Taxes on retirement - pay now or later?

[terces]

At work they added an option to our 401K plan. We can now either invest in it as a standard 401K where we pay taxes at withdrawal or we can invest in a Roth 401K where we pay our taxes now on the money.

Got a big discussion at work.... which is better? And got me even thinking about traditional IRA or Roth IRA?

So was wondering people's views on this forum. Do you invest one way rather than the other? Or do you do a mixture with your retirement funds.

[nck4857]

I do a mix between Roth and Regular 401k, although I have more in my 401k....

[MonkeyMama]

ALL ROTH because we are in low tax bracket and expect more taxes in retirement. (My opinion as a tax professional).

At 25% tax bracket? I'd probably go 50/50. Though if I could max out, "easily," I'd probably just do the ROTH. (If I needed the tax deduction to max out, may go the other way).

Higher tax bracket? Forget the ROTH.

[creditcardfree]

We max our Roth's and contribute the rest to my husband's TSP (like a 401k). If we get to a point where we jump tax brackets...we will adjust to put more in tax deferred accounts.

I think it is important to look at your whole finanical picture and not look at the options as either or. Does your company allow you to contribute to both 401K options?

[am_vanquish]

ALL ROTH because we are in low tax bracket and expect more taxes in retirement.

Ditto, but I think this decision really should be handled on a case-by-case basis.

Also, current trends in government spending make me VERY nervous about future tax rates.

[disneysteve]

We do both kind of by default. My wife's job only offers a regular 401k so that's what she uses. I don't have an employer plan so I fund Roths for myself and my wife. If I had the option, I'd take paying taxes now and being tax-free in retirement. I think taxes will be higher 20 years from now and I prefer the simplicity of knowing I'll get to keep all that I accumulate in my account.

[terces]

I can split between the two choices in my 401K plan. I always figured we'd probably make less when retired but that is a very good point about future taxes possibly being higher.

[creditcardfree]

I can split between the two choices in my 401K plan. I always figured we'd probably make less when retired but that is a very good point about future taxes possibly being higher.

Personally, I think if you can handle paying taxes now, that you should max out the Roth options. Put the rest in tax deferred accounts. However, if the tax burden is too great for your personal situation, they lean more heavily on the 401K and traditional IRA's.

I just like that a good chunk of our retirement money will be able to be withdrawn without paying taxes, and with less that could be exposed to higher tax rates.

[terces]

hmmm... one person in the discussion at work made the argument that how do we know if Roths will continue to be non-taxable at withdrawal. Everything is changeable with the goverment.


I'm thinking a split between the two at this point. We are fortunate to have two additional incomes. One being military retirement and the other VA. Our plan is to someday get to the point where both of these went straight to retirement savings as we become set in our new careers. Being one is taxable and the other not , I'll play with some numbers after I finish our taxes this week to see how we fall in the tax brackets.

[jefffou]

hmmm... one person in the discussion at work made the argument that how do we know if Roths will continue to be non-taxable at withdrawal. Everything is changeable with the goverment

Not that the Federal government couldn't or wouldn't change their mind and make Roth distributions taxable, but to do so would essentially eliminate the benefit for which it was created in the first place.

Certainly, promises to refrain from taxing this or that have been made, and broken. But if Roth distributions ever became taxable, it would certainly end the usefulness of the Roth altogether.

I'm not saying it couldn't happen, it could. My point is that there really is no other benefit that the Roth provides that would make it a useful retirement vehicle on it's own.

But, we're talking about the Federal government here, so one never knows!

Jeff

[creditcardfree]

hmmm... one person in the discussion at work made the argument that how do we know if Roths will continue to be non-taxable at withdrawal. Everything is changeable with the goverment.

This is true. However, I think many here on the boards think this is an unlikely scenario.

The plus for the government offering the roth is that they get the tax revenue NOW. That is what is needed right now. It's also another reason why anyone can covert to a Roth this year: It creates tax revenue in the current year.

[EconoMutt]

I'd pay the tax now. It's hard to say what the tax rates are going to be in the future. They are definitely not going down.

[jIM_Ohio]

ALL ROTH because we are in low tax bracket and expect more taxes in retirement. (My opinion as a tax professional).

At 25% tax bracket? I'd probably go 50/50. Though if I could max out, "easily," I'd probably just do the ROTH. (If I needed the tax deduction to max out, may go the other way).

Higher tax bracket? Forget the ROTH.

What she said

Let me add three others

1) if you have a pension, choose Roth, or put more in Roth than you otherwise would

2) If you expect an inheritance or similar, considering using Roth more

3) If spouse does not work now, but will in the future, consider putting more to Roth.

[jIM_Ohio]

Not that the Federal government couldn't or wouldn't change their mind and make Roth distributions taxable, but to do so would essentially eliminate the benefit for which it was created in the first place.

Certainly, promises to refrain from taxing this or that have been made, and broken. But if Roth distributions ever became taxable, it would certainly end the usefulness of the Roth altogether.

I'm not saying it couldn't happen, it could. My point is that there really is no other benefit that the Roth provides that would make it a useful retirement vehicle on it's own.

But, we're talking about the Federal government here, so one never knows!

Jeff
401k Advice

DISAGREE

there are inheritance benefits over traditional
and there are no RMDs in a Roth, so even if the gains were taxed (like a traditional, non deductable IRA) the fact you are NOT REQUIRED to withdraw the money starting at 70.5 is a HUGE (HUGE!!!!) plus.

And if Roths were going to be taxes, what is the probability that the government passes the law on Dec 31 effective Jan 1?

If they do this, you will see it coming, and just take the money out of the Roth before the tax goes into effect.

[jIM_Ohio]

Ditto, but I think this decision really should be handled on a case-by-case basis.

Also, current trends in government spending make me VERY nervous about future tax rates.

75% or more of taxpayers are in the 15% bracket as their highest marginal tax bracket.

If the government raises taxes, most people will barely notice.

15% to 17% or 20% for that second bracket MIGHT make people pay another $50-$200 in annual taxes.

The bigger bang for the increasing tax rates buck is at higher tax brackets (like raising 28% bracket percentage or lowering floor to 28% bracket, and doing the same to both 33% and 35% brackets as well).