Pros and cons of adding Roth Option to 401K Plan

physiorol · Post by **physiorol** » Thu Jul 16, 2015 11:55 pm

If you were setting up a new 401K would you bother adding the Roth Elective Deferral (Roth 401K) option? If so, why?

Background: I am in the process of switching 401K Service Providers and I have the option of adding the option for employees to make Roth Elective Deferrals to the new plan. I am leaning towards not doing this, primarily because I would rather not have the additional administrative leg work in managing both Roth and pre-tax payroll deferrals. But does the benefit to the employee of having Roth 401K option out-weigh more hassle on my end, or is the additional hassle minimal?

Also, I do not see my self using the Roth 401K option. Because I have high state tax and anticipate a lower tax bracket in retirement. Also, I have the option of contributing to a Roth IRA if I wanted a post-tax investment option.

Cheryl604 · Post by **Cheryl604** » Fri Jul 17, 2015 12:01 am

As a young employee who uses Roth contributions in my 403b, I say - do it!

There may be some people who find it useful.

mp223 · Post by **mp223** » Fri Jul 17, 2015 8:00 am

Speaking as someone who is allocating everything possible to a Roth instead of a traditional, I have some anxiety at times about the government's promise the gains will be totally tax free. For me, 40 years is an awfully long time to have that kind of faith. On a related note, what is the logic behind taxing capital gains in a 401k/IRA at the income rate vs. the long term capital gains rate (I understand why contributions are taxed at the income rate)?

livesoft · Post by **livesoft** » Fri Jul 17, 2015 8:32 am

I was a 401(k) committee member. We decided NOT to have a Roth 401(k) option. The reasons were:

1. Workers who had low enough incomes to benefit from a Roth option should use a Roth IRA instead. Workers who have low enough incomes that can max the Roth IRA should contribute to the traditional 401(k) because their incomes are not low enough if they can do that. Added: I forgot about company match. Workers should capture company match first by contributing to company 401(k). They can do this in traditional and use the tax savings to contribute to a Roth IRA.

2. Workers who had high enough incomes to benefit from a Roth option made so much money it didn't matter and there were less than 4 employees in the whole company that would benefit and two of them were the CEO and the COO.

3. Workers with in-between income would be hurt by a Roth 401(k) option because (a) they would be confused about whether to use one or not and (b) it would cost them extra taxes if in their confusion they chose the Roth option.

Basically the Roth 401(k) seeds confusion among employees just like it does here on the forum. I think that most of the people that come here asking about Roth 401(k) vs Traditional end up going with traditional. So reduce anxiety and decision making and do NOT offer a Roth option to the 401(k).

Silence Dogood · Post by **Silence Dogood** » Fri Jul 17, 2015 9:07 am

It depends on what kind of business this is for.

Are most of the employees in lower or higher tax brackets? Are there a lot of very young workers (teenagers, early twenties)?

Personally, I like the Roth 401k. My employer has said they will add this option later this year. I plan to start contributing to this and convert my traditional 401k. I'm working part time while in college. I'll still be in the 15% tax bracket after converting, and I can take advantage of the American Opportunity Tax Credit.

adam1712 · Post by **adam1712** » Fri Jul 17, 2015 9:47 am

livesoft wrote:I was a 401(k) committee member. We decided NOT to have a Roth 401(k) option. The reasons were:

1. Workers who had low enough incomes to benefit from a Roth option should use a Roth IRA instead. Workers who have low enough incomes that can max the Roth IRA should contribute to the traditional 401(k) because their incomes are not low enough if they can do that. Added: I forgot about company match. Workers should capture company match first by contributing to company 401(k). They can do this in traditional and use the tax savings to contribute to a Roth IRA.

2. Workers who had high enough incomes to benefit from a Roth option made so much money it didn't matter and there were less than 4 employees in the whole company that would benefit and two of them were the CEO and the COO.

3. Workers with in-between income would be hurt by a Roth 401(k) option because (a) they would be confused about whether to use one or not and (b) it would cost them extra taxes if in their confusion they chose the Roth option.

Basically the Roth 401(k) seeds confusion among employees just like it does here on the forum. I think that most of the people that come here asking about Roth 401(k) vs Traditional end up going with traditional. So reduce anxiety and decision making and do NOT offer a Roth option to the 401(k).

