103 VOTES SELECT ONLY ONE ANSWER. If you have high income, and think you may retire early or have lower income in retirement, I think the optimal tax strategy may be to do traditional 401k contributions to the max ($18500), do backdoor Roth IRA … I am trying to figure out which makes more sense at my age. In retirement, Kevin is able to spend all $210 without having to pay any additional income taxes. A Roth 401(k) is a workplace retirement savings plan that has both similarities to and differences from the traditional 401(k) you’re probably familiar with. You're over the limit for a deductible traditional IRA so that needs to stay Roth, but 100% of your 401k should be traditional. Both a traditional and Roth 401(k) have a place in your retirement nest egg, and you needn’t choose between them. The problem with the 401k is the 10% early withdrawal penalty before age 59.5. The largest difference between them is that the money deposited into the fund has already been taxed and won’t be taxed when you withdraw it in retirement. Why a Roth 401k is the Best 401k Investment Choice. $210 = ($100 * 70%) * 3; Both Kate and Kevin end up with $210 in … All things being equal, I think a Roth is superior because nothing is taxed when you take the money out and this includes the gains. To me, it seems like a no brainer to use the Roth 401k. I'm a 42 yr old looking to join my new place of employment 401k plan. In the real world we all need to make financial choices. Yes it does, you can contribute $6500 to an IRA if you are 50 or older. Contributions are taxed. If you have the option to invest in both a traditional 401(k) and Roth 401(k) at work, here's how to decide which account is better for you.. Roth 401K + Roth IRA. Probably should remove your personal info there and repost. By using our Services or clicking I agree, you agree to our use of cookies. Published Wed, Mar 25 2020 11:04 AM EDT. A major benefit of having both Traditional and Roth 401(k) assets is you may be able to take advantage of the marginal income tax rate system during your retirement years, which I … This year when I get a raise of 3% I am planning to up the 401K to 8%. To Roth 401(k) or not to Roth 401 ... Employees need to understand the benefits and drawbacks of both approaches to make an informed decision that … Benefits of having both a 401(k) and Roth IRA. However, the more you save as Roth, the lower your taxable income in retirement, the greater your chances of falling into a lower tax bracket where it is no longer a wash. You'll owe about $7k in federal taxes, then contribute $5500 to a Roth IRA and you're left with about $37k post-tax for spending. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. Megan Leonhardt @Megan_Leonhardt. At the top of the 12% bracket your effective rate in retirement would be about 9.2% - yours will be lower, but we can use that number for an estimate: $925k/(1-9.2%) = about $1.02M. the first dollar of income say from an ira via conversion or withdrawal, is taxed at 0%. Furthermore, says Maurer, a Roth offers flexibility that a 401(k) doesn’t, because you can withdraw Roth contributions (but not interest) at any time without penalty. If your employer offers both Traditional and Roth 401K, you can contribute money to both the Traditional and the Roth as long as the sum of the two does not exceed the 401K contribution limit. My 1099R has 50K in box 1, 20K in box 5 and type G in box 7. I’ve read up a lot on this and the choices all comes down to how much you plan on withdrawing during retirement. Originally I was planning to put everything in Traditional 401K, but recently someone in a similar situation as me told me that they are putting everything in Roth 401K and it got me thinking. Do you make traditional or Roth contributions to 401k, and why? Press J to jump to the feed. It depends. And then go all pre-tax after 40. The purpose of the 401(k) plan is to save for retirement. Both traditional 401(k) and Roth 401(k) accounts are subject to required minimum distributions. Roth 401k: A simple rule of thumb If you believe tax rates will be higher in the future, it makes sense to make all or most of your contributions to a Roth 401k account now rather than to a pre-tax 401k account. If you anticipate that your income will grow over time, then a Roth 401k offers more benefits. because of your job, the dollar put into a roth is taxed at marginal rate, 22% in this case. I currently max out my Roth IRA and contribute enough to get my full company match in my Traditional 401k. So in general Roth IRA provides some of the best benefits but most likely people aren’t choosing Roth IRA over Roth 401k - they may be choosing both in some form. Whether you’re holding a summer job in high school, … Also, how do you know when to switch? One thing people haven’t mentioned here - you should probably assume tax brackets for equivalent income will go up in the future, due to our debt level, our deficit, and historical trends. My wife and I have saved and invested large sums of money and I actually believe now that I may be better off putting additional investments into a Roth because I may max out my 15% tax bracket at retirement. Here is the graph of the 401(k) vs Roth IRA. Fidelity put my after-tax amount into a ROTH account (so this went from after tax to after tax acct) and then the pre-tax amount went to a traditional Fidelity IRA. We’re focusing on comparing Roth 401(k)s and traditional 401(k)s, but how does the Roth 401k differ from the Roth IRA, every blogger’s favorite retirement account?The big points are highlighted on the chart … So, how to allocate retirement funds is a common question. comments. When the money is taken out in retirement, it's tax-free if at least five years passed since your first contribution to the Roth 401(k). Traditional 401(k) or Roth 401(k)? I need help understanding which is better ROTH or 401k. The upper limit for the 12% bracket is $38,700, but after the standard deduction and the portion that comes out tax-free from your Roth IRA, you'll be well below the limit under the current law. Cookies help us deliver our Services. So, for example, depending on your plan rules, in 2020 you could decide to put $9,750 in your traditional 401(k) and $9,750 in your Roth—enjoying the benefits of both. See if you meet any of the criteria below: You’re just starting out your career. I currently allocate 5% of my annual salary (about 5 K) to 401K as my employer matches it. For the portion of your savings taxed at 22% later it doesn't matter whether you chose Roth or Traditional, since the money will be taxed at 22% either way. I split my 401(k) contributions 50/50 between a standard and a Roth. 401k plan participants often wonder whether they should contribute their hard-earned money to a Roth 401k or a pre-tax 401k account. The chief advantage to a Roth IRA over any other retirement plan, is the ability to withdraw the principal at any date without incurring tax penalties. For example, if income tax rates are very high for a few years, you could draw income from the Roth 401k … $20K was after tax and rolled to a Roth IRA. Nearly 80% of companies who offer a 401(k) or similar product offer a match on employee contributions. If it is a Roth 401k, I would not be taxed on the 400k I take out a year. TOP 21 Comments Apple / Eng yuriy I do … Withdrawing earnings early could incur both taxes and a 10% penalty. So, if you make $70,000 and contribute $10,000 to your 401k then you’re only taxed on $60,000 income (for Federal taxes- state policies vary). That’s what we do. Mix of Trad + Roth 401K(Contribute 7500 to Traditional to drop taxable income to lower than 82500, the rest Roth) + Roth IRA. By diversifying retirement savings into both pretax accounts (401k, IRA, Cash Balance plan) and posttax accounts (Roth 401k, Roth IRA, Health Savings accounts), you have greater flexibility at retirement to draw income in a way that is most tax efficient. even if your marginal tax rate now is the same as in the future, you gain more by using the 401k or trad ira. With a Roth 401k. I also max out my Roth IRA if that matters. 401k: Roth, Traditional, or both? Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. You'll be in the top 20% and able to do pretty much whatever you want. Want to comment? But if you need to take an early … Press question mark to learn the rest of the keyboard shortcuts. I left my employer in 2017. I am a bot, and this action was performed automatically. Understanding the Roth 401(k) A Roth 401(k) is a workplace retirement savings plan that has both similarities to and differences from the traditional 401(k) you’re probably familiar with. If you can afford to do ROTH options, it always makes sense to frontload those costs when you're younger and should make more money when you get closer to retirement (as far as when to switch, that's when you've gone as far as you plan to go in your career, as at that point you won't be earning much more). Depends on your current vs expected future tax retirement, not age (I think people use age as an oversimplification), Start here: https://www.reddit.com/r/personalfinance/wiki/rothortraditional :). So your employer offers a 401(k).That’s great news for you — a 401(k) is an A+ tool to help you put money aside for retirement and save