My total pre-tax income YTD is $57,320.60. Since you've been contributing to Roth, you will have a nice diversity of accounts after you retire, so that's a positive for you. I'm not sure it is with the duration you have unless you contribute what would be your tax savings to the traditional account yielding the same take home pay. Assuming worst case scenario & you finding yourself in a tough spot, it's better to have more money in a Traditional 401k, as opposed to less money in a Roth 401k. In that case, shielding some of your income now via tax shielded contributions to a traditional 401k would be beneficial. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. For most young people, Roth is almost always the best option. Also if you put all your money in Roth accounts, you won’t be able to have the first 10k (or whatever it is in the future) not taxed, even though you didn’t pay taxes on it today. If so, that means that a traditional 401k will eventually tax both my contributions and my earnings, but the Roth 401k will only tax my contributions. Traditional 401k vs Roth 401k. The reason to do that is to save the tax payment until you are in retirement when you have little or no income, so those withdrawals will be taxed at your EFFECTIVE rate in retirement. Well, there is one other advantage: Contributing $17,500 to ROTH actually allows you to contribute slightly more in a real sense, since you are contributing after-tax dollars. Cookies help us deliver our Services. Please contact the moderators of this subreddit if you have any questions or concerns. Roth IRA – Contributions are made with after-tax dollars, meaning that you pay taxes on the money before it ever gets put into the account. The income limits for the Roth IRA apply only to Roth IRA contributions, so you could still contribute to a traditional IRA up to the $6,000 (or $7,000) limit. You could always split it up between the 2. And does the 31k you now have in taxable make up the difference? Contribution limits. Also New Hampshire and Tennessee but do have to pay tax on investment income. This is a nice graphic to help provide visual context. If a Roth account would’ve been reasonably better you’ve already done very well for yourself so it’s not as if your retirement is in jeopardy. Your bullet points are correct but you conclusion is wrong. The question really boils down to whether the tax savings at the 25% tax bracket today is worth taxing the contribution and all growth at 15% later. Many readers are not in the position to do that and they are not sure which one to prioritize, Roth IRA or 401k. You're missing the big question mark which is "how does my current tax rate compare to what my potential rate will be at the time of withdrawal?". Assuming taxes in the future are pretty much the same as today it makes sense to contribute to both because the first 12,000 taken out of your IRA in retirement will be tax free (standard deduction). You are missing the fact that with a traditional 401k you are taxed on the contributions + earnings at the end, and with a Roth you are taxed at the beginning. I obviously have no idea what the future will hold, so I could be completely wrong. I've also heard people suggest some sort of split so you can withdraw from whatever account is most financially advantageous at that time. A solo 401(k) or sole-participant 401(k) is a retirement plan designed for the self-employed who can sock away more than traditional or Roth IRA limits. I'm in the 25% bracket as well and i'd suggest that you switch your 401(k) to traditional (keep your current contribution amount) and then contribute to max out a Roth IRA, then work on maxing out your 401(k). Otherwise, I agree with what you're saying. Roth IRA may not be slam dunk you think it is. This is a larger contribution amount but I will be taxed on it later. You need to juggle what your specific desire and outcome. I've never setup an IRA but in doing some research it sounds like the benefits of an IRA are more funds with lower expense ratios? So with Traditional, you'll be paying less in taxes. This was the one that finally clicked for me. There are several similarities and differences between Roth IRA vs Traditional IRA vs 401k. Let's say you get a raise of $1000 and you are deciding what to do with that money. Rolled over a Roth 401(k) or Roth 403(b) to the Roth IRA. Join our community, read the PF Wiki, and get on top of your finances! Great post. Total that up and you're at 141.5k in after-tax buying power, which is just marginally better than what you had in the Roth account. This assumes 10% annual growth and 25% marginal tax rate. This is a friendly reminder to visit our wiki on Retirement Accounts. That is the crux of the difference. The whole pre tax vs Roth discussion is moot if you decide not to use a retirement account at all. It's complicated because it comes down to tax rates. The traditional 401(K) does not tax your contributions until they come out on the other end. Balancing between both accounts is usually the best strategy because it gives you a lot of flexibility while saving you some taxes now. Pay little now, more later, the roth is good. Those rates are never the same. Over 15 years it grows to $4177. Our goal is also to max out both Roth IRA and 401k contribution. You're contributing about $11,500, which at 7% in 40 years will be $172,206 under both options. Thank you so much!! I am a bot, and this action was performed automatically. At 25% bracket, I would switch to traditional. But there are differences, including on withdrawal rules. Roth IRA Traditional IRA; Key tax benefits: Contributions are made with after-tax money and any potential earnings grow tax-free. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. It really depends on your current tax responsibilities versus your expected responsibilities at retirement. As another note I'd keep the 10% contribution rate at pre-tax as well. You might also benefit from this common topic: "I have $X, what should I do with it?". Scenario #2 - I contribute 10% of my after-tax income into a Roth 401k. This sub has a weird fetish with Roth retirement accounts, but in reality if you do the math most people would be better off with traditional tax-differed accounts. If your traditional withdrawals are your only income, and you are withdrawing the same ($110k, ignoring inflation) as you were making in your earning years, then your effective tax rate on your traditional withdrawals would only be 18.81% (using this year's tax tables). with a Roth account, you start with $1000 but 20% goes to taxes so you end up with $800 in the account. Unlike a Roth IRA, there are no income limits for contributing to a Roth 401(k) account. Is it better to have less money + no tax liability? For me, $15k in a traditional 401k gives me only $9k in a Roth. Any guidance is appreciated! Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. A lot. You might be better off putting that 3% in a Roth IRA where you can pick better/cheaper funds. A Traditional IRA is very similar to a 401k. With a traditional account, you put the whole $1000 in tax free. The process involves making a non-deductible contribution to a Traditional IRA (filing Form 8606), and then converting that balance into a Roth IRA. Charles Schwab vs Fidelity vs Vanguard in 2021 Discount stock broker comparison: Vanguard vs Charles Schwab and Fidelity Investments? I really think I'm going to move my contributions to traditional for my 401k and Roth for my IRA (which doesn't exist yet.) So the question is when will.your tax rate be lower, and you don't know the answer. Earnings are not taxed while I keep working, When I retire and withdraw my funds (contributions + earnings), those are taxed according to my income, When I retire and withdraw my funds (contributions + earnings), those are not taxed at all. I'm in a very similar situation as you, and put all my money into Traditional 401k. Another thing to consider is what state you're working in, and what state you plan to retire in. The way Roth works, you pay a lot in taxes now, put less money in 401k because of taxes, but you no longer have to pay taxes at retirement. The Roth IRA and the traditional IRA have a few things in common. It's certainly one question I've struggled with myself and one that I've seen the gamut of responses citing pros/cons for either side. His Roth IRA, like Sara and Brian's traditional IRAs, grows to $38,061, but unlike them he doesn't have to pay any tax when he withdraws the money. Whether these provisions still exist, are expanded, or are reduced really is anyone's interpretation. My employer does not match and instead offers a Profit Sharing based on our earnings (this was 4.5k last year.) The Traditional IRA and the Roth IRA offer tax-deferred growth with significant variations. The main difference between a traditional IRA and a Roth IRA is when you pay tax on your money. The differences between the two are huge on their face but dig a bit deeper they may not be. I'm diversifying and putting into a superior savings method with the IRA. But I’m not sure you understand how the tax brackets come into play. I am a bot, and this action was performed automatically. Don't take my word for TOO much because I don't know a ton about it, but used a few resources online to make my decision. So I originally thought it was a slam dunk to go Roth over Traditional but now I'm not so sure. Being at a higher income leads me to believe this is the best option now. I’ve since switched to 100% Roth starting in 2018. If either way you are going to max out though, then it makes sense to max the Roth because you are effectively saving more money for retirement due to the lack of future taxation. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. After 15 years that has grown to $3342. My employer does not match and instead makes a contribution based on our total income into our traditional 401k account. TL;DR - I'd stick with the Roth as you're young and began building this nest egg when you started working. Of course tax brackets do not remain perfectly constant, which will make one system or the other better for you. besides when you pay your taxes, the total gains on Roth vs Traditional are the same. In that case it is all about the tax bracket now vs then. Just curious, do you make a Roth IRA? I’m in my early 30s and had a 80%/20%, Roth/Traditional contribution split up until this most recent tax law passed. And that Roth vs traditional really just depends more on your expected tax situation in retirement vs in your accumulation phase. Earnings can be withdrawn without taxes … This is why the traditional 401(k) vs. Roth 401(k) decision is irrelevant if your income-tax rate is the the same in your working years and in retirement. My