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No. of Recommendations: 5
bacon,

You wrote, My wife's company did match her Roth 401(k) contributions, at the same rate it matched traditional 401(k) contributions. However, the matches--whether by Plan requirement or by IRS rule, I'm unclear--went into her traditional 401(k) plan.

All employer contributions must be pre-tax. It's the law.

Besides, the employee eventually has to pay taxes on that contribution.

Now if the plan allows it, the employee might be able to do an in-plan conversion of the matching contribution to Roth. Mine does, but I don't think most allow that.

If allowed and you do an in-plan conversion, the administrator will send you a 1099-R at tax time on the converted amount.

- Joel
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No. of Recommendations: 5
I favor trying to build in some flexibility. If your 401k is like mine it is all pre-tax. I think that there are real advantages to also having post-tax money in a ROTH. Eventually you can withdraw your contributions without penalty, which, if life gets interesting, can be really useful.
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I have the option of a 401k or a Roth 401k. Additionally, through my reservist military job I have the option of a TSP (401k) and Roth TSP (Roth 401k). They all follow the same rules. I am also able to max out a Roth IRA for myself and my spouse. I agree, a mix is probably ideal, but the fact that I'm going to be requried to withdrawal a certain percentage per year and likely have little to no deductions (with the exception of charitable donations) doesn't sit well with me. I know a lot of people empty their pre tax accounts between retirement and 70.5 and some convert from traditional to Roth in that time. Realistically, I'll have 5 years or so to convert/spend the pre tax funds and unless I go nuts I won't be able to move it all. This could also create an unacceptable tax burden in that time. What to do....what....to....do.....

Patrick
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Hi Patrick --

First -- thank you for your service to our country. Much appreciated.

Second -- congratulations on having such a great opportunity in front of you where you can forecast a $5 million net worth 31 years out. It may very well come to pass, if all goes well.

Third -- when you think of "bird in the hand", think of where that hand is in the event things don't work out as expected for you. The early withdrawal taxes and penalities associated with traditional retirement accounts are great deterrents from spending the money early, but they're also massive drags on your ability to get to your cash early should you find yourself involuntarily unemployed far younger than expected.

Fourth -- at least one of your jobs is dangerous. Consider the potential of temporary or even permanent disability and make sure you have preparations in place for that possibility. I broke my arm in a nasty way skiing a couple of winters ago. My productivity, and thus pay, at my Fool (night) job fell off a cliff as a result, at the same time that I had to cough up a lot more cash to handle things like surgery bills and physical therapy costs. Fortunately, I have a great boss at my day job and with her help, I was able to manage my non-working days associated with the injury and surgery and early recovery without having to go on disability. Had it been much worse, I was incredibly glad to have the disability plan available to me. Still, I faced thousands of dollars of out of pocket costs and thousands of dollars of lower income levels for what, in the end, was a relatively minor injury in the grand scheme of things...

Fifth -- I write retirement-related articles for the Fool. If you're interested in being interviewed for one on the topic of the benefits of starting early, feel free to contact me via email and we can set up time. Simply reply to this message, uncheck the "Post this Reply to the Boards" box, check the "E-Mail this Reply to the Author" box, type your message, and hit "submit". Your reply will be forwarded to me, and we can either correspond via email or set up some time to talk.

Regards,
-Chuck
Inside Value Home Fool
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Hi Chuck,

Thank you for the response! By nature I'm a planner so having an emergency fund in place, life insurance and disability insurance were all in the forefront of my planning and have been met to an adequate level at this point in life. That is why I am fortunate to be in the position I am now trying to figure out which account will best serve my needs now and in the future. The crux of the issue is the web of IRS codes and trying to make assumptions for 31 years from now based on todays information. As it turns out, it's impossible (who would have thunk?). What I'm trying to do is just make the most educated guess I can which is why I am drawing upon the knowledge of the Fools. I'm also considering hiring a CFP to help me run some scenarios, it would be the first time I've done something like that.

Thanks again for the reply! I'll also be shooting you a private message to discuss your proposal a bit further!