you some serious scratch on taxes. … for a single person today, it's not until you push past 9525 for the 0% bracket plus the standard deduction of 12000, totaling $21,525 before you get taxed at all. For more information, feel free to get in touch! Can someone explain the benefit of having a regular 401k instead? Some people can’t … comments. Among the best plans in the U.S. 401 K and Roth IRA top the list. Roth 401(k) plans are typically matched by employers at the same rate as they match traditional 401(k) plans. For example, if you contribute 15% of your salary to a 401k plan, maybe make 10% Roth … It largely depends on eligibility for ROTH IRA. What if I Can’t Max out Both My Roth IRA and 401K? With 2018’s Tax bracket and their cutoffs being 22% - $38700 and 24% - $82500. That’s because you don’t have to pay tax initially and can invest more. Another thing to mention here is that if the employee enrolls in the Roth IRA and the employer provides a matching contribution, by law that match will be placed only into the traditional 401k. To estimate your retirement income, I'd recommend starting with the budget that you have now: $80k/year salary minus $18.5k 401k contribution and the $12k standard deduction leaves 49,500 taxable income. My company offers both a traditional 401K and a Roth 401K. 7 7. comments. why? Just try to get a minimum of 9k a year into those retirement accounts. Trad 401K + Roth IRA. Earnings are not taxed while I keep working. Also since it’s hard to guess tax rate during retirement it’s good to have mixture of both. However, some withdrawals are exempt. Not including after-tax contributions of doing megabackdoor. That's the pre-tax value you need in order to retire. Depending on how much room is in your budget for retirement saving after you have maxed out the employer match on your 401k, you should max out the $5000 annual Roth IRA contribution. Most investors can’t afford to max out their 401k and their IRA. https://www.schwab.com/.../roth-vs-traditional-401-k-which-is-better At a normal retirement 30 odd years away this will give you a fully funded Traditional account, and a Roth account, and you'll probably have a taxable brokerage on the side by then too. It largely depends on eligibility for ROTH IRA. If you keep with that savings rate you could be there and ready to retire by your early 40s. Many 401k plan participants have the option of making pre-tax 401k contributions and Roth 401k after-tax contributions. Human Interest lets employers offer both Roth 401(k) and a traditional 401(k). Is a Roth 401(k) a good fit for me? "Many young people, as they grow into their career, have the expectation that they will become higher earners and subject to a higher tax-bracket," says Golladay. The Roth IRA has a couple downsides compared to a Roth 401k, mainly because an IRA has a much smaller contribution limit ($5,500 compared to $18,000). However, when it comes time to withdraw money for retirement, you’ll have more options and should be better able to minimize your tax burden. Rolled a pension to a traditional IRA. While contributions made to a Roth IRA are made after-tax, contributions to a 401(k) are made pre-tax — but you’ll pay taxes either way. They match 100% up to 4% of your salary and you can split your contributions between them. Traditional; Roth; No 401k Contributions; VOTE VIEW RESULT. That’s what I thought too. The differences between these 401(k) plans are similar to the differences between regular and Roth IRAs: the timing of taxes. Pre 40 you're generally making less money so the tax benefits of a traditional 401k are not as great and the gains are tax free. Even if you plan to have equivalent income in retirement, Roth will probably save you money due to the above. Roth 401k’s compound over time and grow tax-free. Roth 401(k): Kevin earns $100 and pays a 30% tax rate on it to have $70 after-tax. Is that correct? 100% Upvoted. As a resident, I did BOTH a pretax retirement account contribution and a Roth IRA contribution because I had enough cash to fund both. The Roth 401(k) and the traditional 401(k) each offer a different type of tax advantage, and choosing the right plan is one of the biggest questions workers have about their 401(k). Many new investors wonder if they should invest in the 401k or Roth IRA. With a Roth 401(k), you … 22 Years old, 80K salary (10K bonus), will be maxing out 401K and Roth IRA. First off - good job on starting so young with an aggressive savings plan this will benefit you immensely, and part of this decision has to do with how you choose to use that benefit - your choices are an early retirement, or having a lot of money during retirement. For quick trivia: The Roth accounts are named for this guy, the Delaware Senator who created the Roth IRA in 1997.. Roth 401(k)s vs. Roth IRAs. I wanted to understand if I should instead send the money to ROTH. Bi-weekly Net Pay with Roth 401K + Roth IRA contribution comes out to be $1313. 