Just graduated as an engineer, starting to put 10-15 % of my income into an IRA waiting to have access to company match (same for my fiancee) would it be better to put money into a roth or tradional? And once we have access to work 401(k) after maxing out the match should we load up on one type or split it in some proportion?
Roth vs Traditional
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Last: 2 yr ago by permabull
Everybody says Roth and, if all things remain as they have been, it would be the right thing to do at your age. I've never trusted that I'm going to have a tax free withdrawal though. Once I was able to max out, it's always been traditional. I can count on the tax break now and I can't see them ever making me pay back deductions that were legal when taken. Tax sharks are looking hungry at those future breaks now.
cisgenderedAggie said:
Everybody says Roth and, if all things remain as they have been, it would be the right thing to do at your age. I've never trusted that I'm going to have a tax free withdrawal though. Once I was able to max out, it's always been traditional. I can count on the tax break now and I can't see them ever making me pay back deductions that were legal when taken. Tax sharks are looking hungry at those future breaks now.
You can't see them making you pay back deductions that were legal but you do see them taxing gains that were legally structured as tax free?
I think any change to Roth like you suggest will still pale in comparison to a tax increase on ordinary income.
Also, mathematically, for traditional to be the better option you have to also invest the tax savings or expect a lower tax rate in retirement (which is unlikely for just people today).
A young engineer? Perfect - you can build a spreadsheet. Include a place to put in pre-tax traditional and a place to put in Roth. Then make some assumptions on how much you withdraw annually. You can get a pretty good feel for it that way. You could also tweak tax rates, annual return rate, or other parameters in order to look at sensitivities.
In general the way things have been, early in your career it's better to put more money in a Roth than a traditional IRA or 401k since that's the time you pay the lowest tax rate and since your taxed money has more time to grow. Then as you get older you split or move to adding money to the traditional. In the end you'd like to have some of each so that you can be flexible in which you withdraw from in any given year to control taxes.
One other item - first make sure you are at least contributing to your company's 401k up to their match if they do match. Second, if they offer an HSA you should max that out first and not spend it - this money goes in tax free and can be invested and then used later in life as long as it's for medical expenses. You get tax relief going in, tax relief on growth while it's in there, and tax relief coming out.
In general the way things have been, early in your career it's better to put more money in a Roth than a traditional IRA or 401k since that's the time you pay the lowest tax rate and since your taxed money has more time to grow. Then as you get older you split or move to adding money to the traditional. In the end you'd like to have some of each so that you can be flexible in which you withdraw from in any given year to control taxes.
One other item - first make sure you are at least contributing to your company's 401k up to their match if they do match. Second, if they offer an HSA you should max that out first and not spend it - this money goes in tax free and can be invested and then used later in life as long as it's for medical expenses. You get tax relief going in, tax relief on growth while it's in there, and tax relief coming out.
Roth
Obviously, you should want to do both.
Depending on your age and tax bracket there does come a point for many people that the traditional becomes a better cost savings than the Roth, but you are a long way away from that.
Depending on your age and tax bracket there does come a point for many people that the traditional becomes a better cost savings than the Roth, but you are a long way away from that.
Deplorable Neanderthal Clinger
cjsag94 said:cisgenderedAggie said:
Everybody says Roth and, if all things remain as they have been, it would be the right thing to do at your age. I've never trusted that I'm going to have a tax free withdrawal though. Once I was able to max out, it's always been traditional. I can count on the tax break now and I can't see them ever making me pay back deductions that were legal when taken. Tax sharks are looking hungry at those future breaks now.
You can't see them making you pay back deductions that were legal but you do see them taxing gains that were legally structured as tax free?
I think any change to Roth like you suggest will still pale in comparison to a tax increase on ordinary income.
Also, mathematically, for traditional to be the better option you have to also invest the tax savings or expect a lower tax rate in retirement (which is unlikely for just people today).
Yes, that's about the size of it. Reclassifying distributions out of the Roth from some future time point forward as taxable is an easier path than trying to extract taxes on what was deducted 20-30 years ago.
Not saying that's reason for someone else to not bother with a Roth, it's just my reason. As I said, assume all things remain as they have been to date and it's clear that Roth is superior. I just don't see that lasting for 30- 40 more years so I prefer to take the bird in the hand.
