401k vs Roth 401k?

[thomasm]

My sister's company was just sold. He has a 401k with the old company and the new company offers a regular 401k but also a Roth 401k, this company offers a slightly lower match than his old one. Her husband has a 401k with a great match and they have been putting a lot more money in that account than in her 401k. They both have Roth IRAs.

They have roughly $80k in his 401k, roughly $10k in her 401k, and roughly $35k in their Roth's together.

My sister also may not be working that many more years due to the ages of their children. So there is a chance this account will get rolled into an IRA within the next 5 years.

Should she tell her new company she would like to use their regular 401k or their Roth 401k?
I hope someone here can help. Thanx

[thomasm]

is more info needed to better answer this question?

[jIM_Ohio]

My sister's company was just sold. He has a 401k with the old company and the new company offers a regular 401k but also a Roth 401k, this company offers a slightly lower match than his old one. Her husband has a 401k with a great match and they have been putting a lot more money in that account than in her 401k. They both have Roth IRAs.

They have roughly $80k in his 401k, roughly $10k in her 401k, and roughly $35k in their Roth's together.

My sister also may not be working that many more years due to the ages of their children. So there is a chance this account will get rolled into an IRA within the next 5 years.

Should she tell her new company she would like to use their regular 401k or their Roth 401k?
I hope someone here can help. Thanx

This is a tax question more than an investing question.
What is the marginal tax rate, taxable income, and filing status of the person making the contribution to the 401k?

[thomasm]

This is a tax question more than an investing question.
What is the marginal tax rate, taxable income, and filing status of the person making the contribution to the 401k?

Thank you for your reply Jim Ohio.
This is a married couple who is in the 25% tax rate currently. They make over $100k, but also not so much over $100k because they still qualify for a Roth IRA as of 2015.

[sv2007]

How old are they? If younger than 35, then I'd go with Roth.

[~bs]

it depends on how tax rates changes over time. If your assumption is that tax rates are exactly the same as they are now, then mathematically, it doesn't matter which option you choose. You end up with the same return in the end.

If you want to be conservative, 1/2 in each isn't that bad of an idea.

[jIM_Ohio]

Thank you for your reply Jim Ohio.
This is a married couple who is in the 25% tax rate currently. They make over $100k, but also not so much over $100k because they still qualify for a Roth IRA as of 2015.

First, go here

http://fairmark.com/general-taxation/reference-room/2016-tax-rate-schedules/

You listed income, not AGI or taxable income. For a Roth you need to know AGI (really MAGI) and taxable income.

Look at this table- this table references taxable income, not income. If your friends have 100k income and all of it is taxable, they need a bad CPA (because their existing CPA is even worse).

2016 – Married Filing Jointly
Taxable income is over But not over The tax is Plus Of the amount over
0 18,550 0.00 10% 0
18,550 75,300 1,855.00 15% 18,550
75,300 151,900 10,367.50 25% 75,300
151,900 231,450 29,517.50 28% 151,900
231,450 413,350 51,791.50 33% 231,450
413,350 466,950 111,818.50 35% 413,350
466,950 130,578.50 39.6% 466,950

The question is can they get their taxable income below $75,000. This means put $25,000 into a 401k, or possibly use other tax shelters (like HSA). Once taxable income is below $75,300, they should fill up Roth accounts as their money is being taxed at 15%.

Put money in at 15% bracket, take it out in 25% bracket and the Roth is a clear winner.

Generic replies get generic advice- the post above was very generic.
Specific replies get better advice- you are posting very vague responses in a public internet forum. More detail is needed for the real comprehensive solution.

How you get from 100k income to $75,299 in taxable income is the problem you want to solve.

[thomasm]

How old are they? If younger than 35, then I'd go with Roth.

he is 34 and she is 28

[thomasm]

Generic replies get generic advice- the post above was very generic.
Specific replies get better advice- you are posting very vague responses in a public internet forum. More detail is needed for the real comprehensive solution.

That is a good point, I will work on that.

How you get from 100k income to $75,299 in taxable income is the problem you want to solve.

If the 100k cannot get below 75k, would your advice change between a Roth and traditional 401k? Or should the Traditional be used for every dollar between 100k and 75.3k....only moving to a Roth for every dollar below 75.3k?

This was a great reply and I thank you very much for your help.

[jIM_Ohio]

That is a good point, I will work on that.





If the 100k cannot get below 75k, would your advice change between a Roth and traditional 401k? Or should the Traditional be used for every dollar between 100k and 75.3k....only moving to a Roth for every dollar below 75.3k?

This was a great reply and I thank you very much for your help.

Why try and fail?
if you cannot get $100k in earned income under $75k in taxable income you have a serious problem.

The solution and detail is HOW to do this, not what to do if you can't.
Post AGI and taxable income from prior year tax returns for an example.

[parafly]

As others have stated, this is a tax question, and unfortunately there is no clear cut answer. It all comes down to whether you think the current tax rates are higher or lower than they will be when withdrawals are made in retirement. In essence, you are speculating and just making an educated guess.

The basic rule of thumb is pretty simple. If you have a high income and pay high tax rates, take the tax benefits of a traditional account and lower your taxes now. If you have a lower income and pay relatively low taxes, then take the tax hit now and invest in an account where all distributions will be tax free in the future.

Since the couple appears to be making a decent income, and they are already contributing to Roth IRAs, I would suggest they make contributions to a traditional 401K. This will give them exposure in both pre-tax and post-tax accounts. When in doubt, a best of both worlds approach can work best.

If the wife stops working in a few years, they can always re-evaluate the situation. If their tax burden decreases substantially, it might make sense to go more heavily into the Roth accounts.

[thomasm]

Double post

[thomasm]

Post AGI and taxable income from prior year tax returns for an example.

2015 taxable income $135k
2015 AGI $86k
2015 total money invested in both 401k's $30k

She's in sales so her income fluctuates quite a bit each year (give or take $10k)

[thomasm]

Since the couple appears to be making a decent income, and they are already contributing to Roth IRAs, I would suggest they make contributions to a traditional 401K. This will give them exposure in both pre-tax and post-tax accounts. When in doubt, a best of both worlds approach can work best.

If the wife stops working in a few years, they can always re-evaluate the situation. If their tax burden decreases substantially, it might make sense to go more heavily into the Roth accounts.

Does it matter to you that they currently save about 3x more money each year in their traditional 401k than their Roths? Is that a good ratio or would you rather see that more 50-50?

Also, the wife has the Roth 401k option, not the husband. So when she stops working (she will eventually but it could be 1 year or could be 5), the only Roth option this couple will have is Roth IRA, which they both already max. So they have no ability to go more heavily into their Roths after the wife stops working.

Thank you for your help and reply.

[jIM_Ohio]

2015 taxable income $135k
2015 AGI $86k
2015 total money invested in both 401k's $30k

She's in sales so her income fluctuates quite a bit each year (give or take $10k)

FYI that post contains a lot of mis information, wrong information, or better technical terms are needed.

Taxable income is an IRS term based on form 1040

https://www.irs.gov/pub/irs-pdf/f1040.pdf

AGI is lower than taxable income?
Please double check

looking for lines 38 and line 43. Line 43 should be lower, as lines 39, 40, 41 and 42 get subtracted from line 38 and create taxable income on line 43.

In addition- do both spouses work?
Do both have access to 401ks
what contribution is each spouse making to a retirement plan?
does either have access to an HSA?
How did the $135k gross income get reduced to an AGI of $86k?