Roth vs Traditional 401 (k) In a traditional 401 (k), employees make pre-tax contributions. Both the traditional 401k and Roth 401k has pros and cons. IRAS. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. I don't need the extra money right now which is why I have always been in Roth but that 32% tax bracket is making me rethink everything. But the “Traditional 401k vs. Roth 401k” question is a legitimate one, and one advisors are increasingly likely to deal with in those meetings. Contributing pretax can help lower your bracket though. So I originally thought it was a slam dunk to go Roth over Traditional but now I'm not so sure. If you rolled a traditional 401(k) into a Roth IRA, the clock starts ticking from the date those funds hit the Roth. Salary: $103k/year. First, I would focus on maximizing your contributions. The main difference between the Roth 401 (k) and the traditional is when the money is taxed. Roth 401(k) contributions are a relatively new type of 401(k) that allows you to invest money after taxes, and pay no taxes when funds are withdrawn later — for many investors, this is a more appealing option than a traditional 401(k). So I’m pretty sure there are no income limits to contributing to a Roth 401k like there are to a Roth IRA. Press J to jump to the feed. Makes sense. Since all company contributions are pre-tax, I am planning 50% Roth on my own contributions which would lead to a ~75/25 split between traditional/Roth as a hedge. The New Year’s Day tax deal (also known as the fiscal cliff legislation) made headlines in the retirement world because it included new rules to make it easier for employees to convert existing traditional 401(k) plans to Roth 401(k) plans. In a traditional 401 (k), you can start receiving distributions at age 59 1/2. A Roth IRA should also be part of your plan. My personal contribution is about equal for both the Roth IRA and the traditional 401k . Bi-weekly Net Pay with Roth 401K + Roth IRA contribution comes out to be $1313. 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. Press J to jump to the feed. SOCIAL SECURITY. I don’t think there is an absolute right or wrong answer because none of us can predict tax law changes 30 years out. In a traditional 401 (k) you make pre-tax contributions and pay taxes in retirement when you withdraw. I'm at $60k/year pre tax, and I need $24k a year to live on. (100% immediately vested baby, woohoo) I've seen a lot of conflicting advice out there on which account to focus on, and I've heard about the Roth conversion ladder. With a Roth 401(k), you put in money that’s already been taxed into your 401(k) and it’s never taxed again,” Clark says. Hi, everyone, I'm starting my first big boy job later this year and I'm torn between contributing to a roth or traditional 401k provided by my employer. Cookies help us deliver our Services. By using our Services or clicking I agree, you agree to our use of cookies. For those with less familiarity, a “traditional“ 401(k) is funded with pretax money while a Roth 401(k) is funded with post-tax money. Over the past six years, an increasing number of companies have begun to roll out Roth 401(k) options for their employees. This tool compares the hypothetical results of investing in a Traditional (pre-tax) and a Roth (after-tax) retirement plan. I had always believed a Roth 401K is a better option than traditional as I assumed tax rates would increase by the time I retire. If you still don’t know who this ‘Roth’ guy is, or what he does, choosing between the two can be a matter of random guess. “If you don’t do a Roth 401(k) at work, then you’re just putting in pre-tax dollars and everything your plan builds to over the years is all subject to tax down the road.” Extra $200 bi-weekly goes into taxable investment account or savings. My earning situation has changed drastically over the last two years and I'm currently looking at earning ~115k this year (before taxes.) I’d just prefer to pay taxes now, get it over with, and see the balance grow knowing none of it will be taxed. If so, then do $19.5K traditional 401k and then after/tax contributions that get converted to Roth (up to $56K max total incl. Roth 401(k) plans are created with after-tax funds, while traditional 401(k) plans are funded through pre-tax dollars. Thus, all my retirement has been in Roth. While this reduces your taxable income now, you'll pay regular income tax … I don't think there is a "correct" response per se. If you anticipate a lower rate in the future, then Traditional 401k is better. Withdrawing earnings early could incur both taxes and a 10% penalty. Must-Know Rules for Converting Your 401(k) to a Roth IRA. It's certainly one question I've struggled with myself and one that I've seen the gamut of responses citing pros/cons for either side. It’s worth recognizing that many participants are hearing from the likes of Ramsey and Orman that the Roth 401k is the one they recommend, as have many top 401k advisors in the proper circumstances. But there’s no perfect answer because no one has any idea what taxes will be in 12 years. Is a Traditional (pre-tax) or a Roth (after-tax) retirement account right for you? Do you make traditional or Roth contributions to 401k, and why? Another slight difference between a Roth 401 (k) and a traditional 401 (k) is your access to the money. Traditional 401k. I read the traditional vs roth wiki and had decided on contributing to a Roth 401K. Roth vs Traditional 401(k) Calculator. Some deets: Age: 27 Income: $85k 401k contribution: 15% 401k balance: $20k. Press question mark to learn the rest of the keyboard shortcuts. Can anyone help clarify the advantages of a 401k vs a Roth 401k? 6% of your income doesn’t hit the 401k limit of $19,500/yr employee contribution. Join our