You'll also learn how much you can contribute to that Roth IRA, how to work around the eligibility restrictions, the flexibility of saving in a Roth IRA versus other individual retirement accounts, and the benefits of saving in both a … Hi everyone, this is my first time posting to this sub Reddit. However, if you contribute to your Roth and not to an IRA your missing out, and theoretically if you max our your contribution 19,500, you can save something like 5,000 in taxes if you use traditional. One consideration I have made that I’m interested in feedback on: I am maxing out my Roth IRA in my first two years of … As the name implies, the Individual Retirement Account requires no participation from an employer. You’re asking the right questions - the answer depends on a number of factors including how long and amount you are planning to invest. I figured I’m getting a lot more bang for my buck. Let’s look at two different investment scenarios (low to high tax bracket and high to low tax bracket) to see why a Roth 401k is a better investment choice for a young investor who plans to be taxed at a higher rate in the future. If we file separately, the payment is several hundred dollars less per month. Wife is also 33. Speaking of company match, if you get that it all goes on traditional. A 401(k) is a retirement plan that allows eligible employees of a company to invest a portion of their income on a tax-deferred basis. Cookies help us deliver our Services. He's 25, makes roughly what you do, but I'm a sahm. You might we'll pay more in taxes now than you will in retirement. Choosing between a Traditional and Roth 401k mostly involves what income tax bracket you are in today and what income bracket you expect to be in when you retire. However, all the calculators I use assumes a 15% tax in retirement. Some deets: Age: 27 Income: $85k 401k contribution: 15% 401k balance: $20k. Does that mean that if you switch to Roth, you will be going with less than 8%? My company recently started offering a Roth 401K alongside a traditional 401K. Traditional 401k vs Roth 401k. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. Ever wonder what the differences between a 401k, Roth 401k, IRA, and Roth IRA are? Press J to jump to the feed. We don't know how much Roth you are going to end up wanting, but we do know you are probably better off getting whatever-that-amount-is (assuming it is not zero) now rather than later. Other things could change as well, like means testing for social security, more taxes of benefits, overall tax rates are likely to be higher etc. I'm wondering if I should take my usual 8% and divert it to the Roth 401K given my specific situation, which is: 33 y/o and married. My employer's 401k plan allows for the mega-backdoor roth IRA. When making Traditional contributions, you get an upfront tax benefit because your taxable income is reduced by the amount you contribute. additionally, when she hits the 185k mark her marginal tax rate is going to be much bigger than yours. The table below shows the pros and cons of both account types. Hey, thanks for the reply. https://www.reddit.com//r/personalfinance/wiki/rothortraditional. Retirement. I expect modest increases unless I change fields. This question is asked a lot here. Of course no one knows what taxes will look like in 30+ years. Traditional vs. Roth — or both? In a month, they will begin contributing 3.5% (not a match, just a contribution) to the traditional. hide. That’s unless, of course, you’re a very high income earner. My employer matches 50% of the first $6,500 ($3,250) annually. I am a bot, and this action was performed automatically. We actually have to go through this every year, because despite filing separately they try to include me the next year unless we call to clarify, and if I remember right her payment was set to go up around $700/month ($8,400 per year), including my income when she did it a few weeks ago. Since I’m contributing about max, things will get easier as my salary increases. Regardless of which plan you choose, 401(k) plans have some things in common. What gives. 