Comments on: Roth 401(k) for People Who Contribute the Max http://thefinancebuff.com/roth-401k-for-people-who-contribute-max.html like a friend telling you about money ... Tue, 22 May 2012 19:53:21 +0000 hourly 1 http://wordpress.org/?v=3.1.2 By: JeffB http://thefinancebuff.com/roth-401k-for-people-who-contribute-max.html#comment-7838 JeffB Sat, 28 Jan 2012 02:06:27 +0000 http://blog.thefinancebuff.com/?p=259#comment-7838 @JF Read TFB's initial post on the subject (it is linked to at the beginning of the post). I think it will answer all your questions. @JF

Read TFB’s initial post on the subject (it is linked to at the beginning of the post). I think it will answer all your questions.

]]> By: JF http://thefinancebuff.com/roth-401k-for-people-who-contribute-max.html#comment-5624 JF Fri, 14 Jan 2011 22:14:45 +0000 http://blog.thefinancebuff.com/?p=259#comment-5624 TFB, What about concerns that US debt is increasing and government spending is out of control? Also, as much as we don't like it, America is becoming more "socialist" in nature, and I see it adopting more services such as universal healthcare, etc. The only way I forsee the government funding this is a tax rate increase! Let me also tell you a bit about myself: I'm currently 26, in the 28% income tax bracket, and max out my 401k at $16,500 every year (due to sound financial advice from my parents and friends). Another huge concern of mine is that social security won't even be around by the time I'm old enough to collect! Especially with the recent Obama compromise cutting social security tax... (let's hope this is not permanent in 2 years) Given my concerns, would you still suggest putting all my money in a traditional 401k instead of a Roth 401k? Thanks! -JF TFB,

What about concerns that US debt is increasing and government spending is out of control? Also, as much as we don’t like it, America is becoming more “socialist” in nature, and I see it adopting more services such as universal healthcare, etc. The only way I forsee the government funding this is a tax rate increase!

Let me also tell you a bit about myself: I’m currently 26, in the 28% income tax bracket, and max out my 401k at $16,500 every year (due to sound financial advice from my parents and friends).

Another huge concern of mine is that social security won’t even be around by the time I’m old enough to collect! Especially with the recent Obama compromise cutting social security tax… (let’s hope this is not permanent in 2 years)

Given my concerns, would you still suggest putting all my money in a traditional 401k instead of a Roth 401k?

Thanks!
-JF

]]> By: TFB http://thefinancebuff.com/roth-401k-for-people-who-contribute-max.html#comment-4321 TFB Fri, 20 Aug 2010 04:53:58 +0000 http://blog.thefinancebuff.com/?p=259#comment-4321 KD - You got it. Roth contributions are after tax but after-tax contributions are not Roth. KD – You got it. Roth contributions are after tax but after-tax contributions are not Roth.

]]> By: KD http://thefinancebuff.com/roth-401k-for-people-who-contribute-max.html#comment-4320 KD Thu, 19 Aug 2010 23:31:05 +0000 http://blog.thefinancebuff.com/?p=259#comment-4320 My bad. It seems this can be done only for "eligible rollover distributions" and eligibility criteria are: termination from service, termination of the plan, attainment of retirement age in the plan, such as age 65, attainment of age 59 1/2, in-service and disability. If the plan does not allow in-service distribution then tough luck. I called the retirement plan servicing and the girl there was happily telling me that I could what I described above as my plan allows withdrawal of after-tax contributions. A) My plan does not allow after-tax contributions and B) Roth 401k contributions are not same as after-tax contributions. So I was fooled as usual, I think. :-) My bad. It seems this can be done only for “eligible rollover distributions” and eligibility criteria are: termination from service, termination of the plan, attainment of retirement age in the plan, such as age 65, attainment of age 59 1/2, in-service and disability. If the plan does not allow in-service distribution then tough luck.

