnings but you don't have 20% (or whatever %) right off the bat to compound and earn more return.

If your tax rate remains the same it comes out the same.  Tax rates won't remain the same though.  The best return will come from using pre-tax and post tax accounts.  After you retire, withdraw from the pre-tax account until you start braking into the next tax bracket and pull the rest you need for the year from the post tax account.  This strategy should let you keep the maximum amount of money.

The biggest point is that if your currently getting taxed at 30%, and you anticipate only being taxed around 20% after retirement, you want to maximize those 401k deductions so taxes come later at the 25% rate.


That's what I thought, from what the above poster said, it sounded like there was some benefit to it other than just a possibly lower tax rate later on.

I may be wrong but I am guessing that my tax rate will likely be the same when I retire, barring major revolution or rebel coup.

If your tax rate doesn't change, then the primary advantage is that there is no RMD requirement.  A traditional IRA will have a draw-down starting at age 70.5, whereas a Roth can continue to compound.

EDIT: You can also access the principal of a Roth account without early withdrawal penalty, though you will obviously lose the gain potential on those funds.


For me, I was thinking about looking into the backdoor conversion purely because of the rmd but I'm still young, I have a loan against it and I'm still employed at the company so it's staying there for now. I also kicked around the idea of cashing it out in a few years when I quit my job so I can buy more rentals with it.

If I don't then I'm probably going to convert to a roth if I can just because of the rmd. I am putting a little in a roth right now and maxing my 401k.

I didn't realize a roth had different rules than a 401k on accessing money.

From what I understand after reading, I can withdraw any amount of the principal early?

So riddle me this. I've talked to my boss about working as consultant and being paid as a subcontractor my last year, as we transition me out and try to train a new guy. My primary reason was so I can access my 401k funds and get more rentals up and going before I'm completely depending on that income and don't have a day job.

I would technically meet the irs definition of a subcontractor during that time after my role changed.

If I am not an employee, I can convert my 401k to a roth, then withdraw my principal I would save the 10% penalty of cashing out my 401k, and just get hit with taxes that will probably be offset largely by my rentals anyway.

Am I thinking right there? My 401k is a standard 401k through work. Is that eligible for a conversion?
Link Posted: 11/19/2015 12:50:56 PM EDT
[#16]
Discussion ForumsJump to Quoted PostQuote History
Quoted:


For me, I was thinking about looking into the backdoor conversion purely because of the rmd but I'm still young, I have a loan against it and I'm still employed at the company so it's staying there for now. I also kicked around the idea of cashing it out in a few years when I quit my job so I can buy more rentals with it.

If I don't then I'm probably going to convert to a roth if I can just because of the rmd. I am putting a little in a roth right now and maxing my 401k.

I didn't realize a roth had different rules than a 401k on accessing money.

From what I understand after reading, I can withdraw any amount of the principal early?

So riddle me this. I've talked to my boss about working as consultant and being paid as a subcontractor my last year, as we transition me out and try to train a new guy. My primary reason was so I can access my 401k funds and get more rentals up and going before I'm completely depending on that income and don't have a day job.

I would technically meet the irs definition of a subcontractor during that time after my role changed.

If I am not an employee, I can convert my 401k to a roth, then withdraw my principal I would save the 10% penalty of cashing out my 401k, and just get hit with taxes that will probably be offset largely by my rentals anyway.

Am I thinking right there? My 401k is a standard 401k through work. Is that eligible for a conversion?
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
Quoted:
Quoted:
Quoted:


Traditional
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)
$179,084.77 x .80 = $143,267.82 (tax)

Roth
$100,000 x .80 = $80,000 (tax)
$80,000 x 1.06^10 = $143,267.82 (return after 10 years)

Where am I figuring it wrong? I used flat tax just to make it easier, and didn't add money after the first year.

You don't pay tax on the earnings but you don't have 20% (or whatever %) right off the bat to compound and earn more return.

If your tax rate remains the same it comes out the same.  Tax rates won't remain the same though.  The best return will come from using pre-tax and post tax accounts.  After you retire, withdraw from the pre-tax account until you start braking into the next tax bracket and pull the rest you need for the year from the post tax account.  This strategy should let you keep the maximum amount of money.

