View Full Forums : Speaking about retirements - Roth 401k


Stormhaven
09-27-2005, 03:00 PM
The Roth 401k has been sort of shoved aside and not a lot of people are talking about this new retirement fund. If your company offers 401k plans, you should find out if they plan on offering the new Roth 401k's starting next year.

Roth 401k's are definitely not a 5-minute conversation, but if you have time, I would suggest some <a href="http://biz.yahoo.com/ms/050913/143649.html">reading material</a>.

Panamah
09-27-2005, 03:27 PM
Interesting!

weoden
09-28-2005, 12:36 AM
That sounds like a good idea for saving. Remember you can roll over your 401k to a roth after 5 years. There might be a time where you are between jobs or have just retired where you have reduced earnings and you can convert a piece of a 401k to a roth.

Probably everyone knows that there is no mandatory withdrawl on a roth and you can will that to your children.

Panamah
09-28-2005, 10:00 AM
It sounded like there is a time limit on the Roth 401k though. I thought the article said 70.

Also, if you roll a regular 401k into a Roth you'd have to pay taxes on that money, right?

Stormhaven
09-28-2005, 10:17 AM
You can roll a 401k into a traditional IRA and pay no taxes until you withdraw the money at retirement. If you roll over into a Roth IRA, you have to pay taxes at that point, but you do not have to when you withdraw at retirement. (<a href="http://www.fool.com/money/allaboutiras/allaboutiras03.htm">Good article</a> on Traditional vs. Roth IRAs)

weoden
09-28-2005, 03:18 PM
You can roll a 401k into a traditional IRA and pay no taxes until you withdraw the money at retirement. If you roll over into a Roth IRA, you have to pay taxes at that point, but you do not have to when you withdraw at retirement.

Read the below and follow the link about withdrawls.
"
http://www.fool.com/money/allaboutiras/allaboutiras01.htm
Money may be withdrawn from an IRA at any time, but on withdrawal it may be taxed and/or penalized. Withdrawals from a traditional IRA will always be taxed, either in whole or in part, at ordinary income tax rates. Except as noted below, withdrawals from a traditional IRA prior to age 59 1/2 will result in a 10% excise tax as well as an ordinary income tax. The potential income taxes and early withdrawal penalties on Roth and Education IRA withdrawals will be discussed in subsequent articles.
"

My point about rolling over to a Roth was to choose your time to roll money over. The best time to roll over your traditional ira was late 99' after the stock market crash... Catch my drift? There may be times before 70 1/2 where you can roll over money and reduce the taxes on your savings. See the link below.
http://www.fool.com/money/allaboutiras/allaboutiras01.htm

A roth IRA never has to be withdrawn. Once it is withdrawn, you do not have to pay tax on it because it has been taxed. You can keep this money as an inheritance for your children or what ever you want to do with it.

For the traditional IRA, there is a schedule for withdrawl of your money after age 70 1/2. This mandatory withdrawl requires you to have half of your money left at your life expectancy, I think. I tried to look up the exact requirments but I have to go off memory. If I am correct, a savings amount of 400k at age 70 1/2 requires you to remove half of the 400k by age 75(assuming you are male and that is your expected life span). So, over 5 years, you need to withdrawl 40k per years. That amount is taxable and you have to pay tax on social security, money outside of any savings vechicle and any taxable pension. After age 75, I "THINK" you have to keep withdrawing at a rate around 40k.

A roth does not have to be withdrawn. Also, there is extra amounts you can contribute as you approach retirement.

Keep in mind possible future inflation. The ideal goal would be to live on retirement and not deplete your savings. For that, you need 40 times or more your desired income. If you withdraw 40k / year(60k with SSI), you need 800k of total savings(assumes 8% return and consuming 4% of that). Less than than and you need to dip into savings. If you can live on 20k of SSI and 20k from a traditional roth plus have money in a Roth growing without being consumed... I think that is an ideal situation.

Just to beat this to death, everyone gets a standard deduction and the marginal tax rate starts low and increase as your income increases. The goal is to keep your income steady by rolling over uneeded traditional ira savings into a roth. Between 65 and 70, you can ( I think) roll over less than the total amount of your traditional roth. Lets say that you roll over enough to place you below the top marginal tax bracket. Alternately, you could have rolled over a portion of your traditinal ira after the stock market crashed in 1999. Both of these strategies would minimize your tax payment.

To summarize, you can take the mandatory minimum withdrawl or you could withdraw and roll over as long as you stay in your current tax bracket. However, you do not want to pay tax in total on a traditional roth due to the progressive marginal rates.

PS Bah, I just thought of something else. Those that are young and expect to retire with a lot of income, should invest in a Roth. Those that will not retire in the top tax rate, should stick with a traditional roth. All of these decisions are deterimined by future tax rates and not the current tax rate which is unknown.

Panamah
09-28-2005, 03:40 PM
>A roth IRA never has to be withdrawn.
Yes, but a distiction is that the Roth 401k apparently has the same restrictions as a regular 401k. Just was pointing that out.

I wonder if you can roll a Roth 401k into a Roth Ira?

weoden
09-28-2005, 04:03 PM
Yes, but a distiction is that the Roth 401k apparently has the same restrictions as a regular 401k. I wonder if you can roll a Roth 401k into a Roth Ira?

Send a letter to your federal representives asking that question. The law is probably being written and may be ammended. You could send a letter to a california representative that is part of the committe which writes tax law.

weoden
09-28-2005, 05:44 PM
For drawing 401k money, refer to pub 590 appendix c.
http://www.irs.gov/pub/irs-pdf/p590.pdf

If you are 70, your life expectancy is 17 years if you are single. As I understand the law, you have to withdraw 1/17 of your 401k money when you are 70. If you have 400k then you have to draw 23k. If you have double that money, you have to draw double.

At age 71, you have to draw 1/16.3 during that year. If you made back all that you withdrew in the previous year, you would have to withdraw about 24k.

At age 111, you have to withdraw all of you money.

There are some other options but keeping your taxable income below "a" margin rate makes sense. One thought I had was that congress may make the AMT applicable to the Roth. If there was a change to the tax law, that would be it.