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401k traditional or 410k Roth?

42 10 April 8, 2018 at 04:08 PM
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what's the optimal way to break this down? my company offers both options. should I stick all I can in regular 401k or put some in Roth as well?
what about max regular 401k then Roth IRa?
what's the best way to do this?

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#2
You can certainly max your 401k and then a Roth IRA, but you'll need to earn less than $120k a year to do it. More retirement savings is always good, but a lot of people who have the flexibility to max a 401k at $18,500/year find themselves pushing on the Roth income limit.

Look at other options as well -- 529 for college, even if you don't have kids yet. Definitely max your HSA if you have a qualifying health plan.
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#3
Quote from Apathy_next
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what's the optimal way to break this down? my company offers both options. should I stick all I can in regular 401k or put some in Roth as well?
what about max regular 401k then Roth IRa?
what's the best way to do this?
It really depends on what tax bracket your are in. If you are a higher income earner in say the 24%+ tax bracket it probably makes sense to do the regular 401k.

If you are in a lower tax bracket I would do the Roth 401k to pay the taxes now and have tax free withdrawals in retirement.

If you can max the regular 401k and then max a roth IRA, that is great, you get the max tax deduction and then have some tax free (roth) retirement savings.
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#4
Another idea to consider is the potential value of being "tax diversified". Having money set aside in both roth and traditional accounts will give you more flexibility in retirement. Roth accounts will not have required minimum distributions and contributions can be withdrawn at any time.

There are a ton of articles and podcasts on the subject, it has been much debated. Unless you know the future tax code and what brackets you will fall in it will be difficult to pick a perfect plan. If you receive an employer match their contribution will go into the traditional account, something to consider as you decide your strategy.
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#5
Pre-tax deferrals... max that first, you will be saving the money instead of giving it to, well, people who will waste it on people who aren't you. Then retire to a tax friendly state.
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#6
Quote from Rob_799
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Another idea to consider is the potential value of being "tax diversified". Having money set aside in both roth and traditional accounts will give you more flexibility in retirement. Roth accounts will not have required minimum distributions and contributions can be withdrawn at any time.

There are a ton of articles and podcasts on the subject, it has been much debated. Unless you know the future tax code and what brackets you will fall in it will be difficult to pick a perfect plan. If you receive an employer match their contribution will go into the traditional account, something to consider as you decide your strategy.
There are so many ways to break this down depending on your risk tolerance and current holdings but this answer right here is why im doing a roth 401k. Heres a good breakdown on tax diversification including thr why and when.

https://www.dadsmakingcents.com/tax-cut-and-jobs-act-last-chance-to-tax-diversify/
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#7
I'd strongly argue that if you are young, the roth 401k option makes a strong case due to the potential for long term compound growth that becomes tax free. If you're 25, 35 years of compound growth could see your funds double 4 times. So 5k could become 80k, all of which is tax free if you withdraw over the age of 59.5 ( and funds are aged for at least 5 years, but that's assumed).

The truth is there is no clear answer. Just get as much of that money in there as possible.
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#8
I am doing traditional because if you do roth then you are contributing less and your money is growing slowly specially when you are just starting and you have less than 30k in your 401k.
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#9
Quote from harisahmed90
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I am doing traditional because if you do roth then you are contributing less and your money is growing slowly specially when you are just starting and you have less than 30k in your 401k.
How fast your money grows doesn't have to do with what classification of IRA you're using. It has to do with the underlying investments. Classification governs taxes/penalties on payments as well as contribution limits.
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#10
Quote from vairox
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Pre-tax deferrals... max that first, you will be saving the money instead of giving it to, well, people who will waste it on people who aren't you. Then retire to a tax friendly state.
A locality with low state taxes won't change the fact you still owe Federal taxes on any withdrawals from a 401(K). So as you put it, they are tax deferrals. Regardless of how much moaning and complaining people do about "overtaxation" (which is frankly a joke compared to other developed countries).
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#11
Quote from madcowdisease
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A locality with low state taxes won't change the fact you still owe Federal taxes on any withdrawals from a 401(K). So as you put it, they are tax deferrals. Regardless of how much moaning and complaining people do about "overtaxation" (which is frankly a joke compared to other developed countries).
If you are deferring what would be $830 in federal taxes every month, that is $10k a year...even at a low 7% interest over 20 years that's over $430k, way more than paying that in federal taxes today.
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#12
Quote from dukeblue219
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You can certainly max your 401k and then a Roth IRA, but you'll need to earn less than $120k a year to do it. More retirement savings is always good, but a lot of people who have the flexibility to max a 401k at $18,500/year find themselves pushing on the Roth income limit.

Look at other options as well -- 529 for college, even if you don't have kids yet. Definitely max your HSA if you have a qualifying health plan.
There's a way around the income limits. Google "backdoor Roth IRA." It's pretty easy to do; Vanguard CS helped me do it over the phone the first time.
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#13
Quote from bonkman
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How fast your money grows doesn't have to do with what classification of IRA you're using. It has to do with the underlying investments. Classification governs taxes/penalties on payments as well as contribution limits.
I think he means that he's putting in 70 cents on the dollar because he's paying taxes upfront. He wants more money growing tax deferred and he'll worry about the taxes later. It's not necessarily right or wrong, but he's correct in his assessment.
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#14
There is a bit of misinformation in this thread. Net savings (after taxes paid either now for a Roth or later for a traditional) is no different as long as the tax rate stays the same. Money may look like it "grows faster" in a traditional because taxes are not paid up front, but after paying taxes on the larger amount down the road, the amount saved will be the exact same (assuming the same tax rate). This was a concept that took me a while to understand when I first started exploring roth contributions.

The main deciding factor in roth vs traditional is your current tax rate vs your expected future tax rate. The future rate can change with your income, tax policy, location, etc.

I personally am contributing some to both as a hedge regardless of what happens in the future.
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#15
All about your marginal tax rate.

Benefits to both Roth and Traditional depending on various factors.

Roth - you pay the tax at your current rate and any growth over the years is yours tax-free.

Traditional - you don't pay any tax on the money now, but pay taxes on the money you take out at retirement, which could be at a lower tax rate than now, depending on your income now and then.
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