# Still confused about Roth 401ks **URL:** \ **Category:** Factual Questions\ **Created:** [June 3, 2018, 1:43am UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340 "2018-06-03T01:43:21Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![jasg](https://avatars.discourse-cdn.com/v4/letter/j/f0a364/32.png) [@jasg](https://boards.straightdope.com/u/jasg)\ **Post date:** [June 3, 2018, 6:39pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/21 "2018-06-03T18:39:33Z")
Sorry, that is not a very clear calculator… Other thoughts about Roth accounts- [ul] [li]If you have a corporate plan, IMHO you should take full advantage of it[/li][li]Conversions are a complicated decision involving current vs retirement tax rates, current vs retirement income levels, when you might need the money and non-Roth account values when RMDs begin.[/li][li]Current tax rates are ~3% lower than they will be in 2025 (per current tax plan)[/li][/ul] Personally, my plan has been - [ul] [li]Live off savings until age 70 1/2 when RMDs from 401k must begin[/li][li]Until age 70 (low taxable income) convert to Roth - this lowers my 401k balance & thus, my RMD & taxes post-70 [/li][li]Post-70 live off RMD, SS and savings (then Roth)[/li][li]Leave as much of Roth to the kids as I can[/li][/ul] ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [June 3, 2018, 7:57pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/22 "2018-06-03T19:57:21Z")
> [@edwardcoast](#): > > And generally lower income people use a ROTH IRA because getting a tax deduction from a regular IRA offers them nothing or very little, and they would still end up paying taxes on it when they take it out at retirement. Actually, lower income people can’t afford to invest in a IRA. Rich people are the ones who go for Roth IRAs, they will still be earning plenty from capital gains, dividends and interest after they retire. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [June 3, 2018, 9:28pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/23 "2018-06-03T21:28:04Z")
> [@edwardcoast](#): > > People might be interested to know that the RMD (Requirement Minimum Distribution) on the regular IRA at age 70 1/2 doesn’t apply to the ROTH IRA. So if you don’t need the money, you don’t need to take it out of a ROTH IRA and can leave it in there invested. That’s because the IRS won’t be collecting taxes on it, so they don’t force you to take the money out. Thanks. Yet another advantage of them. ---
**Author:** ![jasg](https://avatars.discourse-cdn.com/v4/letter/j/f0a364/32.png) [@jasg](https://boards.straightdope.com/u/jasg)\ **Post date:** [June 3, 2018, 9:42pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/24 "2018-06-03T21:42:08Z")
> [@DrDeth](#): > > Actually, lower income people can’t afford to invest in a IRA. Rich people are the ones who go for Roth IRAs, they will still be earning plenty from capital gains, dividends and interest after they retire. Actually, the fact that there are income limits argues against that. If you make too much, you can’t contribute to a Roth IRA. A couple I know (who probably never rose above median salaries) were dedicated to making Roth IRA contributions from 1998 when they appeared until now. They have close to $400,000 in their Roth account - just with 20 years of standard Roth contributions to an S&P index fund. (They each started out contributing $38/week and ended up at $125/week.) ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [June 3, 2018, 10:07pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/25 "2018-06-03T22:07:45Z")
> [@jasg](#): > > Actually, the fact that there are income limits argues against that. If you make too much, you can’t contribute to a Roth IRA. Yeah, your modified AGI can’t be over $200K or so, ymmv, various factors, etc. You can be pretty wealthy with a modified AGI of $200K. ---
