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I've been at my first job for about a year. I've built up about $5000 in my workplace's 401(k) and I also fund a Roth IRA. I subscribe to the general notion that, for someone of my age and income, the Roth-style retirement fund will net me the most at retirement. Last month, my employer began offering a Roth 401(k) in addition to the traditional plan I've been using. I'm debating signing up for the Roth 401(k), but here are the questions that occur to me:

1) Is there any benefit (a sort of hedge-your-bets approach) in having half your retirement be in traditional and half in Roth? In other words, are there any drawbacks to having 100% of your retirement be in Roth form? The conventional wisdom (401(k) to the match, then Roth to the max, then 401(k) with what's left) doesn't address Roth 401(k)s.

2) Does it make sense to just 'strand' the $5000 that's already in the traditional 401(k)? Since you can't roll a traditional 401(k) over into a Roth, that money would just sit there and I'd start my Roth 401(k) over at $0. Or would I be better off maintaining the traditional 401(k) for as long as I stay with my current employer (the 'what's done is done' approach)?

Ultimately, I am fairly sure I would have gone with the Roth 401(k) had I the choice at the beginning. My question is, is it worth it to change to a Roth 401(k) at this stage?

Other information that may be helpful -- I'm not really close to a tax bracket boundary, and expect my student loans to be paid off in a few months (in other words, there's not much of a chance my traditional 401(k) contributions will bump me to a lower bracket in the near term).

Any opinions?

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One possible drawback to a Roth would be if they decide to treat them like traditional IRAs (tax it all) or nondeductible IRAs (tax the profits) some time in the future.
One possible drawback to the traditional 401k is that, under current law, a sizeable 401k payout can cause your social security benefits to be as much as 85% taxable. (in other words, 85% of SS can be included in taxable income if your income is too high)

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WhatAWendy said: The conventional wisdom (401(k) to the match, then Roth to the max, then 401(k) with what's left) This is the conventional wisdom that's typically used for simpletons who can't properly analyze their own financial and retirement situation.

There are a number of differences between traditional and roth accounts, but from the standpoint of simple math, a traditional account is more advantageous if you are in a higher tax bracket now than the bracket you anticipate entering upon your retirement. If the opposite is true, the roth is more advantageous. If you expect your tax brackets to remain the same, the roth and the traditional accounts will be exactly the same. You should of course keep in mind that you can make a larger effective after-tax contribution to a roth than you can to a Traditional account if you initially choose to allocate a larger amount towards your roth than the amount that would be required to be allocated towards a Traditional account.

To say it in a different way, it makes absolutely no difference whether you pay tax on your contributions up front and then let the interest accrue on that after-tax amount or whether you do not initially tax contributions but then tax everything at the time you withdraw the money. The ONLY thing that matters in this case is whether the tax bracket is lower at the time you contribute the money vs. when you withdraw it.

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Lol at above post.

Earnings coming out untaxed is a huge advantage if the investments dont let you down. Dont forget that fact...(assuming of course they (IRS) leave Roth gains alone)

If your investments doubles every 10 years (find better investments) you would be saving the taxes on nearly 4x your initial investment by the time you retire...but I'm just a simpleton who subscribes that that mantra above (and if you have a roth 401k all the better for a young investor).

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bNeta86 said: Lol at above post.

Earnings coming out untaxed is a huge advantage if the investments dont let you down. Dont forget that fact...(assuming of course they (IRS) leave Roth gains alone)

If your investments doubles every 10 years (find better investments) you would be saving the taxes on nearly 4x your initial investment by the time you retire...but I'm just a simpleton who subscribes that that mantra above (and if you have a roth 401k all the better for a young investor).
Not again! Haven't we explained this quite throroughly in the past (just SEARCH this forum)?!

If in a particular year you can only allocate an amount towards your retirement savings equal to the contribution limit (in other words, you can either contribute the full $15K to 401K or $15K minus taxes to your Roth 401K; you can't afford to max out the roth and pay the taxes from some other pot of money), then the decision between Traditional vs. Roth, based on math alone (there are other considerations), is based purely on the tax bracket now vs. anticipated tax bracket at retirement.