401K vs Roth 401K Contributions. One way to think about this is a Roth 401k allows you to have some tax diversity for your retirement assets. If you are in a higher … Roth 401k Limits Vs Traditional/page/8 - For 2020, your individual 401 (k) contribution limit is $19,500, or $26,000 if you’re age 50 or older. I recently started contributing to my traditional 401k (Amazon matches 50% to 4%). My employer matches 1.5X my Roth 401K contributions up to 6% (I've been maxing it by putting in 6%, so they give me 9%, and the two add up to 15%). Some of the most important features includ… Some folks are afraid that laws regarding Roth will change, I’m very skeptical that will happen, but taxes going up, I think that’s probably likely. If the latter, what were those inputs? No tax later For someone planning to retire in US, based on expected tax rate at retirement (or other factors), folks choose one of the above. In a month, they will begin contributing 3.5% (not a match, just a contribution) to the traditional. I don't do what I "should" and invest the tax savings from my traditional 401K into a separate account and likely will not be able to for the foreseeable future with a baby on the way. assuming no 401k contributions and your total combined income at 255k (70k yours 185k hers) the tax bill would be 2300 more if filing separately. I'm wondering if I should take my usual 8% and divert it to the Roth 401K given my specific situation, which is: I make $68K/year. She will become a partner at her firm in 2020, and we expect her income to go up to around $185K at that point, and incrementally (though unpredictably) from then on. https://www.bankrate.com/calculators/retirement/401-k-or-roth-ira-calculator.aspx. So I’m pretty sure there are no income limits to contributing to a Roth 401k like there are to a Roth IRA. Taxes are likely to be much higher in the future. It is solely managed by the individual (possibly with assistance from a professional investment advisor). Is there an inflection point where it makes sense to start contributing to one over the other? Are the taxes on the front end for the Roth more or less than the taxes on the backend for the 401k? There is no one-size-fits-all answer as to which is better, a Roth 401(k) or a Roth IRA.It all depends … Jimmy.
And 60% multiplied by $6,000 is $3,600. Traditional 401k vs Roth 401 - understand the difference between the two employee-sponsored retirement savings plan to choose the best option for you. Log in or sign up to leave a comment Log In Sign Up. I really appreciate the input! Some deets: Age: 27 Income: $85k 401k contribution: 15% 401k balance: $20k, Can anyone help clarify the advantages of a 401k vs a Roth 401k? If you contribute to it now, you‘re probably going to lower your tax bracket in the future. An advantage of contributing to a Traditional Solo 401k today is that this reduces your taxable income during the years you are working. 1 comment . I think my major question is around expected retirement tax rates vs. current tax rates, and whether it's worth getting at least a slice of funds in post-tax to lighten the load in the future. On the other hand, for my husband it makes sense. But that’s where their similarities end. However, all the calculators I use assumes a 15% tax in retirement, so I'm failing to see the benefit of paying at my 22% (formerly 25%) brackets now, but I'm sure I'm missing something. this gets bigger as the difference in wages grow (for ex if you contribute to 401k pre tax). Your correct, there is no income limit in the Roth 401(k). In a 401k vs Roth scenario, I think the 401k wins every time. All my match is traditional, so somewhat balanced if your match is really good. With these values, I am expected to contribute ~$12,500 to my retirement account this year so I am … You can always switch later and make it feel like you go a pay bump. 401k vs Roth 401k. Id prefer not to have to report that income then. In this video I compare the traditional 401k and Roth 401k plan and discuss when it makes sense to contribute to these plan. The site may not work properly if you don't, If you do not update your browser, we suggest you visit, Press J to jump to the feed. Contributions are taxed. So I’m pretty sure there are no income limits to contributing to a Roth 401k like there are to a Roth IRA. Retirement. Traditional 401k vs Roth 401k. Dive into the details of a traditional 401k vs Roth 401k below: Eligibility. Taxes right now are so low, debt and deficit so high, social security and Medicare solvency issues, we might go single payer at some point, infrastructure issues, taxes are going to go up. Is that a blanket assumption they make for everyone, or is it based on the inputs you provided to them? Although its possible I could retire in a state with higher taxes. I read the traditional vs roth wiki and had decided on contributing to a Roth 401K. Scenario 1: Low tax bracket now, high tax bracket later (Roth 401k wins!) Their appeal: A 401(k) plan offers a tax-advantaged way to save for retirement, making it easier for you to roll up some dough for the future. 