Traditional or Roth 401k?
- Thread starter Cyched
- Start date
I use a mix. A little heavier on pre-tax right now. There are a lot of factors to consider I need more money in my check right now for this crazy school my kid is in or I would be pumping that Roth money 100%.
It really does depend on your situation. I do a traditional 401k and max a roth IRA so I will have both pre and post tax options down the road. I would be in the same marginal rate if i did all roth or all traditional, so my contribution would be effectively taxed at that rate. For me it makes sense just to do traditional and likely be taxed at a lower rate when I withdraw.
But if you are young and in a lower bracket now or maybe you have enough deductions to get into a low bracket going the roth 401k route would make sense.
But if you are young and in a lower bracket now or maybe you have enough deductions to get into a low bracket going the roth 401k route would make sense.
Not to mention that tax brackets almost always go up. Even if you're income at retirement is the same as it is now, it likely that more of it would fall into the lower bracket.
In 2003, the 25% bracket was from $56,800 through $114,650. In 2010 it was from $68,000 through $137,300. In 2017 it was $75,900 through $153,100.
I do like having some of mine in a Roth IRA so I could use the principle as an emergency fund without worrying about taxes or penalties.
I imagine most people don't have 25k in extra income... Although did they change the limit for traditional? It's looking like it's lowrr by a lot.
I did but then instead of buying a used dodge caravan I went with a ‘18 Range Rover.
I was just joking, that's the advice I constantly see on forums like Reddit personal finance like it's no big deal to just max both out.
I am a millenial...what is this saving for retirement that you speak of?
And CF. This place is hardcore pay as you go.
I like the flexibility of the Roth. Went heavy Roth when I was younger. Pivoted to traditional when my wife made nice coin.
Going with a mix this season. Max out both or something. The CF way.
.....or should I pay off my mortgage in 10 yrs.
Oh a topic you know I'm obsessed about...
The traditional 401k is preferred over the Roth 401k. You should contribute to a Roth IRA outside of your work contributions.
Your work investment options most likely have a fee that is significantly greater than what a Roth IRA fee will be through a third-party administrator like Vanguard or Ameritrade. It does not make sense to use your Roth IRA contribution limits in a plan that has significantly higher fees.
We each max out a Roth IRA at Vanguard and I put 12% into my 401k at work. I tried to max the 401k last year but our budget was just way too tight every single month with kids in daycare.
The traditional 401k is preferred over the Roth 401k. You should contribute to a Roth IRA outside of your work contributions.
Your work investment options most likely have a fee that is significantly greater than what a Roth IRA fee will be through a third-party administrator like Vanguard or Ameritrade. It does not make sense to use your Roth IRA contribution limits in a plan that has significantly higher fees.
We each max out a Roth IRA at Vanguard and I put 12% into my 401k at work. I tried to max the 401k last year but our budget was just way too tight every single month with kids in daycare.
I’m 100% Roth, outside wife’s pension she is 100% Roth. Figure we will make more retired than now. We also never plan to touch this, if we ever do, for a long time. Traditional we have to tap at 70 1/2, Roth you don’t need to touch and can put kids as beneficiaries so you can just pass that to them.
Isn't one major factor of this the amount of growth you have on the money? Everyone always says the decision is just based on your current rate vs your rate in retirement and I'm not sure I agree with that.
$5,000 invested today in an IRA/401K turns into about $50,000 in 30 years at an 8% return.
Assuming a 25% tax rate at both stages in life, you would pay $1,250 in taxes today if you did a Roth (netting $50,000) and $11,250 in taxes at withdrawal if you did a traditional (netting $38,750).
If you invested the extra $1,250 in tax savings up front and invested $6,250 in a traditional that would net out to $63,000 at retirement X 25% = $15,750 = $47,250 which is still behind the Roth scenario and I am guessing most people don't have the discipline to invest the tax savings.
Seems like when you are young and have more time for growth the Roth is a no-brainer. As you get older and have less time for growth the scales probably tip back towards doing a traditional.
$5,000 invested today in an IRA/401K turns into about $50,000 in 30 years at an 8% return.
Assuming a 25% tax rate at both stages in life, you would pay $1,250 in taxes today if you did a Roth (netting $50,000) and $11,250 in taxes at withdrawal if you did a traditional (netting $38,750).
If you invested the extra $1,250 in tax savings up front and invested $6,250 in a traditional that would net out to $63,000 at retirement X 25% = $15,750 = $47,250 which is still behind the Roth scenario and I am guessing most people don't have the discipline to invest the tax savings.
Seems like when you are young and have more time for growth the Roth is a no-brainer. As you get older and have less time for growth the scales probably tip back towards doing a traditional.
Just read this over lunch
https://www.marketwatch.com/story/p...-punished-by-social-security-taxes-2019-01-07
https://www.marketwatch.com/story/p...-punished-by-social-security-taxes-2019-01-07
Why is the traditional preferred? Just curious what the rationale is.
I do max out the Roth outside of work; I keep a mix in my 401k because being able to put additional Roth money away with a higher limit is appealing to me.
The Roth 401k contributions are the same as the regular 401k limits, so making Roth contributions in your 401k doesn’t affect your IRA limits.
With a house paid off, your expenses per year are less. In retirement, your income is only what you withdraw. Because of a paid off house, not needing to save any more money for retirement, no kids, etc people can usually withdraw less than what their income was when they were working.
Thus a majority of people will have a lower tax rate in retirement. Most people should prefer Traditional for most of their 401k.
There are definitely exceptions and a mix isn't bad and gives some flexibility.
