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Author: neonsnake3 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Roth 401(k) & Roth IRA Date: 1/11/2011 5:36 PM
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My wife and I are eligible for and max out a Roth IRA account every year, but my wife's company added a Roth 401(k) option to her retirement savings options this month.

Two questions:

1) Does contributing to a Roth 401(k) in any way subtract from the $5,000 per year contribution she is allowed to make to the Roth IRA or are they unrelated?

2) Anyone have opinions (good or bad) on contributing to both a Roth 401(k) and Roth IRA instead of the traditional methods?

Thanks for the help,
Jake
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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: 68206 of 75335
Subject: Re: Roth 401(k) & Roth IRA Date: 1/11/2011 5:57 PM
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1) Does contributing to a Roth 401(k) in any way subtract from the $5,000 per year contribution she is allowed to make to the Roth IRA or are they unrelated?

They are related, but probably not as directly as you would like.

The ability to contribute to a Roth IRA is limited by your MAGI. Your MAGI is reduced for contributions to a Traditional 401(k), but not reduced for contributions to a Roth 401(k), since Traditional contributions are pre-tax, while Roth contributions are taxable. So, if your joint MAGI puts you close to the limit where you can make a full Roth IRA contribution, by contributing to a Roth 401(k) instead of a Traditional 401(k), your wife may limit the ability for both of you to contribute to Roth IRAs. IRS Pub 590 has the rules and income limits.

2) Anyone have opinions (good or bad) on contributing to both a Roth 401(k) and Roth IRA instead of the traditional methods?

It's really dependent on what you think the tax rules and associated rates will be when you retire. Since my crystal ball is a bit cloudy on that, I think that having different tax treatments for different accounts in retirement will be a good thing - that way I will have some ability to structure my income in order to minimize taxes paid.

AJ

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68207 of 75335
Subject: Re: Roth 401(k) & Roth IRA Date: 1/11/2011 6:37 PM
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1) Does contributing to a Roth 401(k) in any way subtract from the $5,000 per year contribution she is allowed to make to the Roth IRA or are they unrelated?

They are unrelated. Contributions to a 401k plan either traditional or Roth does not preclude contributions to a Roth IRA.

2) Anyone have opinions (good or bad) on contributing to both a Roth 401(k) and Roth IRA instead of the traditional methods?

There is nothing inherently wrong with contribution to both a Roth 401k and Roth IRA. I think the decision really is whether you want to contribute to a Roth 401k vs. a traditional 401k. IF tax rates are currently the same as they will be at time of withdrawal from the 401k the two are mathematically the same. The chances, however, that taxes will be the same in the future as they are currently are somewhere between slim and none. Whether they will be higher or lower at time of withdrawal is more difficult to predict.
I think that it is highly desireable to have accounts that are tax deferred, tax free, and taxable at time of withdrawal to give one some options and control of taxes at the time.
In most cases the decision comes down to whether the current tax deduction is more or less desireable than having the money tax free at retirement.

Bob

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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: 68208 of 75335
Subject: Re: Roth 401(k) & Roth IRA Date: 1/11/2011 6:56 PM
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They are unrelated. Contributions to a 401k plan either traditional or Roth does not preclude contributions to a Roth IRA.

Except, as already mentioned, if close to the MAGI limit, by contributing to a Roth 401(k) instead of a Traditional 401(k), you could put yourself over the MAGI limit and be unable to contribute to a Roth IRA.

AJ

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68210 of 75335
Subject: Re: Roth 401(k) & Roth IRA Date: 1/11/2011 9:38 PM
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The chances, however, that taxes will be the same in the future as they are currently are somewhere between slim and none.

It is also highly dependent on your current marginal tax rate that you are deferring and where you expect to get income during retirement.

For example, my marginal tax rate is currently 28% or 33% and I expect to take distributions from my IRAs and other investments for several years prior to taking social security. Assuming no other income and the current tiered tax system, that means that I will pay 0, 10 & 15% on large chunks of my withdrawals.

If (big IF) tax rates don't change, I don't anticipate ever paying 33% on my withdrawals unless my investment do very well and RMDs kick me over the limit. If that happens, I will be very pleased ;)

I wholeheartedly agree that having savings in different vehicles (Roth & traditional) is a good thing which you are already doing. This allows you more freedom in managing your taxes in retirement. I do believe Roths are oversold as saving large amounts of taxes over traditional IRAs when, in fact, many retirees have little to no income and therefore could withdraw from traditional IRAs at very low tax rates.

-murray

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68212 of 75335
Subject: Re: Roth 401(k) & Roth IRA Date: 1/12/2011 10:49 AM
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All the posted concerns about tax rates are valid. However, trying to predict what they'll be 10, 20, or 30 years down the road when you start withdrawing the money is futile.

I am able to invest in a Roth 401(k) but can only make a contribution to a traditional IRA. And a non-tax deferred account to boot. Having investments in various tax strategy accounts won't give me the best tax rate possible when withdrawing but it won't give me the worst either.

My advice is to sock away money where and when you can.

JLC

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Author: neonsnake3 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68213 of 75335
Subject: Re: Roth 401(k) & Roth IRA Date: 1/12/2011 11:43 AM
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Thanks for the help. All good advice.

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