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What's the argument for Roth 401k over 401k 

JC
Posts: 48

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6/5/2017
JC
Posts: 48
@ azphx1972:
great article. sharing with my wife and friends.
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azphx1972
Posts: 44

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6/1/2017
azphx1972
Posts: 44
I think is an excellent article on why the traditional 401k is preferable over Roth for most people:

https://thefinancebuff.com/case-against-roth-401k.html
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retire4lyfe
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3/16/2017
retire4lyfe
Posts: 4
All of the posts below give a good comparison, but one thing I think wasn't addressed is tax diversification. We currently max out both our 401ks and our Roth IRAs, but we also take a look during the year to see how much room we have before bumping into the next tax bracket and will then place some into the Roth 401ks instead of the traditional 401k up to just below the next bracket, i.e filling out the bracket so to speak. Our reasoning for doing this is it will give us options in retirement on how and when to access our retirement savings.
Our plan is to hopefully retire in our 60s and start pulling from the traditional 401k money with the goal being to reduce required minimum distributions (RMDs) when we hit 70 1/2. Most likely we will convert our Roth 401ks to a Roth IRA at retirement to prevent having to take RMDs from them, (Roth 401ks have RMDs, Roth IRA currently don't). By having a portion of our money in Roth accounts we will have options on how to pull money out especially after 70 1/2, when RMDs could put us in a higher tax bracket. Also, depending on the situation you might be able to keep your taxable income lower and also prevent paying more in Medicare premiums which is based on your taxable income. Having a mixture of both accounts just gives you some flexibility in retirement to help minimize taxes and provide income for retirement.
We also max out an HSA with is like a hybrid of both Roth and Traditional accounts for health care related costs. You get the best of both worlds with them because you get a tax deduction when contributing and no taxes when you withdraw for health care expenses.
Everyone has to examine their own situation and determine which accounts they should/can contribute to, to try and minimize the taxes, but in the end it is a gamble because the rules could change in 20 years. We prefer to hedge our bets by diversifying between the accounts to hopefully give us more options in the future.
Best of luck!
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M543
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3/2/2017
M543
Posts: 61
Agree with njhowie that in most situations you'll end up with the funds going in shaved off the top tax bracket but later withdrawn at a lower tax bracket. Retirement income is very different than working year income. For one, you need less to start with. While you're working you have to first pay your FICA taxes, then pay all of your work deductions, then account for your retirement contributions. All of that happens before you earn a dollar to live on. Then that gets taxed. In retirement, you no longer have to pay FICA or contribute to your 401(k) or any number of other things like commuting and work expenses. They get replaced by higher healthcare costs and other age related expenses, but in general you can get by on a fraction of the income you needed while you were working.
Then you take the income. At the bottom, you'll have your Social Security check. You only pay taxes on a portion of that. So you get a larger chunk of tax free income at the low end than when you're working. Then depending on your state, your retirement income from pensions, IRAs and 401(k)s may not be taxed or may be taxed preferentially. It's that way in my state. So eliminate the state income tax and withdraw your money into the lower tax brackets before you get close to your working tax bracket.
Plow every dime you can into a well-run, low fee traditional 401(k). But you should also consider when you're young having a Roth IRA to do double duty as your early emergency fund and lifelong tax free retirement vehicle (assuming no emergencies arise).
We max out our 401(k) and also max out to Roth IRAs. That gives you the best of both worlds and makes it possible to manage withdrawals to minimize taxes in retirement.
Good luck!
edited by M543 on 3/2/2017
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JC
Posts: 48

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2/24/2017
JC
Posts: 48
njhowie explained it nicely. I use only Traditional bc I expect my income to be lower in retirement. That's all it boils down to for me.


Ric Edelman also argues that it's irrelevant which way you go, that you'd essentially end up with the same number after a set number of years. but he does not take into account income change.
edited by JC on 2/24/2017
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wantabeamillionaire
Posts: 14

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2/18/2017
Thanks. Ramsey said something and I should have known better. I like him for inspiration and I think his story is a good one but his investment advice lacks thought usually because he's battling common behavior flaws more than math.
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njhowie
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2/17/2017
njhowie
Posts: 77
assuming that you contribute the same amount whether traditional (untaxed) or Roth (taxed), and assuming the same rate of return/growth, in then end, if you are at the same net tax rate (not marginal tax rate or tax bracket, but the overall tax rate) the amounts will work out the same.

so, the bulk of the argument boils down to "will you have a higher or lower net tax rate in retirement"? In your situation, during peak earning years with a high tax rate today, the traditional IRA is likely going to be best even paying taxes on the entire amount when the funds are withdrawn in retirement. when I started my first real job at a large corporation 30 years ago, this is how the HR folks explained it. I believe it is still valid today.

my personal belief is that Roth was created by the government not because they were throwing a bone to taxpayers and providing a great retirement savings vehicle. they simply wanted their taxes now. they have no concern for the future when they are no longer in office. they put Roth in place because they saw that the 401k and traditional IRAs were getting preferential tax treatment in being able to defer taxes for 20, 30, even 40 or more years and that was federal revenue that they were losing year after year.
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helicase
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2/6/2017
helicase
Posts: 1
Imagine that you put a fixed amount into your Roth or Trad IRA, and following that, your account value goes up exponentially at, say 4% per year. In the Trad IRA, you don't pay taxes on the initial amount, but pay taxes on the gains. In the Roth IRA, it's vice versa. So the question is: do you expect the returns on your investments to be pretty large by the time you get to retirement? Because in a Trad IRA, that's the part you will be taxed on, and your gains aren't taxed in a Roth.

I'm far from retirement and use a Roth IRA, because even though I'm in a high tax bracket, I expect the investments to grow a lot until my retirement and it's the gains I don't want to pay taxes on. This is assuming I'll be in the same tax bracket at that point. In the Trad IRA, you might not pay taxes now, but you will pay taxes when you start taking money out of the Trad IRA at retirement, so the biggest question there is: do you expect to be in a different tax bracket at retirement?
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wantabeamillionaire
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2/4/2017
I get it if you are early in you career and in a low tax bracket, one that is likely to be lower or the same as in retirement, you should Roth all day. But my wife and I are in a high tax bracket and I feel like I am giving money away by using a Roth 401k. Am I missing the point? Does it still make since for everyone to use a Roth? I can't imagine that's true.
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