Max roth first ($6k/yr) then contribute to 401k up to company match at a minimum. Then every yr you get a raise, bump up your 401k auto contrib by another 1%. If employer health plan is high deductible plan with HSA account, its a good idea to max that HSA as well.
Hijack attempt:
I do backdoor Roths for my wife and I each year. Max out HSA as well. My company did away with 401K match during oil downturn but I've still been maxing 401K, putting in 11% or so to max out at $19K or whatever it is. They plan to bring back 5% match January next year.
Question: wife started a new job that has Roth 401K option. She works at school district for about $25K/year. Should I reduce my 401K contribution next year to just get the 5% max then max out her Roth 401K contribution? Obviously would put most of her salary toward retirement investment, but would free up cash from my salary to balance out. Just thinking the tax benefits of the Roth might make it make sense. Thoughts?
I do backdoor Roths for my wife and I each year. Max out HSA as well. My company did away with 401K match during oil downturn but I've still been maxing 401K, putting in 11% or so to max out at $19K or whatever it is. They plan to bring back 5% match January next year.
Question: wife started a new job that has Roth 401K option. She works at school district for about $25K/year. Should I reduce my 401K contribution next year to just get the 5% max then max out her Roth 401K contribution? Obviously would put most of her salary toward retirement investment, but would free up cash from my salary to balance out. Just thinking the tax benefits of the Roth might make it make sense. Thoughts?
That's one I can answer, 100% instant returns are impossible to beat. Don't leave any match on the table no matter what account it is
Not sure if it's been mentioned yet but even in a Roth the company match portion will still be in a "traditional". I put that in quotes because depending on your 401k provider you may or may not actually see that portion split out, but they are keeping track of it behind the scenes because the company match cannot be Roth.
Is that taxed at the end of the year? Or when you start withdrawing the account? And would you be able to do a mini backdoor roth on it?
All things being equal throughout your life, they both would yield the exact same tax effect. But due to income changes, tax bracket changes, inflation, etc. that won't hold true. My opinion is that taxes in 20-50 years will be higher than they are today, meaning the Roth should be the advantage, but a mix of the two helps hedge against these changes. And, as others have mentioned, Roth early in career and Traditional in later career helps take advantage of your tax brackets.
Seems like this topic gets brought up regularly, but something I never see addressed is the tax benefit of mixed distributions from Roth and Traditional in retirement. If you have a balance of both, you can pull from traditional up to the desired tax threshold, and then supplement the remainder of your expenses tax free with Roth, which reduces the taxes on your traditional balance.
Seems like this topic gets brought up regularly, but something I never see addressed is the tax benefit of mixed distributions from Roth and Traditional in retirement. If you have a balance of both, you can pull from traditional up to the desired tax threshold, and then supplement the remainder of your expenses tax free with Roth, which reduces the taxes on your traditional balance.
Going to be a variety of answers on this. We are late 40s and have a mix of both. It's weighted heavier on the Traditional side simply because that's where we ended up. However, a few years ago we went 100% Roth in 401k as well as IRA's after running a few different analyses with our FA. That is probably against the majority advice here considering our age and tax bracket but that's where our situation shook out.
Also, at this point your future tax situation is not nearly as concrete as it once was. Income tax brackets will absolutely be higher in the future because they will have to be in order to try and pay for all the Democrat wish list items. So, if you are making good money count on an increased tax burden. At the same time, you can also expect SS to be means tested and your retirement accounts garnished either through new taxes or other means.
Also, at this point your future tax situation is not nearly as concrete as it once was. Income tax brackets will absolutely be higher in the future because they will have to be in order to try and pay for all the Democrat wish list items. So, if you are making good money count on an increased tax burden. At the same time, you can also expect SS to be means tested and your retirement accounts garnished either through new taxes or other means.
Traditional.
Unless you plan on retiring earning less than you are now; I don't see how a traditional is better
Z3phyr said:
Just graduated as an engineer, starting to put 10-15 % of my income into an IRA waiting to have access to company match (same for my fiancee) would it be better to put money into a roth or tradional? And once we have access to work 401(k) after maxing out the match should we load up on one type or split it in some proportion?
I would do Roth until 401k is an option. Max them both out after. Best time to start and max is when you're young as you'll have the most time for gains. I started maxing 401k when I started a real job after TAMU, age 22. Just doing that every year, I have ~ $1.5M in 401k/Roth after 23yrs.
