Increased contribution limits in 2023…

[Anonymous]

Anonymous wrote:Fed here. What are the reasons to to Roth 401K vs Pretax?

It is simply a gamble on whether or not you believe that the tax rate you pay in retirement will be greater than the tax rate that you pay today. I have been an extremely high income earner my entire life. I have all of my retirement funds in a Roth (about $1.5M at 45). I am betting that my income when I retire will still have my in the highest rate AND that the highest rate will be higher than it was during my lifetime.

I also get the advantage of not having to draw those funds (unlike a 401k which has required minimum distributions beginning at a certain age- 70.5 I think). If it don’t use the Roth funds at all (distinctly possible) they pass to my kids without taxation.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Fed here. What are the reasons to to Roth 401K vs Pretax?

It is simply a gamble on whether or not you believe that the tax rate you pay in retirement will be greater than the tax rate that you pay today. I have been an extremely high income earner my entire life. I have all of my retirement funds in a Roth (about $1.5M at 45). I am betting that my income when I retire will still have my in the highest rate AND that the highest rate will be higher than it was during my lifetime.

I also get the advantage of not having to draw those funds (unlike a 401k which has required minimum distributions beginning at a certain age- 70.5 I think). If it don’t use the Roth funds at all (distinctly possible) they pass to my kids without taxation.

Some things there to perhaps amplify a bit.

RMDs for traditional 401k/IRA now start the April after you turn 72. If the Roth is in a 401k it is subject to RMDs--make sure to convert to a Roth IRA, which are not subject to RMDs, before RMDs kick in.

About higher taxes in retirement. One issue people often forget is that after one spouse dies, the remaining spouse is now subject to single taxes, which are substantially higher than married filing jointly. So indeed, even if tax rates don't change, you could find yourself in the highest rate of your life. Roths at least provide tax certainty and, if you are married, benefit from MFJ rates.

Upon death, Roths are part of your estate and depending on size of your estate and your state will be subject to state and/or federal estate taxes. But here the Roth wins. Your Roth will be smaller than your 401k (because it is smaller than the 401k by the amount of taxes you paid), so less estate tax will be due.

For heirs, a Roth is far better. Both Roth and traditional 401k/IRA have to be all taken out within ten years. For a Roth, heirs can just let it sit there for ten years growing tax free and take it all out on the last day with no tax due. If you did that with a traditional 401k/IRA, the tax bill would be enormous. To avoid this, the heir should be taking out amounts each year to manage the taxes due by avoiding going into a higher tax bracket. The amounts taken out could be put into a brokerage account, but then they are no longer growing tax free as they would in a Roth.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Fed here. What are the reasons to to Roth 401K vs Pretax?

It is simply a gamble on whether or not you believe that the tax rate you pay in retirement will be greater than the tax rate that you pay today. I have been an extremely high income earner my entire life. I have all of my retirement funds in a Roth (about $1.5M at 45). I am betting that my income when I retire will still have my in the highest rate AND that the highest rate will be higher than it was during my lifetime.

I also get the advantage of not having to draw those funds (unlike a 401k which has required minimum distributions beginning at a certain age- 70.5 I think). If it don’t use the Roth funds at all (distinctly possible) they pass to my kids without taxation.

NP here - I would also say that with a Roth contribution, you also will know that the amount you have saved for retirement is the amount you have saved for retirement. 1M in a Roth account it 1M. 1M in an pretax account is 1M - x (with x being whatever the current tax rates are in the future). Personally, my TSP contributions are 100% Roth TSP even though I know it costs me a lot more now because 1) I expect my household income in retirement will be high-ish just with two pensions and two social security checks, 2) I expect taxes to increase significantly in the future given that taxes are at historic lows now, the amount of federal debt, the cost of supporting boomers, the cost of natural disasters due to climate change, etc. 3) I want to minimize RMDs, 4) I want to know exactly how much money I have to pass on to my child who has a number of disabilities and will never be able to support themselves financially.

