Explain like I'm 5... maxing out retirement

[Anonymous]

I feel like I am smarter than this post will make me sound, but I cannot figure out what maxing out retirement means.

Let's say I have access to four retirement vehicles:
Traditional 401k through work
Roth 401k through work
Roth IRA
Traditional IRA

My income puts me out of the running for a Roth IRA, so I'm down to three options.

I can put $6k into my Traditional IRA, right? Regardless of any 401k investments?

Now where I'm really stuck... $20,500 is the maximum for the TOTAL of my traditional and Roth 401ks, right? Or can I contribute that in EACH?

So if I'm understanding correctly, the absolute maximum I can contribute in a given year is $26,500?

(for the sake of this question let's ignore Backdoors, that feels like a problem for another day...)

[Anonymous]

Anonymous wrote:I feel like I am smarter than this post will make me sound, but I cannot figure out what maxing out retirement means.

Let's say I have access to four retirement vehicles:
Traditional 401k through work
Roth 401k through work
Roth IRA
Traditional IRA

My income puts me out of the running for a Roth IRA, so I'm down to three options.

I can put $6k into my Traditional IRA, right? Regardless of any 401k investments?

Now where I'm really stuck... $20,500 is the maximum for the TOTAL of my traditional and Roth 401ks, right? Or can I contribute that in EACH?

So if I'm understanding correctly, the absolute maximum I can contribute in a given year is $26,500?

(for the sake of this question let's ignore Backdoors, that feels like a problem for another day...)

Yes, 26,500 is the max you can contribute. Your employer match, if any, can increase this number. You can contribute to a traditional IRA and convert to a Roth, so think about whether that makes sense for you.

[Anonymous]

Thank you!!

I don't think Roth makes sense for me... My tax bracket is 32%, it can't possibly be any worse in retirement right? Seems like I should stick to traditional everything.

[Anonymous]

Anonymous wrote:I feel like I am smarter than this post will make me sound, but I cannot figure out what maxing out retirement means.

Let's say I have access to four retirement vehicles:
Traditional 401k through work
Roth 401k through work
Roth IRA
Traditional IRA

My income puts me out of the running for a Roth IRA, so I'm down to three options.

I can put $6k into my Traditional IRA, right? Regardless of any 401k investments?

Now where I'm really stuck... $20,500 is the maximum for the TOTAL of my traditional and Roth 401ks, right? Or can I contribute that in EACH?

So if I'm understanding correctly, the absolute maximum I can contribute in a given year is $26,500?

(for the sake of this question let's ignore Backdoors, that feels like a problem for another day...)

you got it right. 20.5 is limit - you can do both as long as it doesn't go over the limit of 20.5.

if you are going to do traditional IRA, that the time to look into backdoor, not later.

[Anonymous]

Anonymous wrote:Thank you!!

I don't think Roth makes sense for me... My tax bracket is 32%, it can't possibly be any worse in retirement right? Seems like I should stick to traditional everything.

that is a topic for another thread. a lot of people like traditional. i love roth. pros and cons of each

[Anonymous]

I would max out your traditional 401k and then if you want to save more look into backdoor Roths — if you don’t have existing traditional IRAs it is very simple and a big tax benefit

[Anonymous]

Anonymous wrote:Thank you!!

I don't think Roth makes sense for me... My tax bracket is 32%, it can't possibly be any worse in retirement right? Seems like I should stick to traditional everything.

Your contribution to your traditional IRA will not be deductible because you are covered by a retirement plan at work and have a high income (https://www.irs.gov/retirement-plans/ira-deduction-limits). Thus, you absolutely should do a backdoor Roth IRA so that your future earnings will be tax free (unlike if you leave your contribution in the traditional IRA). There is not downside to this.

[Anonymous]

You can also do a Roth 401(k) if that is an option.

[Anonymous]

For the ROTH 401(k) option, don't think about it as your tax bracket now vs later....think about the fact that all the growth of your money will be tax free. You will likely have double, triple, quadruple amount of money that will NOT be taxed. And there are no Required Minimum distributions with a ROTH.

[Anonymous]

Anonymous wrote:For the ROTH 401(k) option, don't think about it as your tax bracket now vs later....think about the fact that all the growth of your money will be tax free. You will likely have double, triple, quadruple amount of money that will NOT be taxed. And there are no Required Minimum distributions with a ROTH.

Roth 401(k) is subject to the same RMD requirements as a traditional 401(K).

The Roth IRA is not subject to RMDs

[Anonymous]

Anonymous wrote:For the ROTH 401(k) option, don't think about it as your tax bracket now vs later....think about the fact that all the growth of your money will be tax free. You will likely have double, triple, quadruple amount of money that will NOT be taxed. And there are no Required Minimum distributions with a ROTH.

This is exactly wrong

[Anonymous]

Anonymous wrote:For the ROTH 401(k) option, don't think about it as your tax bracket now vs later....think about the fact that all the growth of your money will be tax free. You will likely have double, triple, quadruple amount of money that will NOT be taxed. And there are no Required Minimum distributions with a ROTH.

Once again, a PP fails basic math. If you devote the same amount of money to a traditional 401k and a Roth 401k, and your tax rate remains the same, you will have exactly the same amount of money.

This is middle school stuff, people. If you want to screw up your own portfolio, fine, but don't give incorrect advice to others.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Thank you!!

I don't think Roth makes sense for me... My tax bracket is 32%, it can't possibly be any worse in retirement right? Seems like I should stick to traditional everything.

Your contribution to your traditional IRA will not be deductible because you are covered by a retirement plan at work and have a high income (https://www.irs.gov/retirement-plans/ira-deduction-limits). Thus, you absolutely should do a backdoor Roth IRA so that your future earnings will be tax free (unlike if you leave your contribution in the traditional IRA). There is not downside to this.

NP adding to this - you should carefully consider your overall needs. It may be that you'd rather invest the amounts you can put into a backdoor Roth into a taxable account, trading liquidity for tax advantages. Particularly if you envision retiring early.

[Anonymous]

Anonymous wrote:

Anonymous wrote:For the ROTH 401(k) option, don't think about it as your tax bracket now vs later....think about the fact that all the growth of your money will be tax free. You will likely have double, triple, quadruple amount of money that will NOT be taxed. And there are no Required Minimum distributions with a ROTH.

Once again, a PP fails basic math. If you devote the same amount of money to a traditional 401k and a Roth 401k, and your tax rate remains the same, you will have exactly the same amount of money.

This is middle school stuff, people. If you want to screw up your own portfolio, fine, but don't give incorrect advice to others.

You are so confidently wrong. But not interested in debating.

[Anonymous]

Anonymous wrote:

Anonymous wrote:For the ROTH 401(k) option, don't think about it as your tax bracket now vs later....think about the fact that all the growth of your money will be tax free. You will likely have double, triple, quadruple amount of money that will NOT be taxed. And there are no Required Minimum distributions with a ROTH.

Once again, a PP fails basic math. If you devote the same amount of money to a traditional 401k and a Roth 401k, and your tax rate remains the same, you will have exactly the same amount of money.

This is middle school stuff, people. If you want to screw up your own portfolio, fine, but don't give incorrect advice to others.

That's not always true right? Additional 20.5k (if you do ROTH now) may push you up to higher tax bracket. Not sure what you are saying. Are you talking about tax rate after you retire?