1. 401k up to company match
2. Max Roth
3. Max HSA
4. Max 401k
5. After-tax to 401k > Roth conversion (If available; Settle on a monthly budget and throw the rest in here.)
These were my steps taken once all debts were paid.
Pretty much never have to stress too much about spending as long as I stay reasonably close to monthly budget. If you can do all five you are basically guaranteed a comfortable and probably early retirement.
Granted I know step 5 isn't an option for everyone.
2. Max Roth
3. Max HSA
4. Max 401k
5. After-tax to 401k > Roth conversion (If available; Settle on a monthly budget and throw the rest in here.)
These were my steps taken once all debts were paid.
Pretty much never have to stress too much about spending as long as I stay reasonably close to monthly budget. If you can do all five you are basically guaranteed a comfortable and probably early retirement.
Granted I know step 5 isn't an option for everyone.
Z3phyr said:
Is that taxed at the end of the year? Or when you start withdrawing the account? And would you be able to do a mini backdoor roth on it?
It's taxed on withdraw. I can't speak intelligently on backdoor roths. I need to learn about it.
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If you don't already have a traditional ira (regular or rollover 401k from a previous job) I'd do roth, or traditional and immediately backdoor it into a roth. With your earning potential you'll soon be wanting to start doing a backdoor roth and having an existing traditional ira makes that kind of a pain
Years ago I ran a bunch of projections like another poster suggested doing here.
My conclusion was to
1). take the 401k match,
2). max the HSA
3). Normal taxable brokerage
.
.
.
4). 5). 6).
And depending on how much income you have left to save, then max out retirement after you've taken some for yourself in non-tax advantaged accounts.
I hate the restrictions to access on retirement accounts. I withdrew my Roth IRA contributions to buy a property, been my best investment yet. Many 401ks have limited investment options and high fees, and I prefer to invest more aggressively in a self directed account with lower fees.
The other thing I think people don't consider as much is that taxable accounts will pay lower capital gains taxes. For a married couple, the first 100k of capital gains income is tax free under the current laws (assuming it's your only income). Withdrawal of 100k from a 401k today would be taxed at about 20%, and actually even higher if you have social security income.
The difference between tax advantaged accounts and taxable accounts was not significant enough for me to accept the restrictions on the retirement accounts.
Roth IRAs are pretty good though because you can withdrawal your contribution.
Deciding at 22 you're going to limit your money access for the next 38 years, with no idea what lies ahead or when you will die, I think that is insane.
I think building up a nice flexible non-retirement savings before maxing retirement accounts should be considered. Great if you can do both. I would max "retirement" after you've got a "working years" capital reserve.
My conclusion was to
1). take the 401k match,
2). max the HSA
3). Normal taxable brokerage
.
.
.
4). 5). 6).
And depending on how much income you have left to save, then max out retirement after you've taken some for yourself in non-tax advantaged accounts.
I hate the restrictions to access on retirement accounts. I withdrew my Roth IRA contributions to buy a property, been my best investment yet. Many 401ks have limited investment options and high fees, and I prefer to invest more aggressively in a self directed account with lower fees.
The other thing I think people don't consider as much is that taxable accounts will pay lower capital gains taxes. For a married couple, the first 100k of capital gains income is tax free under the current laws (assuming it's your only income). Withdrawal of 100k from a 401k today would be taxed at about 20%, and actually even higher if you have social security income.
The difference between tax advantaged accounts and taxable accounts was not significant enough for me to accept the restrictions on the retirement accounts.
Roth IRAs are pretty good though because you can withdrawal your contribution.
Deciding at 22 you're going to limit your money access for the next 38 years, with no idea what lies ahead or when you will die, I think that is insane.
I think building up a nice flexible non-retirement savings before maxing retirement accounts should be considered. Great if you can do both. I would max "retirement" after you've got a "working years" capital reserve.
Z3phyr said:
Just graduated as an engineer, starting to put 10-15 % of my income into an IRA waiting to have access to company match (same for my fiancee) would it be better to put money into a roth or tradional? And once we have access to work 401(k) after maxing out the match should we load up on one type or split it in some proportion?