I know it's the minority but for the young or semi-retired the Roth 401(k) can be really valuable. At least for me, utilizing the Roth 401(k) has be really valuable to me as I'm currently in the 15% bracket but likely won't be in a few years.

hillman · Post by **hillman** » Fri Jul 17, 2015 9:49 am

mp223 wrote:I have some anxiety at times about the government's promise the gains will be totally tax free. For me, 40 years is an awfully long time to have that kind of faith.

You are not alone, my friend.

Tanelorn · Post by **Tanelorn** » Fri Jul 17, 2015 9:53 am

It's an option, so presumably having it better than not since people can always just not use it. Plus, for those in the top bracket anyway, it's an effectively bigger account value since the limit for post tax vs pretax is the same.

johnubc · Post by **johnubc** » Fri Jul 17, 2015 9:55 am

I would add it.

From the employees perspective - it gives them more options. There are many people who are not eligible to a Roth IRA (too much income or too much in tIRA) - and this gives them an option to get a Roth. I do not like it when others make a decision for me based not their investment (or speculation) perspective. I might have a higher tax rate in retirement and want to be able to hedge against it.

investorguy1 · Post by **investorguy1** » Fri Jul 17, 2015 10:11 am

For many people it makes a lot of sense to do the roth option. For some people they could be worse off in a traditional vs a brokerage if they are in a higher tax break in retirement or tax rates go up! I don't think it takes that much more effort but could mean $10,000's for some emplyees. And it would make them happy. I work in a small business and they added the Roth just for me! So that was nice of them and I am greatfull they did it.

physiorol · Post by **physiorol** » Fri Jul 17, 2015 10:41 am

Thank for all the replies. I can see how the it could benefit the younger part-time worker (which we do have some of but currently our 401K has an age limit of 21-see below). Can someone explain how a roth 401K benefits the older part-time semi-retired worker (which is certainly my long term plan)

At risk of hijacking my own thread. I was considering lowering the age limit of the 401K to 15 years old to allow younger part timers to start contributing. Would this be a good option?

tdogz · Post by **tdogz** » Fri Jul 17, 2015 10:42 am

I'm in the 15% bracket and utilize our Roth 401k. You can't just say that your employees can use their own Roth IRA instead. It isn't the same. A Roth 401k provides 3x more investment space each year than a Roth IRA and contributions qualify for the company match (if offered). Both are huge advantages over only having an IRA for your Roth contributions.

investorguy1 · Post by **investorguy1** » Fri Jul 17, 2015 11:03 am

for older part time workers. They could reduce their rmd by putting money into roth over traditional. If they want to pass the money onto heirs Roth also has some huge advantages. If they will be in a lower tax bracket later, the same tax bracket but tax rates go up they will be better off in a roth. If they and currently in the 15% fed tax bracket or lower they do not pay long term cap gains or dividend tax. In this case they are also better off in the roth since taking money out is tax free instead of taxed as ordinary income. So there are many good reasons. If you want to offer something really great to your younger employees and set them on a great path to saving young for retirement at a relatively low cost then lower the age.

itstoomuch · Post by **itstoomuch** » Fri Jul 17, 2015 11:18 am

+1 Livesoft
We put a lot of $$ into 401k and 401k-Roth in the first decade of 2000.
I kinda wish that we did taxable investments instead of tax qualified. If I needed tax deferral, we could have done low fee/low featured, deferred annuities.

I expect that SS will be means tested.

livesoft · Post by **livesoft** » Fri Jul 17, 2015 12:14 pm

johnubc wrote:I would add it.

From the employees perspective - it gives them more options.

More options is generally confusing. Would the plan provide a CFP at no cost to tell participants which option they should use or perhaps a percentage of options?

livesoft · Post by **livesoft** » Fri Jul 17, 2015 12:16 pm

physiorol wrote:Thank for all the replies. I can see how the it could benefit the younger part-time worker (which we do have some of but currently our 401K has an age limit of 21-see below).

I would suspect that the younger part-time worker probably does not even contribute to the 401(k) plan at all or in such low amounts that it would be meaningless to use a Roth 401(k).

livesoft · Post by **livesoft** » Fri Jul 17, 2015 12:18 pm

investorguy1 wrote:for older part time workers. They could reduce their rmd by putting money into roth over traditional.

If by "older" you mean over age 59.5, then these workers could do an in-service rollover of the traditional 401(k) to a Roth IRA. They would not need a Roth 401(k) at all.

