401K vs Roth
#8
Split the difference,
you can have both.
The Advantage to a ROTH 401k is that you can roll it into a Roth IRA and RMD's are no longer required.
The Advantage to a Traditional 401k is that taxes are deferred until you begin taking RMDs. The downside to RMDs is that as you age they increase, so it's pretty easy to wind up in a higher tax bracket than you'd expect.
you can have both.
The Advantage to a ROTH 401k is that you can roll it into a Roth IRA and RMD's are no longer required.
The Advantage to a Traditional 401k is that taxes are deferred until you begin taking RMDs. The downside to RMDs is that as you age they increase, so it's pretty easy to wind up in a higher tax bracket than you'd expect.
#10
Line Holder
Joined APC: Jun 2014
Position: 11CA
Posts: 47
Sorry for the quality of the previous responses. Your question is applicable to most all FDX pilots and needs serious consideration (most likely from your Financial Advisor). Here are my notes when I researched the issue a few months ago:
It may be appropriate to contribute to both a traditional and a Roth 401(k) if you can, giving you taxable and tax-free withdrawal options. Financial planners call this tax diversification, and it's generally a smart strategy. For example, with a combination of Roth and traditional 401(k) savings, you could take distributions from your traditional 401(k) until you reach the top of your tax bracket, and then withdraw whatever you need beyond that amount from a Roth 401(k), which is tax free, provided certain conditions are met. This is just one example of the flexibility that tax diversification provides. Reducing your taxable income may also be advantageous for other reasons, such as the taxation of Social Security benefits and financial aid qualification.
Also, Roth 401(k)s are subject to minimum distribution requirements, beginning at age 70½, while Roth IRAs are not. This problem is easily avoided, though, by rolling the account into a Roth IRA when you retire. Plus, a Roth IRA may provide additional flexibility to choose your investments.
A Roth in your arsenal gives you the flexibility to avoid bracket-busting withdrawals in retirement, says Ken Perine, a certified financial planner with Meritage Wealth Advisory, in Livermore, Calif. Withdrawals from traditional IRAs and 401(k) plans are taxed as ordinary income, and the money you take out could push you into a higher bracket (the brackets currently extend from 10% to 39.6%). What's more, the additional income could subject you to a host of unpleasant consequences, ranging from higher Medicare premiums to a surtax on your investment income.
If you've made it to retirement without investing in a Roth, you can still add one to your retirement portfolio, and you probably should. You need earned income to contribute to a Roth, so if you're no longer working, this door is closed. But you don't need earned income to convert a deductible IRA to a Roth. And depending on your circumstances, you may be able to convert without paying a big tax bill.
For example, suppose it's your first year of retirement and you've socked away enough in a savings account to cover your expenses for the year. Because you aren't working full-time and have reduced income, you can convert a significant amount of money from your IRA at a low tax rate, says John Scherer, a certified financial planner in Middleton, Wis. In 2015, a married couple can have up to $74,900 in taxable income and remain in the 15% tax bracket. Even if your conversion moves you into the 25% bracket, you'll only pay that rate on the amount that exceeds the threshold. For example, if your conversion results in taxable income of $77,900, you'll pay 25% on only $3,000.
You'll always be able to withdraw the amount you converted without paying taxes or penalties. And after five years, you can withdraw earnings tax- and penalty-free, too (as long as you're at least 59½). (Converting to a Roth also shrinks the amount remaining in your deductible IRA, which you'll appreciate once you turn 70½ and start taking annual required minimum distributions from the account.)
The longer you leave the Roth untouched, the more you'll benefit from tax-free earnings growth. For that reason, financial advisers often recommend tapping taxable accounts first, followed by your tax-deferred retirement accounts, and finally, your Roth IRA. However, if you need a large amount of money for an emergency (and don't have enough in your taxable account to cover it), you can take it out of your Roth without triggering a big tax bill.
Similarly, smaller withdrawals from your Roth will allow you to maintain your retirement lifestyle without some of the unpleasant tax consequences ignited by taxable withdrawals from your deductible IRAs or 401(k) plans. For example, taxes on Social Security benefits are based on what's known as your provisional income--your adjusted gross income (which includes withdrawals from your 401(k) or a traditional IRA), plus any tax-free interest, plus 50% of your benefits. If you substitute tax-free withdrawals from your Roth to cover some of your needs, you may be able to keep your AGI below the thresholds that trigger higher taxes.
Better yet, tax-free withdrawals may help you postpone taking Social Security benefits--and each year you delay claiming benefits between age 62 and 70 boosts your payout by as much as 8% a year. Using tax-free withdrawals to manage your taxable income could also lower Uncle Sam's take of your taxable accounts. Long-term capital gains are tax-free for taxpayers in the 10% or 15% tax brackets.
Another advantage of the Roth is that if you don't need the money, you don't have to start taking it out of the tax shelter at age 70½, as you do from regular IRAs and 401(k)s. Significant mandatory distributions from such accounts can push you into a higher tax bracket.
The benefits of a Roth continue even when you're not around to enjoy them. Money in an inherited Roth account can be withdrawn by heirs tax-free over their lifetimes. With a traditional IRA, withdrawals are taxed at your heirs' top tax brackets.
I use the After Tax method of a backdoor ROTH. That gets around the $18,000 Roth 401k limit and provides opportunity to get much larger investment choices . YMMV.
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