Jump to content

Financial minds… a question.


Prophet Zacharia

Recommended Posts

Is there any benefit of moving “after tax” contributions currently sitting in my 401 account to a Roth IRA, or is it better to sit in the 401 account (I have no intentions of moving any of my pre-tax monies for tax reasons, of course)?

I can’t figure out the difference or benefits of one over the other on after tax money based on what I’ve been reading. 

I am able to leave the IRA untouched for 5 years at this point in time (I assume the 5 year minimum is from the time you open the account, and not from the last deposit date?).

Link to comment
Share on other sites

14 minutes ago, Prophet Zacharia said:

Is there any benefit of moving “after tax” contributions currently sitting in my 401 account to a Roth IRA, or is it better to sit in the 401 account (I have no intentions of moving any of my pre-tax monies for tax reasons, of course)?

I can’t figure out the difference or benefits of one over the other on after tax money based on what I’ve been reading. 

I am able to leave the IRA untouched for 5 years at this point in time (I assume the 5 year minimum is from the time you open the account, and not from the last deposit date?).

I will run this one past our CFO who is also a CPA.

  • Awesome 1
Link to comment
Share on other sites

23 minutes ago, 12string said:

I think I figured this out a few months ago.  I'm leaving my money in a regular 401K.  But I mostly confused myself and I don't know why I decided that, except that I couldn't decide, so I didn't.

Need any more advice?

 

16 minutes ago, 2Far said:

Yeah, ditto to this.

At least I’m not the only one that is confused about this. For years my company didn’t offer me a Roth option, this is a new offering and I just don’t know if I should jump on it or not.

Link to comment
Share on other sites

42 minutes ago, Prophet Zacharia said:

Is there any benefit of moving “after tax” contributions currently sitting in my 401 account to a Roth IRA, or is it better to sit in the 401 account (I have no intentions of moving any of my pre-tax monies for tax reasons, of course)?

I can’t figure out the difference or benefits of one over the other on after tax money based on what I’ve been reading. 

I am able to leave the IRA untouched for 5 years at this point in time (I assume the 5 year minimum is from the time you open the account, and not from the last deposit date?).

I consistently hear younger folks should generally now go with a Roth 401k vs a traditional 401k, and that folks in the middle age ranges should STRONGLY consider the move of their EXISTING retirement $$$ from traditional 401k to Roth 401k.  It gets fuzzy at upper-middle ages nearer retirement, and I haven't heard anything that makes me definitively want to swap from traditional to Roth.

But financial planners should know best (but sadly it isn't readily obvious).

  • Heart 1
Link to comment
Share on other sites

20 minutes ago, Razors Edge said:

I haven't heard anything that makes me definitively want to swap from traditional to Roth.

Do you consider yourself in the middle or upper-middle age range, given your retirement goals? I know we are not too far off in many ways. 
 

And I’ll reiterate, I’m only talking about after-tax contributions in the 401(k). Pre-tax wouldn’t move.
 

Link to comment
Share on other sites

46 minutes ago, Prophet Zacharia said:

Thanks. I anticipate that my post-retirement income will be less than my current, FWIW, even when removing tax deductions like children.

No help from my end.  Said it was out of his wheelhouse.  He is corporate GAAP guy, not a tax guy.  Sorry.

  • Heart 1
Link to comment
Share on other sites

16 minutes ago, Prophet Zacharia said:

And I’ll reiterate, I’m only talking about after-tax contributions in the 401(k). Pre-tax wouldn’t move.

I'm 51, so just into the upper-middle range (maybe cusp?).  55+ is definitely that later range. 35-45 is the middle range. Under 35 is the youngsters.

But what are "pre-tax" vs "after-tax'?  I, as a corporate employee with a standard 401k plan in place, have my "traditional 401k" that is $19,500 +$6,500 (50+) per year PRE-TAX from my pay, so $26k goes into that plan.  Then, totally separate and outside of my job, is my Roth IRA which gets $6,000 + $1,000 (50+) AFTER TAX $$$ from my bank account.  So, the issue I (but maybe not you) run into is that my company offers a Roth 401k now too, so I could instead contribute that same $26,000 but it would be taxed NOW but never again.  It simplifies planning later in life as then ALL your personal retirement money - Roth 401k and Roth IRA would be in UNTAXED distributiions, while a traditional 401k and traditional IRA would be at the mercy of tax rates.

Link to comment
Share on other sites

2 minutes ago, Razors Edge said:

But what are "pre-tax" vs "after-tax'? 

