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re: Roth or 401k for young worker?
Posted on 8/23/25 at 9:48 pm to PANTHER
Posted on 8/23/25 at 9:48 pm to PANTHER
What I’ve always heard (and what I’ve followed and is already mentioned) is to fund your 401k to get the company match, then max out your Roth for the year and then fund the remainder of your 401k.
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Posted on 8/23/25 at 11:55 pm to PANTHER
Assuming her 401k has a Roth then she should do that first. As much as she can. At least to getting the full match etc.. But higher if possible.
If she maxes that out she should do a Roth ira. If not eligible due to in income then a backdoor Roth.
If she still has extra room to save and 401k plan allows it she would then do a mega back door Roth.
If she maxes that out she should do a Roth ira. If not eligible due to in income then a backdoor Roth.
If she still has extra room to save and 401k plan allows it she would then do a mega back door Roth.
Posted on 8/24/25 at 8:21 am to PANTHER
Roth after getting any 401k company match.
This post was edited on 8/24/25 at 8:23 am
Posted on 8/24/25 at 9:10 am to PANTHER
For those too young to know what they want in retirement, just do 50/50 but remember that usually to get a full 401k match, that money has to be on the traditional side and they dont match money on the Roth side.
Posted on 8/24/25 at 9:37 am to notsince98
quote:
For those too young to know what they want in retirement, just do 50/50 but remember that usually to get a full 401k match, that money has to be on the traditional side and they dont match money on the Roth side.
Not all plans are the same. Some employers match Roth 401K contributions as well.
It would be beneficial to know what her 401k options are, but as others have said, max out the match, and contribute to 401k after, if a Roth 401k isn’t available.
This post was edited on 8/24/25 at 9:40 am
Posted on 8/24/25 at 11:41 am to KWL85
quote:
Personally, this is a mistake I made and would handle differently if I had a do-over. I prioritized the current year deductions too much.
I also made this mistake but it's for a 'good problem'...I grew my income more rapidly than I expected and very quickly phased out on IRA contributions (didn't really understand Roth conversions at the time)...did Trad IRA contributions but didn't roll over and would now have to pay high tax rates to do the conversion.
I should have done more Roth 401K in the earlier years but I also appreciated the tax savings to free up the cash. It's all hindsight now but could have been better optimized.
All things considered I have zero issues with where we have landed financially. I can likely retire before I am 45 with an ample retirement lifestyle if things go as planned.
Posted on 8/24/25 at 11:43 am to Craft
quote:
I just do half to Roth 401k and half to the pre tax 401k because I’m not smart enough to figure it out. Company matches 50% up to the max so I max it that way.
In the 22% or 24% bracket...this isn't a bad option. Gives some optionality for tax strategy later in life.
Posted on 8/24/25 at 11:59 am to IbalLSUfaninVA
quote:
Roth until she gets in the 24% bracket. Most likely this will be the lowest tax bracket she will ever be in.
Personally I think this is a silly way to look at it. Predicting tax rates and brackets at retirement is the least known variable when you reach retirement age, and your situation can change year to year. Having both types allows for the most flexibility in retirement, all else equal, I say contribute to both early and often.
The biggest thing for a young person is compounding returns. Pretax contributions have more basis to compound. Most illustrations ignore the fact that you do have to pay tax on the Roth contribution, because they will use the same amount actually contributed in both forms. That is, looking at them side by side they will use the same contribution amount every year, and compare the tax savings before and after retirement. In reality, in order to contribute the same to the Roth option, you effectively have to contribute more than is invested because some of the contribution must be paid in tax. For a young person that has a finite amount of money to contribute, you effectively contribute less - for example, if you can afford to save $5k per year at the 20% tax bracket, the traditional puts all the cash to work while the Roth puts $4k. Do this every year and the traditional will be worth way more than 20% initially contributed.
That said, the Roth option has obvious benefits that shouldn’t be ignored, and the window to get funds into an account is somewhat narrow. There is plenty of merit to maxing the Roth early. The main thing is to save early.
My suggestion is to 1. Get the max 401k match, regardless of Roth/traditional structures 2. Develop sufficient savings in taxable accounts 3. Contribute to both traditional and Roth accounts throughout career
Posted on 8/25/25 at 8:24 am to SG_Geaux
IMO, Roth 401k is the option. The company’s match will go to the traditional since you’re not paying taxes on it now.
For those giving advice on Roth or traditional simply based on tax bracket are not looking at the entire picture. Some considerations to also factor in are Roth does not have RMDs. When you collect SSI, any Roth withdrawals do not factor into your total income which could impact how much of your SS gets taxed.
Basically, anything that you may need to qualify for as you’re older that has income limits, the Roth withdrawals will not impact. Where as, the withdrawals from pre-tax accounts could impact those
For those giving advice on Roth or traditional simply based on tax bracket are not looking at the entire picture. Some considerations to also factor in are Roth does not have RMDs. When you collect SSI, any Roth withdrawals do not factor into your total income which could impact how much of your SS gets taxed.
