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I read the traditional vs roth wiki and had decided on contributing to a Roth 401K. 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. 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are a relatively new type of 401(k) that allows you to invest money after taxes, and pay no taxes when funds are withdrawn later — for many investors, this is a more appealing option than a traditional 401(k). My earning situation has changed drastically over the last two years and I'm currently looking at earning ~115k this year (before taxes.) If a higher rate, then Roth 401k. 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. Press J to jump to the feed. I'm married and 27. My company contributes 13% of my income to my retirement account (50% match on 6% of income + 10% profit sharing on all income). Roth Vs. Press question mark to learn the rest of the keyboard shortcuts. I am 30 and my income is 160K + ~30-40K bonus annually. 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. Press question mark to learn the rest of the keyboard shortcuts, 32/34 SI1K | SR: lol nanny | GI.GO% BroFI. A growing number of employers are beginning to offer not only a Traditional 401K, but now a Roth 401K as well. 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. 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. How to Convert a 401(k) to a Roth 401(k) 401K. Traditional 401k. 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. A Roth IRA should also be part of your plan. 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. If you anticipate a lower rate in the future, then Traditional 401k is better. employer match and $19.5K 401k) Dec 2, 2020 0 2 Nutanix Thus, all my retirement has been in Roth. The main difference between the Roth 401 (k) and the traditional is when the money is taxed. Thus, all my retirement has been in Roth. In a traditional 401 (k), you can start receiving distributions at age 59 1/2. If your employer offers both traditional and Roth options, ... 401K. By using our Services or clicking I agree, you agree to our use of cookies. 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. https://www.schwab.com/.../roth-vs-traditional-401-k-which-is-better I’d pick Roth. Withdrawing earnings early could incur both taxes and a 10% penalty. 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. Extra $200 bi-weekly goes into taxable investment account or savings. Is a Traditional (pre-tax) or a Roth (after-tax) retirement account right for you? Roth vs Traditional 401(k) Calculator. 6% of your income doesn’t hit the 401k limit of $19,500/yr employee contribution. 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. More posts from the financialindependence community, Continue browsing in r/financialindependence. This tool compares the hypothetical results of investing in a Traditional (pre-tax) and a Roth (after-tax) retirement plan. 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. Currently am putting in the 6% which is in a traditional 401k and also contributing to a Roth IRA. Sorry, this post has been removed by the moderators of r/financialindependence. “Doing a Roth 401(k) is vastly superior to doing a traditional 401(k). 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. Join our community, read the PF Wiki, and get on top of your finances! 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. 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. First, I would focus on maximizing your contributions. Moderate COL area (larger midwestern city) - 1 bedroom apartment close to work will be about $1200/month Not including after-tax contributions of doing megabackdoor Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. Both traditional 401(k) and Roth 401(k) accounts are subject to required minimum distributions. Roth 401(k) plans are created with after-tax funds, while traditional 401(k) plans are funded through pre-tax dollars. 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. Press J to jump to the feed. Why a Roth 401k is the Best 401k Investment Choice Roth 401k’s compound over time and grow tax-free. Hi there. I don't think there is a "correct" response per se. 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. My personal contribution is about equal for both the Roth IRA and the traditional 401k . Since you already have so much going into Traditional though, you could consider doing some Roth per your plan, just maybe not the majority. Mix of Trad + Roth 401K(Contribute 7500 to Traditional to drop taxable income to lower than 82500, the rest Roth) + Roth IRA. If you rolled a traditional 401(k) into a Roth IRA, the clock starts ticking from the date those funds hit the Roth. I'm at $60k/year pre tax, and I need $24k a year to live on. Must-Know Rules for Converting Your 401(k) to a Roth IRA. 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. 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. 401K ESTATE PLANNING. “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.” IRAS. Both the traditional 401k and Roth 401k has pros and cons. 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.. While this reduces your taxable income now, you'll pay regular income tax … But the “Traditional 401k vs. Roth 401k” question is a legitimate one, and one advisors are increasingly likely to deal with in those meetings. I recently became eligible for my company's 401k and I'm able to invest in traditional or Roth. 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. 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. Makes sense. Financial Independence is closely related to the concept of Early Retirement/Retiring Early (RE) - quitting your job/career and pursuing other activities with your time. Moderators remove posts from feeds for a variety of reasons, including keeping communities safe, civil, and true to their purpose. Go with your gut, you may be wrong, but don’t stress over it. Trad 401K + Roth IRA. 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. Please try there. Another slight difference between a Roth 401 (k) and a traditional 401 (k) is your access to the money. Another perspective I like to add when making this decision. SOCIAL SECURITY. Generally the higher your income and savings rate the more sense a traditional 401k makes. 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. Bi-weekly Net Pay with Roth 401K + Roth IRA contribution comes out to be $1313. Contributing pretax can help lower your bracket though. Any money you put in a traditional 401(k) goes straight from your paycheck before taxes are applied, so it reduces your taxable income. This is a place for people who are or want to become Financially Independent (FI), which means not having to work for money. Am I overthinking this or should I actually have even more in traditional? 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 … (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. Do you make traditional or Roth contributions to 401k, and why? 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. Over the past six years, an increasing number of companies have begun to roll out Roth 401(k) options for their employees. Salary: $103k/year. Currently I'm contributing 10% of my post-tax income into my Roth 401k. In a traditional 401 (k) you make pre-tax contributions and pay taxes in retirement when you withdraw. Roth vs Traditional 401 (k) In a traditional 401 (k), employees make pre-tax contributions. 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. Thanks! So I originally thought it was a slam dunk to go Roth over Traditional but now I'm not so sure. How much do you make and what’s your savings rate? 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. Cookies help us deliver our Services. 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. So I’m pretty sure there are no income limits to contributing to a Roth 401k like there are to a Roth IRA. 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. Age: 24. I don’t think there is an absolute right or wrong answer because none of us can predict tax law changes 30 years out. But there’s no perfect answer because no one has any idea what taxes will be in 12 years. 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. Can anyone help clarify the advantages of a 401k vs a Roth 401k? Some deets: Age: 27 Income: $85k 401k contribution: 15% 401k balance: $20k. 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