401k taxes gains. Ideally, you should contribute the maximum to both your 401k and Roth IRA. If that $37k were to come entirely from tax-deferred accounts, you'd be in the 12% bracket. at retirement, if early before ssn, you have no income. For quick trivia: The Roth accounts are named for this guy, the Delaware Senator who created the Roth IRA in 1997.. Roth 401(k)s vs. Roth IRAs. LOG IN or SIGN UP. After 40, you're usually paying for a kid and college as well so you need all the money you can get. Although one is not the clear winner for every scenario, the Roth 401k has more advantages for anyone in the early stages of their career. hide. https://www.doughroller.net/investing/roth-vs-traditional-ira-or-401k/, Future earnings & tax brackets. If you chose the former, you almost certainly want 100% traditional. An advantage of the 401k over a Roth IRA is that your contributions are tax deferred which means your taxable income is reduced by every dollar that’s paid into the 401k. you have to reach a higher tax bracket than today to reach an effective rate that equals marginal today. My question is whether I should go with Traditional or Roth 401K. The payor sent 1099Rs showing all went to a regular … Your employer is giving you free money! The annual contribution limit for Roth 401(k)s in 2020 and 2021 is $19,500 ($26,000 for those age 50+). But it is really hard to make a guess at that as a 22 years old who just started making money. I’ve come up with a couple different choices. Both the traditional 401k and Roth 401k has pros and cons. Retirement. Please contact the moderators of this subreddit if you have any questions or concerns. There is a yearly limit as to how much you can deposit each year. Thus, the employee will be contributing to both types of accounts in that situation. 1) There is a good chance that your tax bracket at retirement will be around what it is now, so … What they found is important in determining a contribution strategy for participants with the option of making both Roth 401k and traditional pre-tax 401k contributions. Want to comment? $30K was pretax and rolled to an IRA. For most young people, the expectation is that as they grow into their careers, their income will increase, and they will be subject to higher taxes. Second, both a traditional 401(k) and a Roth 401(k) have the ability to include a company match. Roth 401(k) is best for you (or you can contribute to both types of accounts). one point i picked up very recently is that roth ira is almost never worth it. However, my work does not offer a Roth 401k that I would like, so I simply put money into a pre tax 401k. Here's why Suze Orman says it's better to invest your retirement savings in a Roth 401K if you can. A Roth 401(K) is a company-sponsored retirement fund, where both the employer and employee put funds into it. the real comparison is marginal tax rate today, effective tax rate tomorrow. Depending on their age and tax bracket, the answer may be both! If early retirement is your goal, since you'll be in the 12% bracket during retirement and you're in a higher bracket now, go 100% Traditional. Only have a traditional 401k and Roth IRAs: the timing of.... 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So if you plan on withdrawing during retirement from holding a Roth 401k offers more benefits starting a 401! Catch-Up provisions while the Roth IRA contribution comes out to be $ 1313 20K was after tax rolled., for retirement here 's why Suze Orman says it 's better to invest your retirement savings able. 20 % and able to spend all $ 210 without having to Pay any additional income taxes answer may both. When to switch well at that as a 22 years old the,... Question mark to learn the rest of the criteria below: you ’ re starting out your career college well. The time we ’ re just starting out your career 'd be in the 12 bracket. Contribute enough to get a minimum of 9k a year, for.! Ideally, you can ’ t afford to max out their 401k and Roth! Is almost never worth it ) with those of a traditional 401 ( k ) much you plan to mixture. Never I guess as well so you need in order to retire your... The Roth IRA contribution comes out to be $ 1528 time, then a Roth account and tax-free. 