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I have an option to do a Roth 401k. Should I do it?
Posted on 7/8/20 at 10:33 am
Posted on 7/8/20 at 10:33 am
I’m early in my career so not quite an OT baller yet. I have a 401k with match as well as an independent ROTH IRA. The difference between doing Roth and pretax 401k right now is only about $40 a month. In the long run is that worth it?
9
Posted on 7/8/20 at 10:36 am to jlovel7
Im also early in my career. My thought on it is to get your employee match and then put whatever the rest of your contributions are into the Roth because you know what taxes are now, no telling what they will look like when trying to take your money out.
Some one tell me if that is a bad logic
Some one tell me if that is a bad logic
Posted on 7/8/20 at 10:38 am to dirtytigers
Blending retirement between pre and post tax is just as important as diversifying the assets you hold in your retirement accounts. Traditional 401k up to employer match, and the rest in a Roth. If you still have some extra scratch get your cheapest health insurance option and start using an HSA.
Posted on 7/8/20 at 10:44 am to Mingo Was His NameO
quote:
Blending retirement between pre and post tax is just as important as diversifying the assets you hold in your retirement accounts. Traditional 401k up to employer match, and the rest in a Roth. If you still have some extra scratch get your cheapest health insurance option and start using an HSA.
That’s my current setup. HSA starting in September when I switch health insurance.
Only issue is they just suspended our match. My question though is regardless of match should I do the pre or post tax 401k? I have the option on that.
Posted on 7/8/20 at 10:51 am to jlovel7
quote:
My question though is regardless of match should I do the pre or post tax 401k? I have the option on that.
Others will probably be able to give better advice than I can, but ideally you'd like to do both, in my opinion. If you can save say, 10% of your income, split it between traditional 401k and Roth Ira. Traditional 401k is going to save you employment taxes and lower your taxable income so that should be part of your calculations as well.
Posted on 7/8/20 at 11:10 am to jlovel7
As others said I do a mix of both pre and post tax contributions. I have no idea what the tax laws will be 30 years from now so I diversify between pre and post tax
Posted on 7/8/20 at 11:32 am to jlovel7
What is your current tax rate
As mentioned, I do Roth IRA, HSA, and then TRAD 401k. Mix is good. Diversity is all the rage these days ;)
As mentioned, I do Roth IRA, HSA, and then TRAD 401k. Mix is good. Diversity is all the rage these days ;)
This post was edited on 7/8/20 at 11:34 am
Posted on 7/8/20 at 12:05 pm to jlovel7
Do you ever expect to exceed the income limits for a Roth IRA?
If so, I would highly suggest using the Roth 401k.
Even if not, or unsure, consider this:
Your employer match will be pre-tax dollars. So even if you use the Roth 401k option, you will still have both pre-tax and post-tax dollars.
If so, I would highly suggest using the Roth 401k.
Even if not, or unsure, consider this:
Your employer match will be pre-tax dollars. So even if you use the Roth 401k option, you will still have both pre-tax and post-tax dollars.
Posted on 7/8/20 at 12:28 pm to jlovel7
No one knows the correct answer unless you know what tax rates will be when you retire. Even if you knew future tax rates, it is complicated by how much you withdraw each year which can vary depending on needs etc.
Imho, I think a traditional 401k is better for most people. You get a tax deduction now AND your investments grow tax free (this is way overlooked).
Also you could take the tax savings and invest that too which would help minimize any difference with Roth 401k.
Most people will need less income when they retire (no mortgage, have medicare, not supporting kids etc). I think it's a better bet to be at lower/same tax rate than higher most years in retirement.
Imho, I think a traditional 401k is better for most people. You get a tax deduction now AND your investments grow tax free (this is way overlooked).
Also you could take the tax savings and invest that too which would help minimize any difference with Roth 401k.
Most people will need less income when they retire (no mortgage, have medicare, not supporting kids etc). I think it's a better bet to be at lower/same tax rate than higher most years in retirement.
Posted on 7/8/20 at 12:42 pm to jlovel7
It is important to understand what your current marginal tax rate and understand marginal tax brackets in general.
One important thing to realize is that if you are currently in the 22% or 24% tax bracket, every dollar towards pre-tax contributions reduces income in that (22% or 24%) bucket. In the future (assuming rates stay the same) the first $40K ($80K if married) pulled (or converted to Roth) from a pre-tax account will be at the 12% rate. I would look into roth conversion ladders that help go into these specifics. This is if you are pulling/converting from your pre-tax 401k without any other social security, pension, or other income. Of course every situation is different and needs a thorough review.
I am a fan of diversifying so I would definitely encourage both pre-tax savings and roth savings. I also love the flexibility to pull out contributions of a roth IRA in the future if needed (although the goal is to leave until retirement). You probably won't be doing this right away but I would look to see if your plan has all of the necessary instruments to complete a mega-backdoor roth IRA (something to consider down the road).
