Roth v Traditional IRA

[engle]

According to their rep, Fidelity Investments just re-assigns the same shares in street name from my 401k to one of my Roth IRAs nothing is sold or bought on the open market. The "pricing" is for the 1099 form I will receive from documenting the ordinary income (not cap gains like if it was in a non-retirement account) for this.

Hmm, that might be part of the explanation for last year's first trading day action: (2019-01-02)

View attachment 495511

Hopefully greedier Longs prevail today!

Cheers!

 

[Electroman]

According to their rep, Fidelity Investments just re-assigns the same shares in street name from my 401k to one of my Roth IRAs nothing is sold or bought on the open market. The "pricing" is for the 1099 form I will receive from documenting the ordinary income (not cap gains like if it was in a non-retirement account) for this.

Why would you want move anything from 401K to Roth IRA? What tax benefits do you get by this move? I thought 401K is the most sheltered and is best in terms of taxes

 

[Chickenlittle]

Why would you want move anything from 401K to Roth IRA? What tax benefits do you get by this move? I thought 401K is the most sheltered and is best in terms of taxes

If you are expecting a large return you will save all tax on your future profit by paying the taxes now on your keogh funds now

 

[electrichapp]

Why would you want move anything from 401K to Roth IRA? What tax benefits do you get by this move? I thought 401K is the most sheltered and is best in terms of taxes

I believe 401k is taxed when money is taken from it on retirement. Money put into Roth IRA is after-tax money and is not taxed when money is taken out from it on retirement. I also believe that you have to pay taxes now on the money that you move from 401k to Roth IRA...

 

[mongo]

If you are expecting a large return you will save all tax on your future profit by paying the taxes now on your keogh funds now

That doesn't follow.
Assuming an after tax net coefficient of A, a return of B, and a starting investment of C:
401k = (C * B) * A (taxed at withdraw)
Roth = (C * A) * B (taxed at funding)
Same end result.
If you expect your tax rate to be higher in retirement than it currently is, you should move money to a Roth.
If you have available tax credit to cover the move, you should shift funds to a Roth.

Edit: one character typo

 

[The Accountant]

That doesn't follow.
Assuming an after tax net coefficient of A, a return on B, and a starting investment of C:
401k = (C * B) * A (taxed at withdraw)
Roth = (C * A) * B (taxed at funding)
Same end result.
If you expect your tax rate to be higher in retirement than it currently is, you should move money to a Roth.
If you have available tax credit to cover the move, you should shift funds to a Roth.

Not sure if this clarifies things, but.....

The benefit of a Roth is that although you pay taxes at funding, the appreciation is tax free even when you withdraw it later in retirement. Whereas with a 401k, the appreciation grows tax free, but you pay taxes when you withdraw it at retirement.

A Roth IRA: You fund a Roth with after-tax dollars, meaning you've already paid taxes on the money you put into it. In return for no up-front tax break, your money grows and grows tax free, and when you withdraw at retirement, you pay no taxes

 

[Nocturnal]

If you are expecting a large return you will save all tax on your future profit by paying the taxes now on your keogh funds now

It's also useful if you have a year with no/low taxable income or if say you have a large EV credit you want to take advantage of but not enough tax liability. Then you have the eternal question of what your tax rate will be at retirement vs now. Personally I'm somewhat hedged there because I'm uncertain as to my future income, and looking at US debt and Social Security shortfalls I would not be shocked to see much higher tax rates for everyone down the line. I'm about 1/3 in roth money and the rest in deferred accounts.

 

[mongo]

Not sure if this clarifies things, but.....

The benefit of a Roth is that although you pay taxes at funding, the appreciation is tax free even when you withdraw it later in retirement. Whereas with a 401k, the appreciation grows tax free, but you pay taxes when you withdraw it at retirement.

A Roth IRA: You fund a Roth with after-tax dollars, meaning you've already paid taxes on the money you put into it. In return for no up-front tax break, your money grows and grows tax free, and when you withdraw at retirement, you pay no taxes

Right, you are either taxed on the funding side (Roth), or the withdrawal side (401k or traditional IRA). If the tax rate is the same in both instances, then the net proceeds are identical regardless of the the rate of return on the account. If the tax rates are different, you are better off biasing to the lower tax option.

 

[dl003]

Right, you are either taxed on the funding side (Roth), or the withdrawal side (401k or traditional IRA). If the tax rate is the same in both instances, then the net proceeds are identical regardless of the the rate of return on the account. If the tax rates are different, you are better off biasing to the lower tax option.

The tax situation gets further complicated for Traditional vehicles as when you finally pay tax upon withdrawal, you get deduction (standard/itemized) before paying 0%, 10%, 15%, etc... So, your effective tax rate is much lower than your top bracket. Compared to a Roth vehicle where you pay tax at your top bracket today, Traditional vehicles are harder to predict but also seemingly more advantageous. Past a certain point, though, your top dollars from Traditional withdrawal get taxed at your top bracket so putting everything in a Traditional account doesn't really work past that point. If you have other sources of income in retirement, they also accelerate that process.

