If you went all-in on a Roth 401(k) instead of maxing out your traditional 401(k), would you be better off?
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Timestamps
0:00 – Traditional vs. Roth 401(k)
1:23 – Beginnings of the Roth 401(k)
1:54 – Our assumptions
2:44 – Living expenses assumptions
3:38 – Current retirement savings
4:07 – Projected savings at retirement
4:56 – Expected income in retirement
6:47 – Tax rates make a difference
7:53 – Monte Carlo analysis results
8:29 – Traditional vs. Roth: deciding factors
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— About Patrick King CFP® —
Patrick King is a fee-only financial advisor in Atlanta and the Founder of Prana Wealth. Over his career, Patrick has helped CEOs, all-star athletes, Grammy-winning artists, and many others build their wealth, retire sooner, and create a legacy. Patrick enjoys yoga, mountain biking, golf, travel photography, and Clemson football.
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When it comes to planning for retirement, one of the most important decisions individuals have to make is choosing the type of 401(k) account that best suits their needs. There are two main options to consider: traditional and Roth 401(k). Both have their own advantages and drawbacks, so it is crucial to understand the differences before making a decision.
First, let’s delve into how these plans work. Traditional 401(k) contributions are made with pre-tax dollars, meaning they reduce your taxable income for the year. The investment grows tax-deferred until withdrawal during retirement, at which point it is taxed as regular income. On the other hand, contributions made to a Roth 401(k) are after-tax, meaning taxes are paid upfront. However, the withdrawals during retirement are entirely tax-free.
So, which is better? The answer largely depends on individual circumstances and future financial goals. Here are a few key factors to consider when making a decision:
1. Current and Future Tax Bracket: If you anticipate being in a higher tax bracket during retirement, a Roth 401(k) might be the better choice. By paying taxes upfront at a lower rate, you avoid higher taxes on the withdrawals in retirement. Conversely, if you are currently in a high tax bracket and expect to be in a lower one after retirement, a traditional 401(k) can potentially save you money by deferring taxes until withdrawal.
2. Available Income: Choosing between traditional and Roth 401(k) also depends on your current financial situation. If you need the tax deduction now to increase cash flow, a traditional 401(k) can provide an immediate benefit. On the other hand, if you have extra income and can afford to pay taxes upfront, a Roth 401(k) offers the advantage of tax-free withdrawals later.
3. Required Minimum Distributions (RMDs): It is important to consider your plans for retirement withdrawals when deciding between the two types of 401(k). Traditional 401(k)s require individuals to start taking RMDs at age 72, which can potentially push retirees into higher tax brackets. Roth 401(k)s, on the other hand, have no RMD requirements during the account holder’s lifetime. This can provide flexibility and allow for tax planning strategies in retirement.
4. Estate Planning: If leaving a tax-free inheritance to beneficiaries is important to you, a Roth 401(k) account may be advantageous. By designating beneficiaries, they can receive the funds tax-free and continue to grow the account or take withdrawals based on their needs.
Ultimately, the decision between traditional and Roth 401(k) boils down to personal preference and financial circumstances. Some individuals may even choose to hedge their bets by contributing to both types of accounts, ensuring a mix of pre-tax and tax-free retirement income.
It is important to note that 401(k) rules and regulations can change over time, and individual tax situations differ from one person to another. Consulting a financial advisor or tax professional is always recommended before making any significant retirement planning decisions. They can provide personalized advice tailored to your specific needs and help create a retirement strategy that aligns with your goals.
I'm in the 'catch-up phase' and our company recently started offering a Roth 401k. Since I don't have much in the way of write-offs, the 401K was a no brainer.. but now I'm not so sure. Is there a calculator that can estimate if I should stick with the 401K or start putting it into the Roth 401K? How much should you have in a traditional 401k before diversifying to a *Roth 401k*?
(I'll most likely be in a lower tax bracket when I retire in California)
Also, I heard if your don't qualify for a Roth IRA, then a "backdoor IRA" is recommended.. non-deductible IRA converted to Roth IRA) is the best. Is this hard?
Why does our government but us all through this BS ?
this is not fair. $350k in portfolio in roth and tradication is different and it is not fair to give them both the same. Roth should have less portfolio if it is roth. this is dumb and unreal
What if you were younger? My intuition is to start out paying more into the roth and decreasing it to increase the traditional over the years.
You didn’t tax the company match for Rachael Roth. Company
Match for a Roth 401k go into a traditional 401k or they would be required to be taxed so they wouldn’t be $3,600. You math is not quite right. Close, but not right.
The 401k is good, because retirement choices determine a lot of things. My parents both spent same number of years in the civil service, but my mom was investing through a wealth manager, and my dad through the 401k. My mom retired with about 4.2 million, but my dad retired with roughly 1.8 million. So it really does.
i’m 16 yrs old just started watching this and i’m lost
Your numbers are not fair. Why did you have Roth safe less? I switched to all Roth abs still max out contributions to Roth 401k. These types of things are not right
To me, the issue is so I want to pay the taxes now while I have a job and good cash flow. So for me I like the idea of my retirement being mostly tax free. So I am doing max conversations the next 3 years yes at higher than the recommended 24% tax rate. In retirement I will maje sure I do not have IRMA, SSA taxed and no RMD
The same employer match in both accounts? How can you make that mistake?