One important thing to realize is that if you are currently in the 22% or 24% tax bracket, every dollar towards pre-tax contributions reduces income in that (22% or 24%) bucket. In the future (assuming rates stay the same) the first $40K ($80K if married) pulled (or converted to Roth) from a pre-tax account will be at the 12% rate. I would look into roth conversion ladders that help go into these specifics. This is if you are pulling/converting from your pre-tax 401k without any other social security, pension, or other income. Of course every situation is different and needs a thorough review.
I am a fan of diversifying so I would definitely encourage both pre-tax savings and roth savings. I also love the flexibility to pull out contributions of a roth IRA in the future if needed (although the goal is to leave until retirement). You probably won't be doing this right away but I would look to see if your plan has all of the necessary instruments to complete a mega-backdoor roth IRA (something to consider down the road).
Posted on 7/8/20 at 12:53 pm to bod312
im in the boat with others, mix it.
I didn't have a roth 401 for years and now that option is available I'm plugging in more into ROTH401k to balance some.
I didn't have a roth 401 for years and now that option is available I'm plugging in more into ROTH401k to balance some.
Posted on 7/8/20 at 3:44 pm to FMtTXtiger
I max out my companies matching on my 401, and usually max out on the Roth.
I'm surprised the powers that be ever let the Roth become a reality for us.
I'm surprised the powers that be ever let the Roth become a reality for us.
Posted on 7/8/20 at 3:51 pm to Wraytex
As you cannot predict the future tax rate, I like paying taxes now and having my future money be tax free. Maximize your available tax free investments, as your finances allow.
The farmer would rather pay taxes on the seeds he plants vs the value of the crop once harvested.
The farmer would rather pay taxes on the seeds he plants vs the value of the crop once harvested.
Posted on 7/8/20 at 3:53 pm to LSUisBetterthanU
quote:
As you cannot predict the future tax rate, I like paying taxes now and having my future money be tax free.
Until they start taxing that too.
Posted on 7/8/20 at 4:02 pm to LSUisBetterthanU
quote:
The farmer would rather pay taxes on the seeds he plants vs the value of the crop once harvested.
Not any farmer I know. If you end up plowing a crop under you paid taxes on seed for no reason.
Posted on 7/8/20 at 9:55 pm to jlovel7
$1000 grows to over $17000 at 10% annual return over 30 yrs. You are either taxed on the 1000 up front (roth) or the 17000 when you pull it out (traditional). I don’t care what the rate is, I’d rather pay taxes on the smaller value.
Gross oversimplification granted, but it’s just food for thought.
Gross oversimplification granted, but it’s just food for thought.
Posted on 7/8/20 at 10:05 pm to jlovel7
No one knows what will happen in the future with taxes or their financial situation. I’ve always preferred to take the tax break now and max out the traditional 401k rather than a Roth 401k.
Posted on 7/8/20 at 10:08 pm to BayouWrangler
I think you raise a decent point. Your time until withdrawal should heavily affect your preference. If you you are a few years away from retirement more often you might do better with the deduction. If you are a decade or more from retirement you often benefit by paying taxes up front - especially at a time like right now when tax rates are low.
Your income and savings rates also play big roles in the decision. If you are a reliable saver or high income earner you will probably benefit by making more of your investments roth. But if you won't have a big nest egg just take every tax break possible to increase possible savings because your taxes at withdrawal won't be as high.
Your income and savings rates also play big roles in the decision. If you are a reliable saver or high income earner you will probably benefit by making more of your investments roth. But if you won't have a big nest egg just take every tax break possible to increase possible savings because your taxes at withdrawal won't be as high.
Posted on 7/8/20 at 10:17 pm to jlovel7
Yes, do the Roth 401k. Every plan I have seen that offers the Roth version matches the Roth just like they do the traditional. Make sure your employer matches both the same.
Also, for those on the split mindset, employer matches have to go to traditional. Therefore, you will already have some portion going to traditional.
Finally, when making the decision also keep in mind that the current rules do NOT require a minimum distribution for Roth plans. They do for traditional. So, with a Roth you will only have to take the money out that you need. With traditional, you will have a minimum amount you are required to take out, after 70 1/2, regardless of your needs
Also, for those on the split mindset, employer matches have to go to traditional. Therefore, you will already have some portion going to traditional.
Finally, when making the decision also keep in mind that the current rules do NOT require a minimum distribution for Roth plans. They do for traditional. So, with a Roth you will only have to take the money out that you need. With traditional, you will have a minimum amount you are required to take out, after 70 1/2, regardless of your needs
Posted on 7/8/20 at 10:28 pm to BayouWrangler
quote:in your example, if you have $1000 pretax, you would only have say $750 or so post tax to invest in a roth vs $1000 in a traditional.
1000 grows to over $17000 at 10% annual return over 30 yrs. You are either taxed on the 1000 up front (roth) or the 17000 when you pull it out (traditional). I don’t care what the rate is, I’d rather pay taxes on the smaller value.
This post was edited on 7/8/20 at 10:31 pm
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