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Posted: 1/28/2017 2:04:22 PM EDT
[#1]
Not really any negatives except as you mention, your taxable income will be higher by the amount of your Roth contributions.
The future tax benefit of not paying taxes on your earnings far outweighs that IMO. |
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Posted: 1/28/2017 2:08:33 PM EDT
[#2]
Quoted:
New this year my employer, through Fidelity, has added the option of Roth (post tax) contributions to our 401K. At the moment the balance is about $300K, all in pre-tax contributions and matching funds. Both pre-tax and Roth contributions together count towards the $18K maximum per year. Other than a slightly smaller paycheck now, are there any negatives associated with changing some or all of my contributions over to Roth? With a standard IRA you get the tax benefit now (contributions are pretax, no income tax withheld, higher contribution, lower hit to net pay). When you start taking distributions after retirement, the IRS taxes that as income, but you'd ostensibly be in a lower tax bracket than when you made the contributions in the first place. With a Roth IRA, the contribution is after-tax (whatever contribution you choose will equate to the same drop in your net pay). When you start collecting after retirement, the money is tax-free, so all of your investment gains are tax-free. Sorry if you already knew all of that, but it leads to my main concern. You're deferring the tax breaks with the Roth. What's to say Congress doesn't change their minds at some point in the future, say when the debt has reached $50 trillion? Personally, I'd rather grab the tax benefit now with a traditional IRA. I don't trust the government to not change the rules governing Roths. Just my $.02. |
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Posted: 1/31/2017 8:04:42 AM EDT
[#3]
Quote HistoryQuoted:
Not really any negatives except as you mention, your taxable income will be higher by the amount of your Roth contributions. The future tax benefit of not paying taxes on your earnings far outweighs that IMO. A Roth makes sense only if you are in a low tax bracket now and expect to be in a higher one when drawing distributions. |
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Posted: 1/31/2017 9:14:04 AM EDT
[#4]
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There is no net difference unless the tax brackets are different. Some think, especially if they are in a high tax bracket now, that in the future, when taking distributions, they will be in a lower tax bracket. There is no way to predict the future, but if this is true, then doing a Roth would be foolish. You would pay at your higher rate now and take it out tax free later when your tax rate is lower. That makes no sense, if that is what you think is going to happen with your tax rates. A Roth makes sense only if you are in a low tax bracket now and expect to be in a higher one when drawing distributions. Quote HistoryQuoted:
Quoted:
Not really any negatives except as you mention, your taxable income will be higher by the amount of your Roth contributions. The future tax benefit of not paying taxes on your earnings far outweighs that IMO. There is no net difference unless the tax brackets are different. Some think, especially if they are in a high tax bracket now, that in the future, when taking distributions, they will be in a lower tax bracket. There is no way to predict the future, but if this is true, then doing a Roth would be foolish. You would pay at your higher rate now and take it out tax free later when your tax rate is lower. That makes no sense, if that is what you think is going to happen with your tax rates. A Roth makes sense only if you are in a low tax bracket now and expect to be in a higher one when drawing distributions. There most definitely is a difference even with the same tax brackets. You're not accounting for compounding interest over decades. Also, because the IRAs are capped at $5,500 contribution per year, that negates the ability to invest more in a traditional IRA because of the tax-free contributions. You need to reevaluate Roth IRAs and how they work. I'm 26 years old currently maxing out my Roth IRA and I'm in the 25% tax bracket. With the bottom of the 25% bracket at $37,950, I don't intend to ever fall below that, even in retirement. In this scenario, the Roth is a much, much better option. When I retire in 40 years, the compound interest will be worth far more than what I have invested. |
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Posted: 1/31/2017 1:29:05 PM EDT
[#5]
But I am accounting for growth. Maybe you are not accounting for the money you save on pre-tax investing, or investing that savings so that it will grow? You are just calculating the max each year, forgetting about the cost to you in taxes, and then looking at the tax that will be due on the growth in a traditional but not in a Roth. The overall cost over 40 years to you of doing the Roth does not work like that!
