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I can select either regular 401(k) at work or Roth 401(k)Which one should I contribute to, if I'm subject to AMT ?

Over 50, married and maxing both my wife and myself 401(k) (hers is regular only)

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  Answers  |  3

November 09, 2015

Great Question. I'm assuming, which I hate to do, that you have substantial economic income, but through exclusions, deductions or credits that you pay little regular income tax. That said, the tax-free nature of a Roth 401(k) is appealing to many folks planning for retirement. Your situation gets complicated and you might want to discuss it further with your accountant, because although the Roth 401(k) is tax-free later in retirement, it doesn't offer the same opportunity to reduce tax burdens as a traditional 401(k).
A

Amots | 11.10.15 @ 00:31

Thanks Michael. I don't have any extra deduction beside the regular Mortgage and donation (because of income, I'm limited on education and taxes) This is why I think that at this point regular 401(k) might be better, since the deduction will take me out of AMT and in retirement my taxes will probably be lower

Dave Bradley, Investment Manager (Financial Advisor) in North Charleston, SC | 04.04.16 @ 01:54

Amots, if your future tax rate will be lower when you draw down the $$, then the regular 401(k) would be an advantage. Keep in mind that with the ROTH 401(k). the tax is already paid. so, there are no monetary limits that push you into a higher tax bracket. Concerning the AMT, business owners get great benefits with the employer match, as many others have indicated. This could solve the AMT issue. Hope this helps

$commenter.renderDisplayableName() | 01.17.17 @ 17:41

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November 10, 2015

401(k) contributions are reported on an employee's form W-2, but are not reported as income subject to federal income tax. The AMT is calculated based on your adjusted gross income. Since 401(k) contributions are not reported as part of your adjusted gross income, 401(k) contributions are exempt from the AMT calculation, and avoid the AMT altogether.

However, as Michael suggested, there may be reasons specific to your situation why having tax-free income in retirement will be more beneficial than reducing your taxable income today. If you are subject to AMT, you really should be working with a CPA to work through this.

$commenter.renderDisplayableName() | 01.17.17 @ 17:41

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April 03, 2016

Hi,

Perhaps a better way to look at this is does a ROTH 401(k) or a regular 401(k) increase my net worth more?

Not for the answer nobody likes to hear. What is your future tax rate?

In a nutshell the bottom line is three possibilities:

1). If your tax rate is higher when you draw down the funds, the ROTH 401(k) may give you an advantage due to the tax being paid when you put the $$ in at a lower tax rate.

2). If your tax rate is lower when you draw down the funds, the traditional 401(k) may give you an advantage due to the tax being paid when you take the $$ out at a lower tax rate

3) If your tax rate is the same, their is no financial advantage to either

All you need to know is what your future tax rate will be or be able to predict it with a high degree of certainty.

We always approach this issue from the ROI side. How much in $$ does the 401(k) need to give you in return for the Investment. Your hard earned $$ need to work just as hard for you as you have for them. Contact us directly to discuss your situation in greater detail.

It's not what you make, It's what you keep that determines your lifestyle

$commenter.renderDisplayableName() | 01.17.17 @ 17:41

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