Having an optimized investing strategy can mean extra tens of thousands of dollars *per year* in retirement—and I’m breaking down how you can get the most bang for your buck with the Traditional 401(k).
For the full deep-dive on the ultimate Traditional and Roth strategy, check out The Money with Katie Show podcast:
Here’s the spreadsheet we created to show the Traditional vs. Roth timelines and outcomes:
This show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin. Devin Emery is our Chief Content Officer. Our video editors are Christie Muldoon, Sebastian Vega, and Nichole Friedman. Additional fact-checking comes from Kate Brandt.
*Learn more about our sponsor, M1:
—
🍿WATCH NEXT:
How to Pay No Taxes in Retirement |
How to Prioritize Where You’re Investing |
Why Millennials Need to Rethink Retirement |
💸 GET THE 2024 MONEY WITH KATIE WEALTH PLANNER:
🤑 JOIN THE WAITLIST NOW TO RECEIVE A DISCOUNT ON THE 2024 WEALTH PLANNER:
💌 SIGN UP FOR MY WEEKLY FREE NEWSLETTER:
MY FREE ONLINE COURSES:
🌱 Personal Finance 101:
📈 Investing 101:
☕ Early Retirement 101:
✈️ Travel Rewards 101:
MY PREMIUM ONLINE COURSES:
🤑 Budget Like a Millionaire | Learn how to create a spending plan that actually works (free Wealth Planner included): ($147)
⚖️ Tax-Smart Investing | Need to start investing in a more tax-advantaged way, to the tune of thousands of dollars per year in tax savings? (Free Tax-Smart Investment Planner included): ($197)
MY KEY LINKS
🌍 My blog – www.moneywithkatie.com
📸 Instagram –
🐦 Twitter –
WHO AM I:
I’m Katie, a personal finance content creator on a mission to make everyone else as obsessed with their financial health as I am. With small tweaks and just a little more awareness, you can live a richer, happier life. I started writing about money in 2018.
#MoneywithKatie #Money #Retirement #PersonalFinance #401K #Traditional #Roth #Traditional401k #RothIRA
00:00 Traditional or Roth 401(k)?
00:15 Why a Traditional 401(k) could be better
02:00 Katie’s experiment
05:27 Roth vs Traditional numbers
07:08 Katie’s ultimate strategy
07:59 M1 Finance’s high-yield savings account
*M1 Plus is a paid membership that confers benefits for products and services offered by M1 Finance LLC, M1 Spend LLC and M1 Digital LLC, each a separate, affiliated, and wholly-owned operating subsidiary of M1 Holdings Inc. “M1” refers to M1 Holdings Inc., and its affiliates.
___________________
M1 is not a bank. M1 Spend is a wholly-owned operating subsidiary of M1 Holdings Inc. M1 High-Yield Savings Accounts are furnished by B2 Bank, NA, Member FDIC.
Obtaining stated APY (annual percentage yield) or opening a savings account does not require a minimum account balance. Stated APY is valid from date of account opening. Account fees may reduce earnings. Higher APY rate subject to paid M1 Plus subscription. Rates are subject to change.
B2 Bank is a member FDIC institution and does not itself provide more than $250,000 of FDIC insurance per legal category of account ownership as described in FDIC regulations. Additional FDIC insurance coverage is provided through B2’s Insured Deposit Network Program involving other FDIC insured depository institutions. Deposits may be insured up to $5,000,000 through B2’s Insured Deposit Network Program. Full terms of the Program can be found at
m1.com/legal/agreements/HYSA_Agreement and a complete list of participating banks in the program can be found at m1.com/legal/agreements/depositnetwork
20230512-2891706-9211195…(read more)
LEARN MORE ABOUT: 401k Plans
REVEALED: Best Investment During Inflation
HOW TO INVEST IN GOLD: Gold IRA Investing
HOW TO INVEST IN SILVER: Silver IRA Investing
Saving for retirement is essential, and one of the most popular vehicles for doing so is a 401(k) plan. When it comes to choosing between a traditional 401(k) and a Roth 401(k), many people are drawn to the tax-free withdrawals of a Roth. However, a little-known loophole in the tax code could make traditional 401(k) plans the better option for many savers.