**Author:** ![Alley\_Dweller](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/alley_dweller/32/430_2.png) [@Alley\_Dweller](https://boards.straightdope.com/u/Alley_Dweller)\ **Post date:** [June 4, 2018, 2:24am UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/26 "2018-06-04T02:24:02Z")
> [@jasg](#): > > Actually, the fact that there are income limits argues against that. If you make too much, you can’t contribute to a Roth IRA. > > A couple I know (who probably never rose above median salaries) were dedicated to making Roth IRA contributions from 1998 when they appeared until now. They have close to $400,000 in their Roth account - just with 20 years of standard Roth contributions to an S&P index fund. (They each started out contributing $38/week and ended up at $125/week.) That changed in 2010. There never was an income limit for contributing to a traditional IRA (just on limit on deducting your contributions). In 2010, Congress removed the income limit for converting from a traditional IRA to a Roth IRA. So any billionaire who wants to contribute to a Roth IRA can do so now (as long as they are under age 70 1/2 and have taxable compensation income). Higher income people just have to take the additional steps of first contributing to a Traditional IRA and then converting their Traditional IRA to a Roth IRA. Easy peasy. [Fidelity has a form for it.](https://www.fidelity.com/static/dcle/ira/documents/Roth_IRA_Conversion.pdf) This two step procedure is popularly called a [“backdoor Roth IRA contribution.”](http://www.wallstreetphysician.com/backdoor-roth-ira-legal/) As far as Roth 401(k) contributions go, there is no individual income limit. The CEO as well as the janitor can contribute to a Roth 401(k) without any special backdoor process. The retirement plan as a whole must pass certain non-discrimination tests, but those apply to both traditional and Roth plans. ---
**Author:** ![Manlob](https://avatars.discourse-cdn.com/v4/letter/m/96bed5/32.png) [@Manlob](https://boards.straightdope.com/u/Manlob)\ **Post date:** [June 4, 2018, 4:26am UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/27 "2018-06-04T04:26:06Z")
> [@Alley\_Dweller](#): > > [It was estimated in 2012 that Mitt Romney had $100 million](https://www.theatlantic.com/politics/archive/2012/09/whats-really-going-on-with-mitt-romneys-102-million-ira/261500/) in his Roth IRA. That didn’t come from investing $5000 a year. And there will be no taxes on it if and when he takes it out. That link does not mention it being a Roth. If it is a traditional IRA, he will have pay about $40 million in taxes if he withdraws it or does a backdoor conversion to a Roth. Interesting that the investment experts mentioned in that article think he will eventually pay more tax having put this in an IRA, because the capital gains tax rate is lower than the rate on ordinary income, which is what must be paid for IRA withdrawals. ---
**Author:** ![edwardcoast](https://avatars.discourse-cdn.com/v4/letter/e/cab0a1/32.png) [@edwardcoast](https://boards.straightdope.com/u/edwardcoast)\ **Post date:** [June 4, 2018, 8:20am UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/28 "2018-06-04T08:20:22Z")
> [@DrDeth](#): > > Actually, lower income people can’t afford to invest in a IRA. Rich people are the ones who go for Roth IRAs, they will still be earning plenty from capital gains, dividends and interest after they retire. You need to define rich. Rich people have additional corporate contributions to their retirement plans that the regular employees don’t have access to, a friend of mine that is a CPA told me about this. Anyone with a MAGI over $200K (for married) a year can’t contribute to a ROTH IRA. And you can only contribute earned income, not money from anything else into a ROTH IRA. So that isn’t correct, rich people don’t go for ROTH IRAs: > **[Roth and Traditional IRA Contribution Limits You Need to Know Now](https://www.investopedia.com/retirement/ira-contribution-limits/)** > > The limit for contributions to traditional and Roth IRAs for 2024 is $7,000, plus an additional $1,000 if the taxpayer is age 50 or older. The ROTH IRAs are for people who won’t get much tax benefit from doing a regular IRA, and that’s people who are lower income than those making six-figures. ---