If you require an easier example, if you have $100, your tax rate now and at retirement will remain the same at 20% and your retirement funds will triple over the course of your life, you have the following:

Traditional: $300 at retirement, minus 20% tax = $240
roth: $80 invested now ($100 - $20 tax) = $240 at retirement (no tax is owed then).

So, if your tax rate is the same now and at retirement, it makes no difference whether you choose a roth or a traditional account. Once again, if your tax rate is higher now than what you will have at retirement, you will come out ahead with a traditional account. If it's reversed, a roth is more advantageous.

Please keep in mind that your ability to make larger after-tax contributions does NOT automatically mean that a roth is a better alternative -- you still have to look at the math I explained above to determine this. For instance, even with a larger after tax contribution attributable to a roth, if you are in a 25% bracket at the time of the contribution but will be in a 10% bracket or lower at retirement (which can happen even with very large assets if they are invested in tax exempt vehicles), the larger assets in a roth account will often have come at an unreasonably high price of overpaying your taxes.

Another reason that many people (even those who can afford to max out the roth) are often better off contributing to traditional accounts is because it gives them the ability to convert that account to a roth in a year where they are temporarily in a lower tax bracket. Most people experience those lower tax bracket years in their lives -- people go back to school, get married to non-working spouses, have kids, lose jobs, take sabbaticals, decide to work part-time, etc... Converting all or a portion of a traditional account to a roth in such a lower tax bracket environment can save quite a bit of money.

Once again, please take the time to understand the differences between Roth and Traditional accounts and then run the numbers for your specific situation.

P.S.
Aren't you a financial advisor who charges 1% for your advice?

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If you're very unsure about your future tax situation, splitting between Roth and regular 401ks is a way to diversify your tax liabilities. Not to say that's a great strategy -- if you're very unsure, you probably need to get some professional advise. However, if you are just starting out, you almost certainly will have higher taxes in the future. Personally, I'm just starting out and I'm predicting (for what it's worth) that taxes will probably rise in the future, in general. For now, my money is going to the Roth without a second thought.

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mespin said: If you're very unsure about your future tax situation, splitting between Roth and regular 401ks is a way to diversify your tax liabilities. Not to say that's a great strategy -- if you're very unsure, you probably need to get some professional advise. However, if you are just starting out, you almost certainly will have higher taxes in the future. Personally, I'm just starting out and I'm predicting (for what it's worth) that taxes will probably rise in the future, in general. For now, my money is going to the Roth without a second thought.
Solution: put money in the Roth type accounts now, when you are recently out of school and expect to be rising into higher tax brackets later in your career. Later, when you are making a lot more, contribute to traditional 401ks and IRAs.

In retirement, you will have the best of both worlds with part of your retirement coming out non-taxable and the rest taxable.

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I have a 80-20 split. Mostly because I think there's about an 80% chance that I will be in a higher tax bracket at the time I retire due to personal feelings on my future and an expectation that income taxes will rise.

If I am wrong, I bite the bullet and deal with the fact that my effective contributions were lower now, and benefit with the 20% I have in my traditional. If I am right, sweeeeeet. I just have the lost opportunity cost of putting the 20% in the traditional as opposed to Roth.

Again, I suggest everyone read the example in Geo's last post. It's a good one, and commonly misconstrued and misunderstood.

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A lot of people like the idea of splitting between Roth and traditional accounts. I do not. Diversification is a good thing -- when you have no information about which investment is better. Everybody has SOME information about whether their tax rate will go up or down, even if they don't have a very definite opinion, and should use the information they have.

Splitting between Roth and traditional accounts makes sense, of course, if you don't have all options available (like, if Roth is better for you, but you have only a traditional 401(k)). But for those who have a choice, splitting for the sake of splitting would be like splitting your money between two mutual funds that cover the same areas, one of which has a higher expense ratio.

It's OK to be wrong. Take your best guess, and act on that.

And, no, there is no reason to let the fact that you already have $5000 in a traditional account decide what you do with future money (except in unusual situations, like where a higher balance would let you avoid some fee).