 

[Causalien]

Right, you are either taxed on the funding side (Roth), or the withdrawal side (401k or traditional IRA). If the tax rate is the same in both instances, then the net proceeds are identical regardless of the the rate of return on the account. If the tax rates are different, you are better off biasing to the lower tax option.

Sounds similar to our RRSP and TFSA.

Debated this many times over. In a scenario where you put money in, made a big killing and later need to withdraw, the best way to allocate funds is to put it all in your Roth if possible. Reason being that taxes will only get higher as time goes on OR, you made so much money that withdrawal (even a conservative 5%) in later year will put you at the highest tax rate. In the Roth example, if you made a killing and later withdraw, there is no tax. In the 401k case, if you made a killing, you end up paying more taxes in the end than you put in at the beginning.

As a firm believer of my ability to make money, I pursued the route of Roth IRA and chucked as much high risk investments as possible into it. As for the 401k it is relegated to get some tax returns and for stuffing things that generate interest income that is taxed in the worst possible way outside of a 401k.

 

[kcveins]

Right, you are either taxed on the funding side (Roth), or the withdrawal side (401k or traditional IRA). If the tax rate is the same in both instances, then the net proceeds are identical regardless of the the rate of return on the account. If the tax rates are different, you are better off biasing to the lower tax option.

I've heard this multiple times...
When you put numbers to it in the generic sense, it all balances out
For instance:

I put in $10,000 post tax dollars into my Roth 401-K and bought 100 shares of TSLA when it was $100
TSLA grows to $10,000 a share
If I am in a 33% tax bracket, that means I paid $5000 on my shares upfront and now I have $1,000,000 in TSLA

If I put in the $15,000 investment (counting for the upfront 5K in taxes) then the numbers are similar to the first option - shares worth 1M after taxes

HOWEVER,
If you are able to put in the max contribution for your 401-K (it is now 19K, but lets use the $10K to make the numbers easier), it makes a huge difference if you have a Roth vs non ROTH option. You can put in 10K in either the Roth or non Roth option, then clearly the advantage is in the Roth option
Think of it like this...
I use the same $10,000 investment into a post or pre-tax shelter account purchase my shares of TSLA
In my Roth 401-K, TSLA goes to $10,000/share so I net 990,000
In the pretax 401-k, and TSLA does the same ($10,000 share) now I am paying taxes on 1M, so now I get a net of $666,666

The 2 best reasons for CONVERTING a preexisting 401-k to Roth
1. you feel the tax rate is going to go higher or you will be in a higher tax bracket when you retire
2. the psychological benefit of not having to worry about paying taxes when your income drops in retirement

 

[Jovian]

That doesn't follow.
Assuming an after tax net coefficient of A, a return of B, and a starting investment of C:
401k = (C * B) * A (taxed at withdraw)
Roth = (C * A) * B (taxed at funding)
Same end result.
If you expect your tax rate to be higher in retirement than it currently is, you should move money to a Roth.
If you have available tax credit to cover the move, you should shift funds to a Roth.

Edit: one character typo

Very simply, If I invest 100k in a Roth IRA over time, (I’ll end up paying ~24k income tax so that 100k in my account cost 124k). Then if that 100k becomes 1000k or a million, I can withdraw that million tax free in retirement. An IRA will have you pay taxes on all those earnings and will probably cost you ~200k in taxes (vs the 24k in the Roth).

It is a HUGE tax difference.

This is my understanding of it.


Edit: I now believe this to be incorrect as the IRA will appreciate enough to pay for your taxes.

 

[Electroman]

I believe 401k is taxed when money is taken from it on retirement. Money put into Roth IRA is after-tax money and is not taxed when money is taken out from it on retirement. I also believe that you have to pay taxes now on the money that you move from 401k to Roth IRA...

This assumes that the tax bracket you are in now will be less than that after retirement - am I reading that right?
For the majority of folks that will not be the case, and it will the other way I would think.

 

[MP3Mike]

Very simply, If I invest 100k in a Roth IRA over time, (I’ll end up paying ~24k income tax so that 100k in my account cost 124k). Then if that 100k becomes 1000k or a million, I can withdraw that million tax free in retirement. An IRA will have you pay taxes on all those earnings and will probably cost you ~200k in taxes (vs the 24k in the Roth).

It is a HUGE tax difference.

This is my understanding of it.

But you are missing the point. While you had $100k in your Roth, you would have had $124k in your traditional IRA. So unless your tax rate was different the results would be identical between the two.

