Should I maximize a Roth 401(k) account while limiting my traditional 401(k) contributions?

My company offers a traditional 401(k) option with a 6% match. They have also introduced a Roth 401(k) option with a 6% match. I was thinking of changing my contributions to maximize my Roth 401(k) account at $17,000 per year, while limiting my traditional 401(k) account to $1,000 per year, plus the 6% match I get from my company. Would this be advised?

401(k), IRAs
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December 2017

Everyone is familiar with the cliche to not put all of your eggs in one basket.  This is often referenced in the financial world to diversifiying your investments.  Likewise it can be applied to diversifying your future retirement income as well.  Traditional 401k/IRA, pension income, and. social security (depending on combined income) is taxed as ordinary income.  It makes sense to have some tax-free income in retirement from sources such as a Roth IRA and Roth 401k.  Based on your retirement income needs you could manage your future taxes at retirement by withdrawing an amount of taxable income equal to the top amount in a particular tax bracket, without stepping up into a new marginal tax rate.  The remainder of your annual income could then be withdrawn from your Roth’s without impacting your taxable income.

The question shouldn’t necessarily be if you should contribute to a Roth, but rather how much.  As mentioned above the same principles apply to contributing to your traditional and Roth accounts.  Contribute an amount to the traditional 401k that will bring your taxable income down below the current marginal tax bracket.  The remaining contributions can then be directed to the Roth 401k.  

Generally speaking this would help optimize your current pre-tax contibutions while balancing the flexibility of your future taxable income.  Nobody knows what future tax rates will be, but having flexibility allows you to adjust as necesssary.  Additionally, just because someone might be generating a lower income in retirement does not necessarily mean that they will be in a lower tax rate.  We are currently in a relatively low tax environment and Congress can sometime again raise rates in the future.  In other words your taxable income could possibly go down in retirement while the current tax bracket that you fall-in could increase.

A comprehensive fee-only CFP® professional can help you with your specific situation.  

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