401K vs Roth 401k

Submitted by Jeffrey Sims on Thu, 2020-02-20 03:45

My new employer offers both, and I’ve never worked for a company who does this. I am 57 and plan to work to full retirement. I’m able to max contributions plus there is the employer match. My question is fundamentally driven by which best serves my beneficiaries (children) to maximize what each receives. Other retirement income streams include my military pension and other self directed IRAs. With the Secure Act, I’m hesitant to continue contributing to the standard 401K. I signed up for it because it was what I knew. So????



Submitted by Alan - IRA critic on Thu, 2020-02-20 14:39

  • If you contribute to the Roth 401k, taxes on the amount you could have contributed instead to the pre tax option are determined by your marginal rate each year. When your children inherit this, likely after you have retired and rolled the Roth portion to a Roth IRA, the children will have 10 years to drain the inherited Roth IRA and since it will be tax free, they are best served to wait until the 10th year to drain it. Note that company matching contributions for your Roth 401k contributions will be made to the pre tax account.
  • Conversely, if you contribute to the pre tax option, your taxes are reduced at your current marginal rate, and when RMDs begin you will owe taxes at your retirement marginal rate. When the children inherit, they will pay taxes over the 10 year period at their marginal rates. If you are only concerned with what the children pay, what do you expect their rates to be?  Will then be high earners and savers or not? They will inherit more if you contribute pre tax since they will inherit your tax savings from your contributing pre tax in addition to the actual retirement accounts.
  • You can always hedge by splitting your contributions in any proportion between the pre tax and the Roth 401k. 
  • Your considerations are the same as if you were considering converting your TIRAs to Roth IRAs.

 

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