I think a Roth 401(k) still has RMDs. One must rollover to a Roth IRA to avoid RMDs.

Heir-A-Parent · Post by **Heir-A-Parent** » Fri Jul 17, 2015 12:21 pm

I switched to a Roth 401k because I am in my early 30s. Population growth is slowing and lifespans are increasing, so the tax load on workers from retirees is only going to increase. Taxes now are historically low given the history of the income tax in the US, and will almost certainly increase as more people retire.

Heir-A-Parent · Post by **Heir-A-Parent** » Fri Jul 17, 2015 12:31 pm

hillman wrote:
mp223 wrote:I have some anxiety at times about the government's promise the gains will be totally tax free. For me, 40 years is an awfully long time to have that kind of faith.
You are not alone, my friend.

I still harbor these fears, but they were abated somewhat by the backlash that ensued from proposals to tax 529 plans. Roth IRAs and Roth 401ks have much broader support than 529s.

Silence Dogood · Post by **Silence Dogood** » Fri Jul 17, 2015 12:32 pm

livesoft wrote:
physiorol wrote:Thank for all the replies. I can see how the it could benefit the younger part-time worker (which we do have some of but currently our 401K has an age limit of 21-see below).
I would suspect that the younger part-time worker probably does not even contribute to the 401(k) plan at all or in such low amounts that it would be meaningless to use a Roth 401(k).

I have about $24k in my traditional 401k that I'm hoping to convert to Roth 401k later this year. I expect to have about $20k in income for this year.

20k+24k=44k-$10,300 standard deduction/exemption=$33,700

Still in the 15% tax bracket and with the AOTC.

Silence Dogood · Post by **Silence Dogood** » Fri Jul 17, 2015 12:35 pm

Heir-A-Parent wrote:
hillman wrote:
mp223 wrote:I have some anxiety at times about the government's promise the gains will be totally tax free. For me, 40 years is an awfully long time to have that kind of faith.
You are not alone, my friend.
I still harbor these fears, but they were abated somewhat by the backlash that ensued from proposals to tax 529 plans. Roth IRAs and Roth 401ks have much broader support than 529s.

More likely, RMDs will be mandated for Roth IRAs.

Silence Dogood · Post by **Silence Dogood** » Fri Jul 17, 2015 12:39 pm

I think the best way to simplify a 401k plan would be to limit fund options.

If I were in charge of a 401k plan, I'd have the 12 Vanguard Target Retirement funds (the institutional versions) and then total stock, total international, and total bond market. That's it.

Clever_Username · Post by **Clever_Username** » Fri Jul 17, 2015 12:40 pm

livesoft wrote:2. Workers who had high enough incomes to benefit from a Roth option made so much money it didn't matter and there were less than 4 employees in the whole company that would benefit and two of them were the CEO and the COO.

Why would a higher income benefit more from a Roth option than a lower income employee?

livesoft · Post by **livesoft** » Fri Jul 17, 2015 1:19 pm

Clever_Username wrote:Why would a higher income benefit more from a Roth option than a lower income employee?

I'm not sure what you mean by "lower income"? Did you mean my "in-between income" that I mentioned?

Dulocracy · Post by **Dulocracy** » Fri Jul 17, 2015 1:55 pm

We offer Roth options in our 401k. It has been extremely well received. I respect livesoft a great deal, but I am going to disagree with the paternalistic view that we should decide for employees what is best for them. That is dangerous territory that opens liability. Also, who am I to know that the 25 year old in the 28% tax bracket does not expect to retire with a higher tax rate? Whether or not it is the best option for them is for the employees to decide. The fact that it is a huge morale boost is more relevant for a company to consider.

As far as trouble? It has been no trouble; having the Roth option really did not impact us that much. The 401k has been fairly easy.

livesoft · Post by **livesoft** » Fri Jul 17, 2015 2:06 pm

Dulocracy wrote: Whether or not it is the best option for them is for the employees to decide. The fact that it is a huge morale boost is more relevant for a company to consider.

Do you think there is any liability for letting folks choose a poorer tax option for themselves because they go for the morale boost rather than the cold hard numbers on taxes?

Silence Dogood · Post by **Silence Dogood** » Fri Jul 17, 2015 2:19 pm

livesoft wrote:
Dulocracy wrote: Whether or not it is the best option for them is for the employees to decide. The fact that it is a huge morale boost is more relevant for a company to consider.
Do you think there is any liability for letting folks choose a poorer tax option for themselves because they go for the morale boost rather than the cold hard numbers on taxes?

