Roth 401k vs traditional 401k

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on 5/9 at 2:17 pm

It seems the basic guideline for starting to save for retirement is 1. Max out employer match with company 401k 2. Max out personal roth IRA 3. Max out company 401k. How does this change if your company offers a roth 401k and you're happy with the funds offered? How and why would you choose traditional 401k vs roth 401k? TIA

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Posted by CoolHand

on 5/9 at 2:27 pm to HamSandwich

A Vanguard rep came by and explained to us that ideally you'd invest in both because it gives you "tax diversification". Basically, because its difficult to predict what will happen with taxes at retirement, you have a choice on how you pull from each.

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Posted by TheHiddenFlask

on 5/9 at 2:34 pm to HamSandwich

quote:
How does this change if your company offers a roth 401k and you're happy with the funds offered?

Still follow the same system. The Roth IRA gives much greater flexibility.

quote:
How and why would you choose traditional 401k vs roth 401k? TIA

I'm early in my career, at (hopefully) my lowest earning point, and I think taxes are going up in the future. Therefore, I am piling 100% into my ROTH right now. I'll probably start adding to traditional accounts around 30, then hopefully be above the limit for contributing to either by the time I'm 35.

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Posted by 12Buck

on 5/9 at 2:49 pm to CoolHand

quote:
ideally you'd invest in both because it gives you "tax diversification". Basically, because its difficult to predict what will happen with taxes at retirement, you have a choice on how you pull from each.

This is the correct answer and what we tell our clients all the time.

quote:
then hopefully be above the limit for contributing to either by the time I'm 35.

There is no income limit to contributing to traditional IRA like a Roth has if that is what you are implying.

ETA: After digging deeper to double check myself, there are a few scenerios where some income limits would play. But, generally my second statement remains true.

This post was edited on 5/9 at 2:56 pm

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Posted by TIGERSby10

on 5/10 at 11:53 am to 12Buck

edit: deleted comment, misread the OP

This post was edited on 5/10 at 11:55 am

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Posted by HamSandwich

on 5/10 at 1:57 pm to TheHiddenFlask

Are you saying currently you have a roth 401k and a personal roth ira? I was under the assumption that if I had a roth 401k I wouldn't be able to have a roth ira.

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Posted by TheHiddenFlask

on 5/10 at 2:15 pm to HamSandwich

quote:

Are you saying currently you have a roth 401k and a personal roth ira?

Yes.

quote:
I was under the assumption that if I had a roth 401k I wouldn't be able to have a roth ira.

Why? You can have a traditional 401k and a traditional IRA, can't you?

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Posted by kennypowers816

on 5/10 at 3:48 pm to HamSandwich

quote:
I was under the assumption that if I had a roth 401k I wouldn't be able to have a roth ira.

I have both a Roth IRA and a Roth 401k. I know some would advise against it because I'm not "tax diversified," but I'm not particularly worried about it right now.

quote:
Can I contribute the maximum, including catch-up contributions, to both a designated Roth account and a Roth IRA in the same year?
Yes. if you are age 50 or older, you can make a contribution of up to $22,000 in 2011 to your 401(k), 403(b) or governmental 457(b) plan ($16,500 regular and $5,500 catch-up contributions) and $6,000 to a Roth IRA ($5,000 regular and $1,000 catch-up IRA contributions) for a total of $28,000 for 2011.

IRS.gov

This post was edited on 5/10 at 3:50 pm

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Posted by HamSandwich

on 5/10 at 4:35 pm to TheHiddenFlask

That makes perfect sense. I think I got that in my head due to the standard advice you always hear of 1. Max out 401k employer match 2. Max out roth ira. I just switched it and assumed 1. Max out roth 401k employer match 2. Max out traditional ira. Thanks for clearing it up

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