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If I save on an after-tax basis in a 401k, (plan permitting) the earnings, upon distribution, are taxed as ordinary income and subject to RMDs. However, withdrawing my after-tax contributions only count toward the RMD until they are exhausted. If I save after-tax in a Roth account, the earnings are tax-free with no required withdrawals.
There are earnings limits on contributing to a Roth, but no income or account balance limits on Roth conversions.
Roth distributions are excluded from MAGI and thus substantial income may not count toward IRMAA premiums, but that’s not the case for tax-exempt Muni bond interest also purchased with after-tax money. In theory you could have a $1 million in Roth income and avoid IRMAA. What a deal!
Pre-tax 401k contributions are subject to FICA taxes, but pre-tax cafeteria plan contributions (IRC Section 125) are not. Generally, there are no income limits using a Section 125 plan. Such plans could modestly lower future Social Security benefits or some workers.
If there is any logic here, it escapes me.
My first thought was some rules are to prevent extra benefits for high income workers, but that is not case, especially for Roth conversions.
The goal is to encourage retirement savings and make it more feasible – I assume. Is it working? Not to the extent hoped. How much is all this encouragement costing?
All this may be moot for most Americans if Congress doesn’t get cracking on making both Social Security and Medicare sustainable.
Then there is the possibility that the lost revenue from tax-free programs like Roth get the attention of the current wave of cost cutters. If health insurance premium subsidies get discussed – and they are – why not Roth freebies?
I bet the majority of Americans couldn’t make heads or tails of your post.
I bet you are right.
Some people are focused on maximizing their retirement income and reducing taxes. Delaying Social Security and doing Roth conversions can be good tools to accomplish these things. Everyone’s situation is different. There are no hard and fast rules for all. Nobody should be judged on their personal choice.
I was able to take advantage of my Roth when I was diagnosed with a life-threatening illness. I made a withdrawal so we could relocate and to cover unexpected expenses. There were no taxes on the money withdrawn. That was a good thing. The excess has been saved in a taxable account. If I had not had the Roth, I would have taken a larger withdrawal from my Traditional account.