I'm not sure this example captured the value of the Federal and State income tax savings Cathy realized in the years before retirement due to having a lowered tax liability from the traditional 401k contributions. That could be factored in and make a better case for traditional 401k over the roth 401k? Thanks for the video, you do good work.
There's another tax not mentioned for Catch up Cathy. 85% of Social Security is taxed for those receiving over $44,000+ a year from a 401K or other non-Social Security sources. Roth distributions are not considered income, so Rachel Roth would also forego that tax expense as further increase the gap between her and Catch up Cathy.
We experienced the pinnacle of our era in a flash. Just like Rome, the corrupt administration will
bring this nation to an end. My condolences goes out to those close to retirement and may be
worried about pension, surviving the rising cost of living alongside poor regulatory policies
One thought is to buy the dip and then wait to break even, another thought is: Will buying low during a recession work if I'm retiring in the next 3years, I'm no way near prepared for retirement and I just need strategies to scale up to atleast 2million by the time I'm set to retire
To me the simplicity & flexibilty of a Roth is unmatched in retirement..
In terms of Traditional many things are income limit based in retirement..go over & you pay more..or pay more in taxes or this is reduced or cut off etc..
That aspect is not mentioned the cost of that.
Roths don't count.
What about not only the all the years of tax free growth,but the tax free income post-retirement of a Roth vs a Traditional?..lets says you start at 59 1/2 & live 30 years vs a Traditional..compounding + tax free for 30 years..
How does that factor into which is better?
Roth IRAs offer both tax-free investment growth and tax-free retirement income, while traditional IRAs offer a tax break when you contribute.
So If I was told so many years back then that I would be able to live in my fully owned house at 37 years with my wife at 33 years alongside a combined net worth of over $1.5M in assets and savings with no debts. I may disagree heavily.
It wasn't easy sometime back,when I had 2 kids in school and had a lot of debts to settle.
This lifestyle that made us retire so early is only possible through efficient saving and key passive income processes.
I'll take Roth over Hagar any day of the week.
Shit I don't make 120k per year.
Warren Buffett once said, "if you don't find a way to make money while you sleep, you will work until you are dead", I started my investments and retirement immediately, but I was new, so I decided to use the services of Christy Vallen D'souza a licensed stockbroker recommended to me by my wife. I make so much profit trading with her. You too can make profit. It is never too late to begin your retirement plan.
FYI, it is possible to withdraw your traditional IRA/401K with zero tax liability. To do it, your only sources income need to be limited to social security and an IRA/401K. Because of the standard deduction, you could probably have up to $20K in distributions and pay zero federal income tax. Using the example in the video, this gives you $4,000 a month in todays dollars to live on. ($30k from SS, $20k IRA)
For me, the choice isn’t either or, but a mixture of both. With a frugal lifestyle, the traditional goes in tax free and can come out tax free. Then save the Roth balance for the big time stuff
You did not mention the tax refund Cathy would receive from her 401k contributions. If she put that tax return into an investment account each year, like a Roth IRA, she could invest an additional 6k each year. Using your calculation, that could be an additional $180,000, tax-free.
You can't really quantify it but you have much more flexibility with Roth money as you will still look poor on paper. This could impact somebody many different ways, especially if you need Obamacare or any other means tested assistance in retirement. A Roth also allows you take a large lump sum distribution in retirement for any reason without worrying about how a one time significant taxable event could cost you much more for that year.
The original idea behind the 401k was for companies to lobby Congress in order to rid themselves of pension responsibilities and shrug the investment risk off onto the individual.
State taxes: Does it make sense if working in a income tax state to use Traditional and pay no state income tax on contributions, then retire in a no income tax state and pay no state income tax on withdrawals?
I like these but they are so unreasonable, people in my area are lucky to make 38k a year, please stop with this 120k a year stuff,,,its so unreasonable
Did you factor state taxes on Rachel’s original contribution in your calculations?
Out of idle curiosity, aren't most employer matches traditional and no roth? I contribute 10% to a roth 401K and my employer matches that, but in traditional.
For everyone who trusts the Federal Government, the Roth may be better. But as the deficit increases the odds of Roth remaining tax free are nil. Social Security was initially tax free but the government can change the rules at will.
Nice comparison. When the two ladies retire they will not be saving such a large percentage of their income. Not working saves money as well. reducing their spending should not be a problem. When my income dropped after retirement I started to shift funds from the 401K to the Roth.
Very clever to have 2 women with somewhat non-traditional vocation,a welder and a doctor! I must also add wealth.
Best video I’ve seen breaking it down and explaining everything thank you!! Was trying to see which was better and going with the Roth after this video since I live in California
Regular 401k is better for majority of folks
Why wasn't the Roth scenario also affected by state tax?
Everyone should have both a ROTH IRA and a IRA or 401k. You can only contribute $6,000 a year to a ROTH.