The biggest point is that if your currently getting taxed at 30%, and you anticipate only being taxed around 20% after retirement, you want to maximize those 401k deductions so taxes come later at the 25% rate.


That's what I thought, from what the above poster said, it sounded like there was some benefit to it other than just a possibly lower tax rate later on.

I may be wrong but I am guessing that my tax rate will likely be the same when I retire, barring major revolution or rebel coup.

If your tax rate doesn't change, then the primary advantage is that there is no RMD requirement.  A traditional IRA will have a draw-down starting at age 70.5, whereas a Roth can continue to compound.

EDIT: You can also access the principal of a Roth account without early withdrawal penalty, though you will obviously lose the gain potential on those funds.


For me, I was thinking about looking into the backdoor conversion purely because of the rmd but I'm still young, I have a loan against it and I'm still employed at the company so it's staying there for now. I also kicked around the idea of cashing it out in a few years when I quit my job so I can buy more rentals with it.

If I don't then I'm probably going to convert to a roth if I can just because of the rmd. I am putting a little in a roth right now and maxing my 401k.

I didn't realize a roth had different rules than a 401k on accessing money.

From what I understand after reading, I can withdraw any amount of the principal early?

So riddle me this. I've talked to my boss about working as consultant and being paid as a subcontractor my last year, as we transition me out and try to train a new guy. My primary reason was so I can access my 401k funds and get more rentals up and going before I'm completely depending on that income and don't have a day job.

I would technically meet the irs definition of a subcontractor during that time after my role changed.

If I am not an employee, I can convert my 401k to a roth, then withdraw my principal I would save the 10% penalty of cashing out my 401k, and just get hit with taxes that will probably be offset largely by my rentals anyway.

Am I thinking right there? My 401k is a standard 401k through work. Is that eligible for a conversion?

I'm going to preface with: this is not professional advice, seek the opinion of your CPA and investment guys, yadda yadda.

This is especially true of your subcontractor/consulting idea.  Don't know how aggressive your state's employment department is, but there is a risk that they could come in a classify you as an employee anyway, which could mess things up.

Also remember that as a subcontractor you are responsible for 100% of the FICA taxes, and they are due with your personal tax return.

Anyway, once you are no longer employed with the sponsor of the 401k you can roll those funds into another tax preferred retirement account with no penalty.  However, if you convert it to a Roth you will have the entire amount of the rollover included in your income that year.  I don't know what kind of amount we are talking about, but that could mean some of the rollover is taxed at 25, 28, or 33%+ for federal purposes.

Unfortunately, there is a 5-year holding period in the Roth before you can withdraw without penalty.  You might consider rolling your employer 401k into a Solo 401k (since you will be self-employed), witch would allow you to borrow up to 50% of the balance with no tax consequences (assuming you follow the repayment plan).  Do consult with your CPA and financial planner before making big moves like this though.  Definitely something that you want to have all in order.
Link Posted: 11/19/2015 1:42:38 PM EDT
[#17]
Thanks, i'll do some research when I get closer to that.

I have a small solo401k from when I had my own business, I could investigate doing another when I'm on the own again.

I had anticipated the fica taxes already when I go out as a subcontractor. It's vital to my plan though that I know I can support myself off of my investments before I have no other income. I'm being fairly aggressive on that part and if it blows up then I have to go back to work for a few years the loss I would take on the taxes is worth the extra security and getting my extra rentals up and going 1 or even 2 years sooner. I view the extra fica as a cost of doing business. It hurts, but necessary.

We have already had this employee/subcontractor discussion investigated and tested many times bc we do industrial construction and employee a lot of subs that work solely for us as well as employees. We are pretty comfortable with what constitutes a sub and employee at this point. We use a top 50 accounting firm also, they've helped us keep that straight.
Link Posted: 11/19/2015 3:42:15 PM EDT
[#18]
Thanks for the discussion and explanation. I think I'll go ahead and put both mine and the wife's $5500/ year into a Roth.

