401k->Roth?

[boomhower]

I am contemplating my retirement plan. My employer contributes ~5% into my 401k.(not a match, they just contribute to it) I currently contribute ~6% into it. I have been thinking of stopping my contributions and opening a Roth. I know jack about investing and if I go this method it would most likely be with Vanguard and the 2035 or 2040 target fund.(26-28 years until retirement) The way I was looking at it is it will even out my tax situation as I would say there is a 90%+ change my tax rate will be higher when I retire than it is now. If I am understanding it correctly my tax liability will be higher and my take home pay lower, but would it be worth it in the long run? Thoughts?

Also my 401k fund options aren't regular funds but custom funds put together by the folks that run our pension fund.

 

[CLite]

The way I was looking at it is it will even out my tax situation as I would say there is a 90%+ change my tax rate will be higher when I retire than it is now. If I am understanding it correctly my tax liability will be higher and my take home pay lower, but would it be worth it in the long run? Thoughts?

You have the concept correct. If your tax rate really will be higher when you retire then Roth IRA is the best choice. However, keep in mind that managing a side Roth IRA account will take a bit of work beyond just dumping money into a company's 401k.

Also remember that when you retire your only income will be S.S., any long-term investments, and 401k withdrawals. So your tax rate will be based on your yearly accumulation of those income sources.

 

[kranky]

One factor to consider is the maximum amount you can put in a Roth IRA is $5,000/year at your age. You could make larger contributions in a 401k.

If you are confident your tax bracket will be higher in retirement, then the Roth is a good option. But don't feel that a 401k is a bad option - if you want to sock away more than $5,000 a year, by all means max out the Roth first then contribute to the 401k. There is a lot of value in having investments grow tax-free for 25+ years.

 

[edro]

6% into retirement isn't sufficient by almost all retirement company suggestions.
You should keep the 6% where it is and start a Roth with whatever you can. ($20/week if that's all you can afford)

 

[boomhower]

You have the concept correct. If your tax rate really will be higher when you retire then Roth IRA is the best choice. However, keep in mind that managing a side Roth IRA account will take a bit of work beyond just dumping money into a company's 401k.

Also remember that when you retire your only income will be S.S., any long-term investments, and 401k withdrawals. So your tax rate will be based on your yearly accumulation of those income sources.

The reason I am looking at the target fund is so it will essentially be that simple. I just don't have the time or knowledge to properly manage it myself. Paying someone to manage a portfolio as small as mine would be counterproductive.

I'll also have a pretty darn good pension as long as it isn't pilfered by the state by then.

Considering the current spending in entitlement programs and the aging population taxes are going to go up. My income between my retirement, pension, and SS if it's there will very likely be higher than my current salary.

One factor to consider is the maximum amount you can put in a Roth IRA is $5,000/year at your age. You could make larger contributions in a 401k.

If you are confident your tax bracket will be higher in retirement, then the Roth is a good option. But don't feel that a 401k is a bad option - if you want to sock away more than $5,000 a year, by all means max out the Roth first then contribute to the 401k. There is a lot of value in having investments grow tax-free for 25+ years.

$5k is way more than I put in now, or will for the foreseeable future.

6% into retirement isn't sufficient by almost all retirement company suggestions.
You should keep the 6% where it is and start a Roth with whatever you can. ($20/week if that's all you can afford)

Right now I'm putting away 11% between me and my employer. 6% on my end may not be enough but it's about the top of what I can afford. I'm going to bump it up a bit after I close on my house which will put it at 7.2% and that's going to be the top for a while. I don't see us getting a raise for a while.

As you can probably figure I am in a very low tax bracket right. If not the bottom darn close to it, that's the biggest reason I am pretty darn certain my tax bracket will be higher when I retire.

 

[Doppel]

11% may not be ideal, but it's a lot more than most people do. I doubt many of us reading this can confidently (and actually have run numbers) say they are on track with their retirement contributions.

OP's case Roth sounds like the best approach and also mentioned if it's opened with Vanguard he has a multitude of low-cost funds available to choose from.

 

[Jeffg010]

Be thankful you are getting a 5% match. My employer use to match 6% but then the 2008 downturn and it went to 4% and my end calculations got hit hard. They claimed that most companies stopped matching all together and that we were lucky to get anything. The funny thing is they claim each quarter that we are in the best position compared to everyone else and earnings are up the highest they ever where.

I'm currently doing 20% (max) into my 401k and have been thinking about doing a Roth IRA something like $100 a pay which would be $50 a week. I never did a Roth so any info on the subject is welcomed.

 

[edro]

Remember that 401k is pre-tax dollars, so increasing your percentage contribution doesn't affect your bring home pay as much as you might think.
Use online calculators to see how it affects your paycheck.

About 5 years ago, I took the advice of a coworker who told me to increase your 401k contribution rate by 1% each time you get a raise.
I have done that and am now up to 10% contribution rate (+match).
It's really good advice because if the average raise is 3% and you raise contribution by 1%, you are still getting a raise to your paycheck and building retirement more.