**Author:** ![Topologist](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/topologist/32/3208_2.png) [@Topologist](https://boards.straightdope.com/u/Topologist)\ **Post date:** [June 4, 2018, 8:57am UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/29 "2018-06-04T08:57:52Z")
> [@jasg](#): > > I have an IRA that I funded with a total of $40,000. It is now worth $400,000. I will be in the 10% tax bracket at age 70 when I start spending it down. I will pay **$40,000+** in taxes if I live long enough. > > I also have a Roth IRA that also started with $40,000 but I was in the 20% tax bracket, so I really started with $50,000 - I had to pay **$10,000** in taxes. It too is worth $400,000 but no taxes are due - even if I leave it to my daughter. But this is misleading. As you said, you really started with $50,000 to fund the Roth IRA. Had you invested all of that in a regular IRA, you would have paid no taxes, and it would have been worth $500,000 with taxes due of about $50,000. So the net is higher than what you did with the Roth IRA. This is precisely because your taxes are lower now than when you invested. ---
**Author:** ![Ruken](https://avatars.discourse-cdn.com/v4/letter/r/f475e1/32.png) [@Ruken](https://boards.straightdope.com/u/Ruken)\ **Post date:** [June 4, 2018, 11:07am UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/30 "2018-06-04T11:07:04Z")
> [@edwardcoast](#): > > You need to define rich. Rich people have additional corporate contributions to their retirement plans that the regular employees don’t have access to, a friend of mine that is a CPA told me about this. Are you talking about 401k matching? Hardly a rich-only phenomenon. Although **DrDeth** is still wrong. At one point I was contributing \>20% of my income to a Roth IRA. > [@edwardcoast](#): > > Anyone with a MAGI over $200K (for married) a year can’t contribute to a ROTH IRA. And you can only contribute earned income, not money from anything else into a ROTH IRA. So that isn’t correct, rich people don’t go for ROTH IRAs: > > [2024 Roth and Traditional IRA Contribution Limits](https://www.rothira.com/roth-ira-limits) > > The ROTH IRAs are for people who won’t get much tax benefit from doing a regular IRA, and that’s people who are lower income than those making six-figures. This was already addressed a few posts back. See back door IRA. You can make well above the cap and still contribute to a Roth. Just not directly. ---
**Author:** ![jasg](https://avatars.discourse-cdn.com/v4/letter/j/f0a364/32.png) [@jasg](https://boards.straightdope.com/u/jasg)\ **Post date:** [June 4, 2018, 3:11pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/31 "2018-06-04T15:11:13Z")
> [@DrDeth](#): > > Actually, lower income people can’t afford to invest in a IRA. Rich people are the ones who go for Roth IRAs, they will still be earning plenty from capital gains, dividends and interest after they retire. > [@edwardcoast](#): > > You need to define rich. Rich people have additional corporate contributions to their retirement plans that the regular employees don’t have access to, a friend of mine that is a CPA told me about this. Anyone with a MAGI over $200K (for married) a year can’t contribute to a ROTH IRA. And you can only contribute earned income, not money from anything else into a ROTH IRA. So that isn’t correct, rich people don’t go for ROTH IRAs: > > [2024 Roth and Traditional IRA Contribution Limits](https://www.rothira.com/roth-ira-limits) > > The ROTH IRAs are for people who won’t get much tax benefit from doing a regular IRA, and that’s people who are lower income than those making six-figures. Agreed. As one who was fearful of and late to investing, I believe that everyone should start investing early - and at any income level. The ‘rich’ may be able to take advantage of a Roth account but it is the lass-than-rich who may benefit the most from one. ---
