re: 401k - Putting in more than the company match pros and cons

Personally I prefer a Roth if you are still eligible to contribute to one. Again, like with most financial things, it all depends on your situation. However, if you’re already contributing to a traditional 401k, then the Roth gives you tax diversification. Since you don’t know what taxes will be like in the future or what regulations will be, it doesn’t hurt to have both types of tax advantages accounts to be able to use interchangeably depending on what is most advantageous at the time. There is nothing wrong with going the traditional route either though. If lowering your taxes now is something of importance, it is definitely a viable option.

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If my tax bracket is higher now, wouldn’t a traditional make more sense? Or is having the Roth better as you don’t have to take RMD’s and pay taxes on those down the line?

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Do the math:

401k - Take your annual contribution this year, sheltered from tax, grow the 2022 contribution at X% for Y years to retirement. Estimate and subtract your taxes on the future value of the 2022 contribution at Z tax rate (presumably lower tax rate than your tax rate today) at retirement.

Compare to...

Roth - Take your annual contribution this year (Keep apples to apples for comparison to 401k), subtract your tax rate today, and grow the after-tax 2022 contribution at same X% for same Y years to retirement.

Never as simple as just the math but is always a great place to start.

Then consider:

401k gives you option to withdraw penalty-free at 55 (Roth does not)

Roth has no RMDs (401k has RMDs)

If you end up with both in retirement, there will be a priority sequence of withdrawing (eg, 401k before Roth, as Roth will continue to grow tax free during retirement and no RMDs)

You need more than one or two income streams in retirement (If you were born after 1970-1972 I wouldn’t plan on a penny of SSI)

-Contribute up to your company match
-If you have an HSA max that as it is triple tax advantaged and can be used for anything after age 65 doesn’t have to be healthcare
-max a Roth

Then after that try and max your 401k. After that dump whatever you can into a brokerage account. If you do all these things you will be better off in retirement than 98% of your peers.

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I get the Roth but if my tax bracket is higher now, wouldn’t a traditional make more sense?

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Maybe if you're in the 35% or 37% bracket but I would argue even up to the 32% bracket ROTH still makes a lot of sense. Also kind of depends on how far away you are from retirement. 5 years from now it's probably easier to predict what tax brackets look like vs. 10, 15, 20+ years from now.

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Or is having the Roth better as you don’t have to take RMD’s and pay taxes on those down the line?

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This is why even for high income earners I would build up a ROTH bucket. Not having to do RMDs could be a very nice impact on a chunk of retirement money that grows and can ultimately be withdrawn tax free. If you have everything in pre-tax, you're going to have to take out that minimum every year starting at 72, or 75 for the new law much later.

Right now the RMD table for 75 is 24.6. Meaning for every $100k in pre-tax you have you must take out $4,065 ($100k/24.6). If you have a million in pre-tax it's $40k. If you have $5 million in pre-tax you're going to get taxed on $203k etc...

Build up a ROTH bucket and say you have $2M in ROTH and $3M in pre-tax and suddenly instead of getting taxed $203k of RMD you only have to take out $122k and dont even have to touch the $2M if you dont want to.

Just gives more power to you in retirement and building up multiple buckets gives you more options then.

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Build up a ROTH bucket and say you have $2M in ROTH and $3M in pre-tax and suddenly instead of getting taxed $203k of RMD you only have to take out $122k and dont even have to touch the $2M if you dont want to.

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Hear and agree with your point that multiple may make sense (ie, options in retirement of multiple accounts, etc.) in principle.

But don't forget the math. The difference in pre-tax vs. after-tax growth may more than compensate for RMD taxes.
Always depends on situational context, but I would avoid universal statements about RMD taxes. Your point is good, but the whole picture math should always be encouraged.

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without penalty, something IRAs and Roths don’t allow

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This isn’t totally true. You can take out your Roth contributions witch have already been taxed.

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You can take out your Roth contributions witch have already been taxed.

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You can also take out roth conversions after 5 years. What really impacted some of my decision making was learning about roth conversion ladders and utilizing that to bridge from retirement until you can withdraw without penalty.

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I get the Roth but if my tax bracket is higher now, wouldn’t a traditional make more sense? Or is having the Roth better as you don’t have to take RMD’s and pay taxes on those down the line?

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Keep in mind the Trump tax cuts will likely expire in 3 years, so you need to consider the tax impact on earnings after that. Might make sense for a Roth now, but Traditional later if earnings are still high and taxed more.

Holding in a 401k also has the advantage of not being included in any pro rata considerations if you expect to do any Roth conversions from a traditonal IRA in the future. For most people, maxing out a 401k is the easiest way to accumulate significant wealth.

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I get the Roth but if my tax bracket is higher now, wouldn’t a traditional make more sense? Or is having the Roth better as you don’t have to take RMD’s and pay taxes on those down the line?



I think for some it makes sense. For me, for example, my marginal tax rate for everything I put in a Roth now is 25%. My retirement plan is to live at the top of the 12% marginal tax rate. The top end of 12% is around $84k/yr. Add on the Standard deduction of $25k and that puts the yearly income around $109k/yr. That is way more income that I would need at this point, so we may not go that high but it is my worst case scenario. So at $109k/yr i'd have an effective tax rate of 11%.

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To take this a bit further, if you have some space left in the 12% bracket, you can convert some of your traditional to Roth up to the 12% limit, so your traditional is taxed at 12% and all future growth is tax free.

Lol I just figured out that my AGI is over the Roth Contribution limit anyway.

So it’s 401k and a traditional IRA (and brokerage) for me. No access to an HSA either unfortunately