[Anonymous]

I currently contribute the max into my 401K, and my company contributes and additional 9% of my salary, so between the two I currently contribute $33,865 towards retirement. (My base salary is $148,500 and I get a discretionary bonus). I am 42 and between my husband and I we have about $460K saved for retirement, so we are a bit behind at least according to DCUM standards. Our youngest finally started kindergarten this year, so we are finally done with full time day care payments. During the day care years we were not able to save much for our kids college funds, so we need to increase saving for that.

I am starting to consider dialing back my 401K contributions so I can save toward these other things. Would it be a bad idea to dial back my 401K contributions so overall I am contributing about $28K? It may not make much of a difference in our take home pay, but we have so many other things we should be saving from, we have to make adjustments somewhere.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Fed here. What are the reasons to to Roth 401K vs Pretax?

It is simply a gamble on whether or not you believe that the tax rate you pay in retirement will be greater than the tax rate that you pay today. I have been an extremely high income earner my entire life. I have all of my retirement funds in a Roth (about $1.5M at 45). I am betting that my income when I retire will still have my in the highest rate AND that the highest rate will be higher than it was during my lifetime.

I also get the advantage of not having to draw those funds (unlike a 401k which has required minimum distributions beginning at a certain age- 70.5 I think). If it don’t use the Roth funds at all (distinctly possible) they pass to my kids without taxation.

Some things there to perhaps amplify a bit.

RMDs for traditional 401k/IRA now start the April after you turn 72. If the Roth is in a 401k it is subject to RMDs--make sure to convert to a Roth IRA, which are not subject to RMDs, before RMDs kick in.

About higher taxes in retirement. One issue people often forget is that after one spouse dies, the remaining spouse is now subject to single taxes, which are substantially higher than married filing jointly. So indeed, even if tax rates don't change, you could find yourself in the highest rate of your life. Roths at least provide tax certainty and, if you are married, benefit from MFJ rates.

Upon death, Roths are part of your estate and depending on size of your estate and your state will be subject to state and/or federal estate taxes. But here the Roth wins. Your Roth will be smaller than your 401k (because it is smaller than the 401k by the amount of taxes you paid), so less estate tax will be due.

For heirs, a Roth is far better. Both Roth and traditional 401k/IRA have to be all taken out within ten years. For a Roth, heirs can just let it sit there for ten years growing tax free and take it all out on the last day with no tax due. If you did that with a traditional 401k/IRA, the tax bill would be enormous. To avoid this, the heir should be taking out amounts each year to manage the taxes due by avoiding going into a higher tax bracket. The amounts taken out could be put into a brokerage account, but then they are no longer growing tax free as they would in a Roth.

Are you sure? I thought an estate is defined as something on which an estate tax is potentially due. Roths are already taxed money so don't think they are part of the deceased estate. Would appreciate a clarification on this.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Just got notice from our HR that the contribution limit to our 403b goes up to 22500 next year. I finally started to max out this year at 20500 and while yes it’s only 2000 more, I’m wondering at what point it’s too much going to retirement instead of more liquid investments/savings. For those of you maxing out are you increasing contributions for next year?

Are you hitting the ss max as well? If so, whenever that happens, increase your 401k contribution by that amount. You were doing fine the paycheck before when you had to pay ss so if you put it in your 401k, you won’t miss it

Np - what is ss max?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Just got notice from our HR that the contribution limit to our 403b goes up to 22500 next year. I finally started to max out this year at 20500 and while yes it’s only 2000 more, I’m wondering at what point it’s too much going to retirement instead of more liquid investments/savings. For those of you maxing out are you increasing contributions for next year?

Are you hitting the ss max as well? If so, whenever that happens, increase your 401k contribution by that amount. You were doing fine the paycheck before when you had to pay ss so if you put it in your 401k, you won’t miss it

Np - what is ss max?

I think it’s going from just over $9100 in 2022 to just over $9900 in 2023 :/

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Fed here. What are the reasons to to Roth 401K vs Pretax?