**Author:** ![Ass\_For\_A\_Hat](https://avatars.discourse-cdn.com/v4/letter/a/ec9cab/32.png) [@Ass\_For\_A\_Hat](https://boards.straightdope.com/u/Ass_For_A_Hat)\ **Post date:** [June 4, 2018, 5:26pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/32 "2018-06-04T17:26:38Z")
> [@Mean\_Mr.Mustard](#): > > . > > Still unsure about: > > [ul] > [li]Wise to convert existing 401k to Roth 401k when retiring in 5 years?[/li][li]If yes, how much, percentage-wise?[/li][li]Wise to mark all future contributions to Roth 401k?[/li][/ul] > > mmm Maybe you’ve already checked, but are you sure your 401(k) plan allows you to do an in-plan conversion from pre-tax to Roth? Not all do. For those that do, it’s kind of a weird dance. You’re only allowed to convert the portion of your account that you’re otherwise currently eligible to withdrawal from the plan. Since you’re age 60, your plan may allow (but isn’t required to allow) you to withdrawal some of your account without you leaving employment. No comment on whether this is a wise course or not. I’m not sure you could provide enough information in this setting for anyone to provide a worthwhile recommendation. Many employers these days have hired an investment professional to help their plan participants make decisions like this. You might look into that angle for some more reliable advice. ---
**Author:** ![DrDeth](https://avatars.discourse-cdn.com/v4/letter/d/b487fb/32.png) [@DrDeth](https://boards.straightdope.com/u/DrDeth)\ **Post date:** [June 4, 2018, 6:09pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/33 "2018-06-04T18:09:12Z")
> [@Ruken](#): > > Are you talking about 401k matching? Hardly a rich-only phenomenon. > Although **DrDeth** is still wrong. At one point I was contributing \>20% of my income to a Roth IRA. Sure, there are always exceptions. ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [June 4, 2018, 6:20pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/34 "2018-06-04T18:20:54Z")
Related question: are employer 401(K) matching funds treated differently for tax purposes if the contributions they are matching are made to a Roth account versus a pretax account? > [@jasg](#): > > I have an IRA that I funded with a total of $40,000. It is now worth $400,000. I will be in the 10% tax bracket at age 70 when I start spending it down. I will pay **$40,000+** in taxes if I live long enough. > > I also have a Roth IRA that also started with $40,000 but I was in the 20% tax bracket, so I really started with $50,000 - I had to pay **$10,000** in taxes. It too is worth $400,000 but no taxes are due - even if I leave it to my daughter. > [@needscoffee](#): > > Thanks for this very simple, concise breakdown! Unfortunately, it’s _too_ simple. Most people will not be able to contribute the same amount to a Roth 401(k) that they would to a conventional 401(k), because you have to pay the taxes now (as jasg acknowledges by pointing out that Roth contribution really cost $50,000.00). So a true comparison would take a Roth 401(k) with $32,500.00 in contributions and compare it to a conventional 401(k) with $40,000.00 in contributions. Whether the latter winds up worth more - after taxes on the regular 401(k) - depends on the performance of the market, and on changes in tax policy. If the market goes up a lot, and the money stays in the account for a long time, the earnings will more than make up for the original tax loss. If the market is stagnant, and/or the withdrawal date is soon, the principal is more important and the conventional 401(k) may “earn” more. In theory, it makes sense to contribute more Roth funds to a 401K when you’re young and poor (particularly now given that personal taxes are historically low), and contribute on a pretax basis when you are older and make more money. ---
**Author:** ![jasg](https://avatars.discourse-cdn.com/v4/letter/j/f0a364/32.png) [@jasg](https://boards.straightdope.com/u/jasg)\ **Post date:** [June 4, 2018, 7:24pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/35 "2018-06-04T19:24:17Z")
> [@Topologist](#): > > But this is misleading. As you said, you really started with $50,000 to fund the Roth IRA. Had you invested all of that in a regular IRA, you would have paid no taxes, and it would have been worth $500,000 with taxes due of about $50,000. So the net is higher than what you did with the Roth IRA. This is precisely because your taxes are lower now than when you invested. Simplistic but not intentionally misleading. It is true that you could have had $90,000 (after tax) extra growth in an regular IRA in your example. However it is tough to make predictions, especially about future tax rates so