How can you know the "cold hard numbers" when it's not possible to know the situation of each individual employee (unless it's a very small company)?

Maybe for most people the traditional is better (and why it should kept as the default option) but at least for my situation it would be extremely beneficial. Same for most people who work part-time or temporarily have much lower income.

Also, to the OP, I definitely think that people under 21 should be able to participate in the 401k plan.

livesoft · Post by **livesoft** » Fri Jul 17, 2015 2:29 pm

I did not state that the Roth 401(k) was not good for some people. I did imply that the Roth 401(k) was bad for most people. if a Roth 401(k) option would benefit 2% of the workers and perhaps cause 20% of the workers to make a bad choice and cost them more in taxes, then I can see why the folks who would benefit would say, "Give me a Roth 401(k) option."

Clearly, a 401(k) does not need to be the best for everyone as far as company liability is concerned. There are plenty of problem 401(k)s out there which are not in the best interests of the employees.

Silence Dogood · Post by **Silence Dogood** » Fri Jul 17, 2015 2:39 pm

livesoft wrote:I did not state that the Roth 401(k) was not good for some people. I did imply that the Roth 401(k) was bad for most people. if a Roth 401(k) option would benefit 2% of the workers and perhaps cause 20% of the workers to make a bad choice and cost them more in taxes, then I can see why the folks who would benefit would say, "Give me a Roth 401(k) option."

Clearly, a 401(k) does not need to be the best for everyone as far as company liability is concerned. There are plenty of problem 401(k)s out there which are not in the best interests of the employees.

Well, that's why my first question was asking about the employees that would be participating in this plan. I work part time at a grocery store. As you can imagine, there are a lot of teenagers/people in their early twenties who work at grocery stores part time while going to school. There is also a small but significant group of people in their 60s who work part time for extra income. Even those who work full time and ages 30-60 may benefit from the Roth option due to low income. So for a grocery store, the Roth 401k certainly makes a lot of sense. And this isn't nothing, thousands of people around the country work in grocery stores, retail, etc. Most Americans don't hit the 25% tax bracket.

We have to know more about the company in order to determine if the Roth 401k is right for the OP's company. Obviously if this is a company where starting salary is $65k then it's probably not a good idea.

HurdyGurdy · Post by **HurdyGurdy** » Fri Jul 17, 2015 2:41 pm

Physiorol,

kudos to you for looking out for your people.

At risk of hijacking my own thread. I was considering lowering the age limit of the 401K to 15 years old to allow younger part timers to start contributing. Would this be a good option?

I wonder if a MyRA could satisfy the needs of that segment. Simple, 0 cost, 0 liability, great tax benefits, automatic.

https://myra.gov/employers/

livesoft · Post by **livesoft** » Fri Jul 17, 2015 2:45 pm

Silence Dogood wrote:So for a grocery store, the Roth 401k certainly makes a lot of sense. And this isn't nothing, thousands of people around the country work in grocery stores, retail, etc. Most Americans don't hit the 25% tax bracket.

And those people will not pay taxes on withdrawals from a traditional 401(k) in retirement either. No taxes now. No taxes later. No need for a Roth option.

Silence Dogood · Post by **Silence Dogood** » Fri Jul 17, 2015 2:47 pm

livesoft wrote:
Silence Dogood wrote:So for a grocery store, the Roth 401k certainly makes a lot of sense. And this isn't nothing, thousands of people around the country work in grocery stores, retail, etc. Most Americans don't hit the 25% tax bracket.
And those people will not pay taxes on withdrawals from a traditional 401(k) in retirement either. No taxes now. No taxes later. No need for a Roth option.

Not all teenagers/people in their early twenties plan to work in grocery stores their whole life. It's a temporary job one can have while going to school/figuring out what to do in life. Of course, some may continue to work in this industry (which is perfectly okay with me), but others won't.

Did you ever have a job when you were 15-25 that paid a lot less than when you were older?

livesoft · Post by **livesoft** » Fri Jul 17, 2015 2:50 pm

Silence Dogood wrote:Not all teenagers/people in their early twenties plan to work in grocery stores their whole life. It's a temporary job one can have while going to school/figuring out what to do in life. Of course, some may continue to work in this industry (which is perfectly okay with me), but others won't.