community, read the PF Wiki, and get on top of your finances! Since you already have so much going into Traditional though, you could consider doing some Roth per your plan, just maybe not the majority. A growing number of employers are beginning to offer not only a Traditional 401K, but now a Roth 401K as well. This is a place for people who are or want to become Financially Independent (FI), which means not having to work for money. Mix of Trad + Roth 401K(Contribute 7500 to Traditional to drop taxable income to lower than 82500, the rest Roth) + Roth IRA. Currently am putting in the 6% which is in a traditional 401k and also contributing to a Roth IRA. employer match and $19.5K 401k) Dec 2, 2020 0 2 Nutanix Any money you put in a traditional 401(k) goes straight from your paycheck before taxes are applied, so it reduces your taxable 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. Hi there. If you're in the US and move from a state with high taxes to one with low taxes or none at all, then the savings from avoiding state taxes on that income would be pretty significant even if taxes went up overall, More posts from the personalfinance community. By choosing a Roth 401(k) and paying your taxes upfront, the savings in your account grow tax-free, and once you have held the account for at least five years and are past age 59-½, your withdrawals are also tax-free. Roth Vs. My company contributes 13% of my income to my retirement account (50% match on 6% of income + 10% profit sharing on all income). Not including after-tax contributions of doing megabackdoor 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.. Thanks! If you aren’t able to increase, I’d suggest switching to traditional 401k so you’re saving more absolute dollars and still bringing home the same amount. I had always believed a Roth 401K is a better option than traditional as I assumed tax rates would increase by the time I retire. Even if tax rates go up, they would have to reach levels without recent precedent in order to give you a higher tax rate in retirement than you’re paying now. Currently I'm contributing 10% of my post-tax income into my Roth 401k. If your employer offers both traditional and Roth options, ... 401K. I'm married and 27. If you anticipate that your income will grow over time, then a Roth 401k offers more benefits. How much do you make and what’s your savings rate? A Roth 401k will likely make you richer than a traditional 401k and is one of the best investment decisions you can make as a younger investor in your 20’s or 30’s because of the tax-free withdrawal advantages given an uncertain future. Roth 401K + Roth IRA. However, after reading some analysis, it seems that isn't always the case especially if I have business or mortgage expenses that can write off significant taxes in the future. Both traditional 401(k) and Roth 401(k) accounts are subject to required minimum distributions. At its core, FI/RE is about maximizing your savings rate (through less spending and/or higher income) to achieve FI and have the freedom to RE as fast as possible. I recently became eligible for my company's 401k and I'm able to invest in traditional or Roth. Generally the higher your income and savings rate the more sense a traditional 401k makes. Age: 24. Press question mark to learn the rest of the keyboard shortcuts, 32/34 SI1K | SR: lol nanny | GI.GO% BroFI. Also, Traditional IRAs can be converted to Roth IRAs at strategic times (for instance, right after a big market decline) that can result in lower conversion taxes. The Roth IRA gives Sam 2 advantages over the other 2 investors: First, the Roth IRA captured all of Sam's tax savings—so unlike Brian, he's safe from the temptation to spend it before retirement. Sorry if I didn't make it clear, my company's match is 50% on 6% of my income but I have been putting in the max every year albeit in Roth. Am I overthinking this or should I actually have even more in traditional? 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. How to Convert a 401(k) to a Roth 401(k) 401K. 401K ESTATE PLANNING. However, after reading some analysis, it seems that isn't always the case especially if I have business or mortgage expenses that can write off significant taxes in the future. Moderate COL area (larger midwestern city) - 1 bedroom apartment close to work will be about $1200/month Moderators remove posts from feeds for a variety of reasons, including keeping communities safe, civil, and true to their purpose. Why a Roth 401k is the Best 401k Investment Choice Roth 401k’s compound over time and grow tax-free. I’d pick Roth. “Doing a Roth 401(k) is vastly superior to doing a traditional 401(k). Sorry, this post has been removed by the moderators of r/financialindependence. Go with your gut, you may be wrong, but don’t stress over it. Another perspective I like to add when making this decision. With a Roth 401 (k), you can start withdrawing money without penalty at the same age, but you also must have held the account for … Trad 401K + Roth IRA. However, I recently found out that all employer matches go into a traditional 401K by law, and I'm wondering if its financially worth it to be putting money into a Roth 401K instead of a traditional. Thus, all my retirement has been in Roth. If you're looking for bespoke advice based on your personal financial situation, the best place for it is the weekly "Help Me Fire" thread. His Roth IRA, like Sara and Brian's traditional IRAs, grows to $38,061, but unlike them he doesn't have to pay any tax when he withdraws the money. Please try there. More posts from the financialindependence community, Continue browsing in r/financialindependence. I am 30 and my income is 160K + ~30-40K bonus annually. 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