When / Should I convert to Roth 401K

[myrdale]

38 yr old and roughly $80k per year. Debt free.

I have a traditional 401(K) though work. Roughly $120,000 depending on the day of the week. I contribute 10% and the company matches 4%.

I additionally have a Roth IRA. Roughly $30,000. I've maxed it out the last couple of years and plan to do so going forward.

A coworker mentioned in passing about their Roth 401(K), which got me thinking, should I be doing that instead of the traditional?

I understand only some of the basics:

I am contributing to the traditional 401(K) with pretax dollars, and I will be taxed in the future.

With the Roth 401(K), like the Roth IRA, I would be contributing with post tax dollars.

If I convert the traditional 401(K) to a Roth 401(K) a rather hefty tax bill will come due. Presumably I'd want to pay this out of pocket rather than withdraw from account?

So I could:

1) Convert to the Roth 401(K).
2) Start a Roth 401(K), have both and contribute some or all to it.
3) Do nothing at all, and continue contributing to the traditional 401(K).

Is there a right / best / most optimum path / strategy? I managed to break my crystal ball last week so I have no clue on future tax rates etc.

[Like2Plan]

38 yr old and roughly $80k per year. Debt free.

I have a traditional 401(K) though work. Roughly $120,000 depending on the day of the week. I contribute 10% and the company matches 4%.

I additionally have a Roth IRA. Roughly $30,000. I've maxed it out the last couple of years and plan to do so going forward.

A coworker mentioned in passing about their Roth 401(K), which got me thinking, should I be doing that instead of the traditional?

I understand only some of the basics:

I am contributing to the traditional 401(K) with pretax dollars, and I will be taxed in the future.

With the Roth 401(K), like the Roth IRA, I would be contributing with post tax dollars.

If I convert the traditional 401(K) to a Roth 401(K) a rather hefty tax bill will come due. Presumably I'd want to pay this out of pocket rather than withdraw from account?

I would not do this all at once.

So I could:

1) Convert to the Roth 401(K).
2) Start a Roth 401(K), have both and contribute some or all to it.
3) Do nothing at all, and continue contributing to the traditional 401(K).

Is there a right / best / most optimum path / strategy? I managed to break my crystal ball last week so I have no clue on future tax rates etc.

Well, what is your tax status? Are single or married? If you are MFJ and you have a bunch of tax credits available to you, maybe start contributing to the Roth. You could do some conversions, maybe up to the top of your tax bracket. If you have a little bit of both, you would have some tax diversity, so you could exploit the best of both worlds.

What do I mean by that? Well, my guess is we are probably at the lowest tax rate we will ever be--you would lock that in with your Roth contributions. Also, if you are planning to leave assets in retirement for your heirs--with the new secure act (anyone other than a spouse or more than 10 years difference in age IIRC) has to take distribution within10 years. That could end up with a whopping tax bill for children if not carefully managed.


But, you might find yourself in a lower tax bracket at retirement--so the pretax savings you have right now don't ever get taxed. Also, after you get into RMD territory you are allowed to make charitable donations using those distributions and they are not taxed at all. Also, way later in retirement you might want to use your pretax contributions towards long term care for possible more favorable tax treatment.

[kork13]

I'm generally of the opinion that unless you're in an extreme tax bracket (earn very little, <$30k, or earn alot, >$300k), the Roth vs. traditional argument means relatively little until you're maxing out your retirement accounts. Once you're able to max, I would do 100% Roth, because it's post-tax, and thus more "dense" -- you can pack more money into a Roth. Otherwise, it's designed to be a wash. The government gets your tax dollars upfront or in retirement. I think it's foolish to plan for retirement to suddenly be way cheaper for you (reduced commuting & housing costs get eaten up in medical & assistive costs).

All of that to say that I prefer Roth if there's any way for you to max retirement. However, unless/until you're already maxing out all of your retirement accounts, you shouldn't convert your current traditional 401k to Roth. Once you're maxing, then sure--go ahead and convert to Roth, and pack in the tax money into your retirement accounts to make it post-tax.

[~bs]

Good to have assets in both. Just start contributing some to roth.

[LivingAlmostLarge]

If you make a ton of money you should always do the pretax. You can do the after tax contributions to a 401k and roll to roth up to like $56k/year mega backdoor if you can afford it.

[~bs]

there's more flexibility if you have both. in retirement, you can draw from pre-tax to use up lower tax brackets, then use after tax if you need money at higher brackets.

[Petunia 100]

Unless you have another source of taxable income (pension, rentals, etc.) you definitely want to have some money in tax-deferred. Don't forget you have a 0% tax bracket.

For 2019, the standard deduction for a single person was $12,200. If all of your income came from Roth withdrawals and SS benefits, you effectively said "No, thank you" to having 12.2k of taxable income taxed at 0%. The 10% and 12% brackets stayed empty as well; you likely paid more than 12% in income tax when the money went in to your Roth.

As your taxable income grows, of course, SS benefits can become taxable. So that is something to take into consideration when deciding how much you want in tax-deferred.

[myrdale]

Thank you all for the feedback.

Like2Plan, previously I've filed Single 0. Starting January of this year I switched to Single 1.

Most likely I'll be opening the Roth 401(K) and for the time being leave whats in the traditional 401(K) alone. I'm probably gonna wait a couple of months to get a better feel for it, but for the time being that is the plan.

Thank you all again.

[Like2Plan]

Thank you all for the feedback.

Like2Plan, previously I've filed Single 0. Starting January of this year I switched to Single 1.

Most likely I'll be opening the Roth 401(K) and for the time being leave whats in the traditional 401(K) alone. I'm probably gonna wait a couple of months to get a better feel for it, but for the time being that is the plan.

Thank you all again.

mydale,
Since you are a single filer, you are taxed as follows:

10%	$0 – $9,875
12%	$9,875 – $40,125
22%	$40,126 – $85,525

With an income of 80,000 and the standard deduction of 12,400 (for 2020)--that leaves your 401k contributions being taxed at the 22% rate if you elect the Roth option.
In this situation, I might be tempted to keep it pretax--especially since you also have a Roth IRA that you have been maxing out. (Of course, if we end up getting a big hike in the tax rates--then you might have wished for more Roth 401k contributions now while the rates are lower.)