[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]
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.)
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. This two step procedure is popularly called a “backdoor Roth IRA contribution.”
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.
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.
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:
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.
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.
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.
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.
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.
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?
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.
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.
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.
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.