http://www.forbes.com/sites/financialfinesse/2012/09/12/why-the-pre-tax-v-roth-decision-is-more-complex-than-it-seems/#621afed22c91 But I want to commend you on being young and having a plan and sticking to it. Most people your age are not saving. You are going to come out way ahead. Hopefully, you find other savings vehicles to save more than that $5500 annually, and you may get to financial independence long before you thought possible, still being young and able to enjoy it. |
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Posted: 1/31/2017 1:53:47 PM EDT
[#6]
Quote HistoryQuoted:
But I am accounting for growth. Maybe you are not accounting for the money you save on pre-tax investing, or investing that savings so that it will grow? You are just calculating the max each year, forgetting about the cost to you in taxes, and then looking at the tax that will be due on the growth in a traditional but not in a Roth. The overall cost over 40 years to you of doing the Roth does not work like that! http://www.forbes.com/sites/financialfinesse/2012/09/12/why-the-pre-tax-v-roth-decision-is-more-complex-than-it-seems/#621afed22c91 But I want to commend you on being young and having a plan and sticking to it. Most people your age are not saving. You are going to come out way ahead. Hopefully, you find other savings vehicles to save more than that $5500 annually, and you may get to financial independence long before you thought possible, still being young and able to enjoy it. |
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Posted: 1/31/2017 2:04:03 PM EDT
[#7]
Quote HistoryQuoted:
This - and the correct answer is to max both. The problem I see with the Roth - you are taking a "promise" from the government that they will not tax you again when you withdraw the money. You may very well end up paying taxes twice on the money. |
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Posted: 1/31/2017 2:21:17 PM EDT
[#8]
Quote HistoryQuoted:
The problem I see with the Roth - you are taking a "promise" from the government that they will not tax you again when you withdraw the money. You may very well end up paying taxes twice on the money. |
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Posted: 1/31/2017 2:25:58 PM EDT
[#9]
Quote HistoryQuoted:
There most definitely is a difference even with the same tax brackets. You're not accounting for compounding interest over decades. Also, because the IRAs are capped at $5,500 contribution per year, that negates the ability to invest more in a traditional IRA because of the tax-free contributions. You need to reevaluate Roth IRAs and how they work. I'm 26 years old currently maxing out my Roth IRA and I'm in the 25% tax bracket. With the bottom of the 25% bracket at $37,950, I don't intend to ever fall below that, even in retirement. In this scenario, the Roth is a much, much better option. When I retire in 40 years, the compound interest will be worth far more than what I have invested. By using both a Roth and a post tax 401k you can pull the first $37,950 from the 401k - taxed at the lower rate - then pull the extra you need from your Roth - no taxes paid. The first $37,950 gives a better return than a Roth when coming from your 401k. This assumes tax brackets stay the same through retirement which is a big assumption. |
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Posted: 1/31/2017 7:05:01 PM EDT
[#10]
Unfortunately you will find out when its too late which is best.
You basically need to "guess" as to your income and if you plan to work after collecting retirement. After I switched companies I also swapped from Pre to Post contributions to try and get the best of both worlds. Granted this is a bit ass backwards as you should be doing Post in ones early years and Pre later in life while in a higher tax bracket. Its all part of living and learning. With Post I like knowing exactly what I have and not having mandatory withdraws. Its is nice knowing its all mine.....wait, not too long again Obama wanted to tax the Post account too. My point is that anything can happen later down the road. The key is to just keep saving. I like the idea of both accounts in a way to hedge my retirement. |
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Posted: 1/31/2017 7:34:31 PM EDT
[#11]
The Roth. Vs. traditional math works out to be exactly the same. People forget you need to earn more money to max out a Roth 401k than a traditional.
If you're maxing out the 18500, you're probably at least in the 28% tax bracket so you need to earn 25694 to contribute that 18.5k. In the traditional, you earn 18.5k, 18.5k goes into the 401k. It's pretty simple, if you think you're going to be in a higher tax bracket when you retire, go Roth. If not then traditional. I prefer traditional now, then begin a Roth conversion ladder once I retire and I'll have the best of both worlds. |
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Posted: 2/13/2017 8:00:50 AM EDT
[#12]
I do both with 75% going to a pretax account. It's likely I'll be in a lower tax bracket retired but it would be nice to have an account to pull large lump sums from without a tax hit. My friends parents screwed up the year they retired by pulling a large amount from their IRA and are still paying tax penalties because they didn't hold enough to cover taxes
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Posted: 2/13/2017 12:21:03 PM EDT
[#13]
Quote HistoryQuoted:
