Should You Use a Roth 401(k) If You Have a High Income?
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When it comes to retirement planning, high-income earners often have more options available to them than those with lower incomes. One such option is the Roth 401(k), a retirement savings account that allows individuals to contribute after-tax dollars that can grow tax-free until retirement. However, the question remains: should high-income earners use a Roth 401(k) or stick to a traditional 401(k)?
One of the main benefits of a Roth 401(k) is that withdrawals in retirement are tax-free. This can be particularly advantageous for high-income earners who expect to be in a higher tax bracket in retirement. By paying taxes on contributions now, rather than in retirement, individuals can potentially save money in the long run. Additionally, Roth accounts have no required minimum distributions (RMDs) during retirement, which means that high-income earners can continue to grow their savings tax-free for as long as they like.
However, there are some drawbacks to using a Roth 401(k) for high-income earners. One of the main disadvantages is that contributions to a Roth 401(k) are subject to income limits. In 2021, individuals with a modified adjusted gross income (MAGI) over $140,000 and married couples filing jointly with a MAGI over $208,000 may not be eligible to contribute to a Roth 401(k). This means that high-income earners may not be able to take advantage of the tax-free growth offered by a Roth account.
Another concern for high-income earners considering a Roth 401(k) is the loss of a tax deduction for contributions. Unlike traditional 401(k) contributions, which are made with pre-tax dollars, Roth contributions are made with after-tax dollars. This means that high-income earners may miss out on the immediate tax savings that come with traditional 401(k) contributions.
Ultimately, the decision to use a Roth 401(k) as a high-income earner will depend on individual circumstances and financial goals. Some high-income earners may find that the tax-free withdrawals and potential for tax-free growth outweigh the drawbacks of income limits and loss of tax deductions. Others may prefer to stick with a traditional 401(k) for the immediate tax savings and higher contribution limits.
In conclusion, high-income earners should carefully consider their financial situation and goals before deciding whether to use a Roth 401(k). While a Roth account can offer tax-free growth and withdrawals in retirement, it may not be the best option for everyone. Consulting with a financial advisor can help high-income earners make an informed decision about their retirement savings strategy.
BUT IS PRE-TAX REALLY THE BETTER OPTION..??? I've heard pre-tax and post-tax/Roth end up pretty much the same. In the video, it sounds like Roth is best, if you're under 30% tax bracket. Or, if you can CONVERT to Roth at any time, maybe it's best to input as pre-tax, then convert as needed? I'm 35 and starting to invest, with 22% tax bracket, $50-100K/year available to invest.
The amount of bullshit in this system deserves the documentary in itself. Nobody has the time or crystal ball to understand the future. The system being forced down the throat of Americans that are already over, burdened by their work, and family responsibilities is pure evil. Nobody has the time to read understand, predict the future, and make decisions about the most important thing about their old age over which they have no control.
If you have a Roth 401k are the employer contributions that are matched also taxed contributions?
Compounding growth IS lost when you are only 10 years away from retirement. And you know you're not going to withdraw high six figure (over 300k) a year.
Avoid RMDs you don’t want or need. Roths help you do that.
I am 46 and make $18.50 and I have 16% of my check go to a Roth 401k. I'd rather pay the taxes now than later. Thats my opinion.
I earn slightly over $100k and I’m maxing out my Roth IRA and my 401k. I’m shifting from a traditional 401k to a Roth 401k because that is the only way that I can put more into my retirement other than Roth conversions. By paying taxes now rather than later I’m effectively increasing my contribution.
One thing that I slightly disagree with the experts on is growth after retirement. I’m going to leave almost all of my retirement savings in my retirement accounts after I retire so it will keep growing. The longer I live in retirement the more my retirement savings that I don’t use for living expenses will grow. Even though I’m 52, each dollar that I put into my retirement plans won’t triple. It will triple by the time I retire, but ten years later it will be worth more than triple what it’s worth today.