Thanks,

Patrick
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If your company matches contributions, verify that they will match ROTH contributions.
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I'm at RMD age and in retrospect, I wish I had diversified to include more money in Roth contributions and less in Traditional IRAs. While I do have money in non-taxable accounts, most of it is in traditional IRA/401K accounts.

I'm no where near your income/savings bracket and agree with my money guy that I'm unlikely to run out of money in my lifetime, but I do have to consider the tax implications with big ticket decisions. For example, when I replaced my ten year old car earlier this year with what will probably be the last car I ever buy, I elected to finance it at 2% rather than take the money out of my retirement account and pay 15% taxes on it.

It's hard to plan for a distant future, since we don't know what changes will come. Based on genetics I expect to live another 20 to 25 years and with no dependents, don't need to plan to leave an inheritance to anyone.
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If your company matches contributions, verify that they will match ROTH contributions.

My wife's company did match her Roth 401(k) contributions, at the same rate it matched traditional 401(k) contributions. However, the matches--whether by Plan requirement or by IRS rule, I'm unclear--went into her traditional 401(k) plan.

Eric Hines
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No. of Recommendations: 4
If your company matches contributions, verify that they will match ROTH contributions.

Roth 401K corporate matches are still traditional funds. Youngest worked at Starbucks on a gap year and they matched a percentage of his contributions. He is transferring his contributions to his Roth IRA but the match has to be transferred to a TIRA with which we will then do a conversion to a Roth.

When we started putting away funds for retirement the Roth did not exist and we are now faced with a future that involves huge RMDs when we turn 70.5. I wish I had listened harder when IRAs first became a thing, as there were people on these boards warning of such a future and encouraging a buy and hold approach with stocks instead, but frankly when working and raising a family it's hard to find the time to really investigate what seemed to be coming from naysayers. So now we deal with minimizing a huge future tax bill.

The first step we are taking towards that goal is to retire early. Not as early as I would have liked as it's been a process to convince DH, who comes from a background where you work til you drop, that it's time to pull the plug. We are putting off pensions and SS til 70, minimizing income in order to max out our Roth conversions at the lowest tax rate possible, which will frankly not be all that low. We have a decent amount of funds in non-tax deferred accounts to draw living expenses and pay conversion taxes from.

One thing we did do was to contribute to our Roth IRAs every year we could. We lost the ability to deduct the TIRA from our taxes long ago so that was a no brainer, and by the time work finally came around to the Roth 401K we chose to just keep on with the traditional.

I congratulate the OP on trying to figure out the best approach now instead of blindly throwing money at the retirement pile as we did. None the less, I would rather be in the position we are in now, facing too much taxable income and not a lack of income. Still, we are working with our kids to help them understand the potential pitfalls of the various options of retirement investing.

We aim to draw down on our Roth accounts last, so if there is any money left for the kids to inherit, they won't be overwhelmed by a tax bill.

FWIW,

IP
definitely not a tax pro

IP
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No. of Recommendations: 4
I hear lots of discussion, back and fourth about Roths vs traditional. Lately I've been in the camp of "bird in the hand" and taking the tax advantage today vs in the future. The other reason I've been doing this is because I believe my tax bracket today and going forward to retirement in 31 years will be higher than in retirement. I don't believe I'll have the expenses in retirement that I do today. Kids gone, house paid off, lower overall expenses.

I would have supposed my taxes would have been less in retirement than before, but that is not the case. Also, my other expenses are not much less. Many are more.

House paid off, so no mortgage interest deduction.
Property taxes increased to the point that they are now greater than the interest, principle, and tax escrow before. I just pay my rent to the state instead of the bank and it is more than ever.

Medical expenses: higher now than before. Co-pays higher. Deductibles higher.

No kids, but payed college expenses for daughter of friends.
Helping two other kids whose mother was murdered and have no father. So I might as well have had some kids, and none of these were deductions or tax deductible.

"Income" higher because I must take RMDs from my IRA. And income is taxed by both the feds and the state.

I have about 1/4 in a Roth, 1/4 in a margin account, and 1/2 in a regular IRA. I wish it had been the other way around.
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No. of Recommendations: 8
I project a 401k balance of $5million at the high end 31 years from now.