There most definitely is a difference even with the same tax brackets. You're not accounting for compounding interest over decades. Also, because the IRAs are capped at $5,500 contribution per year, that negates the ability to invest more in a traditional IRA because of the tax-free contributions. You need to reevaluate Roth IRAs and how they work. I'm 26 years old currently maxing out my Roth IRA and I'm in the 25% tax bracket. With the bottom of the 25% bracket at $37,950, I don't intend to ever fall below that, even in retirement. In this scenario, the Roth is a much, much better option. When I retire in 40 years, the compound interest will be worth far more than what I have invested. I'm getting a serious case of deja-vu here. This has been discussed time and time again here. If you exclude other factors like tax credit cutoffs, contribution caps etc, and the tax rate is exactly the same at the time of contribution and distribution there is NO difference between Pre-tax and post-tax contributions. The end result will be exactly the same. Therefore, unless you fit in the group that has other reasons to go one way or the other, it doesn't make a difference. Examples of some scenarios that would warrant choosing one over the other. You are maxing out the 18,500 of your pre-tax and wish to contribute more. Roth 401k has the exact same cap of 18,500. You can switch to Roth contributions which will effectively convert more of your earning to 401k contributions. Your income exceed the earnings cap to earn certain tax credits etc (like the child tax credit). By keeping your contributions as pre-tax, you can reduce your tax liability and MAGI which may permit you to take advantage of those sorts of tax credits. |
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Posted: 2/14/2017 3:17:26 PM EDT
[#14]
Quote HistoryQuoted:
I'm getting a serious case of deja-vu here. This has been discussed time and time again here. If you exclude other factors like tax credit cutoffs, contribution caps etc, and the tax rate is exactly the same at the time of contribution and distribution there is NO difference between Pre-tax and post-tax contributions. The end result will be exactly the same. Therefore, unless you fit in the group that has other reasons to go one way or the other, it doesn't make a difference. Examples of some scenarios that would warrant choosing one over the other. You are maxing out the 18,500 of your pre-tax and wish to contribute more. Roth 401k has the exact same cap of 18,500. You can switch to Roth contributions which will effectively convert more of your earning to 401k contributions. Your income exceed the earnings cap to earn certain tax credits etc (like the child tax credit). By keeping your contributions as pre-tax, you can reduce your tax liability and MAGI which may permit you to take advantage of those sorts of tax credits. I'm a super math oriented person. I never ran the numbers and thought in my head that you would come out ahead to have the extra returns on the higher amount then pay taxes later. Then one day I actually ran the numbers. 
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Posted: 2/16/2017 1:04:17 AM EDT
[#15]
Quote HistoryQuoted:
I'm a super math oriented person. I never ran the numbers and thought in my head that you would come out ahead to have the extra returns on the higher amount then pay taxes later. Then one day I actually ran the numbers. Haha, I won't judge you, our gut instinct or "rough approximations" are going to be wrong at some point in our lives. This is a case where my gut was right... For years I parroted what I was told (the tax-free growth of the Roth wins, always) even though my gut thought was "but your dollars were tax and the tax dollars lost on the front end cannot make gains, it should all balance out" so one day I ran the numbers. As a matter of fact, it was on here, a thread similar to this, and one guy was flat-out adamant that Roth "tax-free growth" outweighed everything else. So I ran the numbers, tax-rate equal on the front and back-end, it came out exactly the same, penny-for-penny. |
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Posted: 2/20/2017 2:00:40 PM EDT
[#16]
Quote HistoryQuoted:
Haha, I won't judge you, our gut instinct or "rough approximations" are going to be wrong at some point in our lives. This is a case where my gut was right... For years I parroted what I was told (the tax-free growth of the Roth wins, always) even though my gut thought was "but your dollars were tax and the tax dollars lost on the front end cannot make gains, it should all balance out" so one day I ran the numbers. As a matter of fact, it was on here, a thread similar to this, and one guy was flat-out adamant that Roth "tax-free growth" outweighed everything else. So I ran the numbers, tax-rate equal on the front and back-end, it came out exactly the same, penny-for-penny. I paid $13000 into my 401k last year and I just raised my contribution in an attempt to get as close as I can to the $18500 limit for my 401k. I think I should be around $17k this year but I have been looking for other ways to save for my retirement. My current home should be paid off in 8 years, currently doing double mortgage payments, and I expect to be employed for another 20 years before I retire. My retirement home is already paid off so all I expect to pay for would be utilities, food, medical, and possibly a car every 5-6 years. I am horrible at math.
