401k Vs Roth 401k

[james.hendrickson]

Okay, so I had an email about this late last week and I confess I was somewhat unsure of my answer. Here is the situation. The person who emailed me had an income about 60,000, access to a 401k AND Roth 401k.

His question was: given his limited income, is it better to contribute to the 401k or the Roth 401k?

I frankly, wasn't sure.

What do you guys think?

[disneysteve]

I think your title is wrong. Are you asking about a regular 401k vs a Roth 401k or a 401k vs a 403b?

[james.hendrickson]

Ugh - sorry. Fixed it.

[phantom]

In general, when he goes to withdraw money, he's going to want some money that he still has to pay taxes on (and can take deductions against) and some money that he already paid taxes on when his income was at it's lowest point. So, his goal should be putting money in ROTH accounts when his income is relatively low and putting money in traditional accounts when his income is relatively high. So, the first question is whether he thinks $60k is going to be relatively low or high for him. If he thinks $60k is relatively low, he could probably just go with the ROTH for now and plan on switching to the Traditional when he gets to a salary that he considers relatively high.

But, how much he already has in ROTH verses Traditional accounts (including IRAs, other 401ks, and 403bs) and how much he wants to have should also be taken into consideration. But, I'm honestly not sure how to figure out the goal side of the equation.

[LivingAlmostLarge]

Exactly what phantom says. Depends on age, amount saved, and when he'll retire.

[Outdoorsygal]

It also depends upon what his tax bracket will be when he is retiring (or when he starts withdrawing the 401K funds) versus what it is now.

I do a combination of both but we only show about 40K per year, even lower than he does. But the tax burden is there so to lower it I do

30% traditional 401k then 15% 401kRoth. Image of it below

Just a reminder but the employer match always goes into the traditional 401k.

Our son will inherit my 401k Roth (he will be in a higher tax bracket) but will not pay taxes on the 401k ROTH because I already did.

With the traditional 401k Roth, our plan is to withdraw these funds tax free (marrieds do not pay taxes for up to $20,600 per yr) and eventually remove it all of the traditional 401k funds to turn it into a mixture of gold and cash. This gold and cash will be kept in a safe in a secret wall of the house. So if all goes as planned, no taxes will ever be paid on what goes into the pre-tax traditional 401k. Not when it goes in or comes out.

Our son will have to start taking periodic deductions on the 401kRoth starting at age 70 1/2 unless it is rolled into an IRA. So just some thoughts with regards to inheritance.

For some reason, imho, there is very little online info about the 401k Roth. I believe it is fairly new

[Outdoorsygal]

I am assuming the 60K is gross income.
If he's married, it appears he just squeaks by to qualify for the savers credit so should plan on contributing at least 2K per year/$167+ per month out of his paycheck to traditional 401k to get that bonus. This amount appears to suffice a typical 3% employer match BUT if his employer matches more than the typical 3%, he will need to contribute a little more $$ to ensure he's met the match. I'd contribute a little more than the employer match to have a little wiggle room in case I am injured/sick in the future and don't end up getting in the hours in I expect. Employer matches always go into the traditional 401k

The non-refundable IRS Savers Credit does not apply to a 401kROTH. How it works is you do your taxes, and whatever you owe at the end, you get to subtract that from what you owe. So it's not a deduction but a credit which is the best. He would save $200. If the spouse opened another qualifying retirement plan, and contributed 2K, that would equal saving $400 on whatever owed. So the jist of of it is, he needs to have $167 per month aka 3% deducted out of his traditional 401k. If employer match is 4%, then he needs to have 4% deducted which is $200 per mo and so on....

[clatoden99]

It depends on how he thinks the tax rate he is paying now compares to the tax rate he thinks he will pay in retirement. If he thinks his rate is lower now, he should choose Roth. If he thinks it's higher, he should choose traditional.
That said, he probably doesn't really have good info to base that on. If he's in the 25% federal bracket or higher, it is generally suggested to choose traditional. If you have state and/or local tax on top of that, that further tips the choice to traditional because they may choose to retire to a state with no income tax. No point in paying it now. The choice to pay the Roth tax now is irreversible.