My 401(k) allowed pre-tax and after tax contributions all these years. I am 80% pretax and 20% after tax in the account. It shows the figures for each category. I can now, if I wish, roll any of that over to a Roth IRA. The question is should I move that 20%. I don’t think I’d be taxed on any of it now, and I think all interest would be left behind to be taxed later. 
 

The benefit to moving it now seems to be that any interest earned going forward would be untaxed when withdrawn. But as I understand it, leaving it would  mean I’d be taxed on only 80% of my withdrawals from the 401(k).

I guess moving the post-tax money to the Roth would mean I’d not be able to access it until 59 1/2, while I would the 401(k) after age 55 (one career employer). Not sure if I’m missing other advantages/disadvantages.

Link to comment
Share on other sites

Like the adult diapers, it depends. It depends on your age, expected retirement age, current income and expected future earnings. Also what you plan on doing after you retire. A Roth allows you to pay tax on your contributions today to avoid taxes when you withdraw them. This is good for those expecting to be in a higher tax bracket after retirement. If retirement income will be much lower than what you make today, there isn’t that big of an advantage tax wise as you are missing out on saving money pre-tax during higher earning years. A qualified tax advisor can provide examples of results to help you determine which would work best for your situation. I am 62 and started with this credit union in 2020. I set up the Roth 401k as I plan on working to March 2026, (66 & 10 months). Retirement income will be pension, social security, and 401k accounts from past positions. 

Link to comment
Share on other sites

20 minutes ago, Philander Seabury said:

Kirby should have something to say aboot this. What confuses me is does the Roth then accumulate tax free once you have paid the tax?  That would seem to good to be true. 

Yes, I am hoping for @Kirby’s froggy wisdom. And yes, I believe that is exactly what the Roth would do. There’s been a big “back door Roth” movement as a result.

  • Awesome 1
Link to comment
Share on other sites

23 minutes ago, Philander Seabury said:

Kirby should have something to say aboot this. What confuses me is does the Roth then accumulate tax free once you have paid the tax?  That would seem to good to be true. 

That's the point of the Roth - pay the taxes up front and forget about them any time later down the road.  The $$$ in the account are exactly the $$$ you have, whereas a traditional "tax at withdrawal" is HUGELY affected by your tax rate when you are taking money out.  The old wisdom was that you would be in a way lower tax bracket by withdrawing (needing) less, so it would make sense to shift the tax time from higher bracket years (earning years) to lower bracket years (retirement).

But the numbers folks have figured out all sorts of permutations on this sort of thing and it is not as simple as pay taxes now or don't pay taxes now. :(

Link to comment
Share on other sites

5 hours ago, Razors Edge said:

I'm 51, so just into the upper-middle range (maybe cusp?).  55+ is definitely that later range. 35-45 is the middle range. Under 35 is the youngsters.

But what are "pre-tax" vs "after-tax'?  I, as a corporate employee with a standard 401k plan in place, have my "traditional 401k" that is $19,500 +$6,500 (50+) per year PRE-TAX from my pay, so $26k goes into that plan.  Then, totally separate and outside of my job, is my Roth IRA which gets $6,000 + $1,000 (50+) AFTER TAX $$$ from my bank account.  So, the issue I (but maybe not you) run into is that my company offers a Roth 401k now too, so I could instead contribute that same $26,000 but it would be taxed NOW but never again.  It simplifies planning later in life as then ALL your personal retirement money - Roth 401k and Roth IRA would be in UNTAXED distributiions, while a traditional 401k and traditional IRA would be at the mercy of tax rates.

I don't wish to/claim to want to get into much detail re U.S. federal tax system:  so a Roth or whatever variant, relates to one's age or latter is related to some company benefit that's offered?

In Canada we have tax-free savings account TSFA, which only allows one to contribute a set maximum amount annually ($6,000 for 2021), but TSFA account with various investment instruments, can grow tax-free, withdrawals are tax-free. Contributions in cash are tax-free, stock in kind contributions is seen as a disposition from source, non TSFA account, with capital gains, etc.  TSFA account is allowed for anyone 18 yrs. old and onward.  No age limit. Initially when TSFA concept was introduced, people didn't use it well. But NOW alot of people have gotten smarter with investments.  Tax authority monitors to catch day traders who treating it as a biz.

Link to comment
Share on other sites

This gets a little too complicated for me.   I think there may be some definite advantages to converting, and the proposed tax changes that are floating around Congress may limit these options after December 31, so if you are thinking of doing this, it's good to talk to someone about this soon (many plans limit transfers at year end, so the actual deadline may be earlier, even as early as December 30).  

One thing I am  uncertain about is how/if the pro rata rule impacts this.   Generally the pro rata rule says if you have pre and post tax contributions in an IRA, any distribution has to be pro rata - you can't just withdraw the post -tax part.  I don't know if this applies in a 401(k) as well.  I'd try to discuss this with a CPA.

