Ignoring your original question and looking at this one. Should you be using traditional or Roth 401k? I assume you mean in general, not just the extra money you are considering putting in from taxable.Thanks for all the replies on this. My marginal tax rate is 23% with no state income tax. I max out our IRAs every year and convert them to Roth. At 50 (46 year old wife), it sounds like I may be better off going with a traditional 401K instead of a Roth. I can choose to do either through the 401K program. I understand that the 15% capital gains would be less than the 23%, so a traditional may make more sense. However, does the tax free growth in a Roth outweigh the difference? It seems like I could figure that out if I knew what my tax rate would be at retirement (at least 10 to 15 years away), but it looks very murky from here. I have a pretty stable business (15 years running) that I will likely sell out my ownership in at the time of retirement. This will hopefully provide income, but I assume that income will be taxed as ordinary income. My wife has a steady corporate job and I am trying to max out her 401K (traditional) also. We have about a 1.2M net worth right now, about 250K of which is in taxable. It seems logical to get that money into tax advantaged accounts to the extent that it is possible. So the question becomes whether to go with Roth or Traditional. If the future tax rate is unclear, maybe I should split the difference? That would be maxing out one Roth and one Traditional each year. Maybe do the same with the IRA's each year?
Net worth is not useful for this. What you need to look at for this decision is how many dollars you have in tax-deferred, Roth, and taxable. In addition, your tax rate in retirement compared to 22% now.
You don't know what your tax rate in retirement will be, but it is very common for working people in the 22% and 24% range to drop into the 12% range in retirement. For example a couple retired right now can have income of $123,500 and be in the 12% bracket.
You apparently are in the 22% tax bracket now, verging on the 24% tax bracket. My first thought is that you should use enough traditional 401k to stay in the 22% bracket as long as you can. That seems a no brainer.
Also, your income is too high to deduct traditional IRA contributions so just keep doing what you are doing there (backdoor Roth for your IRA contributions.)
What about contributions to 401k that are above what is needed to keep you in the 22% bracket? I think most people are going to tell you to continue traditional 401k contributions, but I think you might consider putting some into Roth 401k. For example, if your wife is expecting a pension...I'd use Roth 401k (after staying in the 22% bracket).
The point is it depends on your overall picture which is more than you have told us so far in this thread.
One thing to find out....when you sell your business, how is that taxed? I have not idea.
As for me, I would not be selling in taxable in order to add to 401k (either kind). I would not add any more to taxable for retirement though - filling the 401ks with something (traditional or Roth) is more important in my mind.
Statistics: Posted by retiredjg — Sun Jun 30, 2024 8:36 am — Replies 27 — Views 1842
