Roth 401(k) vs Traditional 401(k): Which One Should I Focus On?
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When it comes to saving for retirement, many individuals rely on their employer-sponsored 401(k) plan. However, there are two main types of 401(k) plans: Roth 401(k) and traditional 401(k). So, which one should you focus on?
First, it’s important to understand the difference between the two plans. A traditional 401(k) allows you to contribute pre-tax dollars, meaning you don’t have to pay taxes on the money until you withdraw it during retirement. On the other hand, a Roth 401(k) requires you to contribute after-tax dollars, but your withdrawals during retirement are tax-free.
One of the biggest advantages of a Roth 401(k) is tax-free withdrawals during retirement, which can lead to significant savings over time. This is especially true if you expect your tax rate to be higher in retirement than it currently is. Additionally, because Roth contributions are made with after-tax dollars, you can withdraw the contributions at any time without penalty or taxes.
However, there are some downsides to a Roth 401(k). Since you’re contributing after-tax dollars, your take-home pay will be lower than it would be with a traditional 401(k). Additionally, high-income earners may not be eligible to contribute to a Roth 401(k) at all, as there are income limits for contributions.
A traditional 401(k), on the other hand, allows you to contribute more pre-tax dollars, which can help lower your current tax burden. This can be especially beneficial if you’re in a high tax bracket. However, withdrawals during retirement are subject to taxes at your then-current tax rate.
Another advantage of a traditional 401(k) is that anyone can contribute, regardless of income level. However, keep in mind that required minimum distributions (RMDs) begin at age 72, and you will be required to pay taxes on those withdrawals.
Ultimately, which plan you should focus on depends on your individual financial situation and goals. If you expect to be in a higher tax bracket during retirement, a Roth 401(k) may be the better choice. But if your top priority is reducing your current tax burden, a traditional 401(k) may be the better option.
It’s also worth considering contributing to both types of 401(k) plans, if possible. This can help diversify your retirement savings and provide more flexibility in retirement.
In conclusion, when it comes to choosing between a Roth 401(k) and a traditional 401(k), it’s important to weigh the potential benefits and drawbacks based on your own financial situation and goals. A financial advisor or tax professional can help you make an informed decision and map out a retirement savings plan that works for you.
I don't think my income will grow by the time I reach 60. I believe my income will peak around 40-50, so for me it makes sense to go the traditional 401k route. Also, I do max out my Roth IRA, so it's kinda like having a roth 401k. I don't think I can contribute to both roth 401k and ira and max it out because I would still like to pay bills and have enough for entertainment, since those are all post-tax contributions. Paying $2000/month to max both vehicles out is pretty stressful with bills. The traditional 401k allows me to max it out easier since it's pre-tax. Pros and cons to both and highly dependent on one's financial situation.
Pretax 401(k) contributions are saving the federal, state and city tax on your marginal working rate. Prolific savers which is what you guys suggest 25% savings rate means over 30% of the workers income will not be needed for expenses in retirement. 25% for the 401(k) and 7% for FICA tax. Your age at retirement for when you spend the 401(k) is also a significant factor. If you are retiring at 60 you can spend down that 401(k) and most likely spend significantly less of an effective tax rate on your income in retirement compared to your marginal rate while working to contribute to the Roth. If your federal marginal working rate is 12% or below, you are also getting a pension, plan on not spending your 401k until 70s than Roth makes the most sense. 22% or above, plan on spending the 401k in your 60s I would strongly consider traditional. In 2022 a couple married filing jointly can claim up to $105,000 in income and still be in the 12% federal bracket with the standard deduction. Which will grow every year with the progressive tax rates.
Wow! After watching this It reassures me that I have made the right decision in going with the Roth 401k. Right now I am at a tax rate of just under 19%.
I don't think these shows differentiate enough between Roth and Traditional retirement funds. Traditional funds are ~70% of stated value. I've been switching my 401k contribution to Roth as I can afford to keep maxing it out. Right now its 50/50
I didn’t hear them mention the taxes on the future gains. Roth doesn’t tax the gains. Traditional taxes the entire distribution amount.
It's really not a mathematical equation. Do you really want to be in business with someone that can change their portion of your investment at any time. You take all the risk and they reap the reward. Pay the taxes now and pay the taxes on your company contribution when Congress allows it. Do you really think taxes will be less in the future? If you're a financial mutant you will be in a higher tax bracket come RMD's. You want to retire poor on paper. Take advantage of Medicare subsidies (as long as it's still income based) and have your social security (yes, it will still be around) tax free. You can do that if you roth. Paying taxes while you still have a job is a lot easier then when you retire and no longer have income coming in.
Split the baby do both, when your young do more Roth and than taper that down to do more traditional when you get older.
Who’s to say the government won’t change its mind 30 years from now and tax your Roth anyway? If you don’t think that’s a real possibility then I’ve got a bridge to sell you.
Question. Would it be more ideal to do a 50/50 split between standard and Roth contributions? Maybe not the highest growth, but would mitigate risk later on by only taxing half on the withdraw. Or am I missing something and completely wrong?
I’m 35 and my wife is 37. We have built a very strong portfolio well into the hundreds of thousands of dollars based off of maxing out our 401k traditional and Roth IRAs with Fidelity. Choose whatever strategy you want commit to it for long term investing.
You need to also consider whether you care if up to 85% of your social security gets taxed. If you want to minimize this, then go the route of ROTH every chance you get, otherwise it's guaranteed the RMD of your traditional 401K/IRA (assuming a substantial amount, which will be the case with this young man) will be high enough that a high percentage (even 85%) of your social security will get taxed. You could go the traditional route and eventually do conversions, but it's going to be tricky because you have to be careful not to convert too much that it bumps you into the next tax bracket, and if you have a substantial amount to convert it will take many years to do the conversion.
i like to utilize the traditional for the match and to get me into a lower tax bracket for the current year. At the same time, I invest in my roth 401k for the tax free growth and a lower tax bracket thanks to my traditional contributions. everyone's situation is different and there are many good strategies out there!
I am going with a hybrid approach. The whole point of Roth is to use as a tax tool to keep your tax burden lower in your retirement. But, I do make a lot more, for others Roth all in might be a better choice. Either way, be happy you can invest at all.
From a 59 year old who never had access to a Roth 401k option, invest in the Roth 401k in the 25-30% "grey zone" they discuss. RMD's in your late 70s are going to FORCE you into a higher tax bracket if you have too much in your traditional 401k. That is my issue from maxing out my traditional 401k for decades.
There's a few things I've suggested my kids think of in this situation. Tax rates now vs anticipated tax rates in 40-60 years. Income now vs income in retirement. The big one (and I sometimes mention this to the younger people at work), how long will the investments now have to benefit from compound interest. Chances are any money you invest now will double at least 4-5 times by retirement. Do you want to pay taxes on it now or when you use it?
Pay taxes now on a smaller amount. And pay none 30 years later after it grows.
Lots of thinking here folks, if you have a company sponsored 401k invest to the max contribution of the company, that’s a 100% gain on your money then invest the rest in a Roth. To whatever is legally allowed depending on your income
Situation. So example if you get 4-5% match from the company, invest that amount, then put the extra in vestibule money into Roth. Then if you can do the HSA, then do it. Be prodigious but also live a little, maybe mess around in stocks or better yet but an investment property and build wealth that way. Got it? Lol
Roth I don't trust the government when it comes to taxes in the future.
A regular 401-ira will put you kids in a higher tax situation when they have to pay out mandatory withdrawals when they inherited it. A Roth will not.