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geo123 said: bNeta86 said: Lol at above post.

Earnings coming out untaxed is a huge advantage if the investments dont let you down. Dont forget that fact...(assuming of course they (IRS) leave Roth gains alone)

If your investments doubles every 10 years (find better investments) you would be saving the taxes on nearly 4x your initial investment by the time you retire...but I'm just a simpleton who subscribes that that mantra above (and if you have a roth 401k all the better for a young investor).
Not again! Haven't we explained this quite throroughly in the past (just SEARCH this forum)?!

If in a particular year you can only allocate an amount towards your retirement savings equal to the contribution limit (in other words, you can either contribute the full $15K to 401K or $15K minus taxes to your Roth 401K; you can't afford to max out the roth and pay the taxes from some other pot of money), then the decision between Traditional vs. Roth, based on math alone (there are other considerations), is based purely on the tax bracket now vs. anticipated tax bracket at retirement.

If you require an easier example, if you have $100, your tax rate now and at retirement will remain the same at 20% and your retirement funds will triple over the course of your life, you have the following:

Traditional: $300 at retirement, minus 20% tax = $240
roth: $80 invested now ($100 - $20 tax) = $240 at retirement (no tax is owed then).

So, if your tax rate is the same now and at retirement, it makes no difference whether you choose a roth or a traditional account. Once again, if your tax rate is higher now than what you will have at retirement, you will come out ahead with a traditional account. If it's reverse, a roth is more advantageous.

Please keep in mind that your ability to make larger after-tax contributions does NOT automatically mean that a roth is a better alternative -- you still have to look at the math I explained above to determine this. For instance, even with a larger after tax contribution attributable to a roth, if you are in a 25% bracket at the time of the contribution but will be in a 10% bracket or lower at retirement (which can happen even with very large assets if they are invested in tax exempt vehicles), the larger assets in a roth account will often have come at an unreasonably high price of overpaying your taxes.

Another reason that many people (even those who can afford to max out the roth) are often better off contributing to traditional accounts is because it gives them the ability to convert that account to a roth in a year where they are temporarily in a lower tax bracket. Most people experience those lower tax bracket years in their lives -- people go back to school, get married to non-working spouses, have kids, lose jobs, take sabbaticals, decide to work part-time, etc... Converting all or a portion of a traditional account to a roth in such a lower tax bracket environment can save quite a bit of money.

Once again, please take the time to understand the differences between Roth and Traditional accounts and then run the numbers for your specific situation.

P.S.
Aren't you a financial advisor who charges 1% for your advice?


One other thing to consider is that if you are near the AMT limit. with the deduction now, you may not hit AMT, but if you go with ROTH and have more taxable income you may hit the AMT mark

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LH, I am not necessarily sure if I agree with your position here. I do, however, agree that for some people your strategy would make sense, but I don't necessarily think it would in all circumstances (especially for those who are less risk averse).

If you think there is a 50-50 chance that you end up in a higher (or lower) tax bracket in retirement, and you take your suggestion and use the information that you have to make a Roth or Traditional selection, aren't you essentially flipping a coin for maximum profit or maximum disadvantage?

If instead, you split 50-50 (based on the probability you personally established earlier) wouldn't you just be decreasing your maximum benefit and decrease your maximum disadvantage as well?

How would this be different than the decision between an investment which will either return 10 or -5 and one which returns 5 or -2.5?

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KnickFanRA said: If you think there is a 50-50 chance that you end up in a higher (or lower) tax bracket in retirement, and you take your suggestion and use the information that you have to make a Roth or Traditional selection, aren't you essentially flipping a coin for maximum profit or maximum disadvantage?If you are truly neutral -- you think your rate has exactly as much chance of going down as up -- then splitting 50/50 is fine (but so is any other split). If you think it's 51/49, go with the 51.