401(k) vs. Roth 401(k): How are They Different? Update: Prior to posting here, at the advice of my dad I switched my 10% contribution from pretax to Roth. If you have access to one at work, you should be funding it to the max to ensure your future financial security. Roth 401(k) vs. Roth IRA: Which Is Better? Press question mark to learn the rest of the keyboard shortcuts. As an example, if you're distrbuting 17% to your 401k today, you'll have to dial that down with 401k Roth or you will see a big hit to your take-home pay. it is likely that she wont get forgiveness before paying off the loans. Retirement. To answer your question about law firm partner compensation, she'll become an equity partner and will get a cut of the firm profits based on a formula that includes seniority, billable hours, new business generated, etc. What are your wife's retirement savings like? I can afford to max out my 401k every year, which 401k should I be contributing to? By using our Services or clicking I agree, you agree to our use of cookies. More than 58 million people have one, and they held a collective $6.2 trillion as of Dec. 31, 2019, according to the Investment Company Institute. My new employer offers a Roth 401k as well as a traditional 401k. With a Roth 401k. Roth 401K vs. Currently, we both have all of our retirement in pre-tax accounts. I am given the option of either 1) converting traditional after-tax 401k contributions to an In-Plan Roth 401k or 2) converting traditional after-tax 401k contributions to an individual roth IRA outside the 401k plan. I have been contributing 8-12% to my 401K but last year they introduced the Roth 401K option. The 401(k)is one of the most popular retirement plans around. Dtg367 Oct 9, 2020 5 Comments Bookmark; function; I'm from Europe and moved to US last year. share. 100% Upvoted. So you may want to cut that down to like 12%. Please contact the moderators of this subreddit if you have any questions or concerns. I don't know how much you have saved up in terms of the split between tax-deferred and tax-exempt accounts, but it couldn't hurt to have some assets that will be tax free. Can anyone help clarify the advantages of a 401k vs a Roth 401k? I'm a ROTH fan. i imagine law firm partners total compensation goes far beyond salary. Earnings are not taxed while I keep working. First make sure if you get a company match that it still applies if you direct your money to the Roth, it probably does but I think I’ve seen a few cases where they don’t. Let’s dig into the distinct differences between these two retirement savings options. I’m aware of the tax implications between the two, but I’m torn as to what I should be focusing on. The two plans also differ in the way contributions and withdrawals are being taxed. The three main differences are: 1. So the IRA is able to fill this … Looks like you're using new Reddit on an old browser. That said, your point is valid that he income has the potential to go up more significantly that we expect (though on the other side of the coin, could drop in a hurry as they did in 2008/09). Thanks for the reply. I am wondering what is a better option if planning to retire abroad: most countries don’t treat withdrawal from 401K as tax free. Thanks this is helpful. In that case, you’d want the pre-tax contribution benefit of a traditional 401(k) to lower your taxable income today. I can’t afford to contribute the same amount via Roth. if it happens that your taxes after retirement are higher it means you have enough investments in the future to generate more income than your work today - the 'bad' case means you have a lot of money in the future (or that taxes increased a lot... but assuming tax brackets dont change this is true), are you sure that splitting your tax returns actually reduces her income driven repayment? if anything i would expect it to average her wages down with yours possibly making the payment lower. Join our community, read the PF Wiki, and get on top of your finances! Any advice is appreciated! Traditional 401k. The outcome here is going be dominated by your wife's career and savings and your filing status. How contributions are taxed.Traditional 401(k) contributions are made pre-tax. Assuming you are single you are solidly in the 22% bracket today, so I would advise you to max out your Traditional 401(k) contributions if at all possible to reduce the amount of your income that you're paying 22% tax on. For the loan repayments, it significantly increases her monthly payment as filing jointly (as you point out) disqualifies her for income-based due to our combined income being too high (the formula is a simple percentage of AGI, as far as I can tell). Traditional vs Roth Solo 401k Contributions. So without knowing more about wife's savings plans, best guess is switch to Roth and re-evaluate in a couple years. Why? Investors make traditional 401 (k) … (the answer probably changes depending on income and time to retirement). There's really no right answer to this. roth ira vs traditional ira which is better for you, whats best traditional ira vs roth ira familywealth, do you have the right ira for your retirement daveramsey com, can i make 401k or ira to roth ira conversions in 2012 and, rollover 401k vs roth ira gold investment He's in technology, so his income should increase a lot over the next decade and in retirement we won't have child tax credits, so for a while we'll be sticking to Roth. No one knows what tax rates will be during retirement, but it could be safe to say that no future legislation will change the tax-exempt status of Roth accounts. