Roth 401K to diversify retirement income?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Traveler
Posts: 472
Joined: Fri Aug 30, 2013 9:07 pm

Roth 401K to diversify retirement income?

Post by Traveler » Mon Oct 30, 2017 7:29 pm

As I start to think more seriously about retirement (in an estimated 10 years), I think about having to fund healthcare for ten years before medicare kicks in, and how given the current healthcare situation with the ACA, I need to be able to manage my income so as to maximize a subsidy. I fully understand that anything can happen to our healthcare system, but diversifying my retirement income streams may not be a bad idea anyway.

About 67% of my retirement savings is in regular 401K and IRA accounts (i.e. they will be taxable upon withdrawal), 30% in a brokerage account, and 3% in a Roth IRA. I am considering using a Roth 401K for about half of the $18,500 limit next year and the rest will go into a regular 401K.

While I would love to keep the tax benefit of the regular 401K, I am concerned that I will be limited in available income streams once I retire. Am I over thinking this or is this something I should definitely be doing? What would a good ratio be for pre-tax vs post-tax retirement dollars?

User avatar
FiveK
Posts: 3120
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth 401K to diversify retirement income?

Post by FiveK » Mon Oct 30, 2017 7:39 pm

Traveler wrote:
Mon Oct 30, 2017 7:29 pm
Am I over thinking this or is this something I should definitely be doing? What would a good ratio be for pre-tax vs post-tax retirement dollars?
The ratio is not as important as the absolute amounts. In particular, the marginal tax rate you will pay based on the amounts you expect to withdraw from the traditional funds, along with capital gains from selling taxable funds. How does that marginal rate compare with what you would save on traditional contributions today?

See also How to withdraw funds from your IRA and 401k without penalty before age 59.5 for some thoughts.

KlangFool
Posts: 6937
Joined: Sat Oct 11, 2008 12:35 pm

Re: Roth 401K to diversify retirement income?

Post by KlangFool » Mon Oct 30, 2017 7:45 pm

Traveler wrote:
Mon Oct 30, 2017 7:29 pm
As I start to think more seriously about retirement (in an estimated 10 years), I think about having to fund healthcare for ten years before medicare kicks in, and how given the current healthcare situation with the ACA, I need to be able to manage my income so as to maximize a subsidy. I fully understand that anything can happen to our healthcare system, but diversifying my retirement income streams may not be a bad idea anyway.

About 67% of my retirement savings is in regular 401K and IRA accounts (i.e. they will be taxable upon withdrawal), 30% in a brokerage account, and 3% in a Roth IRA. I am considering using a Roth 401K for about half of the $18,500 limit next year and the rest will go into a regular 401K.

While I would love to keep the tax benefit of the regular 401K, I am concerned that I will be limited in available income streams once I retire. Am I over thinking this or is this something I should definitely be doing? What would a good ratio be for pre-tax vs post-tax retirement dollars?
Traveler,

<< I am considering using a Roth 401K for about half of the $18,500 limit next year and the rest will go into a regular 401K. >>

I do not understand why you want to do this when you could

A) Contribute 18.5K into Trad. 401K and put the tax savings into Roth IRA

or

B) Contribute 18.5K into Trad. 401K and put the tax savings into the taxable account

You will pay less tax. Why would you contribute to Roth 401K when you have Roth IRA?

KlangFool

JBTX
Posts: 1520
Joined: Wed Jul 26, 2017 12:46 pm

Re: Roth 401K to diversify retirement income?

Post by JBTX » Mon Oct 30, 2017 7:50 pm

The ACA thing does seem like a wrinkle in the traditional advice I often see in the forum. Typically, what I see recommended is people retire before social security, and do rollovers during those transition years to fill up at least to the 15% bracket, and in some situations perhaps higher. But if you are a person that is going to be relying on the ACA exchange and subsidies, there is a cost to doing that, and your marginal subsidy inclusive tax rate becomes much higher than 15% in the subsidy range.

avalpert
Posts: 6193
Joined: Sat Mar 22, 2008 4:58 pm

Re: Roth 401K to diversify retirement income?

Post by avalpert » Mon Oct 30, 2017 7:54 pm

If you have ten years until retirement you have plenty of time to wait and see how our healthcare and tax policies (and your income needs and options) evolve before committing to the Roth. You can always convert in the future while still working up to the top of your current tax bracket and it would be as if you made the choice today - and yet you retain the option to not do that if it turns out it won't help.

Traveler
Posts: 472
Joined: Fri Aug 30, 2013 9:07 pm

Re: Roth 401K to diversify retirement income?