If you are very risk averse, then don't be averse to making one bad call, be averse to not having enough money. The Roth option is less risky than the traditional (you pay today's known rates rather than tomorrow's unknown rates). So if you're very risk averse, that should push you a little toward the Roth, that's all.How would this be different than the decision between an investment which will either return 10 or -5 and one which returns 5 or -2.5?With two investments, diversification makes sense if they're not (completely) correlated -- a combined portfolio can have lower risk than any of its individual holdings. Ignoring that possibility -- if those 2 investments will be either both up or both down -- there's no general reason to split between them 50/50. The more you hold of the first, the higher your expected return and the higher your risk. You should figure out how much risk you can stand, and then buy just enough of the first one to give you exactly that risk level.

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geo123 said: WhatAWendy said: The conventional wisdom (401(k) to the match, then Roth to the max, then 401(k) with what's left) This is the conventional wisdom that's typically used for simpletons who can't properly analyze their own financial and retirement situation.

There are a number of differences between traditional and roth accounts, but from a purely mathematic standpoint, a traditional account is more advantageous if you are in a higher tax bracket now than the bracket you anticipate entering upon your retirement. If the opposite is true, the roth is more advantageous. If you expect your tax brackets to remain the same, the roth and the traditional accounts will be exactly the same. You should of course keep in mind that you can make a larger effective after-tax contribution to a roth than you can to a Traditional account if you initially choose to allocate a larger amount towards your roth than the amount that would be required to be allocated towards a Traditional account.

To say it in a different way, it makes absolutely no difference whether you pay tax on your contributions up front and then let the interest accrue on that after-tax amount or whether you do not initially tax contributions but then tax everything at the time you withdraw the money. The ONLY thing that matters in this case is whether the tax bracket is lower at the time you contribute the money vs. when you withdraw it.


Geo, I think you are 99% right and you are much closer to "best" then the "max match, max roth, rest in 401k" that you quoted.

However, to use your own vernacular, I think you are being too much of a simpleton.

Why? Because tax brackets are marginal.

Let's say I'm in the 25% tax bracket now and when I retire I'm in the 28% tax bracket. By your logic I should be 100% Roth and 0% Traditional.

However, even in retirement, the $x amount is tax free, the next $Y amount is 15%, etc.

Therefore if I can "avoid" 25% taxes on a piece of my "top line" income and then in retirement I pull $X+$Y per year from my traditional account and then pull the rest from my Roth account I will be better off.

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asdf9876 said: Why? Because tax brackets are marginal.

Let's say I'm in the 25% tax bracket now and when I retire I'm in the 28% tax bracket. By your logic I should be 100% Roth and 0% Traditional.

However, even in retirement, the $x amount is tax free, the next $Y amount is 15%, etc.

Therefore if I can "avoid" 25% taxes on a piece of my "top line" income and then in retirement I pull $X+$Y per year from my traditional account and then pull the rest from my Roth account I will be better off.
I'm not following your point. If you're in the 25% bracket today, and you'll be in the 28% bracket in retirement, and you don't care about the other differences (like no required lifetime distributions from a Roth IRA), then the marginal dollar belongs in the Roth IRA. It really is that simple.

If money you've already contributed one way or the other affects your guess of your future tax rates, you need to take that into account, but no more than any other information about future tax rates.

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You should have both a ROTH and a traditional when you retire.

That way you

1. can pull money from the traditional until you hit the 25% (or whatever your highest marginal tax rate is)
2. than you pull money tax-free from your ROTH.
3. In january of he following year start pulling money from the traditional acounts again.

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LH2004 said: asdf9876 said: Why? Because tax brackets are marginal.

Let's say I'm in the 25% tax bracket now and when I retire I'm in the 28% tax bracket. By your logic I should be 100% Roth and 0% Traditional.

However, even in retirement, the $x amount is tax free, the next $Y amount is 15%, etc.

Therefore if I can "avoid" 25% taxes on a piece of my "top line" income and then in retirement I pull $X+$Y per year from my traditional account and then pull the rest from my Roth account I will be better off.
I'm not following your point. If you're in the 25% bracket today, and you'll be in the 28% bracket in retirement, and you don't care about the other differences (like no required lifetime distributions from a Roth IRA), then the marginal dollar belongs in the Roth IRA. It really is that simple.