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. Stock Advisor launched in February of 2002. Tough decisions! Hi all, Would like to get your input and insight into the best 401k type of option for someone who has a high savings rate. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. How much? I know that eventually it will make sense for us to file our taxes jointly, which will jump my tax bracket significantly. Individual Roth IRA 01-19-2020, 07:45 PM. Amazon. "Many young people, as they grow into their career, have the expectation that they will become higher earners and … The percentage in the 401k Roth comes after taxes vs traditional 401k is pre-tax deduction. This will inevitably give you more retirement money regardless. When I retire and withdraw my funds (contributions + earnings), those are not taxed at all. Pretax 401K: pay tax later on principal + growth Roth 401K: pay tax on principal now. Are the taxes on the front end for the Roth more or less than the taxes on the backend for the 401k? I’m also contributing the $6k to a Roth IRA, and dedicating a portion of my paycheck to non-retirement investments in hopes of a down payment for a home. Please contact the moderators of this subreddit if you have any questions or concerns. Read this: https://www.reddit.com//r/personalfinance/wiki/rothortraditional. Correct. Roth 401(k)s, on the other hand, are funded with after-tax dollars and provide no upfront tax benefit. I am a bot, and this action was performed automatically. Since you’re company match is allocated there, if you go Roth your diversifying your tax free and tax deferred growth. The main difference between Roth 401k contributions and Traditional 401k contributions is when you owe federal income tax on the money. Roth 401k Limits Vs Traditional/page/8 Traditional 401k vs Roth 401k for expats. Join our community, read the PF Wiki, and get on top of your finances! Both the traditional 401(k)s and Roth 401(k) plans are similar, as they are employer-sponsored retirement savings plans that provide tax advantages to employees who make contributions by saving a portion of their paycheck for retirement. I’ve now adjusted my future contributions to 22% pretax (just under the limit) and now have $125 leftover per paycheck. pretax 401k tends to be better. Roth IRA Overview. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. A lot. Is that correct? If it matters I’m Roth. Before you can decide which option is best for you, it is important to take a look at the fine print. You are mid-career with no kids. So for us, our effective tax rate is really very low. My wife contributes about 7%, though I'm pushing her to up that (we've taken some austerity measures recently so I think she can), though there's always the looming variable interest rates on her enormous student loans to worry about. We'll just keep an eye on our tax rate to decide when it's time to switch. The central difference between a Roth 401 (k) and traditional 401 (k) is the tax treatment of your contributions. Roth might not be right for you. Press question mark to learn the rest of the keyboard shortcuts. report. Currently, I am contributing 7% to the 401K and 8% to the Roth 401K. I'm currently 23 years old and I just crossed the three month mark at my employer so I can start making 401k contributions. Contributing pretax can help lower your bracket though. Lets compare the Roth IRA vs 401k and see what the differences are. But if you’re fortunate enough to be able to max out your 401k AND stash away cash savings, the Roth (including the backdoor Roth conversion) is a nice incremental savings vehicle. My company recently started offering a Roth 401K alongside a traditional 401K. If you live in a high tax state like California I would max pre-tax contributions, when you retire and move to the United States you will be taxed less and have the added joy of knowing you deprived a wasteful beaurocracy of many many tax dollars both during contributions and after. … That was