By using our Services or clicking I agree, you agree to our use of cookies. How to Convert a 401(k) to a Roth 401(k) 401K. His Roth IRA, like Sara and Brian's traditional IRAs, grows to $38,061, but unlike them he doesn't have to pay any tax when he withdraws the money. However, I recently found out that all employer matches go into a traditional 401K by law, and I'm wondering if its financially worth it to be putting money into a Roth 401K instead of a traditional. If you're looking for bespoke advice based on your personal financial situation, the best place for it is the weekly "Help Me Fire" thread. Must-Know Rules for Converting Your 401(k) to a Roth IRA. Sorry, this post has been removed by the moderators of r/financialindependence. Not including after-tax contributions of doing megabackdoor Thus, all my retirement has been in Roth. The New Year’s Day tax deal (also known as the fiscal cliff legislation) made headlines in the retirement world because it included new rules to make it easier for employees to convert existing traditional 401(k) plans to Roth 401(k) plans. If your employer offers both traditional and Roth options, ... 401K. Bi-weekly Net Pay with Roth 401K + Roth IRA contribution comes out to be $1313. If you anticipate that your income will grow over time, then a Roth 401k offers more benefits. If you aren’t able to increase, I’d suggest switching to traditional 401k so you’re saving more absolute dollars and still bringing home the same amount. SOCIAL SECURITY. Roth 401(k) plans are created with after-tax funds, while traditional 401(k) plans are funded through pre-tax dollars. My personal contribution is about equal for both the Roth IRA and the traditional 401k . I'm at $60k/year pre tax, and I need $24k a year to live on. Cookies help us deliver our Services. 6% of your income doesn’t hit the 401k limit of $19,500/yr employee contribution. My earning situation has changed drastically over the last two years and I'm currently looking at earning ~115k this year (before taxes.) Do you plan to relocate in retirement? The main difference between the Roth 401 (k) and the traditional is when the money is taxed. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. Another slight difference between a Roth 401 (k) and a traditional 401 (k) is your access to the money. Moderate COL area (larger midwestern city) - 1 bedroom apartment close to work will be about $1200/month If so, then do $19.5K traditional 401k and then after/tax contributions that get converted to Roth (up to $56K max total incl. Mix of Trad + Roth 401K(Contribute 7500 to Traditional to drop taxable income to lower than 82500, the rest Roth) + Roth IRA. While this reduces your taxable income now, you'll pay regular income tax … But the “Traditional 401k vs. Roth 401k” question is a legitimate one, and one advisors are increasingly likely to deal with in those meetings. Depending on how much room is in your budget for retirement saving after you have maxed out the employer match on your 401k, you should max out the $5000 annual Roth IRA contribution. https://www.schwab.com/.../roth-vs-traditional-401-k-which-is-better In a traditional 401 (k), you can start receiving distributions at age 59 1/2. Press question mark to learn the rest of the keyboard shortcuts, 32/34 SI1K | SR: lol nanny | GI.GO% BroFI. Even if tax rates go up, they would have to reach levels without recent precedent in order to give you a higher tax rate in retirement than you’re paying now. Roth vs Traditional 401(k) Calculator. Also, Traditional IRAs can be converted to Roth IRAs at strategic times (for instance, right after a big market decline) that can result in lower conversion taxes. More posts from the financialindependence community, Continue browsing in r/financialindependence. If you rolled a traditional 401(k) into a Roth IRA, the clock starts ticking from the date those funds hit the Roth. It’s worth recognizing that many participants are hearing from the likes of Ramsey and Orman that the Roth 401k is the one they recommend, as have many top 401k advisors in the proper circumstances. A growing number of employers are beginning to offer not only a Traditional 401K, but now a Roth 401K as well. If you still don’t know who this ‘Roth’ guy is, or what he does, choosing between the two can be a matter of random guess. (100% immediately vested baby, woohoo) I've seen a lot of conflicting advice out there on which account to focus on, and I've heard about the Roth conversion ladder. Hi there. Can anyone help clarify the advantages of a 401k vs a Roth 401k? “If you don’t do a Roth 401(k) at work, then you’re just putting in pre-tax dollars and everything your plan builds to over the years is all subject to tax down the road.” I don't think there is a "correct" response per se. Salary: $103k/year. Financial Independence is closely related to the concept of Early Retirement/Retiring Early (RE) - quitting your job/career and pursuing other activities with your time. I’d just prefer to pay taxes now, get it over with, and see the balance grow knowing none of it will be taxed. Extra $200 bi-weekly goes into taxable investment account or savings. First, I would focus on maximizing your contributions. So I originally thought it was a slam dunk to go Roth over Traditional but now I'm not so sure. I am 30 and my income is 160K + ~30-40K bonus annually. Age: 24. So I’m pretty sure there are no income limits to contributing to a Roth 401k like there are to a Roth IRA. Am I overthinking this or should I actually have even more in traditional? With a Roth 401 (k), you can start withdrawing money without penalty at the same age, but you also must have held the account for … Thus, all my retirement has been in Roth. Contributing pretax can help lower your bracket though. Go with your gut, you may be wrong, but don’t stress over it. Over the past six years, an increasing number of companies have begun to roll out Roth 401(k) options for their employees. 