When my employer matches me in my Roth 401k they can only match me with non Roth funds. Not sure if all employers do this but a 1/4 of my 401k is traditional and the rest Roth in a year.
When your only source of income is from retirement accounts. When doing your taxes , are you allowed to use the standard deduction to lower your taxable income? If you open a Roth IRA and you satisfy the five year rule. But suddenly you decide to contribute to a traditional IRA. Would the five year start again , even though you had a Roth IRA for five years? Thanks!
Yes, you can use the standard deduction (or itemized deductions) to reduce taxable income from retirement account withdrawals. Regarding the second question, I might not be following perfectly, but you'd generally only need to satisfy the 5-year rule for Roth IRAs once. Keep in mind that while all IRAs have numerous tax rules you need to follow, the 5-year rule isn't generally an issue for traditional IRAs. Of course, anybody reading this would want to triple check everything with a tax expert and/or other sources before making any decisions, as these comments may be out of date, inaccurate, or not relevant to your situation.
I'm in the 'catch-up phase' and our company recently started offering a Roth 401k. Since I don't have much in the way of write-offs, the 401K was a no brainer.. but now I'm not so sure. Is there a calculator that can estimate if I should stick with the 401K or start putting it into the Roth 401K? How much should you have in a traditional 401k before diversifying to a *Roth 401k*? (I'll most likely be in a lower tax bracket when I retire in California) Also, I heard if your don't qualify for a Roth IRA, then a "backdoor IRA" is recommended.. non-deductible IRA converted to Roth IRA) is the best. Is this hard?
I'm not aware of a quick-and-easy calculator that tells you when to do one or the other (or what the right balance is). Financial planning software can help you make some decisions, but that requires going through the planning process and factoring in a variety of inputs. To your question on backdoor Roth, it can be fairly easy logistically. Converting can be as easy as submitting a form or an online request-often just a few minutes. But you need to be mindful of the pro-rata rules, and you'll also want to keep track of your basis (research Form 8606), among other things. While I haven't watched this video (at least not recently), I suspect it has some good information: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-4mdz1704b3U.html
"How much should you have in a traditional 401k before diversifying to a *Roth 401k* ?" That's really not the right question. You don't fill up traditional to some magical number and then switch over to Roth contributions. Favor contributing to Roth 401(k) when in relatively low tax bracket and favor contributing to traditional 401(k) when in relatively high tax bracket. Federal Tax Brackets: 10% 12% 22% ... so big jump from 12% to 22%. You withdraw from traditional up to the tax bracket you want to pay say 12% and then withdraw from Roth.
this is a good video but I take issue with the way you present the Trad/Roth difference. I'm over 50, if I max out my contributions ($30,000/yr) I don't lose 25% of my investment with the Roth, the taxes come out of the rest of my paycheck. It would be an opportunity cost loss but my investment would be the same and the Roth + growth would compound tax free. I also feel it's a hedge or "insurance" as I expect taxes will be higher in the future (like the sunset in 2025)
Thank you, and yes, you're getting at the "supersaver" aspect that the video touches on briefly but doesn't dive into. If your cashflow allows you to max out Roth, you can effectively stuff more money into a Roth account than a traditional account. As with the air-filled bag of potato chips in the example, a portion of that traditional account is typically going to go to taxes, so you don't really get to fill it up with money that you'll eventually spend. The calculations shown assume you have X dollars (less than the max) that you're willing to live without each year. But supersavers generally have more resources to work with. While they typically have higher incomes with a higher tax bracket, it can still make sense to maximize the Roth account.
You mentioned pros and cons for rolling over a roth401k into a roth but didnt mention the con. I cant think of any cons . Could you describe some of the cons of rolling an old employer roth 401k into a roth ira?
Good question, and there might not be significant drawbacks. Something that comes to mind off the top of my head is creditor protection. The employer plan might offer more protection than an IRA, depending on the circumstances. Fees are another potential pitfall, and again, it depends on the situation. There may be others that aren't coming to me right now.
I have a question. First, I've gotten the point how Roth's are better. I see that you should do the match with your company. My question, should I bump the 401k just a tad to drop me a tax bracket?
Roth is not inherently better. You should bump your 401(k) contribution to as much as your budget and income allows with goal to max allowed of $23,000 as soon as you can.
It depends. In the past, employers always matched with pre-tax dollars, so you would generally have to pay taxes on that company money if it was added before 2023. But the rules changed recently (SECURE 2.0 legislation), which allows employers to make matching contributions with Roth money. As of early 2023, I'm not aware of anybody doing that yet. It will take a while for vendors and employers to get it up and running, so I'd plan to get pre-tax matching money for a while-but keep an eye out for the option to change that later. You would probably need to fill out a form or request to make that change if/when the time comes.
@ *Simply Noy* the most likely scenario is that a Roth 401(k) company match is tax free upon withdrawal at retirement as you would pay tax on the Roth 401(k) company match at contribution. Example in 20% tax bracket: $625 pretax income = [$625 * 0.80 =] $500 Roth 401(k) your contribution + $125 tax that you pay $625 pretax income = [$625 * 0.80 =] $500 Roth 401(k) company match + $125 tax that you pay
You can typically invest company matching money as well as your own contributions. In many cases, the funds go into the exact same investment mix-so you don't necessarily choose separate investments for Roth money vs. pre-tax money, for example. Then, the 401(k) vendor (recordkeeper, generally the company/site you log in to to view your account) keeps track of which dollars are which. Hopefully I'm understanding the question correctly here. If not, just let me know. Ultimately, you should be able to invest 100% of your account balance(s) if you want to.
I’m confused. Why wouldn’t one always choose the Roth? With the traditional everything gets taxed (eventually) With the Roth, the earnings/interest escape taxation, no? You just pay tax on contributions.
Roth contributions have some significant benefits. But they're not always the best choice. Traditional contributions might make sense when somebody has a high income and they expect to have a lower income later in life. For instance, if you're in your highest earning years at the top tax bracket, you might enjoy reducing your income if you can take withdrawals in lower brackets later. That said, it still makes sense to evaluate the big picture, including RMDs, health coverage costs, Social Security taxation, and more. This video might cover some of the logic in more detail: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-GHiBAmXTAr4.html
