Roth 401k or Regular 401k?

[DVCcurious]

I can't decide. I've listened to the Ray Lucia show religiously since 1999 and he says you should do the deductible 401k if you are over 30 years old (or so). I've recently started listening to the Dave Ramsey podcasts and he says Roth 401k is the way to go, regardless of almost any factor. I read online and it says you should have some Roth and some deductible.

We are 40 years old. We have about $250,000 in deductible 401ks and maybe $5k in roths (I just did a little in the Roth 401k this year). I am thinking it may be smart to start contributing to the Roth 401k since we have almost all our wealth in the deductible 401ks. However, we are on the edge of the 28% bracket. If we do deductible 401ks we stay in the 25% federal bracket, but if we were to do Roth 401ks we would be pushed into the 28% bracket. We could do a little in the Roth and then when we'd be pushed into the 28% stop doing Roths and do the rest of the year in deductible 401ks so we never are in the 28% bracket.

But I'm wondering what you guys think is smart: do you do the deductible or the Roth 401k?

 

[pearlieq]

We're just shy of 40 and do Roth 401ks. I have no intention of being in a lower tax bracket when I retire, and I can't see taxes going anywhere but up as the boomer generation ages, so I'd rather have tax-free growth ahead of me. That money has at least 50-60 years of work to do.

That being said, there's no guarantee on whose pocket the government could come to pick in the future, so I always assume the tax-free status on the Roth could disappear at any time. I can see an argument for keeping some of both, just to hedge one's bets.

Either way, 90% of the battle is won when you put money away to invest!

 

[pachanga5]

I am 41 and my financial advisor recommended doing both. If you can stay in the 25% bracket I would do what you can to stay there.

 

[redsonja76]

I'm a roth girl. I have no idea what taxes will look like when I'm 67+ and I have the ability to pay the taxes now so I would rather do it now and secure my safety net when I'm older.

 

[arthur06]

We are Roth all the way. We are in our mid 30's.

We have a Roth option in our TSP that we contribute to, but the match is done in traditional.

We also have have Roth IRA's that we do.

Give my 30 years of tax free growth any day over 30 years of tax deferred growth.

I also am not a believer that some in both is the best option.

 

[TheGecko]

No Roth 401K here. I plan on being in a lower tax Bracket when I retire, and don't trust .gov not to change the rules of the game at some point. We do participate in standard Roth IRA on years when the income limits don't hit us. I may consider a portion of the 401 K going into a Roth Conversion on a roll over in the future.

 

[QueenIsabella]

The good news is, there isn't one right answer. The important thing is, you're saving for retirement. So, whatever you decide, it's to the good.

That said, we do regular 401ks. I don't trust the government to not tax Roth IRAs/401ks down the line. I think they're going to look at that HUGE pile of money, and want some of it. You know, like they once said they'd never tax Social Security, ha ha. So, our approach is, we'll take our tax break now, thankyouverymuch.

Another thought--although you might "think" you'll be in a higher/lower tax bracket in the future, these things are tough to predict (and the brackets keep moving--see greedy government, above). So, it's good to consider your future tax bracket, it's really just a good guess.

OTOH, Roths also have the advantage of being able to withdraw your original investment after 5 years. I know this runs counter to the whole "save for retirement" strategy, but if you think you might need this provision down the line, say to buy a house or something, it could be handy. Or maybe you'd rather not be tempted by that option, but it's worth considering.

I guess I would say, if you can, do some of both. Dh and I have been investing in our 401ks, just enough to get the company match. We're now early 50s, 4 kids, and I've been a SAHM for over 20 years. We're closing in on $1M in our accounts--and it's been pretty painless. So, keep up the good work!

 

[NY Pirate Princess]

Also please remember that not all of your income is taxed at a higher rate when you cross a threshold, just the amount ABOVE the threshold. I recommend you listen to Scott Turner's set of podcasts on income taxes to get a clear understanding of how the IRS taxes your income. I don't agree with everything he says, but the tax stuff was the clearest I've ever heard.

http://scottalanturner.com/

As far as the Roth goes, it is really just a guess. Pay now or pay later, and you (and me and everyone else) have zero idea what taxes will look like when you retire. You really need a comprehensive plan and a crystal ball to figure out which way to go. The two most important things are to save, which you are, and understand the vehicles you are saving in. You can't rely on anyone else, not a personal finance celeb or even a paid financial advisor to run the show for you. You must learn, plan, and save according to your plan. Sounds like you are doing wonderfully so far. Keep it up!