As RE pointed out, a Roth has tax free earnings for life, whereas a post tax contribution to an IRA will allow a certain percentage of the account to be withdrawn tax free (based on the basis that you've reported on your tax forms), but you don't get tax free earnings.  In general, if the amount will stay in the account for a long time, it's good to get it into a ROTH.

Here is an article that discusses this in some more detail, but I'd definitely recommend talking to an advisor about this.  Does  your company provide an advisor from the group that provides your 401(k)?  Do you have a CPA you use?

https://www.forbes.com/advisor/retirement/mega-backdoor-roth/

  • Heart 1
Link to comment
Share on other sites

5 minutes ago, Kirby said:

This gets a little too complicated for me.   I think there may be some definite advantages to converting, and the proposed tax changes that are floating around Congress may limit these options after December 31, so if you are thinking of doing this, it's good to talk to someone about this soon (many plans limit transfers at year end, so the actual deadline may be earlier, even as early as December 30).  

One thing I am  uncertain about is how/if the pro rata rule impacts this.   Generally the pro rata rule says if you have pre and post tax contributions in an IRA, any distribution has to be pro rata - you can't just withdraw the post -tax part.  I don't know if this applies in a 401(k) as well.  I'd try to discuss this with a CPA.

As RE pointed out, a Roth has tax free earnings for life, whereas a post tax contribution to an IRA will allow a certain percentage of the account to be withdrawn tax free (based on the basis that you've reported on your tax forms), but you don't get tax free earnings.  In general, if the amount will stay in the account for a long time, it's good to get it into a ROTH.

Here is an article that discusses this in some more detail, but I'd definitely recommend talking to an advisor about this.  Does  your company provide an advisor from the group that provides your 401(k)?  Do you have a CPA you use?

https://www.forbes.com/advisor/retirement/mega-backdoor-roth/

It is really named a mega back door Roth?  Crap!  :D

 

Link to comment
Share on other sites

4 hours ago, Philander Seabury said:

It is really named a mega back door Roth?  Crap!  :D

Yeah... news to me too.

4 hours ago, Kirby said:

I think there may be some definite advantages to converting, and the proposed tax changes that are floating around Congress may limit these options after December 31, so if you are thinking of doing this, it's good to talk to someone about this soon (many plans limit transfers at year end, so the actual deadline may be earlier, even as early as December 30).  

https://fitaxguy.com/the-end-of-the-backdoor-roth-ira/

4 hours ago, Kirby said:

This gets a little too complicated for me. 

ditto...  

Link to comment
Share on other sites

On 10/14/2021 at 1:32 PM, Prophet Zacharia said:

 

At least I’m not the only one that is confused about this. For years my company didn’t offer me a Roth option, this is a new offering and I just don’t know if I should jump on it or not.

I think the Roth option is more geared for folks who are likely to have so much money put away in a 401(k), that when the mandatory withdrawals hit, they will be in a higher income bracket. Alas, that is unlikely to be me.

Link to comment
Share on other sites

3 minutes ago, 2Far said:

I think the Roth option is more geared for folks who are likely to have so much money put away in a 401(k), that when the mandatory withdrawals hit, they will be in a higher income bracket. Alas, that is unlikely to be me.

Isn’t tax free earning good for anyone?

I looked into consultation with the work plan account manager, but their fees are  set as a percentage of my 401 k plan’s net worth. Hundreds of dollars. I’ll be better served asking the CPA who does my tax prep. 

  • Heart 1
Link to comment
Share on other sites

6 hours ago, 2Far said:

I think the Roth option is more geared for folks who are likely to have so much money put away in a 401(k), that when the mandatory withdrawals hit, they will be in a higher income bracket. Alas, that is unlikely to be me.

As Prophet noted, Roths are also good for younger people who will have decades of tax free (not just tax deferred) earnings.   When my niece and nephew had their first real paychecks, we helped them get Roth IRAs started to make it easy for them to contribute in the next few years.  They don't get any tax benefit of the money they put in the account, but they can potentially have over 40 years of tax free growth before they retire. Plus since they're just starting out, their tax rate is probably lower now than it may be in the future.

  • Heart 1
  • Awesome 1
Link to comment
Share on other sites

7 hours ago, Prophet Zacharia said:

Isn’t tax free earning good for anyone?

I looked into consultation with the work plan account manager, but their fees are  set as a percentage of my 401 k plan’s net worth. Hundreds of dollars. I’ll be better served asking the CPA who does my tax prep. 

Hundreds is better than the thousands that some financial planners want!  Yeah, it seems to me that Roth would be good for everyone if the earnings are never taxed, but yeah, a lot better for young people.