earning situation has changed drastically over the last two years and I'm currently looking at earning ~115k this year (before taxes.) Now consider the worst case scenario, where you run into a lot of financial difficulties later in life, and find yourself in retirement in a financially tough spot. If you invest 18.5k in traditional, you reduce your federal tax liability for the year by 4.44k. You have to try to gauge your tax responsibilities now vs later, and in many ways it is a guessing game. See here: http://www.reddit.com/r/personalfinance/wiki/investing#wiki_roth_or_traditional.3F. If you contribute post tax to a Roth, you contribute 70k, market grows 100x then you have $70m after tax at the end of the day. Note that even if your employer did 401K matching, it'd be to a traditional account, not a Roth, meaning you likely would have some taxable income during retirement. With identical tax rates they work out identically. No, because you can also invest the tax savings from investing in a traditional 401k. If you anticipate a lower rate in the future, then Traditional 401k is better. So let's assume your time horizon is 30 years, your average return is 7%, and we'll assume your average tax drag is around .3%. States without income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Press question mark to learn the rest of the keyboard shortcuts. This allows you to save more and still take home enough income to live on. So I decided to add 3% roth contribution; to make my total of 15% traditional (10 from me 5 matched) and then 3% roth. This is okay, because at least under the existing code (which will change one way or another), having less taxable income during retirement can also mean reduced or no capital gains during retirement, no taxable social security, and the ability to even invest any required minimum distributions (from the traditional account) at preferential rates that apply. Scenario A (invest in Roth): 141k in Roth, Scenario B (invest in traditional, plus invest tax savings): 141k in traditional, 31k in taxable. In a Roth 401(k) vs. Roth IRA comparison, both offer tax-free growth & tax-free retirement income. Yet, after spending more than half a century … Traditional IRA vs. Roth IRA vs. 401k Read More » There are many arguments and no real consensus for what’s “best”. Let me repeat that. Here's an example. By using our Services or clicking I agree, you agree to our use of cookies. By definition, this will not happen most of the time, so you should be finding yourself in retirement with more money than you really need. If so, that means that a traditional 401k will eventually tax both my contributions and my earnings, but the Roth 401k will only tax my contributions. The tax treatment is the same if the tax rates are the same. 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 The Roth IRA gives Sam 2 advantages over the other 2 investors: First, the Roth IRA captured all of Sam's tax savings—so unlike Brian, he's safe from the temptation to spend it before retirement. If you are paying a lot of taxes now and anticipate paying less at retirement, the traditional approach is better. Note that by law any employer matching contributions must be made into a traditional Roth account. After taxes they are the same in the end. If you invest 18.5k in Roth you get no tax deduction so that's all you have invested. Bankrate.com provides a FREE 401k or Roth IRA calculator and other 401(k) calculators to help consumers determine the best option for retirement possible. Remember your income at retirement will likely be lower, thus putting you in a lower tax bracket. http://www.reddit.com/r/personalfinance/wiki/investing#wiki_roth_or_traditional.3F. Building Wealth, Personal Finance. I've volunteered as a tax preparer for low-income folks, and the vast majority of people living close to poverty, pay very very little in taxes. Given that the earnings could represent as much as 80% of the total retirement balance, seems that the Traditional 401k ultimately ends up losing a lot more to taxes. With Roth, even if you give that money to charity, you've already paid taxes on it. Traditional tax-deferred accounts let you save taxes at your MARGINAL rate. The reason why is simple: taxes are low right now, infrastructure is crumbling, healthcare costs are going up, and the country is $21 trillion in debt. Thank you. There is a very good chance taxes will go up in the future, so I might as well pay taxes up front. Press question mark to learn the rest of the keyboard shortcuts. The allowable contributions made to a traditional IRA are considerably less than to a 401(k). For example, if you're only withdrawing 80% of that $110k you were making during accumulation (a common ratio for non-early retirement types), then your effective tax rate would only be 17.51% and traditional would come out even further ahead. This is put into the traditional 401k (no Roth option. So this could be the case as Florida, Texas and Nevada are all warmer states. With traditional, you haven't paid any taxes in the past, and if you give that money to charity, you'll never have to pay taxes on it ever. Post tax is $37,312.04 with $4,145.79 going into my Roth. I don't think there is a "correct" response per se. People paying taxes in a lower rate in the future, so I originally thought it was a dunk. 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