The Roth IRA and the traditional IRA have a few things in common. I've also heard people suggest some sort of split so you can withdraw from whatever account is most financially advantageous at that time. The tax treatment is the same if the tax rates are the same. It's extraordinarily unlikely that those two rates would be identical. 401(k) funds are not the only company retirement plan assets eligible for rollover. Traditional makes a lot more sense for me. Press question mark to learn the rest of the keyboard shortcuts. For most people, I think Roth ends up being the best choice if you're starting out and have at least 20+ years to retirement. That said, if you boosted your traditional contributions by about 2.5%, to 12.5%, you'd have the same take home pay as the Roth, and that $2,875 could grow to $43K in and of itself over 40 years, and after taxes, would be about $36,600, creating an after-tax balance in excess of the Roth, making traditional contributions more worthwhile. 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. In other words, i don't really expect a change in income tax up or down. Another thing to consider is what state you're working in, and what state you plan to retire in. ), With my move from the 15% tax bracket to the 25% tax bracket I'm starting to think it behooves me to switch to a pre-tax contribution (since I can't imagine earning more than 75k a year in my retirement.) You might also benefit from this common topic: "I have $X, what should I do with it?". Like you mentioned, there's a good chance that your retirement tax bracket will be lower than what it is now. Is it better to have less money + no tax liability? Roth vs Traditional 401(k) In a traditional 401(k), employees make pre-tax contributions. 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. Cookies help us deliver our Services. with a Roth account, you start with $1000 but 20% goes to taxes so you end up with $800 in the account. So say you're solidly in the 24% federal bracket (say, single and make $110k) and you have no state income tax. This is a friendly reminder to visit our wiki on Retirement Accounts. For quick trivia: The Roth accounts are named for this guy, the Delaware Senator who created the Roth IRA in 1997.. Roth 401(k)s vs. Roth IRAs. I thought the same thing, until I posted the questions here and looked at the hard number examples. But it is a balancing act. All in all, Traditional seems like the best way to minimize total tax liability, as compared to Roth. The Roth has no tax savings today and no taxes paid on it in the future. 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. Please contact the moderators of this subreddit if you have any questions or concerns. Similarly, Roth gains an advantage if you work in a state without income tax and retire to a state which has it. You seem to be mixing up effective tax rates with marginal tax rates (a.k.a. As you age and advance in your career, traditional IRAs start to make more sense. I am a bot, and this action was performed automatically. I'm contributing less dollars but won't be taxed on any of the gains I made (estimating an average of 8-10% a year.). 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). While this reduces your taxable income now, you'll pay regular income tax … The answer relies on your effective tax rate for your traditional withdrawals. That is the crux of the difference. The opportunity exists because there is no income limit for non-deductible contributions and no income limit for Roth conversions. The fact that your contributions are taxed at the beginning in one case, and at the end in the other case, is much more important than you realize. However, there are important differences and it may help you to take them into account when saving for retirement. You could always split it up between the 2. I'll assume 10% annual growth, you retire in 15 years, and 20% tax rates. The two plans actually do have a lot in common. This means your 141k in your traditional account would give you about 114.5k after tax. And that Roth vs traditional really just depends more on your expected tax situation in retirement vs in your accumulation phase. I read that but it doesn't really answer my question. A lot of people involve themselves in charity work & donations, as a noble way to spend their retirement years & surplus savings. Granted, thinking too much about the future does distract from the present. Roth 401(k) Traditional IRA Roth IRA; Conversions and Rollovers Upon termination of employment (or in some plans, even while in service), can be rolled to IRA or Roth IRA. Now you can invest that 4.4k in a taxable investment account and have a total of 22.9k invested. Yet, after spending more than half a century … Traditional IRA vs. Roth IRA vs. 401k Read More » Your bullet points are correct but you conclusion is wrong. 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.) Assuming your effective marginal tax bracket remains perfectly constant, both systems work out exactly the same at the end. Cookies help us deliver our Services. If you anticipate a lower rate in the future, then Traditional 401k is better. Converted a traditional IRA to the Roth IRA. I see the degree of long term financial success required to make a Roth truly worth it to be the best reason not to open one. 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?". How many years will it take for Roth to catch up? (Generally) all Roth contributions are taxed at your marginal rate. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. But there are differences, including on withdrawal rules. Researchers at Duke recently assessed 21 comparable funds from Vanguard and Fidelity across multiple attributes. Your Traditional contributions will be taxed at your effective rate in retirement, By lowering your current tax burden with Traditional contributions, you have additional money to invest. Or more money + tax liability? http://www.reddit.com/r/personalfinance/wiki/investing#wiki_roth_or_traditional.3F. The traditional 401(K) does not tax your contributions until they come out on the other end. As another note I'd keep the 10% contribution rate at pre-tax as well. When rolled to a Roth IRA, taxes need to be paid during the year of the conversion. With the Traditional, you'll save $2,875 in taxes today and pay $25,830 in taxes later yielding an after-tax balance of $146,375 (but with $2,875 in your pocket extra today). But that’s the sort of balancing act that goes through my head when I try to figure this stuff out. The allowable contributions made to a traditional IRA are considerably less than to a 401(k). 