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I'm a 3rd-4th year at a V50 NYC firm doing corporate work. Thus far in my career I have basically been maxing out my Roth 401K, since it vibes with my general risk-averse nature (better to just lock it in and not worry about what the tax policies 30+ years from now will be), but more recently I have been thinking about whether that is the right choice. So my question is whether it is common or advised to split Roth and pre-tax 401K contributions to kind of hedge for tax policy changes and potential income when I want to pull the money. Is there any disadvantage at all to this? My thinking is so that I have at least some pre-tax contributions and won't feel like an idiot if I pull it all out at retirement and realize I lost a ton of $$ from Roth contributions.

A related bonus question, is it currently possible to pull out just the Roth potion let's say while still working in my 60's and then take the pre-tax money out when I'm "fully" retired? Maybe this is an easy google search but figured I would tack this question on.

Thanks!

I have heard one person say their advisor suggested they hedge for future tax risks by contributing Roth dollars. I don't agree, and the usual advice for high earners like Biglaw associates is to NOT contribute Roth dollars if pre-tax is available. For one thing, you can already hedge by making backdoor contributions to a Roth IRA, and for another, many of us can also make mega backdoor Roth contributions. In general, though, the thinking is that you're most likely to be in a lower tax bracket in retirement than you are in your peak earning years (roughly now) so you should max pre-tax contributions. You can't predict what taxes will be in 30 years, so don't try (or that's the smart advice I've heard).

Also, for your bonus question - not legal or financial advice, check with your lawyer/advisor, etc. - I believe Roth and pre-tax money is literally held in separate accounts, subject to separate legal requirements for when and how much you are required to withdraw. I believe the rules for the Roth account would allow you to pull out money up to your contribution amounts before retirement age, so the answer is yes, but you'd have to check the specifics and make sure those rules don't just apply to Roth IRA contributions but also to contributions to a Roth 401(k) which are later rolled over into a Roth IRA.

If you're in the usual biglaw tax bracket, traditional/pre-tax absolutely shithouses Roth. Your average income tax rate in retirement is highly unlikely to be higher than your marginal rate now. Decision gets closer for people in the 22/24% brackets and then Roth is probably better for 12% and below. Another possible exception is if you currently are in a 0% income tax state and want to retire to a state that heavily taxes 401(k) distributions.

Anyway you ought to have a lot of both because TCR is to max out your traditional space and then do as much "mega-backdoor Roth" as possible.

Don't forget HSA, which is tax-advantaged both ways, and bear in mind that paying principal on student loans is effectively tax-advantaged.

Thanks to you both, this is very helpful. At least for now, I've switched to pre-tax 401K contributions.

The Lsat Airbender wrote: ↑

Tue Jul 04, 2023 12:32 pm

If you're in the usual biglaw tax bracket, traditional/pre-tax absolutely shithouses Roth. Your average income tax rate in retirement is highly unlikely to be higher than your marginal rate now. Decision gets closer for people in the 22/24% brackets and then Roth is probably better for 12% and below. Another possible exception is if you currently are in a 0% income tax state and want to retire to a state that heavily taxes 401(k) distributions.

Anyway you ought to have a lot of both because TCR is to max out your traditional space and then do as much "mega-backdoor Roth" as possible.

Don't forget HSA, which is tax-advantaged both ways, and bear in mind that paying principal on student loans is effectively tax-advantaged.

Can you please elaborate on what you mean by “paying principal on student loans is effectively tax-advantaged” ?

Thanks in advance.

bokampers wrote: ↑

Fri Jul 07, 2023 12:48 am

The Lsat Airbender wrote: ↑

Tue Jul 04, 2023 12:32 pm

If you're in the usual biglaw tax bracket, traditional/pre-tax absolutely shithouses Roth. Your average income tax rate in retirement is highly unlikely to be higher than your marginal rate now. Decision gets closer for people in the 22/24% brackets and then Roth is probably better for 12% and below. Another possible exception is if you currently are in a 0% income tax state and want to retire to a state that heavily taxes 401(k) distributions.

Anyway you ought to have a lot of both because TCR is to max out your traditional space and then do as much "mega-backdoor Roth" as possible.

Don't forget HSA, which is tax-advantaged both ways, and bear in mind that paying principal on student loans is effectively tax-advantaged.

Can you please elaborate on what you mean by “paying principal on student loans is effectively tax-advantaged” ?

Thanks in advance.

The cost of interest gets paid out of your post-tax income, so reducing that cost is intrinsically tax-efficient