I have the opportunity to contribute to a Pretax 401k or an after tax Roth IRA at work, and I was wondering which would be better for a 29 year old. My employer will do a 6% match into a 401k if I do either the traditional 401k or the Roth, but I was wondering which would be the suggested route. Figured I should probably do 401k with a 2050 target date investment allocation plan, but I was curious if there were any advantages to doing the Roth instead.
401k vs Roth IRA
- Thread starter WayboDawg
- Start date
If you get the same match then the Roth is likely better.
The reason is that you are likely in a lower tax bracket now than you will be when you retire. Pay the taxes now instead of later
There are plenty of buy-it-and-forget it options in the Roth similar to your 2050 plan.
The reason is that you are likely in a lower tax bracket now than you will be when you retire. Pay the taxes now instead of later
There are plenty of buy-it-and-forget it options in the Roth similar to your 2050 plan.
I would choose the Roth over the traditional (if I had to) for the same reasons mentioned above. Get the the free money match and pay your taxes annually. If you can afford to contribute more than the maximum allowed by the Feds, go ahead and explore putting the extra amount in a tradional IRA or some other mutual funds. Diversity is the ticket to steady growth and minimized risk. If your company has someone specifically assigned for investment strategies, talk w/ them. You might even want to get the free match w/i your company's program and go outside their program w/ your own asset mgr. I would definitely do some shopping for the right financial planner. It's worth your time.
If you are married, contribute to the Roth if your
joint modified gross income is under 183k. If it's over that, contribute to the 401k. If your income varies year to year, then you can simply have both setup and contribute to whichever one makes the best sense in that particular year. I'm not single so I don't know what the income cutoff is....but it isn't too difficult to find out.
joint modified gross income is under 183k. If it's over that, contribute to the 401k. If your income varies year to year, then you can simply have both setup and contribute to whichever one makes the best sense in that particular year. I'm not single so I don't know what the income cutoff is....but it isn't too difficult to find out.
The roth will give you tax diversification. Your contribution will eventually be taken out tax free; your employer's contribution is pretax and will eventually be taxed.
Even if your income is high now, I'd still lean towards the Roth. It seems likely taxes will go up in the future based on current spending, So you might not be hurt even if you end up with a lower income in retirement.
Your employer likely is matching their funds into the traditional 401k option regardless of which plan you put your funds to. You want to put 100% of your funds into the Roth. That lets you play games in retirement as you'll have a nice balance in each. You just look at the tax brackets when you retire. If for example the tax bracket is very low up to $35,0000, you can take your first $35,000 for the year out of traditional for basic living and then use the Roth to supplement your luxury living. Your tax liability will be very very low doing that.
One thing to consider is you can get your contributions out of the roth penalty and tax free before 59.5. Thats a nice benefit if you ever have an emergency. But i think they prorate it with earnings so id also consider maxing out the traditional
And opening a roth ira if you meet the criteria. Contributions come out of a roth ira first. Its a nice emergency fund with pretax retirement benefits.
And opening a roth ira if you meet the criteria. Contributions come out of a roth ira first. Its a nice emergency fund with pretax retirement benefits.
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Do both. Even if your employer only matches in your 401K, you still need to have your Roth IRA for personal contributions.
As someone else mentioned, the employer match will probably go into a traditional 401(k). Since the Roth is sponsored by your work, I suspect it's a Roth 401(k), and not a Roth IRA. The only real difference is you can take your money out of a Roth IRA at any time, and only pay tax on the amount you take out that exceeds the amount you've put in. In a Roth 401(k) (or a traditional 401(k)), you can't just take your money out unless you leave that employer and roll it into an IRA. But you can generally borrow up to 50% of the balance in your account.
As for which to contribute to, if you're in the 15% tax bracket, I'd probably go Roth. Otherwise, probably the traditional, or at least split it 50-50. One thing to remember is, if you contribute to a Roth, you're paying both Fed and MS taxes on the amount you put in. If you contribute to a traditional, you'll only pay Fed taxes when you take the money out at retirement because retirement plan distributions are not taxable in MS.
