Roth 401K or Regular 401K

[Anonymous]

Anonymous wrote:Is there a match on your 401K? Max the match first, then Roth.

This is nonsensical. You can get the match regardless of whether you allocate it to a Roth or Trad 401(k).

[Anonymous]

Anonymous wrote:

Anonymous wrote:Is there a match on your 401K? Max the match first, then Roth.

This is nonsensical. You can get the match regardless of whether you allocate it to a Roth or Trad 401(k).

OP here. The company is only match with Tradition 401K.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Is there a match on your 401K? Max the match first, then Roth.

This is nonsensical. You can get the match regardless of whether you allocate it to a Roth or Trad 401(k).

OP here. The company is only match with Tradition 401K.

I meant Traditional 401K.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Is there a match on your 401K? Max the match first, then Roth.

This is nonsensical. You can get the match regardless of whether you allocate it to a Roth or Trad 401(k).

OP here. The company is only match with Tradition 401K.

I meant Traditional 401K.

Oh, in that case the choice is easy, as you never turn down free money. Do the TRAD up to the company match. Then, allocate the remainder of your contributions to the ROTH.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Is there a match on your 401K? Max the match first, then Roth.

This is nonsensical. You can get the match regardless of whether you allocate it to a Roth or Trad 401(k).

OP here. The company is only match with Tradition 401K.

I meant Traditional 401K.

At my old company, Roth 401K was an option. they matched it, but the match went into a tax-deferred account.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:It is a bit of an oversimplification, but a general test is whether you expect to pay a higher marginal tax rate (1) NOW or (2) LATER, when you take distributions (i.e., in retirement). If you expect your marginal rate will be higher in retirement, you should do the ROTH option, because that allows you to pay taxes now and then never pay any additional taxes on contributions OR earnings. If you expect that your marginal rate will be lower in retirement, you should do the TRAD (i.e., non-Roth) option, so that you can DEFER all taxes until you have that lower rate.

Of course, nobody has a crystal ball, so we can't predict with 100% certainty whether your tax rate will be higher or lower 30-40 years in the future. However, at $70k income, making a few reasonable assumptions, I think it's probably more likely that your tax rate will be higher in the future. So, like the other posters, I'd suggest you put your money in the ROTH option, so that you will never pay taxes again on those contributions OR earnings.

If you want to hedge your bets, you can always just do 50/50.

I don't understand the tax rate assumption. If you are retired, shouldn't you be in a lower tax bracket than when you were working? What am I missing?

Normally. Except the kid is just starting out, so he's presumably in a lower tax bracket now than he will be mid-career, which it will probably make more sense to go with a traditional 401k, where you exclude contributions from current income but pay tax later.

It doesn't matter whether he is in a lower tax bracket now than later in his career. What matters is whether he is in a lower tax bracket now than he will be in retirement. Now if you assume that someone starting at $70k will have their income continually go up and will save large sums to the point where he will be in a higher tax bracket as as result of withdrawals from his retirement accounts, then sure it makes sense to go Roth now.

However, lots of things can happen between now and then-- maybe OP's salary won't be a continual increase, or maybe OP isn't able to save as much as planned, or maybe due to offshoring or technology ends up having to retire earlier than planned. I am assuming if OP is using a Roth then he/she is saving less than with a traditional 401k, esp. in a 25% tax bracket (plus state taxes around here are north of 5%).

So really it comes down to, if OP uses a traditional 401k, the downside risk is having to pay a little extra tax if he/she is very successful. If OP uses a Roth the downside risk is not having enough money to live on in retirement, if things don't go as planned. Personally, I would rather take the first risk, but maybe that's why I am not an entrepreneur.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Is there a match on your 401K? Max the match first, then Roth.

This is nonsensical. You can get the match regardless of whether you allocate it to a Roth or Trad 401(k).

OP here. The company is only match with Tradition 401K.

I meant Traditional 401K.

OP - please double check this - this is not typical. The match goes into tax-deferred, but usually you still get the match.

[Anonymous]

One common misunderstanding is the assumption you will automatically be contributing less money to a Roth than TRAD. This misunderstanding stems from comparing pre-tax dollars to post-tax dollars where the post-tax dollars are smaller due to taxes. But in reality, if you plan to save 5k you most likely would deposit 5k pre-tax dollars into a TRAD IRA or deposit 5k post-tax dollars into a Roth IRA. In this scenario you're actually investing more into the Roth than the TRAD because you're not only investing the 5k but also investing/paying the taxes upfront. If your effective tax rate is 25% and you deposit 5k into a Roth you would need to deposit $6,666 into a TRAD for an equal investment.