Traditional 401k or Roth 401k

[skives]

What do people here prefer for retirement Roth 401k (Roth IRA) or Traditional 401k (Traditional IRA)? Are there circumstances that make you choose one or the other?

[corn18]

The sole consideration is what tax bracket you are in now vs. what you predict you may be in when you withdraw the funds. If you think you will be in a lower tax bracket when you withdraw the funds, then use a Roth or Roth 401k. It really isn't much more complicated than that.

The trick is predicting what your tax bracket will be when you need the funds. A lot can change over the time you deposit the money and the time you withdraw it.

[Thrif-t]

I do both! But I prefer the Roth 401k. I feel that taxes are low and with the deficit what it is, taxes will only be going up, up, up!

Plus we have pensions, so we're not going to be in a much lower bracket come retirement time. So having more in the Roth and not having to pay taxes on withdrawal would be beneficial to us.

BUT, I don't trust that Roth's will stay tax free at withdrawal (who knows what can happen in this country), so I'm gonna keep contributing to both.

Plus right now with kids in college, it is beneficial to us to bring our taxable income down so our kids can qualify for subsidized loans and some grants, hence contributing to the regular 401k.

[Jluke]

What did the bogleheads tell you?

[corn18]

What did the bogleheads tell you?

They have good page on the boglehead wiki about this:

[disneysteve]

The sole consideration is what tax bracket you are in now vs. what you predict you may be in when you withdraw the funds.

This is the straightforward math solution to the question. Of course, the problem is there's no way to know the answer with any certainty.

Personally, I love the Roth because I like knowing that every penny in there will be mine when I take it out. It makes planning much easier. The big problem with the Roth IRA, though, is the very low contribution limit. The other problem is the income limit for contributing. Until 2018, we maxed out our Roths but that was only $13,000/year (since turning 50). Last year was the first year we weren't eligible to contribute anymore. I've got 13% going to my 401k but that's not a perfect solution either because we are saving more than 13% for retirement so the rest is going to taxable investments. Not the ideal solution but we do what we need to do.

[kork13]

I prefer the Roth because it's more "dense" than traditional. We're at a place where we are maxing our TSPs & IRAs, so by paying the taxes now, it's basically like having also invested the tax money in retirement. Dollar for dollar ($19k gross income), if you assume similar tax brackets, it's no difference. But as I see it, I can pack extra money into the Roth ($24k gross income after tax), so I'm putting everything I can into Roth.

[Like2Plan]

Skives,
It can be complicated. Sometimes putting some money into pretax can lower your tax bracket. Here's another example--Maybe you don't quite qualify to make a direct Roth IRA contribution but lowering your taxable income can allow you qualify.

Or, maybe you are in a low tax bracket starting off --contribute to Roth and a higher tax bracket in your later working years--contribute to pre tax. Then you retire and are in a presumably lower tax bracket--convert the pre tax to Roth.

I have read about some folks using pretax conversions to Roth to generate some taxable income and qualify health coverage subsidies under the ACA.

Roth 401Ks can be rolled over to Roth IRAs and not be subject to required minimum distributions.

But, pretax 401k contributions can be rolled over to a traditional IRA and the RMDs can be used to make tax free charitable donations.

So, maybe it's good to have some of both.

[Like2Plan]

I just thought of another situation--if you have pension and/or SS income that fills your lower tax brackets--if high enough the RMDs could make some of your SS taxable and there are all sorts of other little tax traps along the way. .

Another trap is after you are on part B medicare if your income is high enough with RMDs, etc you could be subject to Income Related Monthly Adjustment Amount (IRMAA) which could substantially increase your part B payments. DH and I are nearing medicare age and I have found the actuary tables do not favor a couple reaching the age of 90--though chances of one or the other making it to 90 are very good--so you could more easily reach the IRMAA thresholds with just filing single and RMDs vs MFJ. For this situation, a Roth would be more favorable. So, it really bears some studying. And, even then tax law always seems to change over time making it hard to make predictions over a 40 year career time frame.

[disneysteve]

RMDs are another reason I like Roths. Let me decide how and when I need my money. Don't force me to take it whether I need it or not (and tax me in the process).

[~bs]

just do half in both.

[Jluke]

RMDs are another reason I like Roths. Let me decide how and when I need my money. Don't force me to take it whether I need it or not (and tax me in the process).

So will a Roth 401k require RMDs?

[disneysteve]

So will a Roth 401k require RMDs?

I believe if you leave it in the Roth 401k, it is subject to RMDs. If you roll it over into a Roth IRA then no RMDs are required.

[Thrif-t]

I believe if you leave it in the Roth 401k, it is subject to RMDs. If you roll it over into a Roth IRA then no RMDs are required.

I did not know that Steve, thanks! I always thought it was still required to take RMDs.

[disneysteve]

I did not know that Steve, thanks! I always thought it was still required to take RMDs.

From MarketWatch.com:
Technically Roth 401(k)s, if they remain with your company after your departure or retirement, are subject to RMDs after age 70 1/2. However, they can be rolled into a Roth IRA, which is not subject to RMDs during the owner's lifetime.