Comments on: Roth 401(k)

By: kitty

kitty — Mon, 30 Jul 2007 15:07:33 +0000

I think a lot depends on income. While withdrawals from 401K are added to income and may increase tax on social security, the total income in retirement are still likely to be smaller, so it may result in lower tax rate. In some cases, 401K contribution may be the only thing that is keeping someone from getting hit by the alternative minimum tax or getting limits on deductions, etc. In other cases, choosing Roth 401K vs Roth IRA would put someone in a higher tax rate.

For example, 401K contribution is the only thing right now that allows me to contribute to Roth IRA as well. Adding the money I currently contribute to 401K will immediately put my income above max Roth IRA limit (this year I will be in phaseout range, but without my max 401K contribution, I would definitely be above). If I sell stock I may get into the AMT situation (given that I live in NY State)

By: Harry

Harry — Mon, 30 Jul 2007 06:31:34 +0000

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[...] Roth 401(k) by Sun @ The Sun’s Financial Diary. [...]

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Personal Finance Review - Football is Better edition — Sat, 28 Jul 2007 19:22:23 +0000

[...] Sun’s wife has the rare option to open a Roth 401k. I’d love to have this option as I’d love to pay today’s taxes to escape what I [...]

By: Sun

Sun — Fri, 27 Jul 2007 01:48:08 +0000

Brip Blap: Yes, the tax-free withdrawal in the future is indeed quite attractive, though we don’t know exactly what the tax rates will be. There are chances that the government will need more tax revenue to fund social security and medicare. However, it’s also possible that the current deficit will be gone in the near future without increasing tax burdens.

Even though Roth 401(k) doesn’t offer immediate tax benefit, it seems to be more flexible by the time we need to withdraw the money. Next year we could use a mix of regular and Roth 401(k).

Irving: That’s an excellent point that I have never thought about. All I have read on Roth 401(k) are about the tax effect that the plan itself will have, not the impact on other distributions as you mentioned. I can imagine that at some point the taxes paid in the future will outweigh the benefit received in the past.

I have to think my strategy again .

By: Irving

Irving — Thu, 26 Jul 2007 22:32:08 +0000

Another factor that needs to be considered – and I rarely see discussed – is the effect of taxation of social security benefits. I spoke to a friend who contributed to his regular 401k while working, is now retired, and taking 401k distributions. Because the 401k distributions increase his income, more of his social security income is taxable. He did the numbers, and determined that the rate of tax of his 401k distributions is MORE than the tax break he received from contributing, once the effect of increased taxation of his social security income is figured in. Needless to say, he is not a happy camper. Contributions to a Roth 401k would avoid this problem, because Roth 401k distributions would not be added to his income, and therefore would not increase the amount of his social security income subject to taxation.

By: 401k Rollover IRA

401k Rollover IRA — Thu, 26 Jul 2007 20:30:52 +0000

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By: Jeremy

Jeremy — Thu, 26 Jul 2007 18:02:58 +0000

My employer just began to offer this and I’ve yet to enroll. I have to get off my butt and adjust the contributions between the standard 401 and the roth. Tax diversity is where it will be at come retirement time!

By: Brip Blap

Brip Blap — Thu, 26 Jul 2007 01:25:59 +0000

I would definitely participate if you’re able to. There’s a lot of variables that play into the “Roth vs. regular” debate (for 401ks or IRAs) but to me the risk that the US is going to be raising taxes to pay for the Baby Boomers makes anything that will be tax-free in the future a good bet. If it’s matched by the employers, all the more so. I’m still stuck with a regular 401K but I would switch in a heartbeat, based on my pessimism.