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. employer match and $19.5K 401k) Dec 2, 2020 0 2 Nutanix However, after reading some analysis, it seems that isn't always the case especially if I have business or mortgage expenses that can write off significant taxes in the future. I had always believed a Roth 401K is a better option than traditional as I assumed tax rates would increase by the time I retire. Roth 401K + Roth IRA. Do you make traditional or Roth contributions to 401k, and why? Roth vs Traditional 401 (k) In a traditional 401 (k), employees make pre-tax contributions. In a traditional 401 (k) you make pre-tax contributions and pay taxes in retirement when you withdraw. Hi, everyone, I'm starting my first big boy job later this year and I'm torn between contributing to a roth or traditional 401k provided by my employer. This tool compares the hypothetical results of investing in a Traditional (pre-tax) and a Roth (after-tax) retirement plan. If you anticipate a lower rate in the future, then Traditional 401k is better. Thanks! I don’t think there is an absolute right or wrong answer because none of us can predict tax law changes 30 years out. “Doing a Roth 401(k) is vastly superior to doing a traditional 401(k). Makes sense. Since you already have so much going into Traditional though, you could consider doing some Roth per your plan, just maybe not the majority. Although one is not the clear winner for every scenario, the Roth 401k has more advantages for anyone in the early stages of their career. 401K ESTATE PLANNING. Please try there. 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. Why a Roth 401k is the Best 401k Investment Choice Roth 401k’s compound over time and grow tax-free. This is a place for people who are or want to become Financially Independent (FI), which means not having to work for money. 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. I'm married and 27. I recently became eligible for my company's 401k and I'm able to invest in traditional or Roth. Any money you put in a traditional 401(k) goes straight from your paycheck before taxes are applied, so it reduces your taxable income. Roth 401(k) contributions are a relatively new type of 401(k) that allows you to invest money after taxes, and pay no taxes when funds are withdrawn later — for many investors, this is a more appealing option than a traditional 401(k). Moderators remove posts from feeds for a variety of reasons, including keeping communities safe, civil, and true to their purpose. By choosing a Roth 401(k) and paying your taxes upfront, the savings in your account grow tax-free, and once you have held the account for at least five years and are past age 59-½, your withdrawals are also tax-free. Currently I'm contributing 10% of my post-tax income into my Roth 401k. How much do you make and what’s your savings rate? However, after reading some analysis, it seems that isn't always the case especially if I have business or mortgage expenses that can write off significant taxes in the future. Sorry if I didn't make it clear, my company's match is 50% on 6% of my income but I have been putting in the max every year albeit in Roth. Join our community, read the PF Wiki, and get on top of your finances! Press question mark to learn the rest of the keyboard shortcuts. Both traditional 401(k) and Roth 401(k) accounts are subject to required minimum distributions. A Roth IRA should also be part of your plan. Is a Traditional (pre-tax) or a Roth (after-tax) retirement account right for you? Generally the higher your income and savings rate the more sense a traditional 401k makes. A Roth 401k will likely make you richer than a traditional 401k and is one of the best investment decisions you can make as a younger investor in your 20’s or 30’s because of the tax-free withdrawal advantages given an uncertain future. With a Roth 401(k), you put in money that’s already been taxed into your 401(k) and it’s never taxed again,” Clark says. If a higher rate, then Roth 401k. My company contributes 13% of my income to my retirement account (50% match on 6% of income + 10% profit sharing on all income). If you're in the US and move from a state with high taxes to one with low taxes or none at all, then the savings from avoiding state taxes on that income would be pretty significant even if taxes went up overall, More posts from the personalfinance community. Traditional 401k. Press J to jump to the feed. For those with less familiarity, a “traditional“ 401(k) is funded with pretax money while a Roth 401(k) is funded with post-tax money. At its core, FI/RE is about maximizing your savings rate (through less spending and/or higher income) to achieve FI and have the freedom to RE as fast as possible. Press J to jump to the feed. If you have the option to invest in both a traditional 401(k) and Roth 401(k) at work, here's how to decide which account is better for you.. Trad 401K + Roth IRA. Withdrawing earnings early could incur both taxes and a 10% penalty. IRAS. Another perspective I like to add when making this decision. Since all company contributions are pre-tax, I am planning 50% Roth on my own contributions which would lead to a ~75/25 split between traditional/Roth as a hedge. Roth Vs. I’d pick Roth. Both the traditional 401k and Roth 401k has pros and cons. Some deets: Age: 27 Income: $85k 401k contribution: 15% 401k balance: $20k. I read the traditional vs roth wiki and had decided on contributing to a Roth 401K. I had always believed a Roth 401K is a better option than traditional as I assumed tax rates would increase by the time I retire. Currently am putting in the 6% which is in a traditional 401k and also contributing to a Roth IRA. But there’s no perfect answer because no one has any idea what taxes will be in 12 years. 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