I agree with that. How about you conduct a survey at your work please? Find out how many employees use the Roth 401(k) option, how many use the trad 401(k), and how many use neither.

Silence Dogood · Post by **Silence Dogood** » Fri Jul 17, 2015 2:51 pm

livesoft wrote:
Silence Dogood wrote:Not all teenagers/people in their early twenties plan to work in grocery stores their whole life. It's a temporary job one can have while going to school/figuring out what to do in life. Of course, some may continue to work in this industry (which is perfectly okay with me), but others won't.
I agree with that. How about you conduct a survey at your work please? Find out how many employees use the Roth 401(k) option, how many use the trad 401(k), and how many use neither.

The Roth option hasn't been added yet. It's suppose to be later this year (after I nagged about it for a while). I imagine that the participation rate for the current 401k is very high though (close to 100%), because people are automatically enrolled at 3% after 6 months.

Bill M · Post by **Bill M** » Fri Jul 17, 2015 3:11 pm

I don't know if it is advantageous to the plan to keep retired employees.... But if it is, a Roth option is definitely worthwhile. Otherwise us retired folk are forced to rollover the 401k money into an IRA before converting to Roth, and that means reducing the amount invested in the company-sponsored funds. If keeping retired account holders is a pure cost and not a benefit to the plan, then skip the Roth option.

GoldenFinch · Post by **GoldenFinch** » Fri Jul 17, 2015 3:26 pm

livesoft wrote:I was a 401(k) committee member. We decided NOT to have a Roth 401(k) option. The reasons were:

1. Workers who had low enough incomes to benefit from a Roth option should use a Roth IRA instead. Workers who have low enough incomes that can max the Roth IRA should contribute to the traditional 401(k) because their incomes are not low enough if they can do that. Added: I forgot about company match. Workers should capture company match first by contributing to company 401(k). They can do this in traditional and use the tax savings to contribute to a Roth IRA.

2. Workers who had high enough incomes to benefit from a Roth option made so much money it didn't matter and there were less than 4 employees in the whole company that would benefit and two of them were the CEO and the COO.

3. Workers with in-between income would be hurt by a Roth 401(k) option because (a) they would be confused about whether to use one or not and (b) it would cost them extra taxes if in their confusion they chose the Roth option.

Basically the Roth 401(k) seeds confusion among employees just like it does here on the forum. I think that most of the people that come here asking about Roth 401(k) vs Traditional end up going with traditional. So reduce anxiety and decision making and do NOT offer a Roth option to the 401(k).

Interesting. So at what tax bracket do you think it is disadvantageous to use the Roth 401k option? And at what compensation level is it a good idea to use the Roth 401k option?

livesoft · Post by **livesoft** » Fri Jul 17, 2015 3:33 pm

GoldenFinch wrote:Interesting. So at what tax bracket do you think it is disadvantageous to use the Roth 401k option? And at what compensation level is it a good idea to use the Roth 401k option?

It all goes back to the calculation: Will you be in a higher tax bracket in retirement than you are now? And the answer to that question will also depend on: How good will you be in retirement at not paying taxes?

My personal experience is that I have been in the 33% marginal income tax bracket, then down to 28%, then down to 25%, then down to 15% with retirement expenses in the six-figure range. So I think the compensation level will have to be above the 33% marginal income tax bracket and one or more of the following will apply:

Also I imagine that folks who will be in the higher tax bracket in retirement have some or all of the following qualities:
1. Pensions that fill in the lower tax brackets.
2. Work until age 67 or even later.
3. Inefficient investing in taxable accounts. (They will invest in taxable accounts because they have high income.)

I think we have a poll where retirees were asked if they were in a lower tax bracket than when working. Let me search for it.

Poll: viewtopic.php?t=96555
Poll: viewtopic.php?t=70107
And my favorite: The Effective Average Adjusted Livesoft tax rate: viewtopic.php?t=163748#p2458128

Scott6647 · Post by **Scott6647** » Fri Jul 17, 2015 3:35 pm

livesoft wrote:
Silence Dogood wrote:So for a grocery store, the Roth 401k certainly makes a lot of sense. And this isn't nothing, thousands of people around the country work in grocery stores, retail, etc. Most Americans don't hit the 25% tax bracket.
And those people will not pay taxes on withdrawals from a traditional 401(k) in retirement either. No taxes now. No taxes later. No need for a Roth option.

Are you willing to cover my tax liability in 35 years if I contribute to traditional 401k on your advice and tax rates change?

