Roth 401K or Regular 401K

[Anonymous]

I am a newly graduated and newly employee. I earn less than $70K a year. Should I invest in Roth 401K or Regular 401K?

[Anonymous]

Anonymous wrote:I am a newly graduated and newly employee. I earn less than $70K a year. Should I invest in Roth 401K or Regular 401K?

Roth - more flexibility, tax wise which will be best in the long term is a guessing game.

[Anonymous]

Agree, Roth

[Anonymous]

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.

[Anonymous]

One other thing to consider -- when you reach retirement age, you are REQUIRED to take distributions from your 401K, but not your Roth 401K. The 401K distributions will count towards your taxable income in retirement. This can be important for things like Medicare, because the amount you pay for Medicare is based on your taxable income. The more taxable income you have, the more you will pay or Medicare benefits.

[Anonymous]

Anonymous wrote:One other thing to consider -- when you reach retirement age, you are REQUIRED to take distributions from your 401K, but not your Roth 401K. The 401K distributions will count towards your taxable income in retirement. This can be important for things like Medicare, because the amount you pay for Medicare is based on your taxable income. The more taxable income you have, the more you will pay or Medicare benefits.

Another important factor during retirement is the amount of your Social Security benefit subject to taxes. The more taxable income you have during retirement the more taxes you pay on your SS. If all your retirement income was from SS and Roth you would pay zero taxes during retirement.

[Anonymous]

Lots of threads here on this topic-- also check bogleheads and CNN/personal finance has some good info too.

I would suggest a traditional 401k because you can save more. If you save in a Roth 401k every dollar you save comes right out of your paycheck. If you go traditional you are saving pre-tax, so putting away $1,000 might only reduce your take home pay by $700-800.

Pretty much as long as you aren't maxing out your 401k and don't hate the investment options available to you, I would suggest going with the traditional.

[Anonymous]

Roth, most definitely.

[Anonymous]

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?

[Anonymous]

As a recent graduate, this guy is just starting out in his career and probably now has the lowest salary he'll have for the next 30-40 years. When you plan for retirement, you need to replace your finish-line salary, not your starting salary as a recent graduate. He's already starting to save for retirement in his early 20s (recent graduate), so he's looking to be in a good position to have that higher retirement income. Currently, at $70k in total pay, his marginal rate is most probably 25% (obviously, this depends on deductions and other assumptions, but it is a safe bet). That's pretty darn low. In addition to the above, given the state of entitlement programs and demographic trends, it's more likely than not that the overall tax brackets inch higher in the decades to come.

[Anonymous]

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?

Not if you passive income then is greater than your earned income is now.

[Anonymous]

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

[Anonymous]

Anonymous wrote:I am a newly graduated and newly employee. I earn less than $70K a year. Should I invest in Roth 401K or Regular 401K?

Completely depends on what you think your future income and taxes will be.

I'd wager you're better off with the Roth 401K tho.

[Anonymous]

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

Most companies still match contributing to a Roth 401K. It's just taxable later, unlike the Roth 401K.

[Anonymous]

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.