The loophole in question involves the ability to do what is known as a Roth conversion ladder. Essentially, this strategy allows individuals to convert their traditional 401(k) funds to a Roth IRA in a way that minimizes tax liability and allows for penalty-free withdrawals before retirement age.
Here’s how it works: Savers who have a traditional 401(k) can begin converting a portion of their funds to a Roth IRA each year. By doing so, they can take advantage of lower tax brackets in retirement or years when their income is lower. This can result in significant tax savings over the long term.
Furthermore, once the funds have been in the Roth IRA for at least five years, they can be withdrawn penalty-free, regardless of age. This provides additional flexibility for those who may want to access their retirement funds before reaching retirement age.
Additionally, traditional 401(k) plans often come with employer matching contributions, which can help boost overall savings even further. While Roth 401(k) plans also offer employer matching contributions, these contributions are typically made on a pre-tax basis and would be subject to tax when withdrawn.
Of course, the decision of whether to opt for a traditional 401(k) or a Roth 401(k) ultimately depends on individual circumstances such as current tax bracket, future income expectations, and retirement goals. It’s always best to consult with a financial advisor to determine the best strategy for your specific situation.
In conclusion, the loophole involving Roth conversion ladders makes traditional 401(k) plans a compelling option for retirement savers looking to maximize their tax savings and flexibility. By taking advantage of this strategy, individuals can potentially enjoy the best of both worlds – tax-deferred growth and tax-free withdrawals in retirement.
insane break down – changed the way i think about roth vs traditional and I really love all the number crunching showing why and how it is better. thank you!
what about RMDs from a traditional 401k pushing you into a higher tax bracket and causing you to pay more taxes on SS income?
Finally. Someone who understands this question properly. Im sad that i can only give one thumbs up.
Your entire argument is based on the fact that you will invest the taxes into a Roth IRA, but what if I could max out both even when doing both Roth?
JC she's hot and smart!
Katie, we're doing Roth 401k because we think the company matched portion is traditional, and that will help 'diversify' our tax strategy in retirement. We're no longer eligible to do Roth IRA, and we're investing in an after tax brokerage account after maxing out the 401k's. Curious to know your thoughts (particularly around the match). Thanks!
Thanks for doing such a great job with this, the article, and the podcast episodes on Roth vs Traditional as well as withdrawing for 0% tax rates! My company just added the Roth option and I was going back and forth on it. I'm a few years out still from retirement but do you think about converting up through the 12% bracket early in retirement due to the math showing it's kind of a tossup?
Wait I already get traditional 401k employer match, max out HSA, and max out Roth IRA. Why wouldn't I put the rest into Roth 401k?
I’ve always done 50% traditional, and 50% Roth in my work 401(k). Today, I changed it to 100% traditional based on this video. Thanks so much, hope I’m doing the right thing-thank you.
THANK YOU SO MUCH for also including the 12% rate bracket!!! I've been doing Roth and FEEL like it's the right thing since I'm already in the 12%, but hearing you analyze it show that yes this is likely same/better choice for me than traditional . I have pension which those contributions are taken as traditional so that's also a factor. Gotta love all the complexity each person has!
4:32 This 4% is pertaining to a living amount and NOT about RMDs, right??? The RMDs would not allow you to count what you pull from a ROTH if I understand this correctly….
1:03 This sounds good except the idea comes from the assumption that if I saved 12% from my payroll check then I have 12% to put elsewhere. It seems for my family that the only way we hit the figures we do for our 457b (pre-tax) is that the margin gets us to where we are and whatever is not invested is already spoken for be mundane items like food and electricity. I don't see a 12% pile of cash laying around waiting for a separate ROTH designation. Have I missed the point, or am I just not making enough at $58k for this to be feasible? I think what you're saying is probably in line with what I've always suspected in spite of what many sites say.