taxes could quickly eat into the extra growth. Once RMDs begin at 70, you will pay more taxes (or even get kicked into a higher bracket) on IRA withdrawals. In the simple $400,000 in each in an IRA & Roth vs an $800,000 IRA, just RMDs could cost an extra $3000/year in taxes. Also, if you get hit with a large expense in retirement that forces a large IRA withdrawal could end up kicking you into a higher bracket as well. Finally, a regular IRA left to heirs it will be taxed at their tax rate. So, I consider my Roth as an emergency fund, a hedge against extra taxes and a possible tax-free bonus to my heirs. As RNATB points out, the split between IRA / 401k and Roth savings is complicated - the thing to keep in mind is to take advantage of them (even at a minimum level) over your entire working career. ---
**Author:** ![Ass\_For\_A\_Hat](https://avatars.discourse-cdn.com/v4/letter/a/ec9cab/32.png) [@Ass\_For\_A\_Hat](https://boards.straightdope.com/u/Ass_For_A_Hat)\ **Post date:** [June 4, 2018, 8:01pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/36 "2018-06-04T20:01:21Z")
> [@Really\_Not\_All\_That\_Bright](#): > > Related question: are employer 401(K) matching funds treated differently for tax purposes if the contributions they are matching are made to a Roth account versus a pretax account? No. Matching contributions are always pre-tax, regardless of the type of employee contribution they are matching. ---
**Author:** ![Eonwe](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/eonwe/32/240_2.png) [@Eonwe](https://boards.straightdope.com/u/Eonwe)\ **Post date:** [June 4, 2018, 8:02pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/37 "2018-06-04T20:02:07Z")
I am paranoid (or at least, “have a belief with very little deep understanding to back it up”) that if/when I retire in 30 or 40 years, taxes will be much much higher than they are now. So, I’m putting a larger portion of my meager retirement savings into a Roth vs. 401k (like a 70%/30% split). I’d rather pay taxes now than count on a favorable (or even comparable) tax rate in 2055. ---
**Author:** ![Snarky\_Kong](https://avatars.discourse-cdn.com/v4/letter/s/a183cd/32.png) [@Snarky\_Kong](https://boards.straightdope.com/u/Snarky_Kong)\ **Post date:** [June 4, 2018, 8:47pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/38 "2018-06-04T20:47:38Z")
> [@jasg](#): > > I have an IRA that I funded with a total of $40,000. It is now worth $400,000. I will be in the 10% tax bracket at age 70 when I start spending it down. I will pay **$40,000+** in taxes if I live long enough. > > I also have a Roth IRA that also started with $40,000 but I was in the 20% tax bracket, so I really started with $50,000 - I had to pay **$10,000** in taxes. It too is worth $400,000 but no taxes are due - even if I leave it to my daughter. Bad way to look at it. Start with $50k in both scenarios. Regular IRA you put $50k in. It grows 10x to 500k. You then pay 10% in tax and have $450k left. Roth IRA you have $50k, pay $10k in taxes and deposit $40k. It grows 10x. You pay nothing and have $400k left. Do you prefer the latter scenario just because you paid less in taxes? ---
**Author:** ![jasg](https://avatars.discourse-cdn.com/v4/letter/j/f0a364/32.png) [@jasg](https://boards.straightdope.com/u/jasg)\ **Post date:** [June 4, 2018, 10:05pm UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/39 "2018-06-04T22:05:20Z")
> [@Snarky\_Kong](#): > > Do you prefer the latter scenario just because you paid less in taxes? No. See my explanation, three posts up. ---
**Author:** ![Rysto](https://avatars.discourse-cdn.com/v4/letter/r/ecccb3/32.png) [@Rysto](https://boards.straightdope.com/u/Rysto)\ **Post date:** [June 5, 2018, 12:58am UTC](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340/40 "2018-06-05T00:58:31Z")
On the other hand, if instead of raising income taxes Congress institutes a sales tax or value-added tax, the Roth loses. I’m not sure how useful it is to try and guess at future tax policy. [Previous page](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340.md?page=1) [Next page](https://boards.straightdope.com/t/still-confused-about-roth-401ks/815340.md?page=3)