$11000 a year for the next 6 years until I retire and ten more years of the wife's money and we'll see where it ends up. It would probably be money earmarked for heirs anyway and it sounds like the benefit would be theirs.
Link Posted: 11/19/2015 4:18:26 PM EDT
[#19]
OK just wait a second.  Lets get something real clear.  Everyone seems to be messing up some terminology.

There is not "Roth" account!

Every retirement account can be "Traditional" or "Roth" type accounts.
That applies to 401K, IRA, 457, 403B, etc.

Traditional = pre-tax contributions.  This is the most common account type used in 401k(s), although IRAs can be traditional, usually you will be better off contributing with post-tax money (Roth).
Roth = post-tax contributions.  This usually what people use for an IRA.  Rarely it is available for 401k(s) and for some people It does make sense to use (but not usually).
Link Posted: 11/19/2015 5:32:52 PM EDT
[#20]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
OK just wait a second.  Lets get something real clear.  Everyone seems to be messing up some terminology.

There is not "Roth" account!

Every retirement account can be "Traditional" or "Roth" type accounts.
That applies to 401K, IRA, 457, 403B, etc.

Traditional = pre-tax contributions.  This is the most common account type used in 401k(s), although IRAs can be traditional, usually you will be better off contributing with post-tax money (Roth).
Roth = post-tax contributions.  This usually what people use for an IRA.  Rarely it is available for 401k(s) and for some people It does make sense to use (but not usually).
View Quote


Maybe i misunderstood the thread but i thought that the entire discussion was debating the pros and cons of traditional vs roth?

If we didnt know there was a difference we this thread would have no replies.

It goes without saying that if someone says "401k" that they mean traditional. Ive only heard of 1 person ever having a roth 401k, its not common. Its kind of like saying "pickup". If it is cng or lpg powered ill specify, otherwise just assume its conventional fuel.
Link Posted: 11/20/2015 9:51:09 AM EDT
[#21]
Discussion ForumsJump to Quoted PostQuote History
Quoted:


Maybe i misunderstood the thread but i thought that the entire discussion was debating the pros and cons of traditional vs roth?

If we didnt know there was a difference we this thread would have no replies.

It goes without saying that if someone says "401k" that they mean traditional. Ive only heard of 1 person ever having a roth 401k, its not common. Its kind of like saying "pickup". If it is cng or lpg powered ill specify, otherwise just assume its conventional fuel.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
OK just wait a second.  Lets get something real clear.  Everyone seems to be messing up some terminology.

There is not "Roth" account!

Every retirement account can be "Traditional" or "Roth" type accounts.
That applies to 401K, IRA, 457, 403B, etc.

Traditional = pre-tax contributions.  This is the most common account type used in 401k(s), although IRAs can be traditional, usually you will be better off contributing with post-tax money (Roth).
Roth = post-tax contributions.  This usually what people use for an IRA.  Rarely it is available for 401k(s) and for some people It does make sense to use (but not usually).


Maybe i misunderstood the thread but i thought that the entire discussion was debating the pros and cons of traditional vs roth?

If we didnt know there was a difference we this thread would have no replies.

It goes without saying that if someone says "401k" that they mean traditional. Ive only heard of 1 person ever having a roth 401k, its not common. Its kind of like saying "pickup". If it is cng or lpg powered ill specify, otherwise just assume its conventional fuel.

I have a Roth TSP which is the same as a Roth 401k, but TSP is the federal employee version of a 401k. I always use Roth and traditional to differentiate the two because it doesn't matter what account type (IRA, 401k, TSP, etc.) it is. There are minor difference between account types, such as $5,500 limit for IRAs and higher for 401k and TSP, but the Roth vs. traditional rules are almost, if not exactly, the same across the account types.

Another difference between Roth and traditional is how much a person is capable of investing now. With the traditional IRA, the $5,500 max contribution all comes from pre-tax money. Well, it's taxed at first, but you can either adjust your withholdings to eliminate a tax refund, or just get the refund back later. That means it only takes $5,500 to max it out. A Roth on the other hand is taxed up front. That means at a 25% tax rate, it will take roughly $7,300 ($5,500 contribution and $1,800 tax) now to max it out. That's another $150/month that some people might not be able to spend. In that case, it may be better to max out the traditional and assume you'll have a lower tax bracket in retirement.