Money guy team. I ran out of videos from my favorite finance creators and started fishing around. Made me realize the horrible BS being tossed around out there. Thank you so much for your excellent content. If I could only have my children listen to one financial voice, it would be yours.
Would you recommend your FOO course for teenagers? Do you have a different learning resource for the very young?
I think the argument is weird. So always choose Roth unless your super rich. But if your super rich, why sweat these decisions….your rich.
Finally, someone with a brain…not telling everyone to use Roth. It depends!
Roth is the answer. The BIGGEST problem is that you pay ordinary tax on the capital gain if you go with tradition… this is WTF
I have looked every direction to open a "Roth 401(K)" I am self employed.. Who – where has them .Fidelity has articles however does not offer. Any help appreciated. TY
I am confused. Do I make a decision based on effective or marginal tax rate. For me they are very different. Can you please clarify. Thank you.
At 65 and close to the 32% tax bracket, I'm still maxing out my Roth IRA and Roth 401k. We won't ever touch our Roth money, so it will continue to grow for the rest of our lives (15?, 20?, 25?, 30 years?) AND will pass on to our children tax-free.
Plus, you gotta trust the government to not change things to tax Roth gains.
No one really knows where tax rates will be in the future. Because the government rarely is rational.
It almost seems like if you are under 35 the answer should always be Roth if that's an option. Then above 35 base it on your income so you can maximize the tax free growth
I really like the idea of paying taxes upfront and getting 100% tax free growth. Especially if you plan to amass significant retirement savings.
With all the crazy Socialists gaining more control I can guarantee taxes are going nowhere but up.
Heck they have a crazy new social security tax hike in the works right now.
Boils down to if one is close to retirement and what income bracket one will be after retirement. Tax considerations really.
First step is to determine how much you want to spend in retirement. The next step is to determine what you want to do with the rest of the money, if any, after you pass.
In general, many would want the money to last as long as possible and to leave as much as possible for their beneficiaries.
Now we need to estimate your net worth when you retire. Do one estimate for the Roth 401K contributions approach, and one for the 401K contributions approach. Using your expected, annual expenses in retirement, calculate how long your money will last. You should do this based on the most tax efficient withdrawal method across your income sources and your investments for each of the approaches.
Whichever lasts the longest wins if the money goes to zero before you pass. If the money outlives you, then whichever gives the highest, after tax amount to your beneficiaries wins.
The important thing here is doing the comparison using all off your sources of income.
Even with this there could still be a case where you start with Roth contributions and end with 401K contributions. The idea is to give your Roth contributions time to grow, and take the tax break on the money that doesn't have as much time to grow. Then when you retire you use the 401K money first. This basically gives your Roth as much time to grow while saving you some money on taxes due to your 401K contributions.
I’ve heard the 1 dollar becomes 88 when your 20 something talk, but when I was 20 that’s barely all I had a was a dollar. My power to save now is literally 2000xs greater than it was in the 70s. I wish these shows would realize today’s 60yr olds weren’t making but 2.00/hr 45yrs ago.
Slightly different angle here.. let’s say your 401k has like $60k and can earn 10% a year. If you compound that for 30 years without ever adding anything else and end up with $1M just for an example. You are now taking about hundreds of thousands of dollars that would be taxed if in a traditional and tax-free in the Roth, so your tax rate wouldn’t matter. Just an extra 2 cents to consider.
The question was not addressed. The question assumes that the pre-tax contribution is clearly the better option but should he contribute to both pre-tax 401k and after-tax Roth 401k in some proportion as a hedge against the unknown possibilities of tax situation down the road in retirement. My answer would be if your current marginal tax bracket is 30% or higher federal plus state, do only pre-tax 401k. There are strategies that could be used later such as retiring and using pre-tax retirement money to live on while delaying Social Security until age 70. This reduces pre-tax accounts which reduces RMDs. Also, you can do Roth conversions during this lower income period which would reduce RMDs further.