As for which to contribute to, if you're in the 15% tax bracket, I'd probably go Roth. Otherwise, probably the traditional, or at least split it 50-50. One thing to remember is, if you contribute to a Roth, you're paying both Fed and MS taxes on the amount you put in. If you contribute to a traditional, you'll only pay Fed taxes when you take the money out at retirement because retirement plan distributions are not taxable in MS.
It is a Roth 401(k). I guess the big question is will I save more money in the long run by paying Federal and State taxes on it now instead of just Federal at retirement when I'll likely be in a higher tax bracket. Also, my interest accrued with the Roth 401 (k) wouldn't be taxed right?
Correct. It'll grow tax deferred. I use both Roth IRA and Roth 401K; my company contributes to my R401K.
Go Roth 401(k) if you can. If you have the Roth 401(k) option don't even think about a Roth IRA - just put as much money as you can in the 401. Even if you leave the company, try to keep the money in the 401(k) instead of rolling into an IRA. Why? Because 401(k) is considered pension and if you ever get sued the funds are untouchable. IRA is a personal asset and can be seized if there's a civil judgment against you.
That's the big question that no one really knows the answer to. What will tax rates and tax law be when you retire. One other thing to consider is that, under current law, Social Security benefits are partially taxable if your income (including taxable retirement plan distributions) is over $25,000. Personally, I'm contributing 6% to a traditional 401(k) (we don't have the Roth option), plus maxing out a contribution to a Roth IRA outside of work. When I retire, I plan to delay taking SS benefits for a few years while I convert some of the traditional 401(k) into a Roth IRA. Then when I start taking SS benefits, I'll only take out $25,000 per year from the traditional plan, and take any more I need out of the Roth.
Long way of saying, I guess you probably need to have at least some of your money in a Roth. But again, who knows what tax law will be in 20-40 years.
I guess I'll stick to my guns for now on putting my full 6% in the after tax Roth 401 (k), with my employers 6% contribution going to traditional pre-tax 401 (k). It sounds like a nice mix to me, and I like the idea of my interest earned being un-taxed at the time of withdrawal. I like to believe that my un-taxed interest earned in the Roth 401 (k) will outweigh any additional state taxes paid at the time of investment, and that I'll be in a much higher tax bracket in 30-40 years. Like my late Grandfather used to say, "Never bet against yourself".
As far as federal income taxes, if you go with a roth, you will break dead even if you stay in the same tax bracket when you retire. You will come out ahead if you are in a higher tax bracket at retirement and behind if you are in a lower tax bracket in retirement. That would be relatively easy to predict based on your savings rate and the money you expect to need in retirement (because with a roth, you don't have minimum distributions, so it's your consumption that will dictate your taxable income), but of course there is also the likelihood that tax rates will change between now and then. It seems pretty likely that taxes are going up, so the only question is whether the increased taxes are going to come from income taxes or consumption taxes. Have no clue how that will play out, which is why the Roth 401k is a good option. If you just contribute to get your match, your account will be half taxable and half non-taxable. This gives you some flexibility, subject to minimum distribution rules, to manage your income year to year to minimize the overall tax hit.
The other thing to remember is that the statements above about how you break even depends comparing after tax contributions. 6% invested in a roth IRA will roughly be equivalent to 8% invested in the traditional 401k depending on your marginal tax rate.
Not sure about all this. If you rollover a 401k after changing employment and don't comingle it with a traditional IRA or roth ira, I think it maintains its ERISA protections. Even IRA's are protected under the federal bankruptcy code for over $1M. You might have to declare bankruptcy to receive this protection, but if somebody is coming after your retirement accounts, there's probably a good chance you are bankrupt.
On a Roth401K once it is five years old and you are 59.5 the money is Income tax and penalty free. Even the gain is income tax and penalty free.
The same rules that apply to the Roth IRA is the same to the Roth(401K). I am not a tax guy but I do teach the Roth and other retirement products. If you can get a tax cut today go for the tax cut. That's my opinion because their is no guarantee for tomorrow. You have to make hay while the sun is shinning.
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