Let us imagine your projection is correct. Sounds like a lot.

But, when I started driving 1961, 102 octane gasoline was about $0.22/gallon. Today, premium gasoline is around $3.00/gallon. In 1965, a delicious dinner with filet mignon was $2.25. It is much more now. I remember when haircuts were $0.65, and now they are about $20. I remember paying $0.14 to go to the movies, and now they are about $14.

If that happens again (why would it not?), $5 million may not be enough.
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I favor trying to build in some flexibility. If your 401k is like mine it is all pre-tax. I think that there are real advantages to also having post-tax money in a ROTH. Eventually you can withdraw your contributions without penalty, which, if life gets interesting, can be really useful.

If you mean the Roth IRA, then some of us are not eligible. And the back door Roth IRA is not a good idea since one also has pre-tax traditional IRAs.

PSU
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So, I'm lucky enough to have a 17% contribution by my company, no strings attached. That money goes into a Traditional 401k an I don't need to put in anything. However, I do; I max out my $18k and then am able to make 401(a) after tax contributions. Those along with my employers contributions, starting in 2018 I should be able to reach the 415 max of $54,000. Once I have reached that max, the companie's contributions are then sent to my paycheck.

Additionally, I am able to max out my Roth and my spouses Roth via back door conversion. I calculated a $5million balance in retirement at a 6% annualized average return for 31 years would require about $3,000/mo savings. Currently I'm above that savings/investing rate and barring any unforeseen circumstances, I should be able to continue that indefinitely. Personally, I think $5million might be on the conservative side and I use it to account for those possible unforeseen circumstances.

I'm really grateful to have this "first world problem", I know my situation is not the norm for a lot of people, so I don't want to sound like I'm gloating. The people who have posted about their situation as they're approaching or currently in the RMD phase of life has really helped. I can see now that despite a higher tax bracket today, with no recurring income in retirement it might be more worth paying higher taxes on some of my contributions now in order to avoid the completely tax "unshielded" RMDs in the future.

Has anyone ever created a spreadsheet to figure out the optimal mix of T 401k contributions vs Roth 401k contributions? It seems like if you could shield some of the income from the highest of tax brackets and keep it in the next lowest one by making traditional contributions and the remainder into a Roth might be a good way to go. It may take several years of "trial and error" to achieve this amount.
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No. of Recommendations: 13
Trying to find the optimal mix.

Take the Marine Corps approach, in a time of war you don't need a perfect answer, you need a good enough answer.

The only way you'll know the optimal mix is with 20/20 hindsight. IMHO, do a little of both, tax deferred and tax sheltered. That way you won't get the best scenario but you also won't get the worst scenario. Plus, it gives you flexibility in what will most likely be an ever changing environment.

JLC
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No. of Recommendations: 3
<If that happens again (why would it not?), $5 million may not be enough.>



Even more certain than that, there will be an overwhelming number of people who will not have a penny put away for their futures. Of course, they will still expect to be provided for.

The federal government has an insatiable appetite for money. Never doubt that the desire for ever more cash will lead to them look at anywhere there is ready cash just sitting there. In such a scenario, Roths look like low hanging fruit.

I have zero doubt that Roth funds will be subject to further taxation simply because they are there and that congress is free to change the rules at any time. The rules can be as simple as taxing any future withdrawals at your current tax rate. They could also implement a tax on simply holding it in your account. So they could start out with a 1% tax on any balance of say 10k or more.

The fact that no such things are in the works today, should not eliminate them from planning that goes out multiple decades. Sadly, it would be infinitely wiser to include such potential developments in your plans rather than to exclude them.



BG
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No. of Recommendations: 3
BG,

What is your solution then? Cash under the mattress? Gold? I don't doubt the 401k/Roth Rules will change in the future. I'm hoping if they do change it will include some sort of a grandfather clause or grace period to convert funds out and into something else. If not, perhaps I'll end up looking off shore :-) Who really knows. In my mind, all I can do is make assumptions for the future based on some iteration of todays rules. While this may be "throwing darts", I think planning based on something catastrophic like the government digging their grubby mitts into my Roth is an even wilder proposition.