I’m not as nerdy as you and the other financial planning wonks here (although sometimes I go off on nerd tangents).
I really wrestle with this because combined my wife and I make 300K a year. So a Roth IRA isn’t an option. We could get an HSA though at each of our places of employment and stuff money there. Or we could just stuff money from the tax savings into a muni bond fund.
In the end I think it comes down to a non financial factors for me mainly – life is fragile.
I could be dead before age 59.5. Why pay taxes now? Taxes deferred is taxes saved and time bought IMHO.
We chose the Traditional.
So thanks for letting us know going against the Dave Ramsey grain has some math behind it.
Amazing video, A friend of mine referred me to a financial adviser sometime ago and we got talking about investment and money. I started investing with $120k and in the first 2 months , my portfolio was reading $274,800. Crazy right!, I decided to reinvest my profit and gets more interesting. For over a year we have been working together making consistent profit just bought my second home 2 weeks ago and care for my family.
Can you please elaborate as to how Roth 401k contributions are going to get taxed from the top down?
Hi Katie,
What adter you mqxed out 401k in pretax money, what would you rather do – roth IRA or a pretax non- qualified 457b
Great video. We are all seeking for financial independence and a better way of life. This is not difficult to achieve with savvy investing, a frugal lifestyle, and cautious budgeting. I'm glad I learned early on to work hard for financial independence. As Warren Buffet said, he has seen this happen many times in his life. Not an investor, My husband and i never earned more than a middle class salary. We plan to get retired at 58 with a stock portfolio worth $1.7M. We have never sold so much as one share of stock.
I’m going to give three reasons why I prefer Roth over traditional and won’t ever bother with traditional 401k
1. Estate planning.
If you plan on using a traditional 401k do realize you are leaving a tax trap for your heirs to inherit. If you have 400k in pre tax 401k and you die and aren’t married the account is going to be converted into an inherited IRA given to your heirs if you are taking RMDs when you die your heirs will also have to take RMDs and pay taxes on those RMDs. Most likely your heirs are going to be younger and in their prime earning years so they are going to get taxed more due to higher income then a retiree.
If you have a roth 401k and it gets turned into an inherited IRA guess what? Your heir/s don’t have to do RMDs and don’t get taxed on that money. That is huge bonus for Roth compared to Traditional in regards to passing on legacy wealth.
2. You don’t plan on liquidating your portfolio.
Look if you have a really large 401k in the millions when you go to retire your RMDs are going to be heavily taxed. The tax you will have to pay because of RMDs.
If your money is Roth and in the millions then you don’t have to liquidate your portfolio if you have for example 4 million in your Roth 401k and you roll that over to a Roth IRA and you get 4% dividends through ETFs and/or stocks that is 160k a year 100% tax free.
3. You already heavily contribute to a taxable account.
I already dump almost 20% of my gross income into a taxable brokerage account on top of Roth IRA and 401k contributions. If your like me and already do heavy contributions to a taxable account the “investing the tax savings into a brokerage account to make more money then Roth” is redundant. We put money into Roth specifically to not pay taxes on that money in the future.
I could list a few more reasons but those are the three main reasons I prefer Roth over traditional.
Katie , great informative video! right now I am going 100% Roth. Because I am paying 19% in taxes. That is for state and federal combined. Sometimes it jumps to 22% when I work a lot of overtime.
That is a good approach if people are disciplined enough to do it. However, it is a mistake not to have taxplanning in your retirement plan and people should be encouraged to do so, and review it periodically. RMDs on that amount will be very large and to the extent SS or it's viable replacement is available, that could increase MAGI into IRMMA penalty when they are on SS and they are substantial. People will need to keep their eye on the ball and not go blissfully into the future with large taxdeferred accounts to avoid unfortunate surprises. Just my 2¢