Retirement and 401k strategies

[schmalts]

I'm not a financial guru, not a tax guru. But I find it strange I am the one of the few who think of reasons to contribute to roth 401 instead of traditional 401k. Talked to my guy at Fidelity and again he asked why I am putting in 100% roth. I explained that when I am 59.5 years old I can retire and withdrawal from that Roth and have zero income against ACA insurance price. The silence again tells me something. When I asked if he never thought of that he said no. I said maybe you should be discussing this with your peers. So let's discuss it here, am I wrong with my strategies? Cheapo Obamacare on the exchange if it's still available at that time? I think the problem is most advisors don't know jack about tax law. ROTH withdrawals are not income, and do not affect your income when applying for ACA.

 

[elkantlers]

I wish I knew more about investing in general as well as these types of tax laws. I investe in my company match 401k as well as personal investment and savings. I do have a Roth IRA but maybe I need to look at putting more into it.
Thanks for the heads up.

 

[Brandon270]

I'm no expert either but from everything I've read and heard, the main advantage of a 401k over a Roth is the contribution limits are much higher so you are able to save more. BUT, as you said you are taxed on anything you withdraw on both money you put in as well as interest it made, as you pull money from the account at retirement. I can see what you're saying about taking advantage of showing no income as you withdraw from your Roth but odds are ACA will be a thing of the past.

 

[stealthy_bowman]

You should invest in your company's 401k first, at least to get the maximum of whatever it is they match since that is free money. After that, a Roth makes perfect sense provided that you are within the income limits to leverage such a vehicle. Keep in mind that contributions to a Roth are taxed up front, whereas a traditional IRA allows you to deduct the tax bite upfront, but you end up paying the taxes later when you withdraw. The former (Roth) is better IMO because it allows you to pay no taxes on the cap gains garnered through the investment.

 

[pointingdogsrule]

Just max out both types.

 

[Rzrbck918]

It’s not taxable but that doesn’t mean it is not considered income. Don’t know how that plays with the ACA. Never worried about it. The main problem with a Roth is the $6k limit. My advice is to fill the Roth first and put what additional you can afford into a standard IRA. That’s assuming you don’t have an employer matched 401k. In that case fill the 401k up to the match, then the Roth and finally an IRA up to your limits.

 

[cusecat04]

For tax deferment purposes both Roths and Traditional IRAs fall under the 6k limit (individually)... meaning you can do 6k in a Roth and 0 in a traditional, or 3k in each, etc and defer taxing that income for the year
You can also ask about getting your company to offer a Roth 401k/403b, ours just added a Roth 403b option, I've started putting some away in that over the past few years.

I've had advisers look at me cross eyed as well when I mention retiring at 59 1/2 when I can start pulling from my Roth.

 

[COEngineer]

Most commenters so far apparently don't know that there is such a thing as a Roth 401k (I split my contributions 50/50 between Roth and regular 401k), which has the same limit as regular 401k ($19,000 in 2019).

Reporting the Roth 401k distribution on your 1040 follows these rules (if you can follow this logic you are smarter than me):
"Exception 2. If any of the following apply,
enter the total distribution on line 4a
and see Form 8606 and its instructions
to figure the amount to enter on line 4b.
...
2. You received a distribution from
a Roth IRA. But if either (a) or (b) below
applies, enter -0- on line 4b; you
don’t have to see Form 8606 or its instructions.
a. Distribution code T is shown in
box 7 of Form 1099-R and you made a
contribution (including a conversion) to
a Roth IRA for 2013 or an earlier year.
b. Distribution code Q is shown in
box 7 of Form 1099-R.

 

[Frenchy]

Invest to get any match you can from your employer first. If they offer the Roth 401k, that is the first place to get money. If no Roth 401k is available. Invest up to the match in the traditional 401k with the first dollars, than max out a Roth IRA, than with any other money you have to invest, go back and dump it into your employers 401k. How much you have to invest with dictate how far down those three options you get.

 

[SD_Prairie_Goat]

I'm not a financial guru, not a tax guru. But I find it strange I am the one of the few who think of reasons to contribute to roth instead of traditional 401k. Talked to my guy at Fidelity and again he asked why I am putting in 100% roth. I explained that when I am 59.5 years old I can retire and withdrawal from that Roth and have zero income against ACA insurance price. The silence again tells me something. When I asked if he never thought of that he said no. I said maybe you should be discussing this with your peers. So let's discuss it here, am I wrong with my strategies? Cheapo Obamacare on the exchange if it's still available at that time? I think the problem is most advisors don't know jack about tax law. ROTH withdrawals are not income, and do not affect your income when applying for ACA.

I'm not saying you're wrong, but can you explain why the Roth withdrawal counts as zero income for ACA insurance prices? I get that Roth comes out tax free since it went in post tax, but my understanding is it is still reported as income on tax forms? I'm sure I am missing some info here, so please enlighten me!

I currently direct more toward my traditional 401k than my Roth IRA, so this has peaked my curiosity for sure.

 

[npaden]

Most companies offer a Roth option in their 401k plans now. Same match, same limits as regular 401k contributions.

One other trick that people have been using is that if you are in too high of an income bracket to be allowed to put money into a Roth IRA, you can put that money into a traditional, nondeductible IRA and then immediately convert it to a Roth IRA.

