Traditional or Roth 401k?

[Cyched]

My employer offers the option of choosing either pre-tax (traditional) deferrals or Roth deferrals in our 401k. I’m guessing a lot of you are similar. I’ve done some research on which kind is ‘best’ and the answer always seems to be “it depends.” A lot of it is based on your current tax rate vs retirement tax rate, but I don’t know how to accurately judge that without a crystal ball

Currently I’m putting the amount to getting the employer match in pre-tax, and any additional deferrals/increases in Roth. I max out my personal Roth IRA outside of work.

What option do you guys use? A mix of both? Not necessarily looking for a hard “do this” answer, but curious to see how others approach it.

 

[srjclone]

I have a traditional through my company and have opened an additional Roth with money I had saved, and like the set up so far. Obviously you don't get the return with the Roth, but it is worth it for the tax free earnings and withdrawals imo. But you're right, from all I can tell "it depends"

 

[cowgirl836]

I do both. So when I first started, I just put everything into pre-tax cause I was 22 and didn't know anything beyond "you should contribute". Few years ago I switched to all post-tax to let it even out a bit.

Last year I switched it so it's split pretty much like what you do. The employer match is all pre-tax, I max out a Roth IRA, so I split my 401k contribution pre and post tax to try and keep my total pot somewhat even.

 

[DSMCy]

I do 50/50 in my 401k as well. I max out a Roth IRA too.

I've talked to advisers/friends about this and no one seems to have the "right answer". As you said, it depends.

I do like putting some money in a traditional 401k. I don't expect tax rates to be lower in my retirement (~30+ years), but my thinking is I may be able to work myself into a lower tax bracket by taking money out of the Roth funds.

 

[DSMCy]

I have a traditional through my company and have opened an additional Roth with money I had saved, and like the set up so far. Obviously you don't get the return with the Roth, but it is worth it for the tax free earnings and withdrawals imo. But you're right, from all I can tell "it depends"

Edit: Nevermind. I think you're referring to no tax advantage of Roth contributions.

 

[Dante]

Pre-tax money you put in now will always reduce the amount of income in your current top margin tax bracket.

My goal is to max out my pre-tax deferrals before moving to a Roth. I expect less income in retirement and a lower marginal tax rate.

 

[DSMCy]

Pre-tax money you put in now will always reduce the amount of income in your current top margin tax bracket.

My goal is to max out my pre-tax deferrals before moving to a Roth. I expect less income in retirement and a lower marginal tax rate.

You do know that the money you withdrawal from the Traditional 401k/IRA will be counted as income, right?
If you aren't working in retirement, but are still withdrawing $100k per year, that means you'll pay taxes in whatever the $100k tax bracket is.

 

[VeloClone]

My financial advisor pointed out that he liked the Roth for us because I have a pension and a 457 that are both pretax (will be taxed upon withdrawal) so a Roth gives us flexible income that we can use for occasional things like a new car or a big trip that won't bump us way up on taxable income for that year. We will have flexibility.

 

[srjclone]

What does this mean?

sorry Traditional is tax-deductible on both state and federal tax returns, the year you make the contribution. Where as the Roth does not provide a tax break

 

[rhoho]

Unless you plan on the tax bracket being the same or better for you when you retire than do roth IRA. You are going to pay the taxes now and not have to worry about it in the future when taxes are higher

 

[Sigmapolis]

Considering how far in the hole the federal government, state governments, local governments, and pension funds are in right now...

...and some of the crazed spending plans both sides have right now...

...and how CBO and long-term fiscal projections presume historical interest rates, full employment, and no expensive, multi-trillion dollar foreign entanglements...

...the "tax free!" status of Roth accounts feels like something that is going to go away sometime, once people who love spending other people's money finally start to run out of other people's money from the more traditional sources of the same.

Anyways, practical advice...

There is no way to know what the future holds on this one.

All my stuff is in a Roth. All of my wife's stuff is in a traditional 401(k) because that was her only option. I doubt it ends up making much of a difference either way, but defaulting to something like that of a 50-50 hedge is just what I went with for it.

 

[ghettocowboy4cy]

Pre-tax money you put in now will always reduce the amount of income in your current top margin tax bracket.

My goal is to max out my pre-tax deferrals before moving to a Roth. I expect less income in retirement and a lower marginal tax rate.

This and you also have to look at if you have a house and will it be paid off by the time retirement comes around.

 

[Dante]

You do know that the money you withdrawal from the Traditional 401k/IRA will be counted as income, right?
If you aren't working in retirement, but are still withdrawing $100k per year, that means you'll pay taxes in whatever the $100k tax bracket is.

Yes, I understand the withdrawals will be fully taxable, but with the withdrawals, wages, SSI, etc. I still expect less overall income in retirement and lower marginal tax.

 

[SCNCY]

I started off doing a tax-deferred 401k. After two job switches, I rolled everything into a Traditional IRA (still tax-deferred), but at my new job, I opened a Roth 401k and a Roth IRA. My current tax rate is below 15%, so i think going Roth right now is good. But that may change in the future.

With that being said, splitting between the two wouldn't be bad. Yeah, one may have turned out better than the other far in the future, but by having both, you would at least get half of the benefit of the better option and half of the loss from the other; as opposed to risking getting the full loss of the worse option.

 

[dmclone]

Like others, I like doing a mix but as I get older I find myself doing more and more Roth. I just looked at my 401k and only about 20% of my total 401k is in the Roth form. This is probably because when I first started, Roth 401k was not an option (2006 first year) and my employer contributions. Of course I have a separate Roth IRA.

 

[CtownCyclone]

My financial advisor pointed out that he liked the Roth for us because I have a pension and a 457 that are both pretax (will be taxed upon withdrawal) so a Roth gives us flexible income that we can use for occasional things like a new car or a big trip that won't bump us way up on taxable income for that year. We will have flexibility.

This is similar to what my money guy told me. My current employer does not have Roth contributions, but wife's does (although she isn't contributing to it right now).

 

[Rabbuk]

Pre-tax money you put in now will always reduce the amount of income in your current top margin tax bracket.

My goal is to max out my pre-tax deferrals before moving to a Roth. I expect less income in retirement and a lower marginal tax rate.

This is my thought as well, I'm young enough that anything from social security will be a bonus

 

[isufbcurt]

You do know that the money you withdrawal from the Traditional 401k/IRA will be counted as income, right?
If you aren't working in retirement, but are still withdrawing $100k per year, that means you'll pay taxes in whatever the $100k tax bracket is.

Personally I'd rather pay taxes when I am retired because I will be making substantially less than I do currently.

 

[Rabbuk]

Personally I'd rather pay taxes when I am retired because I will be making substantially less than I do currently.

I think unless you have something like ipers, social security, and 401k income heading your way almost everyone makes less money as a retiree. Or have substantial sources of passive income from elsewhere

 

[isufbcurt]

I think unless you have something like ipers, social security, and 401k income heading your way almost everyone makes less money as a retiree. Or have substantial sources of passive income from elsewhere

Exactly why I would rather pay the lower tax rates then.