(Closed) Roth vs 401K

posted 5 years ago in Money
Post # 4
Member
6124 posts
Bee Keeper
  • Wedding: August 2012

@oracle:  That explains it well!  I was going to point out the contribution differences ($17,500 versus $5,500).

Post # 5
Member
2363 posts
Buzzing bee
  • Wedding: October 2012

@oracle:  I didn’t read the link, but was going to suggest maximizing the Roth first and then contributing to the IRA to diversify your tax risk.

ETA I just read Dave Ramsey’s advice.  If only my retirement accounts would average a 12% return for the next 40 years!

Post # 7
Member
7311 posts
Busy Beekeeper
  • Wedding: October 2011 - Bed & Breakfast

@LittleRiver:  Right?! My retirement investments are averaging 9.5% over the last 12 months. 12% seems like a dream!

Post # 8
Member
14440 posts
Honey Beekeeper
  • Wedding: June 2011

Wow, that is funny cause I was just thinking about this 30 minutes ago while driving to work.  We are doing 401k and maxing the Roth, then I was thinking if we should not be doing Roth and doing 401k instead cause the money isnt taxed going in… but this article seems to say we’re doing it right and don’t change a thing.

Post # 9
Member
7311 posts
Busy Beekeeper
  • Wedding: October 2011 - Bed & Breakfast

@oracle:  Right now we are not following the Dave Ramsey advice because we’re using our retirement savings contributions to lower our current tax burden. We both earn a good living, and even with a kid and mortgage interest deductions we still pay a large amount of Federal and State income taxes. Our accountant and our financial planner both advised us to do as much as possible into our 401K in order to reduce our current income tax liability.

We’ll be 40 when we are done paying for teen LK’s college, so we will max out our Roth options at that time to diversify the tax status of our retirement income stream. The Roth contributions will still have 22-25 years to accumulate and grow.

Post # 10
Member
4371 posts
Honey bee

Our strategy is to max out our IRA’s and then contribute to 401K. As I understand it, you don’t get to control your 401K investments like you can your IRA’s. We’ll also be rolling our old 401K’s into IRA’s. 

Post # 11
Member
6124 posts
Bee Keeper
  • Wedding: August 2012

My 2012 personal rate of return average was 15.4%.  Wow!  2013 is starting out with a 7.9% average though.

 

We’re doing a mix of post-tax (ROTH, HSA) and pre-tax (457b, 403b) accounts.  We don’t have 401k’s, but 401a’s here and we don’t get to contribute to those, the empoloyees only (at 14.2%).  I think we are not going to be making what we make now in retirement (different replacement income since we’ll have no mortgage), so I want to lower my taxes now.  But in retirement we’ll be paying taxes on some of those withdrawals, just not all.

 

We also want to lower our taxable income a good chunk just with the pre-tax accounts. The 457b has no penalty for early withdrawal before 59½, so that’s what is going to get us through early retirement before actual retirement age.  We’ll have to pay ordinary income tax on it though. 

 

Post # 12
Member
6124 posts
Bee Keeper
  • Wedding: August 2012

@oracle:  I thought of another difference…

You can take out any of your own Roth contributions at any time, penalty free, but you can with a 401k but there’s a 10% penalty fee, plus taxes I think.  Not saying you should use it like a personal savings account, but it is a nice perk if you find yourself in the most dire of circumstances and need money.

We are considering our Roths as our secondary emergency funds.  As in we BOTH loose our jobs (not just one job), and ran out of our primary emergency funds, and have no employment on the horizon.  Very dire!

401ks have forced distributions (must start withdrawing at age 70 ½ unless you’re still employed).  Roth IRA has no forced distributions.

Here is a chart of more differences:

http://en.wikipedia.org/wiki/Comparison_of_401%28k%29_and_IRA_accounts

Post # 14
Member
1646 posts
Bumble bee
  • Wedding: August 2013

It is all about whether you believe you’re going to have a higher tax rate NOW or later. I am very pessimistic about the direction our country is going in, tax wise, and I believe our tax rates will continue to rise. For that reason, I still put money into a 401K because the limit is higher, but then I convert the 401K at the end of every year into a Roth IRA going forward. I pay the taxes that year, and never again. I get the best investments I want. 

 

I’m over the income limit for Roth so I can’t contribute to that one anyway. 

Post # 15
Member
4371 posts
Honey bee

@melonseeds:  Oh, I totally didn’t realize there is an income limit, and I think we’ll go over that this coming year. So if I contribute to the limit on my 401k, I can still roll that to a Roth IRA afterwards?

Post # 16
Member
1646 posts
Bumble bee
  • Wedding: August 2013

@SoupyCat:  Yes, definitely. Contribute up to the limit and then convert it to a Roth IRA before year’s end. However, make sure by tax season you have the money to pay for the taxes you’d owe on the ENTIRE amount of that IRA!

 

 

I do mine through Fidelity and the forms didn’t talk to each other. I got a form 1099-R from the 401k side (which technically meant I owed no taxes). I needed to get a form 5498 from the Roth side to show that it was Roth contribution in order for the tax calculation go through. My amazing tax advisor caught this mistake just in time.

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