Will taxation in retirement matter for this choice?
My 401k plan adviser recommended to convert my 401k to a Roth 401k. That move will trigger substantial immediate taxes at the time of conversion.
But it should make the later distributions tax free.
Would this conversion make sense?
Traditional 401k contributions are pre-tax. The money grows tax-deferred. When the money is withdrawn, every withdrawn dollar is taxed as ordinary income.
Roth 401k contributions are post-tax. Every contributed dollar is taxed. The money also grows tax-deferred. When the money is withdrawn, it is not taxed.
With a Roth 401k I basically prepay my future taxes now.
When I pre-pay my taxes now, it will be at my current high tax bracket.
In retirement I will very likely have lower tax bracket.
It already doesn't make sense to pre-pay.
In addition, I will probably not use up all my 401k money and part of the pre-paid taxes will go "unused".
My answer to my 401k adviser will be No.
But it should make the later distributions tax free.
Would this conversion make sense?
Traditional 401k contributions are pre-tax. The money grows tax-deferred. When the money is withdrawn, every withdrawn dollar is taxed as ordinary income.
Roth 401k contributions are post-tax. Every contributed dollar is taxed. The money also grows tax-deferred. When the money is withdrawn, it is not taxed.
With a Roth 401k I basically prepay my future taxes now.
When I pre-pay my taxes now, it will be at my current high tax bracket.
In retirement I will very likely have lower tax bracket.
It already doesn't make sense to pre-pay.
In addition, I will probably not use up all my 401k money and part of the pre-paid taxes will go "unused".
My answer to my 401k adviser will be No.
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