0 comments. Charles Schwab vs Fidelity vs Vanguard in 2021 Discount stock broker comparison: Vanguard vs Charles Schwab and Fidelity Investments? This is a larger contribution amount but I will be taxed on it later. Join our community, read the PF Wiki, and get on top of your finances! You might be able to actually save more in tax deductions now than you'll pay in taxes in a lower bracket later. With a trad, you’re going to be taxed on the money as it’s taken out, but often times when you are retirement age, your earned income may be less so that you’re taxed at a lower rate than you would be if you were taxed on the money today. First contributed directly to the Roth IRA. In a Roth 401(k) vs. Roth IRA comparison, both offer tax-free growth & tax-free retirement income. So with Traditional, you'll be paying less in taxes. With a traditional IRA, you get a tax deferment today and pay taxes on the money when you withdraw the funds in retirement. With a traditional IRA, investments inside the account grow tax-deferred. With identical tax rates they work out identically. Press J to jump to the feed. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. 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. So with the same tax rate, they work out identically. You might be better off putting that 3% in a Roth IRA where you can pick better/cheaper funds. But in terms of gains, they are the same. This allows you to save more and still take home enough income to live on. I'm in a very similar situation as you, and put all my money into Traditional 401k. 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%. For me, $15k in a traditional 401k gives me only $9k in a Roth. Congratulations! Bear in mind with most Roth's, that employer contributions (including the profit sharing) are made to a traditional account, so this does offer some diversity in retirement. If you contributed 100k to a traditional, are not taxed, and the market grows 100x, you then have 100m before tax and say $70m after tax. After 15 years that has grown to $3342. Is that correct? Roth are very bad for people like me in very high tax brackets. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. It's very likely that your tax bracket upon retirement will be lower than 25%, so at high incomes traditional is typically a better option. If I’m making the kind of money where I’m considering Roth ladders or backdoor stuff I’d probably have a fee based financial person doing it for me. Also, Vanguard provides access to some institutional class shares with lower minimums than at Fidelity. Traditional vs. Roth IRA – The Similarities. Dive into the details of a traditional 401k vs Roth 401k below: Eligibility. Currently I'm contributing 10% of my post-tax income into my Roth 401k. Traditional tax-deferred accounts let you save taxes at your MARGINAL rate. I don't think there is a "correct" response per se. Additionally, you're able to withdraw your contributions tax-free and penalty-free at any time, for any reason. Unless you are a student working part-time or for some reason expect your income to grow tremendously later in life, just stick with a traditional account. Scenario A (invest in Roth): 141k in Roth, Scenario B (invest in traditional, plus invest tax savings): 141k in traditional, 31k in taxable. If a higher rate, then Roth 401k. This means that for 2021 you cannot contribute $6,000 to each type (i.e., traditional and Roth IRA); however, you can contribute some to each up … tax brackets). 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. Pay little now, more later, the roth is good. 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. Post tax is $37,312.04 with $4,145.79 going into my Roth. That said, if you boosted your traditional contributions by about 2.5%, to 12.5%, you'd have the same take home pay as the Roth, and that $2,875 could grow to $43K in and of itself over 40 years, and after taxes, would be about $36,600, creating an after-tax balance in excess of the Roth, making traditional contributions more worthwhile. My total pre-tax income YTD is $57,320.60. Great post. Any guidance is appreciated! You need to juggle what your specific desire and outcome. My employer does not match and instead makes a contribution based on our total income into our traditional 401k account. While it might sound like an ordinary thing to do, most people don’t pay nearly as much attention to their future as they should. Looks like you're using new Reddit on an old browser. 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. Assuming your effective marginal tax bracket remains perfectly constant, both systems work out exactly the same at the end. Unlike a Roth IRA, there are no income limits for contributing to a Roth 401(k) account. November 4, 2014. Let's say you get a raise of $1000 and you are deciding what to do with that money. If you invest 18.5k in Roth you get no tax deduction so that's all you have invested. Here is a table of 10 years of growth in both Roth and Traditional accounts. Contributions to Traditional IRAs and Roth IRAs Are Aggregated Contributions to IRAs and Roth IRAs are aggregated. Your taxable account would be worth 27k after 15% capital gains tax on the earnings as well. And, since I am planning to live very cheap in retirement (hopefully), my withdrawal tax rate should be low. If you are paying a lot of taxes now and anticipate paying less at retirement, the traditional approach is better. besides when you pay your taxes, the total gains on Roth vs Traditional are the same. 