Link to comment
Share on other sites

1 hour ago, Philander Seabury said:

Hundreds is better than the thousands that some financial planners want!  Yeah, it seems to me that Roth would be good for everyone if the earnings are never taxed, but yeah, a lot better for young people.

Especially if you won't leave the funds in the account long term, a Roth might not be a good idea for someone in a high tax bracket that expects to be in a lower bracket in the future.  Also, the imputed  income from a conversion could kick someone into a higher income level that might disqualify them for an ACA subsidy (although for 2 years, the subsidy isn't an "all or nothing" determination as it usually is due to Covid relief regulations) or result in Medicare surcharges .  But the tax free earnings part is always good.

https://thefinancebuff.com/stay-under-obamacare-premium-subsidy-cliff.html

Link to comment
Share on other sites

7 minutes ago, Kirby said:

Especially if you won't leave the funds in the account long term, a Roth might not be a good idea for someone in a high tax bracket that expects to be in a lower bracket in the future.  Also, the imputed  income from a conversion could kick someone into a higher income level that might disqualify them for an ACA subsidy (although for 2 years, the subsidy isn't an "all or nothing" determination as it usually is due to Covid relief regulations) or result in Medicare surcharges .  But the tax free earnings part is always good.

https://thefinancebuff.com/stay-under-obamacare-premium-subsidy-cliff.html

I obviously don't have a financial mind because all this stuff makes my head hurt!

  • Haha 1
Link to comment
Share on other sites

13 minutes ago, Philander Seabury said:

I obviously don't have a financial mind because all this stuff makes my head hurt!

Me too!  I know just enough to know I'm probably doing things all wrong, but not enough to correct it. :scratchhead:

  • Heart 1
Link to comment
Share on other sites

20 minutes ago, Kirby said:

Me too!  I know just enough to know I'm probably doing things all wrong, but not enough to correct it. :scratchhead:

If you ask 10 financial planners on what to do you will get 10 different answers 

  • Haha 1
  • Sad 1
Link to comment
Share on other sites

On 10/14/2021 at 1:53 PM, Prophet Zacharia said:

 

And I’ll reiterate, I’m only talking about after-tax contributions in the 401(k). Pre-tax wouldn’t move.
 

And that is the key. While I haven't researched this in a while, may want to doublecheck the two key points.

1) After-tax is After-tax...but it doesn't stop there. For accounting purposes, $X amount remains $X amount and in a 401k, withdrawals simply reduces it until $X amount is depleted. Excess beyond that (earnings - capital gains, dividends) is taxed, just like pre-tax contributions and it's earnings. On a Roth, those earnings are also tax exempt when withdrawn. That is the difference.

2) A Roth, if it doesn't already exist, has a 5 year requirement on tax free withdrawals with tax (and possible penalty) prior to that. HOWEVER, all after-tax contributions can be withdrawn anytime in that 5 year period without tax/penalty as it is the excess beyond (subsequent earnings) that has the initial 5 year restriction. That is a one time 5 year restriction based on when the account was opened...not a running 5 year with each contribution. That is why if an existing Roth has been open 5 yeas there is no restriction.

3) Delay beyond Dec 31, 2021 may not be to your benefit as there is movement in Congress to change the law to "close loopholes the affluent were using to avoid taxes."  Two specific targets are the 401k/IRS rollover conversions since they typically involve huge lump sums, and eliminate ability to contribute to a Roth above a certain income level (As I recall, was somewhere around $220,000 married...but don't quote me). Not law yet and don't know where stands legislatively...or simply "talking points/ideas" trying to gain traction.

EDIT: Don't overlook pre-tax contribution withdrawn/deposits as contribution to Roth. If you have a low tax year (first bracket or even excess below standard deduction, it may be better to pay the taxes, if any, and deposit in Roth as contribution (assuming you don't otherwise need it.) An IRA has a RMD (Required Minimum Distribution) beginning at 72, where a Roth does not. While you assume you will be in a lower tax bracket after 72, you may not me and may not be able to control it. An example that happened to my mom. A stock holding she had was taken over by another company. Had the takeover been in shares of the new company, would be no problem as cost basis remains same for new shares (adjusted by quantity). However, this was a cash buyout - lump sum immediately taxable, pushing into a higher bracket...and still need to do the RMD!

Speaking of RMD, while generally discussed in terms of IRA's it is also required for SEP, 401k, 403b, profit sharing and other defined contribution programs. A Roth does not have an RMD (no government tax benefit so no laws requiring it) with only the required distribution at death to the beneficiaries - but that is a whole different subject.

  • Heart 1
Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...