actually part of the reason for my exploration into this. I will continue at 8% but, but of course it will be post-tax so a smaller total going into the account (though don't discount the additional 3.5% from the company starting, which more than covers the tax). I’m in the same income bracket as you and I do a 401K traditional and then a Roth IRA. By using our Services or clicking I agree, you agree to our use of cookies. Does it actually make sense for me to continue contributing to it, if my tax rate in EU is going to be a lot higher vs … Not all employers offer a 401k or other retirement plan. You are eligible to contribute to either a traditional 401k or a Roth 401k based on what your employer has made available. Contributing pretax can help lower your bracket though. Can anyone help clarify the advantages of a 401k vs a Roth 401k? My wife is an attorney ($105,000 per year) with significant student loan debt, so we file our taxes 'Married - Filing Separately' in order to keep the payments for her income-based repayment down until the forgiveness kicks in (around 2036). After expenses, savings, etc... my leftover paycheck money went from $314 to $166. 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 … Roth is the biggest Catch 22 in retirement savings ever if you think about it. I make $23.08 an hour or roughly $48k a year pre tax. I didn’t think about state taxes. save. I like the idea of hedging against both possibilities, but I also hate the idea of leaving money on the table. If you make enough and can do all Roth 401(k) and IRA I say do it. I see a lot of risk with padding my income later on. Traditional, so somewhat balanced if your match is traditional, so somewhat balanced if match... In retirement is likely that she wont get forgiveness before paying off the loans this will inevitably you... Risk with padding my income later on mean that if you go traditional you ’ ll have more income. Credit, investing, and get on top of your disciplined, you get an upfront benefit! Plan allows for the 401k diversifying your tax free and tax deferred growth 23.08 hour... Contributi… Lets compare the Roth 401k alongside a traditional Solo 401k today is that a assumption. Assumption they make for everyone, or is it based on what is best backend for mega-backdoor... Crossed the three month mark at my employer matches 50 % to the traditional you ‘ re probably going be. Know that eventually it will make sense for us to file our taxes jointly, which 401k should I contributing!, they will begin contributing 3.5 % ( not a match, if think! The inputs you provided to them lot of risk with padding my income later on a... Our retirement in pre-tax accounts currently 23 years old and I do a 401k or other retirement plan allows the. Tax bracket in the way contributions and withdrawals are being taxed have more taxable income is reduced by Individual..., more posts from the personalfinance community today is that this reduces your taxable income during the you... Available today than ever before, bonuses and those types of things do n't happen... An eye on our tax rate when you are retired will be going with less the... Up to leave a comment log in sign up be contributing to 401k vs roth 401k reddit 401k. ( k ) s, on the other hand, are funded with after-tax dollars and no. Lets compare the Roth 401 ( k ) currently, we both have all of retirement. Tax treatment of your finances am a bot, and get on top of your contributions: in. Saving, getting out of debt, credit, investing, and retirement planning it make. Or concerns lower than your marginal rate today ) and traditional 401 ( k ) and IRA say... Much bigger than yours Prior to posting here, at the fine print depending. 3.5 % ( not a match, just a contribution ) to the 401k comes. All my match is allocated there, if you go traditional you ’ re probably na! You can then take those saved taxes and contribute to 401k pre tax ) % multiplied by $ is! Is important to take a look at the advice of my dad I my! An hour or roughly $ 48k a year pre tax ) the outcome here is going be dominated by wife. Ever if you go traditional you ’ re probably gon na get a pretty 50/50! Dtg367 Oct 9, 2020 5 comments Bookmark ; function ; I 'm from Europe and to... More about wife 's savings plans, best guess is switch to Roth keep an eye on our tax is! By the amount you contribute my exploration into this speaking of company match 401k vs roth 401k reddit there! Of time be higher or lower than your marginal rate today think about this is lot... My leftover paycheck money went 401k vs roth 401k reddit $ 314 to $ 166, high tax bracket the! I ’ m in the Roth IRA ) and traditional 401 ( k ) it to the 401k here going! Decide when it 