People are also failing to realize the more u have in a pre-tax and then withdraw, you Medicare and Medicaid will be higher. It’s always best to show that you are poor on paper. There are many benefits to that. I don’t see taxes being lower in the future. I also want to retire early which means I want to go on the ACA and get federal subsidies while looking poor on paper w a Roth IRA . I would be able to do that w a pre-tax Ira
Because it cooks evenly
He says the answer depends on future tax rates/policies. All I can say is the Democrats punish hard workers, savers, investors, and job creators and Democrats reward illegal aliens, drug cartels, human traffickers, students with big loans, and people who don't plan for the future. Case in point, the FBI just confiscated the MyPillow guy's business phone. So it might boil down to which political party is in power.
It also depends on whether you are going to ALSO invest that tax savings. If it comes down to you are either going to invest $20,500 in a Traditional 401k or Roth 401k then yes Roth is better. It gets more complicated if you say that you are going to invest that $20,500 in a traditional 401k AND invest the $6,560 (32% tax savings from traditional 401k contribution.)
It also depends on your retirement time horizon. If you want early retirement (F.I.R.E) in the next 10 to 15 years, then you don't have that much time to compound either, so the immediate tax savings that allows you to invest more of your income is a bigger deal.
If you keep funds in brokerage then you have to come off the hip every year on taxes. So pretax help offset issues and I have not seen etfs do chit except pay the institutions.
Nobody talks about the effects of drawing Social Security with Roth and Traditional. If all you have is Traditional- after RMD's, Your SS will be taxed at 85%. Roth on the other hand is NOT income and ones SS will be less taxed. Also, If one ever needs a large sum to be pulled out of your Roth401k , such as medical expenses or buy a bar or RV it won't be considered Income and Your SS won't be taxed. Dont forget every dollar earned in a Roth 401k is also Tax free $$$- not so with traditional.
Max the 401k contributions, put the rest in a Roth 401k, then roll the Roth 401k into a Roth IRA. You can backdoor the Roth IRA income limits, a Roth IRA doesn’t have forced distribution conditions AND can be passed on to your kids.
i went with a roth401K (only last 10 yrs of working ) as soon as one was offered by our company. my simplistic thinking was that tax rates are quite low historically and will likely will go up by the time i need to draw on those accounts given the cumulative government debt, even though i will have only passive income during retirement. i also liked the legacy aspect of it if we still had some left over at the end. i had roth iras years before when my wife and i were eligible, i still contributed to non deductible iras for me and my wife with the goal of backdoor conversions. when we eventually did the backdoor roth i was hit with the prorata rule for my conversions as i had previously rolled over my old pretax 401ks to a traditional ira as well as a lump sum pensions payout.
i was never aware that you could contribute more after taxmoney in our 401'sfor a mega roth. i never saw it mentioned, maybe we didn't have that option but if i did and i was not still aware of the pro rata rule i would have been even more siginificantly double taxed on those supposedly after tax contributions once a conversion was done. without owning significant amounts in a traditional ira and if it was available to me i would have been all over a megaroth conversion plan.
i still contributed quite a bit to a taxable account in addition to maxing out 401k/roth 401ks, iras(though i stopped my contribution due to the prorata rule but still did spousal iras ) and 10k yearly contributions to my son's 529(0-13 y/o). my taxable investments were roughly equivalent and later larger than my combined 401k and aftertax iras for me and my wife annual contribution. i have never second guessed my roth401K decision as to whether i would have been better taking the tax deferral and putting the difference in my taxable accounts.
i don't think you can aspire to retire early if you limit yourself to max contributions to retirement accounts. i retired at 55.
It’s simple, Roth when you are young, deferred when your old. Then watch it grow
They didn’t even mention the RMD on traditional that alone makes Roth better.
One thing that has bothered me is the possibility of a flat national tax being implemented. If that occurs it would essentially double tax roth money (you already paid tax on it as income and then would pay again as sales tax in the retirement years).