Post by Traveler » Mon Oct 30, 2017 8:11 pm

KlangFool wrote:
Mon Oct 30, 2017 7:45 pm
Traveler wrote:
Mon Oct 30, 2017 7:29 pm
As I start to think more seriously about retirement (in an estimated 10 years), I think about having to fund healthcare for ten years before medicare kicks in, and how given the current healthcare situation with the ACA, I need to be able to manage my income so as to maximize a subsidy. I fully understand that anything can happen to our healthcare system, but diversifying my retirement income streams may not be a bad idea anyway.

About 67% of my retirement savings is in regular 401K and IRA accounts (i.e. they will be taxable upon withdrawal), 30% in a brokerage account, and 3% in a Roth IRA. I am considering using a Roth 401K for about half of the $18,500 limit next year and the rest will go into a regular 401K.

While I would love to keep the tax benefit of the regular 401K, I am concerned that I will be limited in available income streams once I retire. Am I over thinking this or is this something I should definitely be doing? What would a good ratio be for pre-tax vs post-tax retirement dollars?
Traveler,

<< I am considering using a Roth 401K for about half of the $18,500 limit next year and the rest will go into a regular 401K. >>

I do not understand why you want to do this when you could

A) Contribute 18.5K into Trad. 401K and put the tax savings into Roth IRA

or

B) Contribute 18.5K into Trad. 401K and put the tax savings into the taxable account

You will pay less tax. Why would you contribute to Roth 401K when you have Roth IRA?

KlangFool

I think I'm over thinking this or not fully understanding it. To answer your question, I would contribute to a Roth 401K because I can put more than the Roth IRA limit in it. Also, my income is too high and I have too much in traditional IRAs to do a backdoor Roth. Maybe continuing to max my regular 401K and put any extra cash in the brokerage account is what I should be doing. I feel like I'm not doing something that I should be doing and will kick myself later for being too stupid to have realized it now.

User avatar
Thrifty Femme
Posts: 277
Joined: Sun Apr 12, 2015 1:54 pm

Re: Roth 401K to diversify retirement income?

Post by Thrifty Femme » Mon Oct 30, 2017 8:15 pm

Traveler wrote:
Mon Oct 30, 2017 8:11 pm

I think I'm over thinking this or not fully understanding it. To answer your question, I would contribute to a Roth 401K because I can put more than the Roth IRA limit in it. Also, my income is too high and I have too much in traditional IRAs to do a backdoor Roth. Maybe continuing to max my regular 401K and put any extra cash in the brokerage account is what I should be doing. I feel like I'm not doing something that I should be doing and will kick myself later for being too stupid to have realized it now.
Are you able to roll you traditional IRAs into your 401k?

Traveler
Posts: 472
Joined: Fri Aug 30, 2013 9:07 pm

Re: Roth 401K to diversify retirement income?

Post by Traveler » Mon Oct 30, 2017 8:21 pm

I believe I can - I am calling my 401K provider this week to find out if/how to do it. That would clear up the income limit issue and I could then contribute $5500/year into my Roth IRA. That may be all I need to ease my mind that I'll have sufficiently diverse investment streams to get creative if needed in the early part of retirement.

For some reason I can't seem to wrap my head around the concept of tax efficiency in retirement, and like I said previously, I worry that I should be doing something now that I'm not doing.

KlangFool
Posts: 6937
Joined: Sat Oct 11, 2008 12:35 pm

Re: Roth 401K to diversify retirement income?

Post by KlangFool » Mon Oct 30, 2017 8:26 pm

Traveler wrote:
Mon Oct 30, 2017 8:11 pm
KlangFool wrote:
Mon Oct 30, 2017 7:45 pm
Traveler wrote:
Mon Oct 30, 2017 7:29 pm
As I start to think more seriously about retirement (in an estimated 10 years), I think about having to fund healthcare for ten years before medicare kicks in, and how given the current healthcare situation with the ACA, I need to be able to manage my income so as to maximize a subsidy. I fully understand that anything can happen to our healthcare system, but diversifying my retirement income streams may not be a bad idea anyway.

About 67% of my retirement savings is in regular 401K and IRA accounts (i.e. they will be taxable upon withdrawal), 30% in a brokerage account, and 3% in a Roth IRA. I am considering using a Roth 401K for about half of the $18,500 limit next year and the rest will go into a regular 401K.

While I would love to keep the tax benefit of the regular 401K, I am concerned that I will be limited in available income streams once I retire. Am I over thinking this or is this something I should definitely be doing? What would a good ratio be for pre-tax vs post-tax retirement dollars?
Traveler,

<< I am considering using a Roth 401K for about half of the $18,500 limit next year and the rest will go into a regular 401K. >>

I do not understand why you want to do this when you could

A) Contribute 18.5K into Trad. 401K and put the tax savings into Roth IRA

or

B) Contribute 18.5K into Trad. 401K and put the tax savings into the taxable account

You will pay less tax. Why would you contribute to Roth 401K when you have Roth IRA?

