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Maxing out Roth IRA & Roth 401K
Posted on 11/4/24 at 2:53 pm
Posted on 11/4/24 at 2:53 pm
I maxed out my Roth IRA ($7,000) already this year and wanted to continue to invest towards retirement. My work offers a 401K & Roth 401K. Can I also contribute to the Roth 401K or is the $7,000 the limit for all Roth accounts? Does it make more sense to contribute to the traditional 401K? Any advice.
This post was edited on 11/4/24 at 2:53 pm
3
Posted on 11/4/24 at 3:20 pm to Nighthawk504
quote:
s the $7,000 the limit for all Roth accounts?
No. 401k and IRA have separate rules.
quote:
Does it make more sense to contribute to the traditional 401K?
Depends on the situation. Traditional makes more sense in my situation but there are several situations where Roth is better.
Posted on 11/4/24 at 3:27 pm to Nighthawk504
quote:
Does it make more sense to contribute to the traditional 401K?
Depends on your situation. It makes sense to contribute to 401K in general but you need to determine if your current income is going to be lower or higher than your retirement income.
I have been maxing my Roth 401k but we are in a bit of a unique situation where our household income is going to go from ~$220k/year to ~$750k/year in 1.5 years so I have been wanting everything I put in to be taxed now due to our lower income.
Posted on 11/4/24 at 3:41 pm to reds on reds on reds
Need a roommate?
Posted on 11/4/24 at 4:35 pm to reds on reds on reds
quote:
you need to determine if your current income is going to be lower or higher than your retirement income.
That's an over simplification that can lead to tax inefficiency. You actually need to compare MARGINAL tax rate today versus anticipated EFFECTIVE tax rate of withdrawals. Even w same or higher income in retirement, a portion of withdrawals would be taxed in lower brackets. There's also state tax rates, IRMMA, tax on SS payments, ACA subsidy thresholds etc to consider. eta: forgot to mention RMDs, widow's tax, and tax burden on heirs.
All that said, I'd strongly consider Roth 401k if in the 12% bracket or below and traditional starts getting more appealing in the 22% bracket and above but it is very situation dependent and we dont know future tax rates either.
This post was edited on 11/4/24 at 4:56 pm
Posted on 11/4/24 at 4:42 pm to reds on reds on reds
quote:If you are the average Joe, you will be taxed significantly lighter in retirement. So first priority should be to max out pre-tax contributions to 401k, and then max out Roth IRA.
you need to determine if your current income is going to be lower or higher than your retirement income
It only becomes a debate when you expect your retirement income to be nice and cushy. But that's not an average Joe. The average Joe hopes to have just enough retirement income to retire, so max out that pre-tax 401k.
This post was edited on 11/4/24 at 4:43 pm
Posted on 11/4/24 at 4:52 pm to reds on reds on reds
quote:This is a guy in the situation I'm referring to. He's doing the right thing considering after tax contributions as the higher priority. I am ENVIOUS. If you ain't in this position, max out your pre-tax.
I have been maxing my Roth 401k but we are in a bit of a unique situation where our household income is going to go from ~$220k/year to ~$750k/year in 1.5 years so I have been wanting everything I put in to be taxed now due to our lower income.
This post was edited on 11/4/24 at 4:54 pm
Posted on 11/5/24 at 7:50 am to Nighthawk504
I fall just within the 24% bracket and this year I maxed both my roth 401K and roth IRA since I like the idea of non-taxable income in retirement. It's my first year being able to do so. However, I am considering adjusting so that a portion of my 401k contribution goes to the traditional 401K to lower my annual income into the 22% bucket and have a little more take-home, but I may wait to see what happens with upcoming tax cuts. I'm 32 and single if that gives any context.
Some questions that get posed that I've seen to determine which route to go are:
- Do you see yourself being in a higher tax bracket now or in retirement? If higher now go traditional, higher at retirement go roth..
- Do you think tax rates will be higher/lower comparatively now vs. when in retirement? Same logic as above.
- Do you need more take-home now, or can you afford to eat some in tax? If you're wanting more take-home now to save for home, car, other expenses, it may make sense to do traditional now.
At the end of the day, you're still doing great, and won't regret either option. I think people have strong arguments for either so just pick one and roll with it.
Some questions that get posed that I've seen to determine which route to go are:
- Do you see yourself being in a higher tax bracket now or in retirement? If higher now go traditional, higher at retirement go roth..
- Do you think tax rates will be higher/lower comparatively now vs. when in retirement? Same logic as above.
- Do you need more take-home now, or can you afford to eat some in tax? If you're wanting more take-home now to save for home, car, other expenses, it may make sense to do traditional now.
At the end of the day, you're still doing great, and won't regret either option. I think people have strong arguments for either so just pick one and roll with it.
This post was edited on 11/18/24 at 9:35 am
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