If you are please send me your information so I can hunt you up if the tax bill is higher than now. If not it may be wise to preface your comment with "if things remain the same there will be no taxes later".

It is amazing that no one here thinks they can time the market but a lot of people here know what tax rates will be in 35 years.

GoldenFinch · Post by **GoldenFinch** » Fri Jul 17, 2015 3:48 pm

livesoft wrote:
GoldenFinch wrote:Interesting. So at what tax bracket do you think it is disadvantageous to use the Roth 401k option? And at what compensation level is it a good idea to use the Roth 401k option?
It all goes back to the calculation: Will you be in a higher tax bracket in retirement than you are now? And the answer to that question will also depend on: How good will you be in retirement at not paying taxes?

My personal experience is that I have been in the 33% marginal income tax bracket, then down to 28%, then down to 25%, then down to 15% with retirement expenses in the six-figure range. So I think the compensation level will have to be above the 33% marginal income tax bracket and one or more of the following will apply:

Also I imagine that folks who will be in the higher tax bracket in retirement have some or all of the following qualities:
1. Pensions that fill in the lower tax brackets.
2. Work until age 67 or even later.
3. Inefficient investing in taxable accounts. (They will invest in taxable accounts because they have high income.)

I think we have a poll where retirees were asked if they were in a lower tax bracket than when working. Let me search for it.

Poll: viewtopic.php?t=96555
Poll: viewtopic.php?t=70107
And my favorite: The Effective Average Adjusted Livesoft tax rate: viewtopic.php?t=163748#p2458128

Thank you for the info. A lot to think about.

physiorol · Post by **physiorol** » Fri Jul 17, 2015 3:50 pm

Here is some of the info about our company.

Our office is small. Most of the payroll goes to the 2 owners (me being one of them) but our salaries are both <100,000. We have a few part timers and a fulltime receptionist. And we are in a high-state-tax state.

Most of the assets in the 401K are the owners (it is a safe harbor plan matching 6%). To be honest the 401K is mostly serving the purpose of retirement planning for the owners. However, we want it to work for any employees that we do have, hopefully they will start much earlier than I did.

Owners are mid 40s and we do not anticipate dramatic increase in income in the future. I expect to continue to work part-time as long as possible into retirement making in the vicinity of 50K in today's dollars.

livesoft · Post by **livesoft** » Fri Jul 17, 2015 3:53 pm

Scott6647 wrote:It is amazing that no one here thinks they can time the market but a lot of people here know what tax rates will be in 35 years.

It does not bother me if tax rates will change. Do you remember the Fiscal Cliff that occurred back one December? Do you remember all the folks who shifted income into a lower tax year and screwed themselves because the tax laws were changing?

Also do not forget that exemptions, deductions, and many tax preference items are indexed to cost-of-living increases. So in 35 years, you could be making $500,000 a year and be in the 15% tax bracket if inflation takes off.

In general, one will get plenty of notice and opportunity to move things around before one's taxes will go up drastically. So I don't think it is something to worry about.

physiorol · Post by **physiorol** » Fri Jul 17, 2015 3:54 pm

Bill M wrote:I don't know if it is advantageous to the plan to keep retired employees.... But if it is, a Roth option is definitely worthwhile. Otherwise us retired folk are forced to rollover the 401k money into an IRA before converting to Roth, and that means reducing the amount invested in the company-sponsored funds. If keeping retired account holders is a pure cost and not a benefit to the plan, then skip the Roth option.

Can you define retired employee? As owner I hope to work within this company for a long time. I may gradually cut back but do not anticipate not working in my field at all.

Scott6647 · Post by **Scott6647** » Fri Jul 17, 2015 3:57 pm

Here is a look at tax rates from 2013 adjusted to inflation.
For married filing jointly

In the 1980 the 28 percent tax bracket was as low as 54,000

In the 1990 59,000 would get you a 28 percent tax rate

In the 2000s 59,600 would get you in the 25 percent tax rate

http://taxfoundation.org/sites/taxfound ... justed.pdf

The changes occur very quickly sometimes. The proof is in the chart.

Scott6647 · Post by **Scott6647** » Fri Jul 17, 2015 4:07 pm

livesoft wrote:
Scott6647 wrote:It is amazing that no one here thinks they can time the market but a lot of people here know what tax rates will be in 35 years.
It does not bother me if tax rates will change. Do you remember the Fiscal Cliff that occurred back one December? Do you remember all the folks who shifted income into a lower tax year and screwed themselves because the tax laws were changing?