 

[amcnj]

The other unknown is what will investments earn the next x years. Some "experts" predict below average returns for the foreseeable future, so that might make getting a tax break now more enticing. I also think some depends on your income level. I have one child making considerably more than another right now, so the immediate tax benefits of a regular IRA may be more appropriate for them right now, while a Roth might be better for the other, given their lower current tax rate right now.

Also, I believe a Roth within a company 401 K plan still requires mandatory withdrawals at age 70.5, while the IRA Roths do not, making the IRA Roth possibly a better really long term vehicle, and one from which to pass assets on to heirs in the future.

Hopefully someone else will correct any misinformation I may have posted here!

 

[NY Pirate Princess]

My 401K requires mandatory withdrawals at 70 and a half, but you can roll the Roth portion over to a regular Roth IRA before that date, so I'm told.

 

[runwad]

I'm doing a little of both, well more of the regular just a little of the Roth 401k. I don't want my income to jump and throw me in another tax bracket so I just do a little in the Roth 401k to keep me where I'm at tax wise.

 

[Ciandella915]

I'm not a financial advisor, so I'm much in the same boat of asking around. My retirement advisor told my husband and I that Roth is the way to go. Tax it now when it's cheaper and your money hasn't grown (yet). Taxes generally don't tend to go down, and hopefully the amount in your account won't either! (This also gives me an accurate view of what I've actually got.)

 

[supersnoop]

Will your income put you in a higher tax bracket now, or in retirement? If you'll pay more in taxes now, put in in a regular 401k. If you're income will be higher in retirement, put it in a Roth now.

The difference is when you pay the taxes. When do you think you'll pay less?

 

[DVCcurious]

We both work for the federal government and when we retire at 62 we're going to get about a $95,000 pension (total, not $95k for each of us). The way it works is, if you work less than 40 years your pension is years of service X 1% of your final salary. But if you work 40+ years the calculation is years of service X 1.1% of your salary. We both started right out of college so at 62 we'll get 44% (40 years X 1.1%) of our final salary as a pension, which will work out to about 95k in today's dollars.

The 95k (today's dollars) is in the 25% bracket (which starts at 75k). So as I mentioned we're currently right on the edge of the 28% bracket. If we do all Roth we'd be pushed into the 28%. But if we do all deductible we stay in the 25%. It's a mathematical fact that we will be in at least the 25% bracket at retirement (let's be real here, tax brackets aren't going to shift lower for those with 95k incomes in the future). When you factor in required minimum distributions we may be forced into the 28% bracket at retirement. That's why I'm considering the Roth. But right now it's a guarantee we'll be in the 28% bracket for some of our income if we do 100% roth contributions. Anyway, that's our situation. I appreciate the help on this. It seems more and more like Roth may be the way to go for a few years until our balances become more closely aligned (like 25% roth, 75% pre tax or something, right now we're like 98% roth).

 

[arthur06]

We both work for the federal government and when we retire at 62 we're going to get about a $95,000 pension (total, not $95k for each of us). The way it works is, if you work less than 40 years your pension is years of service X 1% of your final salary. But if you work 40+ years the calculation is years of service X 1.1% of your salary. We both started right out of college so at 62 we'll get 44% (40 years X 1.1%) of our final salary as a pension, which will work out to about 95k in today's dollars.

The 95k (today's dollars) is in the 25% bracket (which starts at 75k). So as I mentioned we're currently right on the edge of the 28% bracket. If we do all Roth we'd be pushed into the 28%. But if we do all deductible we stay in the 25%. It's a mathematical fact that we will be in at least the 25% bracket at retirement (let's be real here, tax brackets aren't going to shift lower for those with 95k incomes in the future). When you factor in required minimum distributions we may be forced into the 28% bracket at retirement. That's why I'm considering the Roth. But right now it's a guarantee we'll be in the 28% bracket for some of our income if we do 100% roth contributions. Anyway, that's our situation. I appreciate the help on this. It seems more and more like Roth may be the way to go for a few years until our balances become more closely aligned (like 25% roth, 75% pre tax or something, right now we're like 98% roth).

Are you Civil Service or FERS?

 

[DVCcurious]

FERS