If money you've already contributed one way or the other affects your guess of your future tax rates, you need to take that into account, but no more than any other information about future tax rates.


You're right, what I meant was what tax bracket you would be in if your Roth was taxable. Otherwise you end up with 100% tax free income in retirement and you throw away all the low tax brackets.

I'm just saying let's say you'll want more money per year in retirement (i.e. income). But if you plan on putting it 100% in Roth then you have no taxable income so then you are in the 0% tax bracket. Then because you're going to be in the 0% tax bracket and you are currently in the 25% tax bracket by your logic you shouldn't hedge or go 50-50 so then you should put 100% in traditional. But then because it will be 100% taxable you're now in the 28% tax bracket so by your logic you don't hedge so you now put 100% in Roth.......


So my point is regardless of what "income" you want in retirement it is not easy to predict your tax bracket. I don't see doing an 80-20 split as a diversifying compromise. In fact it could be "optimum" because you have to get the lower tax bracket in come from *somewhere*.


A lot of people like the idea of splitting between Roth and traditional accounts. I do not.

Would you care to explain where my 0%, 15%, 25% tax bracket income is supposed to come from if I do not "split" between Roth and traditional?

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asdf9876 said: Would you care to explain where my 0%, 15%, 25% tax bracket income is supposed to come from if I do not "split" between Roth and traditional?Social security. Your pension. Interest on the 0% BT's you'll still be doing. Part-time work. Rents. Dividends. Recaptured gain on properties you sell.

If you won't have any of those things, and have substantial income now, then, yes, you are much better off with traditional IRA's and 401(k)s.

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LH2004 said: A lot of people like the idea of splitting between Roth and traditional accounts. I do not. Diversification is a good thing -- when you have no information about which investment is better. Everybody has SOME information about whether their tax rate will go up or down, even if they don't have a very definite opinion, and should use the information they have.

This is not true. You are forgetting that the tax system is always changing. Sure you can make concrete arguments about which investment vehicle is better based on today’s tax structure. However, you have no guarantee that when you retire that the tax structure will have gone unchanged. People that split between different vehicles are hedging themselves against changes in the income tax structure. Very rarely is it a good idea to have all your eggs in one basket.

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LH2004 said: A lot of people like the idea of splitting between Roth and traditional accounts. I do not. Diversification is a good thing -- when you have no information about which investment is better. Everybody has SOME information about whether their tax rate will go up or down, even if they don't have a very definite opinion, and should use the information they have.

Splitting between Roth and traditional accounts makes sense, of course, if you don't have all options available (like, if Roth is better for you, but you have only a traditional 401(k)). But for those who have a choice, splitting for the sake of splitting would be like splitting your money between two mutual funds that cover the same areas, one of which has a higher expense ratio.

It's OK to be wrong. Take your best guess, and act on that.

And, no, there is no reason to let the fact that you already have $5000 in a traditional account decide what you do with future money (except in unusual situations, like where a higher balance would let you avoid some fee).
I think I'm understanding your point, that splitting between roth and traditional makes no sense if there are other options. In other words, one should have options. I've only lately realized that too much of our retirement money will be taxed in retirement, so I'm going to start doing roths.

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The main issue as discussed is your expected marginal tax rate at retirement vs your marginal tax rate now. I should point out that if you're paying state or local income tax now, you might give some thought as to whether you intend to retire in a state with income taxes.
geo123 said: Another reason that many people (even those who can afford to max out the roth) are often better off contributing to traditional accounts is because it gives them the ability to convert that account to a roth in a year where they are temporarily in a lower tax bracket. Most people experience those lower tax bracket years in their lives -- people go back to school, get married to non-working spouses, have kids, lose jobs, take sabbaticals, decide to work part-time, etc... Converting all or a portion of a traditional account to a roth in such a lower tax bracket environment can save quite a bit of money.
After the primary consideration of your tax rates now and later, I think this is the primary arguement in favor of going the traditional route (assuming the tax rates are fairly similar). The option to convert from traditional to Roth during a low income year could be quite valuable as geo points out.