Read my next post for more on this.
Link Posted: 11/20/2015 10:09:41 AM EDT
[#22]
Discussion ForumsJump to Quoted PostQuote History
Quoted:

Traditional
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)
$179,084.77 x .80 = $143,267.82 (tax)

Roth
$100,000 x .80 = $80,000 (tax)
$80,000 x 1.06^10 = $143,267.82 (return after 10 years)

Where am I figuring it wrong? I used flat tax just to make it easier, and didn't add money after the first year.

You don't pay tax on the earnings but you don't have 20% (or whatever %) right off the bat to compound and earn more return.
View Quote

So the math is correct; however, you're missing one part. Refer to my post above for background. In many cases, people can afford to invest the full $5,500 in a Roth IRA which really requires ~$7,300 at a 25% tax rate to leave you with the $5,500 investment. In this case, you will be left with more money at the end because instead of the $80,000 in your example here, you will have the full $100,000 and the $179,084.77 after 10 years will be all tax-free. You'll be ~$45,000 ahead in this case.

For example, let's say someone can afford to invest the maximum in either a traditional ($5,500 tax free) or Roth ($5,500 post-tax requires ~$7,300 pre-tax). I'll use your $100,000 numbers.
25% tax bracket pre and post-retirement:
Traditional:
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)
$179,084.77 x .75 = $134,313.58 (25% tax on withdrawals)

Roth:
Assume they can afford to max it out and pay the tax in that tax year, effectively giving them the same starting balance in their IRA.
$133,333 x 0.75 = $100,000 (after 25% tax on income)
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)

Difference in final account balance: $44,771.19
Difference in initial cost: $33,333
Roth advantage: $11,438.19



25% tax brack pre-retirement and 20% post-retirement:
Traditional:
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)
$179,084.77 x .80 = $143,267.82 (after 20% tax)

Roth:
$133,333 x 0.75 = $100,000 (after 25% tax)
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)

Difference in final account balance: $35,816.95
Difference in initial cost: $33,333
Roth advantage: $2,483.95

As your tax bracket falls in retirement, and the length of time you have to invest grows shorter, the traditional starts catching up and taking over.
Link Posted: 11/20/2015 10:36:57 AM EDT
[#23]
My point was that the terms "Roth"  and "IRA" are not interchangeable, although some people tend to think that they are.
Way too often I see people coming on forums like this and say "I want to open a Roth account, how do I do it?"
They don't fully understand the implications involved in picking between the various types of accounts.
I don't need any further explanation of the differences, I am an Accountant (which is probably why this drives me nuts).
Link Posted: 11/20/2015 10:38:26 AM EDT
[#24]
Discussion ForumsJump to Quoted PostQuote History
Quoted:

So the math is correct; however, you're missing one part. Refer to my post above for background. In many cases, people can afford to invest the full $5,500 in a Roth IRA which really requires ~$7,300 at a 25% tax rate to leave you with the $5,500 investment. In this case, you will be left with more money at the end because instead of the $80,000 in your example here, you will have the full $100,000 and the $179,084.77 after 10 years will be all tax-free. You'll be ~$45,000 ahead in this case.

For example, let's say someone can afford to invest the maximum in either a traditional ($5,500 tax free) or Roth ($5,500 post-tax requires ~$7,300 pre-tax). I'll use your $100,000 numbers.
25% tax bracket pre and post-retirement:
Traditional:
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)
$179,084.77 x .75 = $134,313.58 (25% tax on withdrawals)

Roth:
Assume they can afford to max it out and pay the tax in that tax year, effectively giving them the same starting balance in their IRA.
$133,333 x 0.75 = $100,000 (after 25% tax on income)
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)

Difference in final account balance: $44,771.19
Difference in initial cost: $33,333
Roth advantage: $11,438.19