Also do not forget that exemptions, deductions, and many tax preference items are indexed to cost-of-living increases. So in 35 years, you could be making $500,000 a year and be in the 15% tax bracket if inflation takes off.

In general, one will get plenty of notice and opportunity to move things around before one's taxes will go up drastically. So I don't think it is something to worry about.

As shown above over the last 25 years the 25 percent tax bracket has applied from 54,000 to the current 75,000 for married filing jointly in inflation adjusted dollars. If taxes change to their norm over the last 25 years the 25 percent bracket is going to apply above about 60,000 (figures in my head so not perfect).

I contribute to both Roth and traditional for this reason. It is reasonable to hedge.

Ybsybs · Post by **Ybsybs** » Fri Jul 17, 2015 4:14 pm

physiorol wrote:If you were setting up a new 401K would you bother adding the Roth Elective Deferral (Roth 401K) option? If so, why?

If I were a potential employee I'd be more interested in working for your company if you offered the Roth than if you didn't. It is nice to be able to choose what is best for your own circumstances rather than depending on an administrator who doesn't have all the information to choose for you.

GoldenFinch · Post by **GoldenFinch** » Fri Jul 17, 2015 4:15 pm

[*]

physiorol wrote:Here is some of the info about our company.

Our office is small. Most of the payroll goes to the 2 owners (me being one of them) but our salaries are both <100,000. We have a few part timers and a fulltime receptionist. And we are in a high-state-tax state.

Most of the assets in the 401K are the owners (it is a safe harbor plan matching 6%). To be honest the 401K is mostly serving the purpose of retirement planning for the owners. However, we want it to work for any employees that we do have, hopefully they will start much earlier than I did.

Owners are mid 40s and we do not anticipate dramatic increase in income in the future. I expect to continue to work part-time as long as possible into retirement making in the vicinity of 50K in today's dollars.

My husband owns a small tech business (28 years) and we are in our late 40's. He has a similar situation to yours in that his company's 401k assets are 70% his because so few employees use it, even though there is a match (it is also a safe harbor plan). He added the Roth option at my request and only one employee other than my husband uses it. I think it's good to have the option.

Apparently, sorting out whether you should use it or not is complicated. I'm pretty sure that in our situation it's a good idea.

sharpjm · Post by **sharpjm** » Fri Jul 17, 2015 4:31 pm

I"ll throw in my $0.02 from an employee perspective. I'm in the 25% bracket and have a good plan. I intend to take advantage of roth after I fill up my roth IRA space. I will do so until my income increases to the 28% bracket, at which point, I will only do tax-deferred until I am back into the 25% bracket. If my income increases to higher tax brackets I will likely switch to non-roth, but that decision is pure speculation of my expected retirement income and future tax rates. If/when I leave my employer, I plan to roll over all my roth contributions to my roth IRA. Then I no longer have RMDs or tax on that $18k per year of savings. I have complete control over my income in retirement and can probably stay in the 15% bracket or lower with RMDs from my employer's contribution to the tax-deferred side of the plan. If I stay in the 15% bracket (or lower) in retirement, I can essentially treat taxable accounts like roth accounts too... but now I'm making more assumptions about future tax code.

My $0.02 from a tax/investor perspective. There is never a calculation to determine if roth is better or not. There is no income limit or tax bracket where roth is no longer "good". Anyone who claims that offering roth will only help "X" subset of employees is being arrogantly ignorant. Nobody knows the future tax code and nobody can know for certain how their income will change over time or what it will be in retirement, except for people who are very very close to retirement. Offering roth will give people the choice and they can decide where to contribute based on their best estimate of future earnings, retirement income, and future tax code. And lastly, rolling over roth contributions to a roth IRA at retirement gives the advantages related to RMDs I mentioned above.

livesoft · Post by **livesoft** » Fri Jul 17, 2015 4:36 pm

I think I was just labeled arrogantly ignorant.

sharpjm · Post by **sharpjm** » Fri Jul 17, 2015 4:44 pm

livesoft wrote:I think I was just labeled arrogantly ignorant.

I don't think it was the first time, was it?

livesoft · Post by **livesoft** » Fri Jul 17, 2015 4:48 pm

Nope, but I have received apologies later along with a "You were right."