lynnerself
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Post by lynnerself on Feb 26, 2011 23:45:35 GMT -5
Any thoughts on which to invest in? I am offered both. I have always assumed that the decision should be primarily based on expected tax rate at retirement compared to current tax rate. Are there other things to consider? Does the number of years to retirement come into play at all. Currently I am maxing out my 401K with a 50/50 split between the 2. I have (hopefully) 6 years to retirement.
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HappyLady
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Post by HappyLady on Feb 27, 2011 18:57:03 GMT -5
I have a Roth IRA, so I picked the regular 401k...part of the "not all my eggs in one basket" approach.
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bman
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Post by bman on Feb 28, 2011 9:51:38 GMT -5
I agree that it is a good idea to put some in both Roth and Traditional. Even if you could predict how your future income will compare to your current income, you never know how the tax laws and rates will change. So doing both seems like the safest route to me: diversify your investment vehicles as well as the investments themselves.
I contribute more to my Roth because the company match portion counts as Traditional contribution. My traditional and Roth balances are pretty much equal.
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Deleted
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Post by Deleted on Feb 28, 2011 10:00:12 GMT -5
I have a Roth IRA, so I picked the regular 401k...part of the "not all my eggs in one basket" approach. Dittos
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qofcc
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Post by qofcc on Feb 28, 2011 10:31:38 GMT -5
I have always assumed that the decision should be primarily based on expected tax rate at retirement compared to current tax rate.
That's exactly the case and if you're only 6 years away from retirement, you should be able to estimate which tax bracket you're going to be in when you start making withdrawals.
If your income when you start retirement is going to be less than or equal to your current income, then go with the traditional. If you expect your income to be higher or you plan to withdraw a large lump sum in retirement, allocate enough in the Roth to fund that.
The Roth IRA is best for people who are in the lowest tax brackets that expect to be in a higher bracket later or people who want the flexibility to withdraw the money without penalty before retirement.
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Deleted
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Post by Deleted on Feb 28, 2011 11:57:02 GMT -5
My job does offer a ROTH 401K. But I already had a ROTH, so just contributing to the Traditional 401K
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lynnerself
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Post by lynnerself on Feb 28, 2011 12:19:43 GMT -5
I contribute more to my Roth because the company match portion counts as Traditional contribution. My traditional and Roth balances are pretty much equal.
But I already had a ROTH, so just contributing to the Traditional 401K
I am maxing out both Roth IRA and 401K, so my employers contribution to my 401K would about match my Roth IRA contributions. So my overall is still roughly 50/50.
If your income when you start retirement is going to be less than or equal to your current income, then go with the traditional
I think that my tax bracket will be somewhat lower in retirement. But I am really drawn to tax free grow and a tax free income stream at retirement. Also, most of my DH retirement is in deferred accounts.
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telephus44
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Post by telephus44 on Feb 28, 2011 12:42:50 GMT -5
I put my 401K as a Roth - but my husband's is a traditional. That's how we keep our bases covered. I have a ROTH IRA as well.
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mithrin
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Post by mithrin on Feb 28, 2011 18:25:25 GMT -5
I think the important thing is to have mix of both types over the course of your lifetime.
If you put all your money into Roth 401K and Roth IRA, then you'll have little taxable income during retirement and you'll essentially "waste" your deductions and lower tax brackets during your retirement. If you put it all into Traditional retirement accounts, you get all the tax breaks now, but lose flexibility during retirement. All your accounts will be subject to the RMD which will limit your ability to reduce income if you want to get below tax thresholds. Lump sum withdrawals also spike your taxes for that year, whereas with a mixture, you can use the Roth funds for lump sum withdrawals and avoid unwanted tax implications.
The only time you don't want to mix the types is when you're a high earner, so that the tax savings now will outweigh your top bracket during retirement. Even for high earners, they can likely get some Roth exposure during their early years, when income is lower, or perhaps later in life, if they take an early retirement from the high-paying career, but continue working part-time.
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lynnerself
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Post by lynnerself on Feb 28, 2011 18:44:05 GMT -5
mithrin What would you define as "high earner" in these scenarios?
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mithrin
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Post by mithrin on Mar 1, 2011 15:21:24 GMT -5
mithrin What would you define as "high earner" in these scenarios? It's not a simple number, but a comparison of current vs. expected tax bracket. If you're in the 25% bracket now, and expect taxable income during retirement to stay in the 15% bracket, saving an extra 10% on taxes by doing traditional is almost certainly going to outweigh the benefits of Roth. If you're in 25% now and expect to be in the 25% bracket during retirement, then might want to put at least some of your money into Roth vehicles. For those in higher brackets, IRA choices are already limited due to income phase-outs, so they may only be able to use the Roth IRA, or neither. Anyone in the 28%+ tax bracket would probably be best served by taking advantage of every opportunity to take the tax break now with traditional accounts, especially since many of them aren't available due to income phase-outs towards the upper end of the 25% bracket.
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Politically_Incorrect12
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Post by Politically_Incorrect12 on Mar 1, 2011 22:57:07 GMT -5
Is the Roth 401K the same limit as the traditional Roth?
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cronewitch
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Post by cronewitch on Mar 2, 2011 0:48:22 GMT -5
Yes they have the same limit.
I don't have a ROTH option now but want one. My 401K is as large as I want it for retirement. I only put in 11K last year and am thinking the same for this year. I don't want to pay taxes at the normal rate in retirement and have a RMD that limits my choices.
I am in the 15% bracket now and want to hit that in retirement but not pay tax on SS income. I have about 225K in 401K now so that will mean taking out about 10K in retirement, that should cover my 0 and 10% brackets. I still want to work 2 more years so if I put in 22K more and it grows at all I will have perhaps too much in 8 years when I am 70.
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schildi
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Post by schildi on Mar 2, 2011 1:14:45 GMT -5
Is the Roth 401K the same limit as the traditional Roth? No, I think the Roth 401(k) limit is the same as the regular 401(k) limit, i.e. $16,500 if you are under 50. But effectively, the Roth is more because it is after tax money, and will not be taxed when withdrawn in retirement (given the rules are all met).
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Post by gaultamort on Mar 2, 2011 9:55:25 GMT -5
My company profit sharing is traditional, so my contribution, which I should max out by next year, is Roth. Both DH and I have Roth IRAs that we should be able to contribute to for a few more years; he also has a Simple IRA that is pretax dollars. We're in our early 30s, so right now, we're trying to have a balance of both types of accounts. We haven't even begun to think about our retirement tax bracket, but I feel pretty good about our position right now.
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lynnerself
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Post by lynnerself on Mar 2, 2011 11:22:06 GMT -5
The 401K limit is the same ($16500 or $22000 depending on age) no matter whether it is invested as traditional (pre tax) or Roth (taxable) or any combination. Employer contributions are always traditional.
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