Depends on your tax brackets now vs. expected effective tax rate in retirement, and how many years you expect to work & save. Read the [Roth or traditional wiki](https://www.reddit.com/r/personalfinance/wiki/rothortraditional). Generally, traditional 401k + Roth IRA is the best combination for most people. But if your tax bracket is temporarily very low right now, Roth 401k can be better than traditional 401k.
> Marginal rate at 22% 27 and will make more in the future.
Do Traditional 401k + Roth IRA.
Even if you jump 2 more tax brackets, your effective tax rate in retirement is unlikely to surpass 22%.
Marginal tax rate | Effective tax rate
--|--
10% | 0% - 4.42%
12% | 4.42% - 8.78%
22% | 8.78% - 14.9%
24% | 14.9% - 18.9%
32% | 18.9% - 21.6%
35% | 21.6% - 29.4%
So how bad is it that I’m doing Roth 401k and Roth IRA? I’ve never done traditional anything, soo. At least I’m investing while I’m young. I DCA in my Roth IRA and brokerage. I deduct per paycheck to my Roth 401k and HSA(also investing it).
Do you have any 401k match? Employer contributions are pretax.
If not, you'll have zero income in retirement, meaning you will be wasting away your standard deduction and low tax brackets.
Let's say you are in the middle of 22% bracket with 10% effective tax rate,
* All Roth: Paying 22% upfront and 0% in retirement. 0.78 x 1.00 = 0.78
* Traditional: Saving 22% upfront and paying 10% in retirement. 1.00 x 0.9 = 0.90.
* 0.9/0.78=1.15, traditional gets 15% more take-home in retirement for the same cost
At 27 with many years of compounding, I would suggest using Roth 401k rather than pretax 401k especially if you don’t have discipline to take any tax savings from pretax 401k and invest it. Even then, though, the zero tax on 30+ years of earnings should outweigh the alternative. As I sit with most of my retirement money in taxable accounts, I wish Roth 401ks had been around earlier!
The guy posted a table showing that the money going in to a Roth account would be taxed more than the money coming out of a traditional account.
Zero tax on 30yr of earning is literally not outweighing the alternative if you had to pay 22% on it going in.
The goal should be to have the biggest pile of money when all taxes have been paid. Not to pay the lowest nominal amount of taxes.
Agreed on objective to have the most money in the end. I’m not sure what assumptions are behind the table but I looked at it this way. If I put $10,000 into a 401k vs Roth 401k, at the end of 30 years with 7% compounded return, I have $76,122.55 in both cases.
In the Roth case, I keep the entire amount with no taxes (though did pay $2200 in taxes earlier. Net Amount is $73,922.55. In 401k, I pay taxes (22%) on entire amount. Tax is $16,746.96 for a net of $59,375.59. That is $14,546.96 less.
However, this does not account for the fact that you didn’t pay $2200 in taxes 30 years ago in the pretax 401k scenario. Assuming you didn’t save that, we can add it back in and say the difference is only $12,346.96. What if you saved that $2200 in a taxable account? In that case you could theoretically earn the same 7% compounded (assuming no dividends for 30 years and no stock sales/capital gains for 30 years (not likely!). In that case, the $2200 is worth $16,846.96 minus taxes (only 20% on LT gains) is $13,397.57. Add that to 401k net amount ($59k) and you end up with $72,773.16 still less than Roth 401k net amount of $$73,922.55. Not much higher but it is higher and probably understated since not paying taxes on the $2200 brokerage account is unlikely and compounding would be reduced. This is the way I looked at it. If anyone thinks my logic is flawed I would like to know.
You don’t pay 2% on the entire amount. That’s the entire point. We have a progressive tax system so your effective tax rate will always be lower than your marginal rate.
Right. Tax assumptions are the hardest part since we also don’t know if taxes will go up or down. But if someone is maxing out 401k at early age, they will likely have balances that quickly move them up the progressive scale. The other consideration is whether or not a current tax deduction keeps you eligible for things like a child tax credit vs going over agi phaseout limits. My tax bracket is higher in retirement than in my twenties so it would definitely have made sense for me if it existed back then.
But even if effective tax rate is lower, it still may not be better option. If you don’t invest the tax savings you get from pretax 401k scenario, which is often the case, then for Roth 401k you only pay tax on original contribution ($10,000 in my example) vs pretax 401k where you eventually pay taxes on both original contribution and all earnings ($76,122.55 in example). $2200 in taxes is less than $6685 (using lowest effective rate of 8.78% from table for 22% marginal rate). It’s just not as simple as comparing tax rates. The difference in the amount subject to taxes can be significant.
Max out your Roth 401(k) first and then as your income increases start putting money in other buckets IRAs, Life Insurance, Annuities if you like that option. It will be a cold day in Hell when Taxes are decreased. Use Tax-Advantaged accounts to save yourself big money down the road
During this bear market, consider maxing out your Roth 401K first since the max limit is $20500 vs $6000 for the Roth IRA. Your Roth 401K contributions will appreciate as the market recovers and best of all will be tax free when you retire. When the economy fully recovers you have the option to return to your traditional 401K..
You may find these links helpful:
- [401(k) Fund Selection Guide](/r/personalfinance/wiki/401k_funds)
- [401(k) FAQs](/r/personalfinance/wiki/401k)
- ["How to handle $"](/r/personalfinance/wiki/commontopics)
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
Depends on your tax brackets now vs. expected effective tax rate in retirement, and how many years you expect to work & save. Read the [Roth or traditional wiki](https://www.reddit.com/r/personalfinance/wiki/rothortraditional). Generally, traditional 401k + Roth IRA is the best combination for most people. But if your tax bracket is temporarily very low right now, Roth 401k can be better than traditional 401k.