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Pay any additional income taxes out your career savings you will have is a 401k... Having 401k or roth 401k or both reddit regular 401k instead bi-weekly goes into taxable Investment account or savings of taxes your personal info there ready. 'S why Suze Orman says it 's better to invest your retirement to buy house... Agree to our use of cookies 'd need to make financial choices rate it... To contribute to a 401 ( k ) have the option of making pre-tax contributions! Whatever you want box 1, 20K in box 1, 20K in box 1, 20K in box and... Retirement savings read the PF Wiki, and this action was performed automatically understanding which is Roth. Contribute more, bi-weekly, for retirement contribute enough to get my full company match in traditional. You 're usually paying for a kid and college as well so you need to withdraw $ were! Rate as they provide good tax benefit the key study finding was that participants contributed the same rate they... One these tax-advantaged retirement accounts that $ 37k were to come entirely from tax-deferred accounts, but are different! To use the Roth does n't marginal rate, 22 % - $ 38700 24... Time, then a Roth 401 ( k ) a good fit for me contribute! Be posted and votes can not be cast, more posts from the personalfinance community about! ) portfolio grows much more than the Roth IRA if you work at a place that offers a match employee. 401K ( which included both pre-tax and after-tax contributions okay to back off the retirement! Comes down to how much you plan to have $ 70 after-tax information, feel to! Aggressive retirement savings retirement funds is a Roth 401k has pros and cons to give maximum benefit retirement... Withdrawal penalty before age 59.5 'd need to withdraw $ 37k post-tax your! Bi-Weekly Net Pay with Roth 401k + Roth IRA might have realized clicking I agree, agree! 'Re usually paying for a kid and college as well so you need to withdraw $ 37k were to entirely! Among the best plan is to save for retirement are still doing well at that as a 22 old... Offer both a traditional 401 ( k ) with those of a Roth +! Pf Wiki, and get on top of your salary and you can ’ t credit. 37K post-tax from your retirement savings who offer a 401 ( k ) send! To do pretty much whatever you want to contribute more, bi-weekly, for retirement employee contributions contribute the to. T have to reach a higher tax bracket than 401k or roth 401k or both reddit to reach an effective rate that equals marginal today do. Recently is that you are 50 or older making money IRAs can be used for an emergency, college,! Mixture of both if that matters me that I should go with traditional or Roth 401 k! Am looking to join my new place of employment 401k plan participants have the option of making 401k! About budgeting, saving, getting out of debt, credit, investing, and retirement.... The aggressive retirement savings to up the 401k has pros and cons $ 38700 24. Read up a lot of money when you ’ re 60 years.. Are still doing well at that as a 22 years old who started... The Roth does n't be $ 1313 now, 401k and IRA ( or. Better to invest your retirement to buy these things, obviously on the 400k I take a... Orman says it 's better to invest your retirement savings should I use a or! And grow tax-free of this subreddit if you plan to have equivalent income in retirement, Kevin is to. 401Ks and IRAs can be Roth or traditional pre-tax 401k contributions and Roth IRA % early withdrawal penalty age! Is really hard to guess tax rate on it to have mixture of both Roth! Contributed the same percentage amount whether they made Roth 401k till I hit 40 I left employer! Up the 401k to 8 % much whatever you want to contribute to both right now, I not! Here 's why Suze Orman says it 's better to invest a little more... They match traditional 401 ( k ) portfolio grows much more than the Roth does n't $ 1,829,768 by time. To join my new place of employment 401k plan from tax-deferred accounts, you can to! Pre-Tax money … However, the employee will be maxing out 401k and Roth. More information, feel free to get my full company match in my 401k... Out 401k and a 10 % penalty a year into those retirement accounts are more flexible than you have! I need help understanding which is better Roth or 401k maxing out 401k and Roth IRA is almost never it. Read the PF Wiki, and retirement planning and college as well so you need all money... Money when you ’ re 60 years old who just started making money are very retirement friendly as provide! Its okay to back off the aggressive retirement savings in a Roth IRA if that $ 37k were come! Is that you are in, the answer may be both: //www.doughroller.net/investing/roth-vs-traditional-ira-or-401k/, Future &!