It does sound like you found a loophole to get a subsidy under the ACA, most folks are going to have a hard time retiring at less than 65 and pulling out Roth money for 100% of their income though. Generally you want to put money into the Roth when you are paying low taxes and take money out of the Roth when you are paying high taxes. The chances of the current ACA subsidy structure being in place in 10 or 15 years when I retire is not enough of a certainty that I would make big decisions on my Roth contributions today. The way the new QBI works folks can have an effective tax rate of over 50% on income if you are in the phase out range. Taking advantage of a traditional 401k to reduce that income might be a much better thing than putting money into a Roth to get a possible subsidy on ACA down the road if it is still around. Each person is going to have different issues, pretty hard for your investment advisor to be able to know what your specific issues are.

My 2 cents.

 

[npaden]

What’s included as income | HealthCare.gov

Find out if you qualify for lower costs on Marketplace health insurance coverage at HealthCare.gov.

www.healthcare.gov

Roth withdrawals are not included in your Adjusted Gross Income which is the number that they use to determine the ACA subsidy.

It is interesting that they do require you to add in the Nontaxable portion of Social Security benefits though.

 

[Pucky Freak]

With Roth and 401k Roth you pay taxes up front so when you withdraw its income but not taxable income. You end up saving a ton more $ in the long run. The reason a Roth is superior is you have more choices and lower fees, compared to 401k. You have to know what you're doing to pick good options and find tiny fees, but there's a lot of reward in figuring these things out and using them to your advantage

 

[Deleted member 18333]

Schmalts

You are not correct. Roth withdrawals are considered income just not taxable when you withdraw them. You pay the taxes today. They will still be considered as income in regards to ACA considerations. The purpose of Roth contributions is the tax deferred aspect. A simplistic way of looking at it is Roth contributions are a good idea today if you believe your income tax rate today is lower than what you believe it will be when you retire. There are other things to consider but this is a simple way of determining if Roth is a good idea. It does not matter if it’s a Roth 401k or IRA.

 

[npaden]

Just to clarify, in my opinion, the decision to invest in a Roth IRA or Roth 401K vs a traditional IRA or traditional 401K is all about tax rates.

If you think your tax rate is lower today than it will be when you make your withdrawal then you should invest in a Roth.

If you think your tax rate is higher today than it will be when you make your withdrawal then you should generally invest in a 401k.

The only slight caveat to the above is that you can effectively contribute more to the Roth because it is using after tax money so if you are maxing out your contributions ($18,500 for your 401K and $5,500 for your IRA) then you might consider putting money into the Roth if the tax difference is not very much.

 

[npaden]

Schmalts

You are not correct. Roth withdrawals are considered income just not taxable when you withdraw them. You pay the taxes today. They will still be considered as income in regards to ACA considerations. The purpose of Roth contributions is the tax deferred aspect. A simplistic way of looking at it is Roth contributions are a good idea today if you believe your income tax rate today is lower than what you believe it will be when you retire. There are other things to consider but this is a simple way of determining if Roth is a good idea. It does not matter if it’s a Roth 401k or IRA.

Actually he is correct. The ACA subsidy is calculated on Adjusted Gross Income. Roth withdrawals are not included in your Adjusted Gross Income. See link provided above.

 

[BackofBeyond]

It seems like there’s some general confusion, there’s a difference between a Roth IRA, and a Roth contribution to your 401(k).

Here’s what we do... both my wife and I contribute to our 401(k) AND our individual Roth IRAs. On the 401(k) side of the equation we make traditional (tax deferred) and Roth (after tax) contributions. By law, any money your employer puts in as a match or bonus etc. has to be in the tax deferred side. We contribute as much as needed to max out the company match into the traditional account, then put the rest of the yearly max ($19k/yr) in as a Roth Contribution. That way we pay the tax on it now, and any growth from here to when we withdraw it is tax free. We also both max out our individual Roth IRAs ($6k/yr) which is also not taxed upon withdrawal.

Long story short - Traditional 401(k) is tax deferred, you pay the income tax upon withdrawal. Roth 401(k) is not tax deferred, you pay income tax and then deposit the money, any growth after deposit is not taxable income. Roth IRA is a totally different account separate from your 401(k)... also income tax paid, then money deposited.

 

[Deleted member 18333]

Actually he is correct. The ACA subsidy is calculated on Adjusted Gross Income. Roth withdrawals are not included in your Adjusted Gross Income. See link provided above.

Well crap! Looks like I am wrong. Thank you Nate. Apologies for questioning you Schmalts with crappy info.

 

[RobG]

Just to clarify, in my opinion, the decision to invest in a Roth IRA or Roth 401K vs a traditional IRA or traditional 401K is all about tax rates.

If you think your tax rate is lower today than it will be when you make your withdrawal then you should invest in a Roth.

If you think your tax rate is higher today than it will be when you make your withdrawal then you should generally invest in a 401k.

The only slight caveat to the above is that you can effectively contribute more to the Roth because it is using after tax money so if you are maxing out your contributions ($18,500 for your 401K and $5,500 for your IRA) then you might consider putting money into the Roth if the tax difference is not very much.

I totally agree, with the additional note that it is your current tax bracket compared to your average tax rate in retirement. (This almost always the case) And you may have a company match with a 401k.

If your insurance allows it, an HSA has the same tax advantage as a Roth if you save your receipts and don't cash it in until retirement.

 

[VikingsGuy]

Which is better for any particular individual varies on many things such as current personal tax rate, future personal tax rate, types/returns of invested funds, income mix at retirement, state income tax now, state income tax at retirement, etc There is not one universally correct answer, but the HTers above have raised a lot of good food for thought.