It's stupid little tips like this that can make all the difference.

 

[HardcoreRobot]

roth distributions during retirement wont be taxed as income, so it will also be a nice way then to put some extra money in your pocket without increasing your tax burden. if you are already going to have lots of taxable retirement money, probably a good idea to have non-taxable as well.

dont forget the contribution limit on the IRA. 401ks now often have the option to take post-tax contributions (like roth) and then you just have the overall 401k limit (up to 17k this year?) if that is offered in your plan that gives you another option of putting aside some post-tax money without opening another account, though there are definite advantages to doing it on your own.

 

[overst33r]

Go introduce yourself at Bogleheads.org. They will help you.

 

[GotIssues]

Money put in Roth is taxed now, tax free in retirement.
Money put in Traditional 401k/IRA is tax free now, taxed in retirement (Take $50k out/year in retirement, taxed as if you made $50k working).

Since you are likely in the lowest tax bracket you'll ever be in (hopefully) and have time for it to grow, Roth > Traditional. You should shift your 401k contributions to your Roth IRA until it's maxed for the year, then put into 401k, but maintain any company match (it's free money).

In terms of 401k/IRA, good rule of thumb:
1. 401k up to company match
2. Roth IRA up to contribution limit ($5k for the under 50 crowd, $5500 for 50+)
3. 401k up to contribution limit ($17k for the under 50 crowd, $22.5k for 50+ as of 2012)
4. Traditional IRA (if you don't qualify for Roth, they share a contribution limit)

 

[Chess]

What I prefer is my 401k with my company...

They put 10% in every year regardless if I put 0% or 3%....

10% every year is pretty solid... So of course I have a pretty decent retirement currently... if the stock market will ever get good, I will be golden

 

[ss284]

What I prefer is my 401k with my company...

They put 10% in every year regardless if I put 0% or 3%....

10% every year is pretty solid... So of course I have a pretty decent retirement currently... if the stock market will ever get good, I will be golden

BAH?

 

[Printer Bandit]

how about 401k + Roth 401k?

 

[Elbryn]

I am contemplating my retirement plan. My employer contributes ~5% into my 401k.(not a match, they just contribute to it) I currently contribute ~6% into it. I have been thinking of stopping my contributions and opening a Roth. I know jack about investing and if I go this method it would most likely be with Vanguard and the 2035 or 2040 target fund.(26-28 years until retirement) The way I was looking at it is it will even out my tax situation as I would say there is a 90%+ change my tax rate will be higher when I retire than it is now. If I am understanding it correctly my tax liability will be higher and my take home pay lower, but would it be worth it in the long run? Thoughts?

Also my 401k fund options aren't regular funds but custom funds put together by the folks that run our pension fund.

you got quite the nice gig, pension plus 401k contribution. i would agree with others here to go the roth ira route to give you tax flexibility when you retire as money taken out of roth is not taxed. with a pension and SS, you'll end up losing most of your SS with i think the windfall tax that reduces your benefit if you have a pension. you'll get something but not a lot to count on.

only concern is asset allocation and managing the balance between the 401k and roth ira as they should be viewed together and not separate. take a look at both target funds in both sides and see if you can piece together a pair that look pretty close and change assets at the same times.

 

[Jeff7]

Be thankful you are getting a 5% match. My employer use to match 6% but then the 2008 downturn and it went to 4% and my end calculations got hit hard. They claimed that most companies stopped matching all together and that we were lucky to get anything. The funny thing is they claim each quarter that we are in the best position compared to everyone else and earnings are up the highest they ever where.

I'm currently doing 20% (max) into my 401k and have been thinking about doing a Roth IRA something like $100 a pay which would be $50 a week. I never did a Roth so any info on the subject is welcomed.

I love that line.
We did a survey here awhile ago on ways to improve the company. The items that were most frequently mentioned were answered with what amounted to "We're already incredibly 'competitive'/awesome, so we're not going to do things any differently."
I wonder how many people will bother to do the survey again the next time?

"Competitive" - another interesting term. Sometimes it's good, other times it's "Other companies are continually making things worse for their workers, so we (excluding management [in most cases]) need to stay competitive." :\


We get a 50% match of up to 4% of salary. I'm a bit wary of putting too much into it, because I'm still not entirely confident that the huge upswing in the stock market, starting around the beginning of 1995, isn't just some massive bubble of wacky accounting. I very much doubt that the country's actual productivity increased so dramatically in such a short time. Or maybe it's just a surge in offshoring, who knows.
The expense rates on the 401k plan are also around 1.5-1.9%, depending on the investment package chosen. :\



A thought on Roth IRAs and the tax-now vs tax-later thing:
If I pay taxes on money now, that money is therefore not being invested, so I lose out on the interest that it could potentially earn over X years.
If I pay taxes later, I may pay a bit more due to a higher rate, but is that higher rate going to be anywhere near enough to offset that lost interest?
So would it not make more sense to put money into something that's taxed at the time of disbursement? Or am I missing something obvious?