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autologic said: This is not true. You are forgetting that the tax system is always changing. Sure you can make concrete arguments about which investment vehicle is better based on today’s tax structure. However, you have no guarantee that when you retire that the tax structure will have gone unchanged. People that split between different vehicles are hedging themselves against changes in the income tax structure. Very rarely is it a good idea to have all your eggs in one basket.Please take a look at LH2004's posts above -- he's already addressed the issue of tax rate/structure uncertainty by pointing out that for those concerned about it, the Roth option is somewhat less risky since it effectively locks in today's tax rates (versus future unknown rates).

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LH2004 said: asdf9876 said: Would you care to explain where my 0%, 15%, 25% tax bracket income is supposed to come from if I do not "split" between Roth and traditional?Social security. Your pension. Interest on the 0% BT's you'll still be doing. Part-time work. Rents. Dividends. Recaptured gain on properties you sell.

If you won't have any of those things, and have substantial income now, then, yes, you are much better off with traditional IRA's and 401(k)s.


Let's say I'm counting on no income in retirement other than my retirement accounts. By your logic I shouldn't hedge/diversify and I should be 100% in traditional retirement accounts.

I would disagree and say I should shoot for enough traditional accounts to get me up to my current marginal tax rate and the remainder should be "Roth-like".

I'm NOT saying to diversify your tax exposure as a way to protect yourself against future tax laws. I'm saying you can't be such an extremist if you want to shoot for highest total return in your pocket. in my situation

Just my personal preference I am investment heavy and real estate poor. There is no way my BT money alone is going to bust me through the 0%, 15%, and 25% income tax brackets on their own. Therefore I need traditional accounts to bump me up to the margin then I need Roth accounts to take me beyond.

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ohh well...

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bNeta86 said:
15k in a roth is worth more to me than 15k in a traditional almost every time(if tax rates are the same at retirement)...but that is just my take on it.

Since your Roth is after tax money, that should be obvious, no?

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geo123 said: Please take a look at LH2004's posts above -- he's already addressed the issue of tax rate/structure uncertainty by pointing out that for those concerned about it, the Roth option is somewhat less risky since it effectively locks in today's tax rates (versus future unknown rates).

I agree that it protects against tax structure changes, but it doesn't protect against Roth 401k/IRA structural changes. Again, the likeliness of changes in this area are up for debate, but definitely cannot be ruled out of the question.

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KnickFanRA said: ...it doesn't protect against Roth 401k/IRA structural changes.What sort of potential changes are you referring to above?

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WhatAWendy said:

2) Does it make sense to just 'strand' the $5000 that's already in the traditional 401(k)? Since you can't roll a traditional 401(k) over into a Roth, that money would just sit there and I'd start my Roth 401(k) over at $0. Or would I be better off maintaining the traditional 401(k) for as long as I stay with my current employer (the 'what's done is done' approach)?

You can roll traditional into Roth. I've done it. You just pay taxes on it and have to report in on income tax. Let' me share with you what exactly happened.

1. One year, I was doing taxes, also had bond money from sale of house (bond money is evil) and was going to have to pay about $2000. The way the bond money penalty works is based upon income. What is easiest way to decrease taxable income? By taking out IRA. So I decided to take out IRA of $18000 to lower income beyond penalty rate. Please remember you have until April 15 to take out IRA, so I just wainted from income tax refund to come in and then opened up IRA. I waiting about a month, didn't do anything but keep it in cash reserves, then rolled it over to Roth IRA with same investment company. I also send like $100 in to the Roth Account to make it $2,000. I wanted some stability, so I purchased one Fanna Mae bond for $1,000 (5.45) and one tresury bill for $1,000 (4 percent).
2. The next taxable year, the amount rolled over was taxable income.
3. Please note that I am in special situation, with 4 kids, a wife, Close to 20,000 in deductions, the past two tax years the amount paid on Federal Income tax was 0.00. This is not amount I got back or had to pay. The reason is with 4 kids * $1,000 tax credit this is more than taxes are computed. Tecnhically, if you look at w-4, I got paid like $15 more than what was withheld, but it's because of child tax credit.
4. I am going to get so screwed in 2009 or 2010, when that changes.</blockquote></blockquote>

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markrobertssr said: WhatAWendy said: You can roll traditional into Roth. I've done it. You just pay taxes on it and have to report in on income tax. Let' me share with you what exactly happened.No she didn't, you did.