Patrick
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No. of Recommendations: 2
PSU: "If you mean the Roth IRA, then some of us are not eligible. And the back door Roth IRA is not a good idea since one also has pre-tax traditional IRAs."

We are in the same boat. When they created Roth IRA'a about 20 years ago, we were doing our best to max out tax deferred accounts while putting our daughters through college and then paying for weddings. By the time those obligations were met, we made too much money to qualify for the Roth. But if your kids are grown and you make too much money to qualify for a Roth, you can take after tax dollars and invest them in a taxable account that contains growth stocks, index funds, and/or investments like Berkshire Hathaway that grow with limited taxes.

I am 61. My taxable Vanguard account has roughly 50% vti and 50% vbiax which gives us a broad based low cost low tax combination of about 80% equities and 20% bonds. (Vti is 100% equities and vbiax is 60% equities and 40% bonds.)

My other brokerage account has a basket of stocks that produce dividends that are taxed at a favorable rate, some preferred stocks that are fully taxed, a Virginia Municipal bond fund yielding about 3.2% tax free, and a low cost mutual fund - veirx.

Many middle and upper middle class workers receive encouragement to put money in IRA's and 401(k)'s by their employers. But they receive little or no guidance on what to do with other savings except from expensive brokers.

That is where Vanguard and Fidelity and some of the other lower cost brokers are starting to fill the gap that we faced 20 years ago when we had no idea what to do with our investment money and turned to expensive brokers and/or gave up hope of saving outside of our sheltered accounts.
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No. of Recommendations: 1
Even more certain than that, there will be an overwhelming number of people who will not have a penny put away for their futures. Of course, they will still expect to be provided for.

The federal government has an insatiable appetite for money. Never doubt that the desire for ever more cash will lead to them look at anywhere there is ready cash just sitting there. In such a scenario, Roths look like low hanging fruit.

I have zero doubt that Roth funds will be subject to further taxation simply because they are there and that congress is free to change the rules at any time. The rules can be as simple as taxing any future withdrawals at your current tax rate. They could also implement a tax on simply holding it in your account. So they could start out with a 1% tax on any balance of say 10k or more.

The fact that no such things are in the works today, should not eliminate them from planning that goes out multiple decades. Sadly, it would be infinitely wiser to include such potential developments in your plans rather than to exclude them.


I entirely agree. In addition to all you said, the government has another sneaky way to get your money. When the government is really in trouble, they will try to sell treasury bonds and no one will wish to buy them. Think the largest holders, the governments of China, Russia, Saudi Arabia, ... . They are already unloading their treasuries as fast as they can without depressing the bond prices too much. When no one wants the bonds, the Federal Reserve can buy them, but that causes massive inflation. So here is the way for the government to unload the unwanted bonds.

Have you ever heard of someone losing money by owning common stocks? So have I. All the government needs to do to sell the unwanted bonds is to pass the "Retirement Account Insurance and Security Act" (I made up the name, but you get the idea.) that provides that all retirement accounts must contain at least 30% (I picked that number out of a hat) in US treasury bonds. Instead of it looking like they are stealing your money, it looks like they are protecting you from unscrupulous stock salesmen. Sneaky, right? And do not think they would never dare do that. They did something similar to insurance companies during WW-II, requiring much greater amounts invested in US Treasuries than the companies would otherwise have wished.
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No. of Recommendations: 5
bacon,

You wrote, My wife's company did match her Roth 401(k) contributions, at the same rate it matched traditional 401(k) contributions. However, the matches--whether by Plan requirement or by IRS rule, I'm unclear--went into her traditional 401(k) plan.

All employer contributions must be pre-tax. It's the law.

Besides, the employee eventually has to pay taxes on that contribution.

Now if the plan allows it, the employee might be able to do an in-plan conversion of the matching contribution to Roth. Mine does, but I don't think most allow that.

If allowed and you do an in-plan conversion, the administrator will send you a 1099-R at tax time on the converted amount.

- Joel
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