I called the retirement plan servicing and the girl there was happily telling me that I could what I described above as my plan allows withdrawal of after-tax contributions. A) My plan does not allow after-tax contributions and B) Roth 401k contributions are not same as after-tax contributions.

So I was fooled as usual, I think. :-)

]]> By: KD http://thefinancebuff.com/roth-401k-for-people-who-contribute-max.html#comment-4319 KD Thu, 19 Aug 2010 21:26:31 +0000 http://blog.thefinancebuff.com/?p=259#comment-4319 TFB, is this statement correct? "If you make a contribution to Roth 401k and roll it over to Roth IRA in 2 days, say, and earn no income on it (that is you put it in a money market fund and essentially the value remains constant) then its ok." The last answer on this page seems to imply this. http://answers.google.com/answers/threadview/id/754302.html It may be a non-qualified distribution if the Roth 401k plan does not allow in service withdrawal. But is it still ok as far as put it back into Roth IRA? This may help if one has a poor and expensive fund choices in Roth 401k? Again AGI limits may apply, I suppose? Are there other tax issues? Thanks a bunch, KD TFB, is this statement correct? “If you make a contribution to Roth 401k and roll it over to Roth IRA in 2 days, say, and earn no income on it (that is you put it in a money market fund and essentially the value remains constant) then its ok.” The last answer on this page seems to imply this. http://answers.google.com/answers/threadview/id/754302.html

It may be a non-qualified distribution if the Roth 401k plan does not allow in service withdrawal. But is it still ok as far as put it back into Roth IRA?

This may help if one has a poor and expensive fund choices in Roth 401k? Again AGI limits may apply, I suppose?

Are there other tax issues?

Thanks a bunch, KD

]]> By: TFB http://thefinancebuff.com/roth-401k-for-people-who-contribute-max.html#comment-3958 TFB Sat, 08 May 2010 19:22:27 +0000 http://blog.thefinancebuff.com/?p=259#comment-3958 KD - SS and Medicare have no effect in this calculation. When you contribute to a traditional 401k, you still pay SS and Medicare tax on that contribution. If you include the SS and Medicare tax rate in the marginal tax rate, the spreadsheet assumes the traditional 401k contribution is exempt from SS and Medicare taxes, which is not the case. KD – SS and Medicare have no effect in this calculation. When you contribute to a traditional 401k, you still pay SS and Medicare tax on that contribution. If you include the SS and Medicare tax rate in the marginal tax rate, the spreadsheet assumes the traditional 401k contribution is exempt from SS and Medicare taxes, which is not the case.

]]> By: KD http://thefinancebuff.com/roth-401k-for-people-who-contribute-max.html#comment-3957 KD Sat, 08 May 2010 18:07:31 +0000 http://blog.thefinancebuff.com/?p=259#comment-3957 SS and medicare taxes are strictly not taxes, but I wonder how they play into this debate. I increased my marginal tax rate to account for SS and medicare tax in the spreadsheet and it made Roth 401k a no no in almost all cases. I assumed one does not pay SS and medicare tax in retirement. Basically, for the marginal dollar, a Roth 401k that was worth about 5-10 percentage points in marginal tax rate has been taken up by SS and medicare tax. I am assuming that your SS in retirement does not increase substantially because you contributed to Roth 401k to the max v/s contributing to traditional 401k to the max as SS is designed to provide diminishing returns for people with higher current incomes. SS and medicare taxes are strictly not taxes, but I wonder how they play into this debate. I increased my marginal tax rate to account for SS and medicare tax in the spreadsheet and it made Roth 401k a no no in almost all cases. I assumed one does not pay SS and medicare tax in retirement. Basically, for the marginal dollar, a Roth 401k that was worth about 5-10 percentage points in marginal tax rate has been taken up by SS and medicare tax. I am assuming that your SS in retirement does not increase substantially because you contributed to Roth 401k to the max v/s contributing to traditional 401k to the max as SS is designed to provide diminishing returns for people with higher current incomes.