You CANNOT convert a traditional 401(k) to a Roth 401(k). You can convert an IRA; but, until you're 59 1/2, you can't roll out your 401(k) money to an IRA to have the opportunity to convert that, while you're still employed at the plan's sponsor.1. One year, I was doing taxes, also had bond money from sale of house (bond money is evil) and was going to have to pay about $2000. The way the bond money penalty works is based upon income. What is easiest way to decrease taxable income? By taking out IRA. So I decided to take out IRA of $18000 to lower income beyond penalty rate. Please remember you have until April 15 to take out IRA, so I just wainted from income tax refund to come in and then opened up IRA. I waiting about a month, didn't do anything but keep it in cash reserves, then rolled it over to Roth IRA with same investment company. I also send like $100 in to the Roth Account to make it $2,000.Umm...what? What "bond money?" What penalty?

You can't contribute $18,000 to an IRA. The limit is $4000 this year, and that's for traditional and Roth combined.

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geo123 said: What sort of potential changes are you referring to above?

Remember when "we'll never tax your Social Security checks"? Now up to 85% of your social security can be included in taxable income. There's nothing in the Constitution to prevent them from making your Roth taxable. Just the potential (almost zero) for the American Sheeple to get upset enough to take up arms and kill them for it.

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For those that save and don't spend, now congress considering limit future social security benefits by your net worth. Thus, the losers that spend everything and are broker when they are older win again. Ugh! It will likely go that way.

Best to switch between Traditional IRA and Roth IRA when market at a low, pay less in tax. With market new a high the timing appears circumspect.

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Hypersion said: You should have both a ROTH and a traditional when you retire.

That way you

1. can pull money from the traditional until you hit the 25% (or whatever your highest marginal tax rate is)
2. than you pull money tax-free from your ROTH.
3. In january of he following year start pulling money from the traditional acounts again.

I like your strategy. If you have both types of accounts, you can pick your own tax bracket based on how much you want to spend each year.

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geo123 said: autologic said: This is not true. You are forgetting that the tax system is always changing. Sure you can make concrete arguments about which investment vehicle is better based on today’s tax structure. However, you have no guarantee that when you retire that the tax structure will have gone unchanged. People that split between different vehicles are hedging themselves against changes in the income tax structure. Very rarely is it a good idea to have all your eggs in one basket.Please take a look at LH2004's posts above -- he's already addressed the issue of tax rate/structure uncertainty by pointing out that for those concerned about it, the Roth option is somewhat less risky since it effectively locks in today's tax rates (versus future unknown rates).

Ugh...Allow me to restate the painfully obvious. You (and no one else) do not know what the tax structure will be like in the future. It could be possible that ROTH accounts will be taxable in the future. It is also possible that in the future withdrawing from a ROTH account could make you ineligible for tax exemptions or other government subsidy (ex. withdrawing from a ROTH reduces the amount of SS you are eligible to receive.) If you do not know what the future holds it is best to diversify you assets among the available options to minimize your risk. Just like in the stock market game diversification guarantees you will not pick the absolute best or worst scenario. You could make some educated guesses given your specific case and weight your portfolio accordingly but not a single person can tell you for a fact that either vehicle will earn you more money in 10+ years. And no one can tell you which is the 'safer' bet against future tax structures.

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autologic said: If you do not know what the future holds it is best to diversify you assets among the available options to minimize your risk. Just like in the stock market game diversification guarantees you will not pick the absolute best or worst scenario. You could make some educated guesses given your specific case and weight your portfolio accordingly but not a single person can tell you for a fact that either vehicle will earn you more money in 10+ years. And no one can tell you which is the 'safer' bet against future tax structures.Nonsense. When you're driving down the street, you're never certain that driving on the right is safer than driving on the left: there could always be potholes or hidden dangers on the right. That does NOT mean you should spend half the time on the left. Being on the right is safer (and otherwise better) in EXPECTATION; whether or not it turns out to have been right, after the fact, isn't the issue.

