Roth 401k thoughts? also what to do with old 401k

[iliketosavemoney]

Hi all,

I started a new job and have a few choices to make regarding my retirement accounts.

I currently fully fund my Roth IRA which I'm going to keep doing.

I have a 401k with my old employer (only about $7500).

My new employer offers a 401k or Roth 401k and match 50% up to 6% of my salary.
If I elect the Roth 401k, the company's matching contribution is pre-tax.

Both old and new employer's 401k are/will be invested in Vanguard Target Retirement 2045 Fund.

Should I do the Roth 401k option? Also, should I rollover my old 401k into my Roth IRA or rollover into my new employer's matching contribution account?

Thanks for any advice and help.

[jpg7n16]

What tax bracket are you in?
What state are you in?
What is your expectation of tax rates when you're in retirement?

Federal Income Tax Brackets for 2012


The Roth vs Traditional decision is primarily a decision around tax rates (is it better to pay the tax today with a Roth, or postpone the taxes with a traditional?)

[bjl584]

Without knowing anything about your income and tax bracket I would say to choose the traditional 401K. That way when you retire you have the advantage of the pre taxed and the post taxed accounts.

[iliketosavemoney]

Hi JPG and Brian,

Thanks for your replies.

I'm in NJ and in the 25% tax bracket at the moment. (83,000)
As for the future, I think I'll end up in the 28% bracket.
I was leaning toward the Roth because I think I will be in a higher tax bracket in the future.
And I'd have a traditional 401k from the company's matching contributions.

[Petunia 100]

If you do not expect to have a pension or some other significant source of taxable income in retirement, then go for the traditional 401k. Remember, everyone gets to have some taxable income taxed at 0%. If all of your retirement income is from Roth withdrawals and SS benefits, then you aren't filling up your 0% bracket.

[MakeAStash]

If you expect your tax rate during retirement to be higher than now, opt for Roth otherwise choose traditional. Since future tax rates are a guessing game, I've chosen to put some in Roth and some in traditional. Having both types should allow you to best optimize/juggle withdrawals to minimize taxes during retirement.

[Anton martin]

You must refer to Advisor.

I believe that you must refer your concern to expert advisor, only he/she can guide through this. As they understand this scenario in better way and also they will provide you with more better options.

[kv968]

I have a 401k with my old employer (only about $7500).

Both old and new employer's 401k are/will be invested in Vanguard Target Retirement 2045 Fund.

Also, should I rollover my old 401k into my Roth IRA or rollover into my new employer's matching contribution account?

Since you're planning on keeping the old 401k in the 2045 Fund regardless, I'd compare the expense ratio for the fund in your 401k to the same fund at Vanguard. If it's less at Vanguard then I'd roll it over.

If you do roll your 401k into a Roth you'll owe taxes on the amount converted.

I'm in NJ and in the 25% tax bracket at the moment. (83,000)
As for the future, I think I'll end up in the 28% bracket.
I was leaning toward the Roth because I think I will be in a higher tax bracket in the future.
And I'd have a traditional 401k from the company's matching contributions.

Realize that when talking about future tax brackets it's not the tax bracket you expect to be while working but what you expect to be in during retirement.

It's all pretty much a guessing game because although you may be able to get an idea of where you'll be income-wise in retirement, tax rates are an unknown especially if you're far off from retirement.

Although I feel it's always good to have that tax-free, Roth money, it's also most likely beneficial to have some distributions that are taxable also.

Your employer's contribution should currently be about $2500/yr. Holding that contribution amount steady over the next 35 years at a 6% annual return rate that comes out to be ~$260,000-$300,000 in taxable money if you're planning on retiring at or a little after 2045. So if you were able to take the recommended 4% withdraw on the $260,000 you'd get $10,400/yr. The current standard tax deductions and exemptions are $9750 for a single filer. So in essence you'd basically be able to get that "taxable" money tax-free. Of course this is using current tax rules and assuming no other taxable income in retirement but you get the idea...hopefully

[iliketosavemoney]

Thanks all for your replies!

I think I'm understanding a little more about what I should be doing for retirement.

Thanks KV for the detailed explanation. I was incorrectly thinking that my future tax bracket was right before I retire instead of when I'm in retirement.

I'll have to do more research and try to see if my company offers financial planning services.

Thanks again everyone!