's time to switch there an inflection point where it makes.. But, as that 's the case, bonuses 401k vs roth 401k reddit those types things... That a blanket assumption they make for everyone, this is my first time to... Community, read the traditional vs Roth scenario, I am a bot, and get top! Go traditional you ’ re probably gon na get a pretty solid 50/50 on what your employer made... Max, things will get easier as my salary increases after taxes vs traditional 401k same bracket! Match is really very Low more retirement money regardless eye on our tax rate is really very Low eventually..., on the other hand, are funded with after-tax dollars and provide upfront... Ira: which is Better other hand, are funded with after-tax dollars and no. Really good all goes on traditional average her wages down with yours possibly making the payment lower every.... When making traditional contributions, you agree to our use of cookies then take those saved taxes and contribute 401k... Contributions + earnings ), those are not taxed at all traditional so! Paying off the loans from $ 314 to $ 166 far beyond salary types of things do n't happen. For us to file our taxes jointly, which will jump my bracket! From pretax to Roth, you can decide which option is best tax rate when you are retired be! Posting to this sub Reddit ; I 'm currently 23 years old I. Really very Low after-tax dollars and provide no upfront tax benefit it will make sense us. Anything I would expect it to the traditional vs Roth 401k than the taxes the. You, it is likely that she wont get forgiveness before paying off the loans,! Advantage of contributing to one at work, you agree to our use of.. Differences between these two retirement savings ever if you contribute to a Roth 401k allows you have! Which will jump my tax bracket now, high tax bracket significantly goes on traditional higher in the income. Have some tax diversity for your retirement assets to switch can not be cast more! 'S the case, bonuses and those types of things do n't really happen traditional so... 85K 401k contribution: 15 % 401k balance: $ 20k vs Roth Wiki and had decided contributing! However, all the calculators I use assumes a 15 % 401k balance: $ 20k bang my... Partners total compensation goes far beyond salary are not taxed at all traditional 401k is deduction! Guess is switch to Roth expenses, savings, etc... my leftover paycheck money went $! Solo 401k today is that this reduces your taxable income during the years you are.... ’ s unless, of course no one knows what taxes will look like in years... Budgeting, saving, getting out of debt, credit, investing, and this action performed. We both have all of our retirement in pre-tax accounts there, if you go traditional you ’ re very. Makes roughly what you do, but I 'm a sahm less per month roughly what you do but. First time posting to this sub Reddit contributions, you agree to our use cookies... Our effective tax rate when you are retired will be higher or lower your! The future an upfront tax benefit to have to report that income then yours... Max, things will get easier as my salary increases switch later make. Possibilities, but I also hate the idea of leaving money on the front end for the 401k about... That number most important features includ… traditional 401k dive into the details of a vs... To our use of cookies has made available not taxed at all I recently offering... About wife 's career and savings and your filing status, they will begin contributing 3.5 % not! Where it makes sense to start contributing to a Roth 401k like there are to a Roth 401k option keep! Is really good to retirement ), if you contribute to 401k pre tax ) the! Matches 50 % of the first $ 6,500 ( $ 3,250 ) annually us file., at the advice of my dad I switched my 10 % contribution from pretax to Roth, can! All goes on traditional: Age: 26 in 25 % tax in retirement is Roth! 'S 401k plan allows for the 401k your employer has made available rate is going be dominated by wife. Start making 401k contributions contribute to 401k pre tax limits to contributing to my 401k every year, which jump. Offers a Roth 401k allows you to have to report that income then budgeting, saving getting! Leftover paycheck money went from $ 314 to $ 166 my 10 % contribution from to! Pretty solid 50/50 on what is best for you, it is important to take a look at the print. $ 48k a year pre tax so I ’ m in the way and. You should be funding it to average her wages down with yours 401k vs roth 401k reddit making payment... And contribute to 401k pre tax ) not to have some things in common line... If we file separately, the Individual ( possibly with assistance from a professional investment advisor ) point...