Pre-tax VS After-tax 401K Plan

nelsona · Post by **nelsona** » Wed Jan 25, 2012 8:51 am

One thing to note though is that any matching you get will be 401(k) money, not Roth401(k), so if you roll thatover, it does restart the clock on the penalty -- but just for that portion.

harjindermall · Post by **harjindermall** » Wed Jan 25, 2012 11:22 am

Thanks for that information. I'm actually thinking of not contributing because I need the money right away when I move back which looks like will be in less than 5 years (closer to 3-4).

I have a Roth IRA with Fidelity already and I had it for over 5 years so I should be able to cash it out tax free right?

nelsona · Post by **nelsona** » Wed Jan 25, 2012 11:38 am

Yes.

Obviously saving for retirement is a long range issue.

I'm not a big beleiver in sacrificing retirement income for immedaite needs. You can always get a loan for immediate needs (house, kids school, business, etc), but no one gives "retirement loans". That is your responsibility.

harjindermall · Post by **harjindermall** » Wed Jan 25, 2012 12:17 pm

That's true. I will go ahead and create a Roth 401K.

Should my wife create a Roth 401K plan as well? She's currently contributing to a 401K.

nelsona · Post by **nelsona** » Wed Jan 25, 2012 2:31 pm

If her intent is to eventually have nly a Roth, the sooner she funds that instead of 401(k), the better.

harjindermall · Post by **harjindermall** » Wed Jan 25, 2012 3:45 pm

I created a Roth 401K and will be contributing the maximum of $17,000. That limit only includes what I put in correct?

My wife will also be creating a Roth 401K and will contribute the maximum and will stop contributing to her 401K.

nelsona · Post by **nelsona** » Wed Jan 25, 2012 4:12 pm

Good. Like I said however, be aware that you are foregoing at least a 25% tax deduction now when you do this. Just make sure that by doing this you are not putting yourself in the 28% tax bracket (over about 160K for Mariied couple standard deduction).

harjindermall · Post by **harjindermall** » Wed Jan 25, 2012 6:07 pm

Can you elaborate on the tax bracket? I'm not sure I am following you.

nelsona · Post by **nelsona** » Wed Jan 25, 2012 6:34 pm

I'll be rela brief.
I think you will have to educate yourself on this....

401(K) give deduction for contribution Roth401(k) does not. Married filing jointly tax bracket for 25% marginal tax rate is about 160K with standard deduction.

So if you arnd spouse are using Roth401(k), your taxable income will be 34K more per year than if you use 401(k). Thatis at least 8.5K more in federal taxes. It could be more if your income is above 160K. So you need to decide if saving 25 or 28% (plus state taxrate) now is better than what you will save later.

harjindermall · Post by **harjindermall** » Wed Jan 25, 2012 8:34 pm

Looks like we are in the 28% tax bracket whether we contribute or not to the Roth 401k.

harjindermall · Post by **harjindermall** » Wed Jan 25, 2012 11:27 pm

Looks like we will be moving back in less than 2 years. Still worth it to contribute?

nelsona · Post by **nelsona** » Wed Jan 25, 2012 11:52 pm

So you are each making about 100K. Unless you are both going to be making that kind of money for the rest of your life, you should probably do Roth all the way.

harjindermall · Post by **harjindermall** » Thu Jan 26, 2012 12:01 am

That's correct. We'll do the Roth 401k and transfer it to a Roth Ira before we move back.

Fidelity will be able to keep our accounts open but we wont be able to make any changes to the account when we move. After. 5 years, we'll take the money out.

Thanks a lot for your help. I learnt a great deal.

ExpatAmerican · Post by **ExpatAmerican** » Fri Jan 27, 2012 10:39 am

Darrell Thompson at Macquarie Private Wealth Corp in Toronto is FINRA licensed and can manage US qualified plans (IRA's, 401Ks) for Canadian and/or US residents. He can be contacted toll-free at 866-775-7704 or emailed at darrell.thompson@macquarie.com.