I wish there were a cookie cutter formula for what you should do. But there is more to take into account that just taking a percentage and sticking into a tax deferred vehicle. This strategy also has pitfalls when you reach retirement.
What you need to have is a conversation that includes not only an income analysis and what you should do from a tax deferred qualified account strategy, but what should you do to create more tax free income. You may success your way out of being able to a Roth, when other options are available.
Let's set up a time to talk and see if other strategies would give you a better outcome.
One of the things I would have done differently when I was younger is put more in my taxable accounts. We don't have near what I would like in that.
I've got about 10k in mine, idk if I should just keep throwing money at it or do something else
you may all go to hell and i will go to Texas
hedge said:
I've got about 10k in mine, idk if I should just keep throwing money at it or do something else
In my case, I left the work force earlier and younger than planned so having a bit more in taxable would have been nice and given me a bit more flexibility. We are still comparatively in better shape than most in our age group, but absolute wise I'm still not comfortable with where we are in that account.
Obligatory: need my paltry BTC holding to make its run to $1M so I can get my island.
hedge said:
I've got about 10k in mine, idk if I should just keep throwing money at it or do something else
Taxes will be increasing when the Trump tax cuts expire in 2025. Biden is aggressively pursing retirement plans.
It would wise to look at strategies that focus on taxing the "seed" and not the "harvest."
Here is a chart showing how tax brackets will change in 4 years.
The Biden plan to go after 401k and IRA accounts but ignores the value of pensions is going to be what starts a war.
dallasiteinsa02 said:
The Biden plan to go after 401k and IRA accounts but ignores the value of pensions is going to be what starts a war.
They are.
And its not just for those make over $400k. That is where they will start.
https://apnews.com/article/joe-biden-business-nancy-pelosi-10f0a84bc96fdaf86a92fa4d3ab69a5c
That must be a fake graphic, I was told taxes only go up on the top 1%
That article is almost a month old although I'm not sure if anything new has been released.
Haven't seen anything on Biden's 401k reform in a while which breaks his promise on his $400k tax threshold.
Haven't seen anything on Biden's 401k reform in a while which breaks his promise on his $400k tax threshold.
Prohibit all employee after-tax contributions in qualified plans and IRAs from being converted to a Roth regardless
of income level:
Effective date: Distributions, transfers and contributions made in taxable years beginning after 12/31/2021.
https://www.cnbc.com/2021/09/13/house-democrats-propose-new-retirement-plan-rules-for-the-wealthy.html
Slightly confusing article but it looks like Backdoor Roths are no longer allowable if you make above $400K single and $450K married and mega back doors are illegal for everyone. The former doesn't go into effect until 2032.
Still no new word on the 401K Reform Plan that switches it all to a tax credit on the backend.
Still no new word on the 401K Reform Plan that switches it all to a tax credit on the backend.
I just doubled my after-tax contributions for the last 5 pay periods of the year, since they're probably the last mega backdoor Roth conversions I'll ever make.
It sucks that they're applying this across the board rather than just to $400k+ income levels as with the backdoor roth limitations.
Biden always promised his tax changes would only affect the wealthy; guess I was foolish to believe that.
Alas...
It sucks that they're applying this across the board rather than just to $400k+ income levels as with the backdoor roth limitations.
Biden always promised his tax changes would only affect the wealthy; guess I was foolish to believe that.
Alas...
Brian Earl Spilner said:
I just doubled my after-tax contributions for the last 5 pay periods of the year, since they're probably the last mega backdoor Roth conversions I'll ever make.
It sucks that they're applying this across the board rather than just to $400k+ income levels as with the backdoor roth limitations.
Biden always promised his tax changes would only affect the wealthy; guess I was foolish to believe that.
Alas...
The trend is concerning.
Punish savers and those who were frugal and chose wisely for their future.
Add inflation, Tax on Gas, Property, and Social Security to subsidize Medicare.
This is only the beginning.
Brian Earl Spilner said:
I just doubled my after-tax contributions for the last 5 pay periods of the year, since they're probably the last mega backdoor Roth conversions I'll ever make.
It sucks that they're applying this across the board rather than just to $400k+ income levels as with the backdoor roth limitations.
Biden always promised his tax changes would only affect the wealthy; guess I was foolish to believe that.
Alas...
Well, he's a known, prolific liar and a left wing puppet so this is to be expected.
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