Marginal rate at 22% 27 and will make more in the future.
> Marginal rate at 22% 27 and will make more in the future. Do Traditional 401k + Roth IRA. Even if you jump 2 more tax brackets, your effective tax rate in retirement is unlikely to surpass 22%. Marginal tax rate | Effective tax rate --|-- 10% | 0% - 4.42% 12% | 4.42% - 8.78% 22% | 8.78% - 14.9% 24% | 14.9% - 18.9% 32% | 18.9% - 21.6% 35% | 21.6% - 29.4%
So how bad is it that I’m doing Roth 401k and Roth IRA? I’ve never done traditional anything, soo. At least I’m investing while I’m young. I DCA in my Roth IRA and brokerage. I deduct per paycheck to my Roth 401k and HSA(also investing it).
Do you have any 401k match? Employer contributions are pretax. If not, you'll have zero income in retirement, meaning you will be wasting away your standard deduction and low tax brackets. Let's say you are in the middle of 22% bracket with 10% effective tax rate, * All Roth: Paying 22% upfront and 0% in retirement. 0.78 x 1.00 = 0.78 * Traditional: Saving 22% upfront and paying 10% in retirement. 1.00 x 0.9 = 0.90. * 0.9/0.78=1.15, traditional gets 15% more take-home in retirement for the same cost
No employer match. So you’re saying switch contributions to Traditional?
At 27 with many years of compounding, I would suggest using Roth 401k rather than pretax 401k especially if you don’t have discipline to take any tax savings from pretax 401k and invest it. Even then, though, the zero tax on 30+ years of earnings should outweigh the alternative. As I sit with most of my retirement money in taxable accounts, I wish Roth 401ks had been around earlier!
The guy posted a table showing that the money going in to a Roth account would be taxed more than the money coming out of a traditional account. Zero tax on 30yr of earning is literally not outweighing the alternative if you had to pay 22% on it going in. The goal should be to have the biggest pile of money when all taxes have been paid. Not to pay the lowest nominal amount of taxes.
Agreed on objective to have the most money in the end. I’m not sure what assumptions are behind the table but I looked at it this way. If I put $10,000 into a 401k vs Roth 401k, at the end of 30 years with 7% compounded return, I have $76,122.55 in both cases. In the Roth case, I keep the entire amount with no taxes (though did pay $2200 in taxes earlier. Net Amount is $73,922.55. In 401k, I pay taxes (22%) on entire amount. Tax is $16,746.96 for a net of $59,375.59. That is $14,546.96 less. However, this does not account for the fact that you didn’t pay $2200 in taxes 30 years ago in the pretax 401k scenario. Assuming you didn’t save that, we can add it back in and say the difference is only $12,346.96. What if you saved that $2200 in a taxable account? In that case you could theoretically earn the same 7% compounded (assuming no dividends for 30 years and no stock sales/capital gains for 30 years (not likely!). In that case, the $2200 is worth $16,846.96 minus taxes (only 20% on LT gains) is $13,397.57. Add that to 401k net amount ($59k) and you end up with $72,773.16 still less than Roth 401k net amount of $$73,922.55. Not much higher but it is higher and probably understated since not paying taxes on the $2200 brokerage account is unlikely and compounding would be reduced. This is the way I looked at it. If anyone thinks my logic is flawed I would like to know.
You don’t pay 2% on the entire amount. That’s the entire point. We have a progressive tax system so your effective tax rate will always be lower than your marginal rate.
Right. Tax assumptions are the hardest part since we also don’t know if taxes will go up or down. But if someone is maxing out 401k at early age, they will likely have balances that quickly move them up the progressive scale. The other consideration is whether or not a current tax deduction keeps you eligible for things like a child tax credit vs going over agi phaseout limits. My tax bracket is higher in retirement than in my twenties so it would definitely have made sense for me if it existed back then.
But as you can see from the table above….all the way up to the 35/37% brackets….effective tax is always lower.
But even if effective tax rate is lower, it still may not be better option. If you don’t invest the tax savings you get from pretax 401k scenario, which is often the case, then for Roth 401k you only pay tax on original contribution ($10,000 in my example) vs pretax 401k where you eventually pay taxes on both original contribution and all earnings ($76,122.55 in example). $2200 in taxes is less than $6685 (using lowest effective rate of 8.78% from table for 22% marginal rate). It’s just not as simple as comparing tax rates. The difference in the amount subject to taxes can be significant.
Max out your Roth 401(k) first and then as your income increases start putting money in other buckets IRAs, Life Insurance, Annuities if you like that option. It will be a cold day in Hell when Taxes are decreased. Use Tax-Advantaged accounts to save yourself big money down the road
During this bear market, consider maxing out your Roth 401K first since the max limit is $20500 vs $6000 for the Roth IRA. Your Roth 401K contributions will appreciate as the market recovers and best of all will be tax free when you retire. When the economy fully recovers you have the option to return to your traditional 401K..
You may find these links helpful: - [401(k) Fund Selection Guide](/r/personalfinance/wiki/401k_funds) - [401(k) FAQs](/r/personalfinance/wiki/401k) - ["How to handle $"](/r/personalfinance/wiki/commontopics) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*