25% tax brack pre-retirement and 20% post-retirement:
Traditional:
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)
$179,084.77 x .80 = $143,267.82 (after 20% tax)

Roth:
$133,333 x 0.75 = $100,000 (after 25% tax)
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)

Difference in final account balance: $35,816.95
Difference in initial cost: $33,333
Roth advantage: $2,483.95

As your tax bracket falls in retirement, and the length of time you have to invest grows shorter, the traditional starts catching up and taking over.
View Quote View All Quotes
View All Quotes
Discussion ForumsJump to Quoted PostQuote History
Quoted:
Quoted:
<trimmed all of the quotes.]

Traditional
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)
$179,084.77 x .80 = $143,267.82 (tax)

Roth
$100,000 x .80 = $80,000 (tax)
$80,000 x 1.06^10 = $143,267.82 (return after 10 years)

Where am I figuring it wrong? I used flat tax just to make it easier, and didn't add money after the first year.

You don't pay tax on the earnings but you don't have 20% (or whatever %) right off the bat to compound and earn more return.

So the math is correct; however, you're missing one part. Refer to my post above for background. In many cases, people can afford to invest the full $5,500 in a Roth IRA which really requires ~$7,300 at a 25% tax rate to leave you with the $5,500 investment. In this case, you will be left with more money at the end because instead of the $80,000 in your example here, you will have the full $100,000 and the $179,084.77 after 10 years will be all tax-free. You'll be ~$45,000 ahead in this case.

For example, let's say someone can afford to invest the maximum in either a traditional ($5,500 tax free) or Roth ($5,500 post-tax requires ~$7,300 pre-tax). I'll use your $100,000 numbers.
25% tax bracket pre and post-retirement:
Traditional:
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)
$179,084.77 x .75 = $134,313.58 (25% tax on withdrawals)

Roth:
Assume they can afford to max it out and pay the tax in that tax year, effectively giving them the same starting balance in their IRA.
$133,333 x 0.75 = $100,000 (after 25% tax on income)
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)

Difference in final account balance: $44,771.19
Difference in initial cost: $33,333
Roth advantage: $11,438.19



25% tax brack pre-retirement and 20% post-retirement:
Traditional:
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)
$179,084.77 x .80 = $143,267.82 (after 20% tax)

Roth:
$133,333 x 0.75 = $100,000 (after 25% tax)
$100,000 x 1.06^10 = $179,084.77 (return after 10 years)

Difference in final account balance: $35,816.95
Difference in initial cost: $33,333
Roth advantage: $2,483.95

As your tax bracket falls in retirement, and the length of time you have to invest grows shorter, the traditional starts catching up and taking over.


Thanks, good point. I did not think of that. I was only looking at an apples to apples comparison of the same gross and returns. I think I'm on the right track.
Link Posted: 11/20/2015 10:54:48 AM EDT
[#25]
Discussion ForumsJump to Quoted PostQuote History
Quoted:
My point was that the terms "Roth"  and "IRA" are not interchangeable, although some people tend to think that they are.
Way too often I see people coming on forums like this and say "I want to open a Roth account, how do I do it?"
They don't fully understand the implications involved in picking between the various types of accounts.
I don't need any further explanation of the differences, I am an Accountant (which is probably why this drives me nuts).
View Quote


I run into the same things with my job. Customers (dairy owners) call in to order parts. Parts they've ordered from us for 15 years.

They still don't know the right name. I can decipher it, but it's not always easy. I have a pretty good grasp of the tax code as it pertains to my job, investments, and a couple small family businesses I'm involved in. I still butcher the terminology when I talk to my accountant.
Close Join Our Mail List to Stay Up To Date! Win a FREE Membership!

Sign up for the ARFCOM weekly newsletter and be entered to win a free ARFCOM membership. One new winner* is announced every week!

You will receive an email every Friday morning featuring the latest chatter from the hottest topics, breaking news surrounding legislation, as well as exclusive deals only available to ARFCOM email subscribers.


By signing up you agree to our User Agreement. *Must have a registered ARFCOM account to win.
Top Top