Basically, anything that you may need to qualify for as you’re older that has income limits, the Roth withdrawals will not impact. Where as, the withdrawals from pre-tax accounts could impact those
Posted on 8/25/25 at 8:50 am to Weekend Warrior79
First off just want to make sure OP understands "ROTH" is not an account type, it's a tax treatment. ROTH vs. Traditional is tax treatment vs. IRA/401k/403b, etc are retirement account types. There's ROTH (after tax) 401k and traditional (pre-tax) 401k contributions you can make. Likewise there is a Traditional IRA and ROTH IRA contributions that can be made. Gotta make the distinction there.
Personally my opinion is if someone is in the 22-24% bracket, I would almost always do roth in 401k and IRA (or traditional IRA then convert to ROTH if over income limit). These are pretty historically low brackets for someone with these income levels. We are in the 24% bracket and do ROTH 401k contributions, companies match what they do pre-tax (only way they can) so we still technically have both buckets building in our 401k (pre-tax and post tax). We max out traditional IRAs for the year and convert to ROTH once we're done maxing those out each year now. I also max out an HSA for the family each year. So certainly a much larger roth bucket than traditional, but again, I believe the rates we have now are really really good and just rather take the front-end hit and have a bunch of money the govt cant tell me when to take it out in the future (RMDs for traditional + Tax on that).
I also dont really recommend the "max both out" strategy as I believe in investing in after-tax brokerage some too (HSA falls into this if they have one as well). Needs to be a healthy balance between savings, retirement investments and brokerage investment IMO. A lot of people go the route of throwing everything into the 401k/IRA/HSA they can until all are maxed out and only have some savings on the side and little to no after tax brokerage investment. This can create tough cash flow problems potentially when you have larger purchases to make IMO like cars, homes, expensive vacations and other large purchases. Wife and I could easily max out our 401k's on top of the IRAs and HSA we have, but choose to only do about half into the 401k we could and most of that leftover goes into savings/brokerage investments so we have a healthy amount of money we can access when we need to whenever. Some folks sometimes will just have some emergency savings, no brokerage investment then run into never wanting to use the "emergency" savings when they have to buy a big purchase and end up with more debt, higher interest debt, or a higher payment than they wanted as a result. In the end we made that decision due to try and make "Everyday" life easier on top of just running our retirement numbers and finding out there was zero reason to max out our 401k's every year with how much would be in our total retirement by doing so once we did retire. I.E. if we just maxed them all out, we would go WELL beyond our retirement end goal and just had no need to do that.
Personally my opinion is if someone is in the 22-24% bracket, I would almost always do roth in 401k and IRA (or traditional IRA then convert to ROTH if over income limit). These are pretty historically low brackets for someone with these income levels. We are in the 24% bracket and do ROTH 401k contributions, companies match what they do pre-tax (only way they can) so we still technically have both buckets building in our 401k (pre-tax and post tax). We max out traditional IRAs for the year and convert to ROTH once we're done maxing those out each year now. I also max out an HSA for the family each year. So certainly a much larger roth bucket than traditional, but again, I believe the rates we have now are really really good and just rather take the front-end hit and have a bunch of money the govt cant tell me when to take it out in the future (RMDs for traditional + Tax on that).
I also dont really recommend the "max both out" strategy as I believe in investing in after-tax brokerage some too (HSA falls into this if they have one as well). Needs to be a healthy balance between savings, retirement investments and brokerage investment IMO. A lot of people go the route of throwing everything into the 401k/IRA/HSA they can until all are maxed out and only have some savings on the side and little to no after tax brokerage investment. This can create tough cash flow problems potentially when you have larger purchases to make IMO like cars, homes, expensive vacations and other large purchases. Wife and I could easily max out our 401k's on top of the IRAs and HSA we have, but choose to only do about half into the 401k we could and most of that leftover goes into savings/brokerage investments so we have a healthy amount of money we can access when we need to whenever. Some folks sometimes will just have some emergency savings, no brokerage investment then run into never wanting to use the "emergency" savings when they have to buy a big purchase and end up with more debt, higher interest debt, or a higher payment than they wanted as a result. In the end we made that decision due to try and make "Everyday" life easier on top of just running our retirement numbers and finding out there was zero reason to max out our 401k's every year with how much would be in our total retirement by doing so once we did retire. I.E. if we just maxed them all out, we would go WELL beyond our retirement end goal and just had no need to do that.
This post was edited on 8/25/25 at 8:55 am
Posted on 8/25/25 at 4:56 pm to IbalLSUfaninVA
quote:
Roth until she gets in the 24% bracket. Most likely this will be the lowest tax bracket she will ever be in.
Employer match?
Posted on 8/25/25 at 9:00 pm to PANTHER
Does she have access to a Roth 401k? That's what I contribute to
Posted on 8/26/25 at 5:33 pm to WM88
Agreed. My company offers Roth options. Before they did I had maxed my match from the company, so I can’t say with 100% certainty that if you do just the Roth that they would match. I would think they would.
Posted on 8/27/25 at 6:23 am to KWL85
quote:
Agree, except that I would prioritize Roth past the 24% bracket.
Posted on 8/27/25 at 10:08 am to OceanMan
Good post. An aspect to consider is the rate of growth from your investments. The tax free growth in a Roth can be significant if the rate of return is high. The higher rates can produce tax savings greater than the basis difference you mention.
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