 

[Jeffg010]

I love that line.
We did a survey here awhile ago on ways to improve the company. The items that were most frequently mentioned were answered with what amounted to "We're already incredibly 'competitive'/awesome, so we're not going to do things any differently."
I wonder how many people will bother to do the survey again the next time?

"Competitive" - another interesting term. Sometimes it's good, other times it's "Other companies are continually making things worse for their workers, so we (excluding management [in most cases]) need to stay competitive." :\

We have these meetings twice a year were the CEO will come and talk to us an let us ask questions in front of a microphone. I want to ask how he thinks we are doing for our sector. When he starts in about our revenue, best position in the sector and we have billions and his whole ra ra ra speech. I want to say to him then why you cut our 401k match from 6% to 4%. I'm sure this would go over well. The sad thing is anyone making over $150,000 does not get a match so the higher ups give don't a crap.

The other thing is when I start asking coworkers about the 2% cut to the match no one seemed to care. Everyone was more mad at the the $50 a year increase to the health care benefits. You should have heard all the crying over that. People sure are dumb crying over $50 a year when you going to lose $100,000's in the match. Just goes to show you people only care about the now and not the future.

 

[Elbryn]

We get a 50% match of up to 4% of salary. I'm a bit wary of putting too much into it, because I'm still not entirely confident that the huge upswing in the stock market, starting around the beginning of 1995, isn't just some massive bubble of wacky accounting. I very much doubt that the country's actual productivity increased so dramatically in such a short time. Or maybe it's just a surge in offshoring, who knows.
The expense rates on the 401k plan are also around 1.5-1.9%, depending on the investment package chosen. :\

A thought on Roth IRAs and the tax-now vs tax-later thing:
If I pay taxes on money now, that money is therefore not being invested, so I lose out on the interest that it could potentially earn over X years.
If I pay taxes later, I may pay a bit more due to a higher rate, but is that higher rate going to be anywhere near enough to offset that lost interest?
So would it not make more sense to put money into something that's taxed at the time of disbursement? Or am I missing something obvious?

on the first paragraph- your 401k expenses suck.. i'd go up to 8% just to capture the match.. free money is free money. then go roth ira and possibly taxable with tax efficient low cost index etf/funds ie: total stock market index or total international indexes.

second paragraph- if you tax rate stays exactly the same, and you get the same exact investment gain and there are no additional taxes along the way, you get the same number in either case. if your tax rate goes up in retirement- the roth side wins. if your tax rate goes down- 401k/pretax wins.

the benefit is being able to game the tax system with roth ira money. since it's already been taxed, you can take money out of your 401k up to the the start of the 25% bracket, so your effective marginal rate is 15%, then take the rest of the money you need out of roth.

 

[darkxshade]

So would it not make more sense to put money into something that's taxed at the time of disbursement? Or am I missing something obvious?

Suppose you have 10k to put into retirement and for simplicity sake say tax is 25% and your investment at retirement earned 50%. Everything else being equal...

tax now:
10k*.75 = 7500
7500*1.5 = 11250 tax free at retirement

tax later:

10k*1.5 = 15000
15000*.75 = 11250 after taxes at retirement

edit: of course that's a rather simple way to look at it assuming nothing changes. What will affect the numbers is how tax laws change, how you take distributions, etc but these things can affect both ways positively or negatively but overall Roth has the slight advantage. But as a pure tax now vs tax later argument, they are both the same.

 

[GotIssues]

What I prefer is my 401k with my company...

They put 10% in every year regardless if I put 0% or 3%....

10% every year is pretty solid... So of course I have a pretty decent retirement currently... if the stock market will ever get good, I will be golden

10% from your company is insane. I get 8% (6% straight up, 2% match) and have never heard of another company going above 6%.

A thought on Roth IRAs and the tax-now vs tax-later thing:
If I pay taxes on money now, that money is therefore not being invested, so I lose out on the interest that it could potentially earn over X years.
If I pay taxes later, I may pay a bit more due to a higher rate, but is that higher rate going to be anywhere near enough to offset that lost interest?
So would it not make more sense to put money into something that's taxed at the time of disbursement? Or am I missing something obvious?

As has already been said, it depends on the tax rate now and when you retire and what withdrawal strategy you use. However, taxes will rise by the time you retire (assuming it's 10+ years). We need to pay down the national debt somehow, and I don't see spending cuts doing it alone.

 

[Chess]

BAH?

DING DING we have a winner

 

[Chess]

10% from your company is insane. I get 8% (6% straight up, 2% match) and have never heard of another company going above 6%.

It is insane.... its pretty damn sweet.... that is a huge perk on one reason I havent left....

 

[JS80]

I say 50% chance politicians go after Roth in the future.

 

[overst33r]

I say 50% chance politicians go after Roth in the future.

Forgive my naivety, but why would they?

 

[JS80]

Forgive my naivety, but why would they?

Why wouldn't they?