]]> By: KD http://thefinancebuff.com/roth-401k-for-people-who-contribute-max.html#comment-3909 KD Fri, 30 Apr 2010 01:16:41 +0000 http://blog.thefinancebuff.com/?p=259#comment-3909 Thanks TFB. I see your point. But honestly I don't know if I am going to get raises higher than inflation, esp, considering I got my first job after my PhD and its only been a year in the job with a small raise to show for last year in which economy was not doing so well. Another thing, couple of decades from now who knows what the tax structure develops into, what benefits remain, what benefits disappear, ex, Social Security, how well do the investments gain, etc. With such uncertainties, the choice between trad 401k and roth 401k for me personally seems to be a dart throw. As you say, its complicated. May be doing, half and half is an option. May be continuing with trad 401k is easier than second guessing future benefit of roth 401k. As always, your excellent analysis on these issues is extremely valuable and worth a lot more than what one could get out of a paid professional. Thanks TFB. I see your point. But honestly I don’t know if I am going to get raises higher than inflation, esp, considering I got my first job after my PhD and its only been a year in the job with a small raise to show for last year in which economy was not doing so well. Another thing, couple of decades from now who knows what the tax structure develops into, what benefits remain, what benefits disappear, ex, Social Security, how well do the investments gain, etc. With such uncertainties, the choice between trad 401k and roth 401k for me personally seems to be a dart throw. As you say, its complicated. May be doing, half and half is an option. May be continuing with trad 401k is easier than second guessing future benefit of roth 401k.

As always, your excellent analysis on these issues is extremely valuable and worth a lot more than what one could get out of a paid professional.

]]> By: TFB http://thefinancebuff.com/roth-401k-for-people-who-contribute-max.html#comment-3907 TFB Thu, 29 Apr 2010 22:50:18 +0000 http://blog.thefinancebuff.com/?p=259#comment-3907 KD - It's more complicated than that. It's not about what you currently have in a traditional account is already enough to fill the lower brackets. It's about whether you *will* have enough to fill them. For someone in late 20s, if the salary is projected to increase at a good pace above inflation, a Roth 401k account may very well be better even if you don't have much saved already. Current income can go to Roth and let future income go to Traditional. KD – It’s more complicated than that. It’s not about what you currently have in a traditional account is already enough to fill the lower brackets. It’s about whether you *will* have enough to fill them. For someone in late 20s, if the salary is projected to increase at a good pace above inflation, a Roth 401k account may very well be better even if you don’t have much saved already. Current income can go to Roth and let future income go to Traditional.

]]> By: KD http://thefinancebuff.com/roth-401k-for-people-who-contribute-max.html#comment-3904 KD Thu, 29 Apr 2010 20:13:21 +0000 http://blog.thefinancebuff.com/?p=259#comment-3904 TFB, I wish you could add a few features to the spreadsheet. It would not doubt add to the complexity of the spreadsheet. Could it provide guidance on when you have enough in your lower tax brackets? I know this would entail knowing total savings as a percentage of the gross income and the various tax brackets. Possibly your current balance in various accounts too. Just something to think over. I really like this article and keep coming back to it again and again. I am in my late twenties and so I keep maxing out traditional 401k under the notion that my retirement income from current balance in the traditional 401k does not fill up the lower tax brackets at retirement yet. I do not contribute to a roth 401k. I hope I am taking the right lesson from your article. Please correct me if I am wrong. TFB, I wish you could add a few features to the spreadsheet. It would not doubt add to the complexity of the spreadsheet. Could it provide guidance on when you have enough in your lower tax brackets? I know this would entail knowing total savings as a percentage of the gross income and the various tax brackets. Possibly your current balance in various accounts too. Just something to think over. I really like this article and keep coming back to it again and again.

I am in my late twenties and so I keep maxing out traditional 401k under the notion that my retirement income from current balance in the traditional 401k does not fill up the lower tax brackets at retirement yet. I do not contribute to a roth 401k.

I hope I am taking the right lesson from your article. Please correct me if I am wrong.

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