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Posted: 2/20/2017 3:17:18 PM EDT
[#17]
Quote HistoryQuoted:
Does this work if I am currently in the 28% tax bracket? I am probably going to be in the either the 15% or 25% tax bracket once I retire. In my case any post tax contributions made now to a Roth IRA would be at the 28% tax rate, when I retire I will be taxed at either 15% or 25%. I would think that contributing to an Roth IRA would not be the way to go because of my current tax rate. I paid $13000 into my 401k last year and I just raised my contribution in an attempt to get as close as I can to the $18500 limit for my 401k. I think I should be around $17k this year but I have been looking for other ways to save for my retirement. My current home should be paid off in 8 years, currently doing double mortgage payments, and I expect to be employed for another 20 years before I retire. My retirement home is already paid off so all I expect to pay for would be utilities, food, medical, and possibly a car every 5-6 years. I am horrible at math. Pretty much everyone should be putting some money into a standard IRA - at least enough to pull out every year at the lowest tax bracket in retirement. This wouldn't apply to people with pensions that are going to pay them more than that lowest bracket. In that case they may want to go either way depending on their current tax bracket and anticipated tax bracket later. People have to remember - being in the 28% tax bracket doesn't mean you pay 28% taxes on all your money, just 28% on the money that falls in that bracket. |
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Posted: 2/20/2017 3:33:09 PM EDT
[#18]
Quote HistoryQuoted:
In this situation you want to max the standard 401k before the Roth. It will take money from your 28% bracket now and you will pay taxes at 15 to 25% later - depending on how much your withdrawing. Pretty much everyone should be putting some money into a standard IRA - at least enough to pull out every year at the lowest tax bracket in retirement. This wouldn't apply to people with pensions that are going to pay them more than that lowest bracket. In that case they may want to go either way depending on their current tax bracket and anticipated tax bracket later. People have to remember - being in the 28% tax bracket doesn't mean you pay 28% taxes on all your money, just 28% on the money that falls in that bracket. |
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Posted: 2/20/2017 3:49:07 PM EDT
[#19]
Quote HistoryQuoted:
Not really any negatives except as you mention, your taxable income will be higher by the amount of your Roth contributions. The future tax benefit of not paying taxes on your earnings far outweighs that IMO. This is usually the case, however if switching contributions from a tax deferred 401K to a Roth bumps you up to the next tax bracket... That probably isn't worth it. There's always the option of getting both. It's hard to do in the short term, but I gotta believe you'll be glad you did it in the long run. |
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Posted: 2/20/2017 3:56:09 PM EDT
[#20]
Quote HistoryQuoted:
I am probably going to be in the either the 15% or 25% tax bracket once I retire. You probably already know this...But the nice thing about having a Roth and a tax deferred 401K in retirement, is you can use your Roth to manipulate your tax liability when you are retired. Depending on your lifestyle, you draw enough tax deferred income until you are a few dollars short of going into the next bracket, then use your Roth to top off anything after that you may want/need. This is my plan, assuming the gov doesn't drastically alter the way they collect taxes. |
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Posted: 2/20/2017 3:58:27 PM EDT
[#21]
Quote HistoryQuoted:
You probably already know this...But the nice thing about having a Roth and a tax deferred 401K in retirement, is you can use your Roth to manipulate your tax liability when you are retired. Depending on your lifestyle, you draw enough tax deferred income until you are a few dollars short of going into the next bracket, then use your Roth to top off anything after that you may want/need. This is my plan, assuming the gov doesn't drastically alter the way they collect taxes. |
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Posted: 2/21/2017 9:51:38 AM EDT
[#22]
Quote HistoryQuoted:
This is usually the case, however if switching contributions from a tax deferred 401K to a Roth bumps you up to the next tax bracket... That probably isn't worth it. There's always the option of getting both. It's hard to do in the short term, but I gotta believe you'll be glad you did it in the long run. Just so everyone's clear, being "bumped up" to the next tax bracket only affects the income over the maximum threshold for the next lower bracket. You entire income is not taxed at the highest bracket. |
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Posted: 3/20/2017 12:03:29 PM EDT
[#23]
Thanks for all of the replies. This has been an interesting read. I think I'm going to do with all pre-tax for now. I'm glad I asked and that there is no big advantage to the Roth contributions.
There's a couple things I had forgot about when I wrote the OP: I turn 50 this year so I can put another $8K in annually going forward and that's enough of a haircut to my take home pay for now. Plus, I live in NH and work in MA. It appears from what I've read elsewhere that even though my MA non-resident taxable income is reduced by the 401k pre-tax contributions, the money I take out after retirement will not be subject to MA income tax. I hope that applies to the pension I'll receive from a MA based company too. Legally beating MA out of money brings me happiness. There is no income tax in NH. |
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Posted: 3/22/2017 12:48:36 PM EDT
[#24]
Quote HistoryQuoted:
Thanks for all of the replies. This has been an interesting read. I think I'm going to do with all pre-tax for now. I'm glad I asked and that there is no big advantage to the Roth contributions. There's a couple things I had forgot about when I wrote the OP: I turn 50 this year so I can put another $8K in annually going forward and that's enough of a haircut to my take home pay for now. Plus, I live in NH and work in MA. It appears from what I've read elsewhere that even though my MA non-resident taxable income is reduced by the 401k pre-tax contributions, the money I take out after retirement will not be subject to MA income tax. I hope that applies to the pension I'll receive from a MA based company too. Legally beating MA out of money brings me happiness. There is no income tax in NH. The only real advantage I see to the Roth is that if you're already maxing 401k out, you can effectively convert more of your earning to retirement funds through the Roth option. |
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