If you expect your tax rate to be the same in retirement as it is today, a 50/50 split is fine (but so is anything else). If you're currently, temporarily, in the 10% bracket, but expect to be in the 35% when you retire, which you expect will be 40% by then, you're a moron to use a traditional IRA or 401(k) AT ALL (if you have the Roth option). If you get some kind of one-time enormous income this year, from winning a lawsuit or something, that puts you in the top bracket plus AMT plus state taxes now, but you're about to retire and have almost no income except social security, then you're a moron to use a Roth AT ALL (if you have the traditional options).

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Obviously you can make informed decisions based upon today’s rules. That fact is not being debated. My point of contention is that no one knows the future and can defiantly say what savings vehicle is best. Allow me to modify your simple yet flawed analogy to better describe my point. Structuring your retirement strategy on current data is like driving a car while looking in the rearview mirror. Just because you know what has transpired does not mean you know what the future holds. Just because you've made three right turns doesn’t necessarily mean the next turn will be a right as well.

Saying something to the effect of 'using a roth is safer because it locks in today’s tax brackets' is just silly. OP no one can tell you which savings vehicle is the 'best.' You need to decide which one you think is most beneficial, decide how confident you are in your decision, and then weight your split accordingly.

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Of you split 50/50, you are probably risk averse and afraid of making the wrong decision. LH2004's strategy maximizes expected returns, but has risk of having a lower return then a 50/50 split.

I see a lot of similarities between this issue and deciding whether to invest a lump sum in the market or whether to dollar cost average. Dollar cost averaging is less risky because it loses less in a bear market, but investing the entire lump sum maximizes the expected returns.

I always go for maximum expected returns.

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What about having an amount in a Traditional 401k (Not necessarily at your current employer) so that you can roll it over into a Traditional IRA and then convert it to a Roth at times when your have a lower income. Maybe you travelled for a year, or lost your job, or just took an extended leave of absence. Wouldn't it be prudent to have money available to convert should you run into a period when you're in a lower tax bracket.

Would this work?

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I like having a portion in a Roth in case I ever need to make a large withdrawl in one year (buy a boat or help kids with down payment on home... but more likely medical expenses). That way I don't get penalized and kicked into a higher income tax bracket for that particular year. I'm not sure that helps you figure out what percent, but maybe something to keep in mind.

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pull it all out, pay the early withdrawal penalty, and put it on black. you got a 50-50 (minus those naughty greens) chance at setting yourself up for life!

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The one thing that gets me - with a roth you withdraw money penalty free(after 5 yrs), a 401k u cant. Those of you who argue its the same, ignore this huge benefit of a roth

Skipping 116 Messages...
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catanpirate said:   A newer player on the scene is the HSA as an investment vehicle. It has the same tax properties in retirement as a 401k, except there is the possibility that withdrawals may *never* be taxed if they are used to pay for healthcare costs.
This makes me think that HSA > Trad IRA > Roth IRA, for most people.

I agree about HSA being a very early contribution area, with it coming only after any 401(k) contribution required to obtain a match offered by your employer. With more and more employers pushing HDHP insurance, the HSA is my most tax advantaged vehicle by far. The only better long-term return is the matching contributions to basic (small %) 401(k) contribution. Also, with direct payroll deductions for a HSA contribution through a cafeteria plan, these funds are not even subject to payroll taxes (so long as you incur qualified health expenses at some point and pay them out / later reimburse yourself from the HSA), as they are treated as (paradoxically) employer contributions.

I personally pay any health care costs out of pocket in order to allow the tax advantaged balance to grow and compound, as the self reimbursement rules allow you to pay yourself back with monies out of the HSA at any point in the future (you never lose the tax benefit for incurred expenses so long as you can prove you incurred them after the establishment of the HSA - keep receipts and good records!). This allows me to leverage compounded tax-advantaged returns to better fund my long term qualified medical expenses, at the cost of some taxable account balance and returns (which would likely be taxed for my current situation/investment choices).

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