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Roth 401K

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  • Avatar mjohnson 
    Participant
    Status: Physician
    Posts: 54
    Joined: 05/05/2019

    Anyone have one and/or contributing to it? This assumes yearly back door Roth IRA as well.

    I know the math favors not using the Roth 401K but I just can’t imagine taxes are going to stay low in the future due to all the US debt. Especially for folks that will have large SS as well as large retirement accounts. I’m going back and forth as I get a full employer match (36K) that is traditional.

    #233959 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2382
    Joined: 03/01/2018

    What is your marginal tax rate federal plus state and if you care to share expected adjusted gross income and married or single and kids?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #233963 Reply
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    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8137
    Joined: 01/09/2016

    Many people contribute to Roth 401k – this includes some of our clients who are in the top tax bracket but have the same beliefs as you. There really is no way early in your life to make an informed decision based upon future tax rates. I lean toward Roth because you are forced to pay taxes and then they are done.

    It’s a rare person who will invest the tax savings from the traditional 401k contribution to pay the future tax liability. So, mathematically, it may work out. From a practical perspective, probably not.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #233964 Reply
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 706
    Joined: 06/18/2018
    Earnest refinancing bonus

    “I just can’t imagine taxes are going to stay low”

    Stay low? Your taxes are low? Sure, if you’re in a 20% tax bracket, Roth away. (Seriously though, have you ever put a number on your cumulative tax burden? Payroll taxes, fed income, state income, property, sales, auto, gas, special airport security airfare, rental car, hotel, all the absurd special taxes on your cellphone bill, etc?)

    If you mean your future taxes will be even higher than the already high rates you already pay, then yes, that might happen. In which case you’ll get some tax rate arbitrage benefit having done a Roth 401k.

    Unless they just decide to tax Roths again, too, just because. Or make your Roth gains subject to FICA. Or have a special wealth tax. Or make SS even more ‘means tested’. Hard to guess which way the gov’t will forcibly confiscate money from us in the future, the most likely answer is probably ‘all of them’.

    #233971 Reply
    abds abds 
    Participant
    Status: Physician
    Posts: 242
    Joined: 01/16/2017

    Impossible to predict future tax rates. So the question is: What would you do with the amount you saved in taxes if you did traditional over Roth? Would you diligently invest it in a taxable account or would you possibly spend/waste it? If you are confident you would invest the extra, at a high tax bracket then traditional probably is a better choice.

    At a 35% tax bracket, putting $19k in a Roth will cost you around $29k (pre-tax dollars). Putting 19k in a traditional will cost you 19k. What would you do with that extra $10k ($6500 after taxes)?

    #233987 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2382
    Joined: 03/01/2018
    There really is no way early in your life to make an informed decision based upon future tax rates.

    Click to expand…

    Perhaps. But you can certainly make an informed decision based on current tax rates.

    Critical in my mind is understanding the tax cost of that 19k Roth vs traditional for you.

    It could be as low as 19k * 24% even for a full time doc in a no tax state.

    Or it could be 19k * 60% or even >70% for someone in a high tax state with a bunch of kids and AGI right on the cusp of the child tax credit phaseout.

    Roth 401k for you could be perfectly reasonable, or absolutely insane.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #233991 Reply
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    Avatar docnews 
    Participant
    Status: Physician
    Posts: 410
    Joined: 01/09/2016

    For someone, such as myself, who is in a no income tax state and whose taxable income is near pass thru deduction phase out for my self-employment, my effective marginal tax rate can be as low as 19%. So yes I’m considering it this year for the first time.

    #234037 Reply
    triad triad 
    Participant
    Status: Dentist, Small Business Owner
    Posts: 277
    Joined: 04/29/2016

    I’m doing one this year.  First time down to the 24% bracket with income not likely to get out of this bracket for the rest (10 years) of my career. My taxable/traditional/roth ratio is 55/42/3 so some diversification there would be nice.

    #234476 Reply
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    Avatar GasFIRE 
    Participant
    Status: Physician
    Posts: 216
    Joined: 01/08/2018

    I’ve been working part-time for the past 7 years as a 1099 and have contributed to my Roth 401k each year. Originally in the 28% bracket, but now at 24%. With the 199A pass-through deduction my cost is 19%. @triad keep doing what you’re doing. My original taxable/trad/Roth ratio was similar to yours. Now at 38/41/21. Adding Roth conversions into the mix, I would like to flip my trad/Roth ratio by the time I need to start taking my RMD.

    #234512 Reply
    Liked by Tim
    Avatar cyrano7 
    Participant
    Status: Dentist
    Posts: 11
    Joined: 06/15/2019

    I just had to make this decision recently.  Taxes rates – federal 21%, total 31%.  I read and re-read every article/blog post on WCI and this forum.  Ultimately, I chose to make a Roth contribution to my 401k since I believe I will fall into the “super saver” category.  Also, I believe Roth money will be more valuable to my heirs and that’s who will probably receive my Roth IRA (with Roth 401k rolled in) since I am likely to spend my taxable money first.

    #234546 Reply
    Liked by GasFIRE
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2382
    Joined: 03/01/2018
    I just had to make this decision recently.  Taxes rates – federal 21%, total 31%.

    Click to expand…

    How do you have a federal marginal rate of 21%?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #234559 Reply
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 706
    Joined: 06/18/2018

    “I just had to make this decision recently. Taxes rates – federal 21%”

    How do you get to 21% marginal federal? Impressed if you’re filling up your 401k while making that little, and more impressed if you think you’ll never spend it

    #234569 Reply
    Avatar cyrano7 
    Participant
    Status: Dentist
    Posts: 11
    Joined: 06/15/2019
    I just had to make this decision recently.  Taxes rates – federal 21%, total 31%. 

    Click to expand…

    How do you have a federal marginal rate of 21%?

    Click to expand…

    Sorry, I meant effective tax rates.  Marginal is 32%

    #234611 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2382
    Joined: 03/01/2018
    I just had to make this decision recently.  Taxes rates – federal 21%, total 31%. 

    Click to expand…

    How do you have a federal marginal rate of 21%?

    Click to expand…

    Sorry, I meant effective tax rates.  Marginal is 32%

    Click to expand…

    so total marginal tax rate is 42%? personally I would not elect Roth over pretax at that level. In that income range some sneaky changes can happen with QBI deduction and child tax credits, obviously not applicable to all. How about your situation?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #234616 Reply
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    Avatar cyrano7 
    Participant
    Status: Dentist
    Posts: 11
    Joined: 06/15/2019
    I just had to make this decision recently.  Taxes rates – federal 21%, total 31%. 

    Click to expand…

    How do you have a federal marginal rate of 21%?

    Click to expand…

    Sorry, I meant effective tax rates.  Marginal is 32%

    Click to expand…

    so total marginal tax rate is 42%? personally I would not elect Roth over pretax at that level. In that income range some sneaky changes can happen with QBI deduction and child tax credits, obviously not applicable to all. How about your situation?

    Click to expand…

    Yes.  I know, I went back and forth a lot, but ultimately decided this would likely be a lower income year than in retirement.  I’m sure you’re right about the tax credit, but my accountant seemed to think a Roth 401k contribution was a no brainer and was surprised I would consider the tax deferred contribution.  Also, in one year I will be eligible for partnership and my income should double after that for a few years and then increase a bit further.  Some day when I have more time I should probably write a post asking for a second opinion on what I’m doing with my portfolio and finances.  I am going to have some additional complexity next year with a buy-in to the practice and to the real estate portion of the practice. I think I have a lot to learn from people on this forum and would probably benefit quite a bit from interacting a bit more instead of just lurking.

    #234739 Reply

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