Lower 401k to save into Roth IRA?

Updated : Sep 05, 2019 in Articles

Lower 401k to save into Roth IRA?

today is Q&A Tuesday and today’s
question is should I lower my 401k contributions to save into my Roth IRA
I’m also gonna give you a couple of examples to help clarify how you should
figure this out but before we do. If this is your first time at our channel
or you haven’t subscribed click on the subscribe button at the bottom. My name is Travis Sickle CERTIFIED FINANCIAL PLANNER with Sickle Hunter Financial Advisors. between the 401k and the Roth IRA, 401k
is pre-tax dollars that means it’s lowering your taxable income this year
the dollars that you’re contributing to the 401k that is going to reduce
dollar-for-dollar your taxable income and when the
flipside the Roth IRA goes in after-tax so there’s not a tax benefit in the year
that you put the contributions into the Roth IRA but all the growth that comes
out of the Roth IRA is tax-free as long as it’s in retirement or for a couple of
other reasons now the 401k comes out as ordinary
income when you pull those dollars out so using both the 401k and the Roth IRA
it will help you smooth out your taxes so that should tell you that you should
use both but be careful before you lower your 401k contributions without looking
at all the facts so let’s go through a couple of examples so example number one
let’s say that you make $80,000 you save $10,000 into your 401K so what that
means is if you make $80,000 you put $10,000 into your 401 K that means when
you go to do your taxes you’re only going to be taxed on that $70,000 so
that is what we call a deduction because it’s reducing your taxable income so
let’s say we make it a little bit of an adjustment here for a minute
let’s say that we’re going to reduce our 401k contributions by $6,000 because we
want to get that into the Roth IRA so doing so because we’re reducing it by
$6,000 and we’re in the 22 percent tax bracket that means we’re gonna have an
additional tax liability of $1,320 that’s $6,000 times 22 percent that is if that’s what your tax brackets at
you’re gonna be at 22% that’s an additional one thousand three hundred
twenty dollars that you’re gonna pay in taxes so don’t just go out and blindly
adjust your 401k without looking at the tax effects so maybe you’re already
familiar with how that worked by lowering your 401k contributions you’re
gonna have a higher tax bill so now let’s talk about example number two so
example number two let’s say we make $55,000 and then we’re gonna save $6,000 you still want to get the match so you
only save 3% and put the rest into the Roth IRA well if we did that if
if we were taking advantage of the health care premium tax credit so if you
have a health plan where you’re getting a premium tax credit you’re gonna want
to pay attention to this very closely because you just went from qualifying
for the tax break to now paying full price now this is pretty easy to look at
because what you can do is you can look at the healthcare gov website and figure
out the exact threshold or the exact amount you need to get your income to to
qualify for those premium tax credits now you might be below this amount or
above this amount but knowing it is super important because as you make
these adjustments it’s not just going to affect your retirement plan and your
taxes it’s also gonna affect your health insurance this is only one example of
changing your taxable income by putting it into the 401k in order to qualify for
the premium tax credits there are other thresholds depending on your family size
and your filing status so you want to verify it’s not always gonna be at $55,000 so make sure that you’re looking at your particular situation
including which state you are because that’s also going to impact it now most
of the states are the same but not all of them so you want to look a little bit
closer but by adjusting that 401k it could affect your premium tax credit so
make sure you’re taking a look at that now on the other side if you’re not
saving enough into your 401k and you upped your 401k contribution you might
actually qualify for additional premium tax credits so look a little bit closer
now let’s talk about a third example I’m gonna give you an example that’s gonna
qualify for another credit just because you adjust your 401k so in this example
let’s say that you’re making $34,000 and you want to save $3,000 we’re saving $3,000 into the 401k so let’s say we we want to adjust that where we’re gonna split it up so we’re gonna
put $1,500 into the 401K and then we’re gonna take the another 1,500 and put it
into the Roth IRA so we’re gonna split up our $3,000 between the two well doing
so might sound like a good idea because now you’re getting 401 K dollars and
Roth IRA dollars sure like that’s pretty good I got the best of both worlds and
hopefully I’m smoothing out my taxes but you again you have to look a little bit
closer because you’re right at the threshold for something called the
savers credit now let’s let’s clarify this example again you make 34k and you
were putting 3,000 into the 401 K so that’s reducing your taxable income down
to 31,000 but because we split it up now our taxable income only goes down by
1,500 why because we put 1,500 into the 401K so with 34,000 – 1,500 is $32,500 now the premium tax credit for this
particular situation is $32,000 and that would qualify us for 10% credit so rather than getting $200 from the IRS we’re
gonna get zero effect the savers credit just because we made a little adjustment
by five hundred dollars in order to have missed that credit or to qualify for
that credit depending on how close you are to those thresholds now again
depends on your filing status your family size so you want to check the
savers credit as well so now we have the premium tax credit and the savers credit
has two factors when looking at how much you’re putting to the 401K versus the
Roth IRA now let’s talk about a fourth example this is going to be the last
example I’m going to go through for this particular situation but let’s suppose
that you’re making a hundred and sixty-five thousand dollars now and
you’re saving ten thousand into the 401 K so let’s say we change that to only
three percent so that’s going to put it to four thousand nine hundred and fifty
dollars that we’re saving into the 401 K and we’re putting the difference inside
of the Roth IRA well that $5,050 into the Roth IRA just put you from the 24% tax bracket and pushed you up to the
32% tax bracket so you the point is you want to look at what tax brackets
are in so you can maximize the amount of savings now it’s not to say that your
all your your taxable income is going to go up a tax bracket it’s only every
dollar after that tax bracket but why pay additional dollars just because you
made a silly adjustment when you could have just put it into the 401k and stuck
below the threshold and stayed in the 24% tax bracket so there’s no reason
that you should pay an additional 8% on every single dollar over that threshold
just because you made an adjustment at the wrong time so there isn’t one right
or wrong way to do this stuff you have to look at your tax bracket your credits
deductions your filing status your family size there are a lot of factors
that go into figuring out should you put the money into the Roth IRA or the 401k
so again when anybody tells you there’s only one way to do it
they’re probably wrong because it really depends on your particular situation now
if you have questions put them in the comments down at the bottom and if
you’ve enjoyed this video be sure to subscribe and leave your comments down
at the bottom


  • I have two questions. What are your thoughts on having both a traditional and roth ira, and not having a 401k. Is having a 401k still worth it if the expense ratios are high Atkins around 1.3% to 1.5%?

  • Hi Travis, new full time employee this year. My company has a 401K, but there's no matching until I've worked here for a year. Do you still recommend contributing to it fully? $19k, also is this a good time to invest since the market hasn't crashed in a long time? Thank you!

Leave a Reply

Your email address will not be published. Required fields are marked *