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. So this could be the case as Florida, Texas and Nevada are all warmer states. The differences between the two are huge on their face but dig a bit deeper they may not be. 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. Our goal is also to max out both Roth IRA and 401k contribution. You are eligible to contribute to either a traditional 401k or a Roth 401k based on what your employer has made available. So I originally thought it was a slam dunk to go Roth over Traditional but now I'm not so sure. Scenario #2 - I contribute 10% of my after-tax income into a Roth 401k. If you work in a state with income tax and retire in a state without income tax, traditional gets an advantage. Your math sounds good except although the question is putting Roth vs traditional in a vacuum. I obviously have no idea what the future will hold, so I could be completely wrong. With traditional, you pay a lot less in taxes now, put more into 401k, but you later have to pay taxes during retirement. Of course tax brackets do not remain perfectly constant, which will make one system or the other better for you. 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. By using our Services or clicking I agree, you agree to our use of cookies. Let me repeat that. Just curious, do you make a Roth IRA? As Roth still beats non taxed account. But if the $2,875 of tax savings today is just spent or used for short-term goals, the Roth would likely yield a higher balance. 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. Thank you so much!! Possibly never. Your goal should be to save enough money for retirement, assuming worst case emergencies & stock market crashes. Most people plan to contribute to the 401k to get all the employer matching and then contribute to Roth IRA. If you invest in a Roth and come up short of your retirement goals then there really isn’t any silver lining. I’ve since switched to 100% Roth starting in 2018. TL;DR - I'd stick with the Roth as you're young and began building this nest egg when you started working. 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. Up until earlier this week I was going 10% traditional and I read several places that in my income bracket that it's hard to predict, so splitting it is a good option. In that case, shielding some of your income now via tax shielded contributions to a traditional 401k would be beneficial. This is a nice graphic to help provide visual context. 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. 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. Before you can decide which option is best for you, it is important to take a look at the fine print. Roth IRA vs. traditional IRA. That's a lot to think about. 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. And does the 31k you now have in taxable make up the difference? Being at a higher income leads me to believe this is the best option now. With Roth accounts you pay taxes at the MARGINAL rate now. With Roth, even if you give that money to charity, you've already paid taxes on it. States without income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. (The other is converting a traditional IRA to a Roth IRA, also known as a backdoor conversion.) Both the traditional IRA and the Roth IRA allow your earnings to grow tax-deferred until you make withdrawals. Roth IRA Traditional IRA; Key tax benefits: Contributions are made with after-tax money and any potential earnings grow tax-free. do you have the right ira for your retirement daveramsey com, whats the difference between a roth ira and a traditional ira, traditional ira vs roth ira the best choice for early, roth ira vs traditional ira headwater investment consulting, roth 401k and roth ira retirement plans conversion limits 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. Also New Hampshire and Tennessee but do have to pay tax on investment income. Scenario #2 is what I'm doing now but I feel like I should switch to #1. (Just learned last year how the tax brackets work so I understand it's income OVER 75k that I'm taxed at 25% on.). A Traditional IRA is very similar to a 401k. 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. Otherwise, I agree with what you're saying. After taxes they are the same in the end. The process involves making a non-deductible contribution to a Traditional IRA (filing Form 8606), and then converting that balance into a Roth IRA. There are several similarities and differences between Roth IRA vs Traditional IRA vs 401k. With a Roth IRA, you pay tax on the money now, but your investment grows tax-free, and you get to spend it tax-free in retirement. Just want some affirmation before making the switch. Contribution limits. 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? IRA vs 401k, Roth vs Traditional – Retirement Accounts Made Simple. Appreciate the support! New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. 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. 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. Earnings can be withdrawn without taxes … After that, they will maximize 401k contribution. With a traditional account, you put the whole $1000 in tax free. 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. Whether these provisions still exist, are expanded, or are reduced really is anyone's interpretation. Traditional 401k vs Roth 401k. 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. There are many arguments and no real consensus for what’s “best”. The vast majority of people involve themselves in charity work & donations, compared! To withdraw your contributions tax-free and penalty-free at any time, for any reason reduced really is 's... Thing as an `` effective marginal tax bracket now vs later, the traditional IRA very. Is how much more exactly the same tax rate when I try to roth ira vs traditional 401k reddit... Then there really isn ’ t any silver lining more in tax deductions than... For me, $ 15k in a state without income tax and retire to a Medical FlexSpend pre-tax. One system or the other better for you more on your current tax now. 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