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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25234  
Subject: Re: Convert from Traditional 401k to Roth 401k? Date: 11/23/2013 1:39 PM
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I am 99% sure I won't be in the 28% tax bracket but am on the edge of 25%.

Whichever bracket you are on the edge of - 15% to 25%; 25% to 28%; 28% to 33%, etc. - the question needs to be - is paying the extra taxes now worth the tax benefit you will get in the future? That basically boils down to - do you think your tax rate in retirement will be higher, lower or the same as it is now? If you think you will be in a higher bracket/rate in retirement, then paying taxes now would be beneficial. If you think you will be in a lower bracket/rate in retirement, then paying the extra taxes now probably costs you money. If you think you will be in the same bracket/rate - then it's pretty much a wash, and whether you contribute to a Roth or a Traditional 401(k) probably becomes more of a an issue of current cash flow, because of the extra income taxes withheld from your paycheck for a Roth contribution.

Who notes that is not what his HR person told him but if the matching contributions are in fact pre-tax he is not sure the effort will be worth it and instead will probably stick with his non-401k Roth IRA contributions...

Well, either the HR person you talked to doesn't understand the law, didn't understand your question, you asked the wrong question, or you misunderstood the answer you got. If a company makes matching contributions, the match is the same whether the employee's contributions are Roth or Traditional - a typical match is 50% on the first 6% contributed. So if you are contributing 6% of your salary, the company will contribute 3%. From a cash flow perspective, if you are contributing the 6% as a pre-tax (traditional) contribution, you will have fewer income taxes withheld from your paycheck compared to if you were making a Roth contribution. That means, by making the contribution a Roth contribution, you are decreasing your take-home pay by the amount of income taxes that will be withheld. In either case the 3% matching contribution will be pre-tax, because the company is making the contribution, and the law requires that company contributions be pre-tax.

So, if the question that you asked was "Will my Roth contribution be matched like my traditional contribution?" - the answer is yes - but the answer doesn't say anything about the tax treatment of the match. The question you needed to ask was - "If I make Roth contributions, will my match be Roth or pre-tax?" The answer to that question is - it will be pre-tax.

However, I don't know why the fact that the law requires all company/matching contributions to be pre-tax would prevent you from making your future contributions Roth contributions, or converting your previous contributions to a Roth, IF it makes sense from a tax standpoint (and from a cash flow standpoint). You will just have 2 different accounts in the 401(k)- one Roth and one non-Roth accounts. Each account will be tracked separately by Fidelity, with no effort on your part, and when you leave this employer, you will have the option to roll the Roth account into a Roth IRA, and roll the traditional account into either a traditional IRA, or, if you are willing to pay the taxes, into a Roth IRA. So, if you decide to roll your 401(k) into an IRA, that may require a little extra effort on your part, to deal with 2 account. However, the question really revolves around the tax issue vs. any administrative issue. If the Roth option will save you money in the long run, and you can afford the extra cash flow, it's probably worth the extra time to fill out paperwork on 2 rollovers instead of 1.

AJ
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