KlangFool

I think I'm over thinking this or not fully understanding it. To answer your question, I would contribute to a Roth 401K because I can put more than the Roth IRA limit in it. Also, my income is too high and I have too much in traditional IRAs to do a backdoor Roth. Maybe continuing to max my regular 401K and put any extra cash in the brokerage account is what I should be doing. I feel like I'm not doing something that I should be doing and will kick myself later for being too stupid to have realized it now.
Traveler,

If your income is too high, why would you want to pay more tax by contributing to Roth 401K?

<< Maybe continuing to max my regular 401K and put any extra cash in the brokerage account is what I should be doing.>>

This makes the most sense.

You are overthinking this.

KlangFool

User avatar
FiveK
Posts: 3120
Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth 401K to diversify retirement income?

Post by FiveK » Mon Oct 30, 2017 8:28 pm

Traveler wrote:
Mon Oct 30, 2017 8:21 pm
For some reason I can't seem to wrap my head around the concept of tax efficiency in retirement, and like I said previously, I worry that I should be doing something now that I'm not doing.
Have you estimated your marginal rate in retirement? See the Estimating withdrawal tax rates is not an exact science, but here is one approach part of that post if you're looking for a starting point.

JBTX
Posts: 1520
Joined: Wed Jul 26, 2017 12:46 pm

Re: Roth 401K to diversify retirement income?

Post by JBTX » Mon Oct 30, 2017 8:28 pm

Traveler wrote:
Mon Oct 30, 2017 8:11 pm
KlangFool wrote:
Mon Oct 30, 2017 7:45 pm
Traveler wrote:
Mon Oct 30, 2017 7:29 pm
As I start to think more seriously about retirement (in an estimated 10 years), I think about having to fund healthcare for ten years before medicare kicks in, and how given the current healthcare situation with the ACA, I need to be able to manage my income so as to maximize a subsidy. I fully understand that anything can happen to our healthcare system, but diversifying my retirement income streams may not be a bad idea anyway.

About 67% of my retirement savings is in regular 401K and IRA accounts (i.e. they will be taxable upon withdrawal), 30% in a brokerage account, and 3% in a Roth IRA. I am considering using a Roth 401K for about half of the $18,500 limit next year and the rest will go into a regular 401K.

While I would love to keep the tax benefit of the regular 401K, I am concerned that I will be limited in available income streams once I retire. Am I over thinking this or is this something I should definitely be doing? What would a good ratio be for pre-tax vs post-tax retirement dollars?
Traveler,

<< I am considering using a Roth 401K for about half of the $18,500 limit next year and the rest will go into a regular 401K. >>

I do not understand why you want to do this when you could

A) Contribute 18.5K into Trad. 401K and put the tax savings into Roth IRA

or

B) Contribute 18.5K into Trad. 401K and put the tax savings into the taxable account

You will pay less tax. Why would you contribute to Roth 401K when you have Roth IRA?

KlangFool

I think I'm over thinking this or not fully understanding it. To answer your question, I would contribute to a Roth 401K because I can put more than the Roth IRA limit in it. Also, my income is too high and I have too much in traditional IRAs to do a backdoor Roth. Maybe continuing to max my regular 401K and put any extra cash in the brokerage account is what I should be doing. I feel like I'm not doing something that I should be doing and will kick myself later for being too stupid to have realized it now.
1. Is your income too high to contribute to a Roth IRA? If you max out a traditional 401k, will that lower your income enough to contribute to a Roth IRA?

2. Whether or not you should do Roth 401k vs regular 401k depends on a lot of factors, namely what your marginal tax rate is now, what your marginal tax rate will be in retirement post social security, and what your ACA subsidy inclusive marginal tax rate is during the transition years. And what those rates will be will largely be determined by how much traditional IRA's you have in total and decide to either convert to roth in the transition years or take out as RMD's in social security years.

In other words we can't really answer your question with a high degree of confidence until we have a fuller financial picture of how much you have and what your marginal tax rates are and will be.

lynneny
Posts: 115
Joined: Sun Apr 15, 2012 10:23 pm

Re: Roth 401K to diversify retirement income?

Post by lynneny » Mon Oct 30, 2017 10:25 pm

There are so many unknowns in the future that I just decided to go for tax diversification. When our retirement plan started offering a Roth 401(k) option last year, I split my 401(k) contribution between the tax-deferred and the Roth options. (I also fully fund a Roth IRA and an HSA).

I'll only have one or two low income years before a small pension starting at 65 and dividends from my taxable account take up much of the 15% tax bracket (as a single person, that's only about $37,000). So doing Roth conversions after I retire isn't much of an option for me. And during that year or two of low income, it might make more sense for me to realize some capital gains on highly appreciated stock in my taxable account.

Post Reply