 

[TexasGator]

kcveins and others beat me to it. you put money in a Roth if you feel taxes could be higher in the future, or if you believe there will be significant appreciation of assets. So if you believe Tesla will go 10x, and have a way to move it without incuring huge tax penalties, it's a good idea. Also great for high dividend paying stocks too

wish Roth IRAs had been around when I was younger (also wish i had the funds to take advantage). I am pushing my kids to put as much as possible into Roths, after getting max 401k match etc

there are ways to move from 401k to Roth, but not sure of the rules

 

[mongo]

I've heard this multiple times...
When you put numbers to it in the generic sense, it all balances out
For instance:

I put in $10,000 post tax dollars into my Roth 401-K and bought 100 shares of TSLA when it was $100
TSLA grows to $10,000 a share
If I am in a 33% tax bracket, that means I paid $5000 on my shares upfront and now I have $1,000,000 in TSLA

If I put in the $15,000 investment (counting for the upfront 5K in taxes) then the numbers are similar to the first option - shares worth 1M after taxes

HOWEVER,
If you are able to put in the max contribution for your 401-K (it is now 19K, but lets use the $10K to make the numbers easier), it makes a huge difference if you have a Roth vs non ROTH option. You can put in 10K in either the Roth or non Roth option, then clearly the advantage is in the Roth option
Think of it like this...
I use the same $10,000 investment into a post or pre-tax shelter account purchase my shares of TSLA
In my Roth 401-K, TSLA goes to $10,000/share so I net 990,000
In the pretax 401-k, and TSLA does the same ($10,000 share) now I am paying taxes on 1M, so now I get a net of $666,666

The 2 best reasons for CONVERTING a preexisting 401-k to Roth
1. you feel the tax rate is going to go higher or you will be in a higher tax bracket when you retire
2. the psychological benefit of not having to worry about paying taxes when your income drops in retirement

That is not a fair comparison. In the Roth case you are putting in 10,000 post tax, which is 15,152 pretax. Using the same pretax amount in the 401k case: 15,152 pretax * 100 (TSLA rise) = 1,515,152 * 0.66 = 1,000,000.

Very simply, If I invest 100k in a Roth IRA over time, (I’ll end up paying ~24k income tax so that 100k in my account cost 124k). Then if that 100k becomes 1000k or a million, I can withdraw that million tax free in retirement. An IRA will have you pay taxes on all those earnings and will probably cost you ~200k in taxes (vs the 24k in the Roth).

It is a HUGE tax difference.

This is my understanding of it.

You pay more in taxes, but the net you get out is the same (assuming a flat tax rate).
IRA: 1,000 * 100 * 50% = Roth: 1,000 * 50% * 100, in one case the tax is on the $1,000 ($500) in the other it is on 100,000 ($50,000). However, in both cases you end up with 50,000.

In reality, the tax code is more complicated:
If you plan on a low draw from your account, you can pull from an IRA or 401k virtually tax free. I'm expecting TSLA to do great, and improve my standard of living, thus increasing my incremental tax rate. Therefore a Roth would be better for me in the long run.

 

[Jovian]

That is not a fair comparison. In the Roth case you are putting in 10,000 post tax, which is 15,152 pretax. Using the same pretax amount in the 401k case: 15,152 pretax * 100 (TSLA rise) = 1,515,152 * 0.66 = 1,000,000.



You pay more in taxes, but the net you get out is the same (assuming a flat tax rate).
IRA: 1,000 * 100 * 50% = Roth: 1,000 * 50% * 100, in one case the tax is on the $1,000 ($500) in the other it is on 100,000 ($50,000). However, in both cases you end up with 50,000.

In reality, the tax code is more complicated:
If you plan on a low draw from your account, you can pull from an IRA or 401k virtually tax free. I'm expecting TSLA to do great, and improve my standard of living, thus increasing my incremental tax rate. Therefore a Roth would be better for me in the long run.

I stand corrected.

 

[MP3Mike]

That is not a fair comparison. In the Roth case you are putting in 10,000 post tax, which is 15,152 pretax. Using the same pretax amount in the 401k case: 15,152 pretax * 100 (TSLA rise) = 1,515,152 * 0.66 = 1,000,000.

There is one difference, in that the dollar limit you can put in to both is the same. So you can put ~$9,000 worth into the Roth IRA per year, but only $6,000 into the traditional IRA. So in that sense you are better off with the Roth.

 

[Boomer19]

There is one difference, in that the dollar limit you can put in to both is the same. So you can put ~$9,000 worth into the Roth IRA per year, but only $6,000 into the traditional IRA. So in that sense you are better off with the Roth.

if you qualify for it

 

[Krugerrand]

Dudes! Just accept you’re going to have to pay a crap ton of taxes at one end or the other. Pay them up front or let them take them from your cold, dead hand. Whatever.

As long as @Lycanthrope has enough left over to build my walls, none of you should care. Buy. Hold. Buy some more. Hold. Pass onto to your loved ones (if you’ve even got any) and forgetaboutit.