It is simply a gamble on whether or not you believe that the tax rate you pay in retirement will be greater than the tax rate that you pay today. I have been an extremely high income earner my entire life. I have all of my retirement funds in a Roth (about $1.5M at 45). I am betting that my income when I retire will still have my in the highest rate AND that the highest rate will be higher than it was during my lifetime.

I also get the advantage of not having to draw those funds (unlike a 401k which has required minimum distributions beginning at a certain age- 70.5 I think). If it don’t use the Roth funds at all (distinctly possible) they pass to my kids without taxation.

NP here - I would also say that with a Roth contribution, you also will know that the amount you have saved for retirement is the amount you have saved for retirement. 1M in a Roth account it 1M. 1M in an pretax account is 1M - x (with x being whatever the current tax rates are in the future). Personally, my TSP contributions are 100% Roth TSP even though I know it costs me a lot more now because 1) I expect my household income in retirement will be high-ish just with two pensions and two social security checks, 2) I expect taxes to increase significantly in the future given that taxes are at historic lows now, the amount of federal debt, the cost of supporting boomers, the cost of natural disasters due to climate change, etc. 3) I want to minimize RMDs, 4) I want to know exactly how much money I have to pass on to my child who has a number of disabilities and will never be able to support themselves financially.

Tax increases have been pretty rare recently but if you think they will increase substantially I wouldn’t assume Roths will be exempt— seems more likely we would see some attempts to tax large Roth balances (or withdrawals from Roths with large balances).

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Fed here. What are the reasons to to Roth 401K vs Pretax?

It is simply a gamble on whether or not you believe that the tax rate you pay in retirement will be greater than the tax rate that you pay today. I have been an extremely high income earner my entire life. I have all of my retirement funds in a Roth (about $1.5M at 45). I am betting that my income when I retire will still have my in the highest rate AND that the highest rate will be higher than it was during my lifetime.

I also get the advantage of not having to draw those funds (unlike a 401k which has required minimum distributions beginning at a certain age- 70.5 I think). If it don’t use the Roth funds at all (distinctly possible) they pass to my kids without taxation.

Some things there to perhaps amplify a bit.

RMDs for traditional 401k/IRA now start the April after you turn 72. If the Roth is in a 401k it is subject to RMDs--make sure to convert to a Roth IRA, which are not subject to RMDs, before RMDs kick in.

About higher taxes in retirement. One issue people often forget is that after one spouse dies, the remaining spouse is now subject to single taxes, which are substantially higher than married filing jointly. So indeed, even if tax rates don't change, you could find yourself in the highest rate of your life. Roths at least provide tax certainty and, if you are married, benefit from MFJ rates.

Upon death, Roths are part of your estate and depending on size of your estate and your state will be subject to state and/or federal estate taxes. But here the Roth wins. Your Roth will be smaller than your 401k (because it is smaller than the 401k by the amount of taxes you paid), so less estate tax will be due.

For heirs, a Roth is far better. Both Roth and traditional 401k/IRA have to be all taken out within ten years. For a Roth, heirs can just let it sit there for ten years growing tax free and take it all out on the last day with no tax due. If you did that with a traditional 401k/IRA, the tax bill would be enormous. To avoid this, the heir should be taking out amounts each year to manage the taxes due by avoiding going into a higher tax bracket. The amounts taken out could be put into a brokerage account, but then they are no longer growing tax free as they would in a Roth.

Are you sure? I thought an estate is defined as something on which an estate tax is potentially due. Roths are already taxed money so don't think they are part of the deceased estate. Would appreciate a clarification on this.

From the first hit showing up on my Goggle search: "Don't misunderstand. Roth IRA balances are not exempt from the federal estate tax (nor are traditional IRA balances)."

https://pksadvisors.com/roth-iras-as-an-estate-planning-tool/

[Anonymous]

Apparently the new bill, assuming it passes, will raise the catchup contribution for 2023 to 7500 for 50 and up and more for 60 yos.

Will have to think about that