I have the option to put my 401k contributions in a Roth 401k or traditional, or to split my contribution across the two. I expect my tax obligation to be lower in retirement than it is now – does a Roth make sense in my situation?
I have the option to put my 401k contributions in a Roth 401k or traditional, or to split my contribution across the two. I expect my tax obligation to be lower in retirement than it is now – does a Roth make sense in my situation?
People overthink this alot.
Traditional works for almost everyone because 1. in retirement you won’t be diverting 20-30% of your income to savings 2. in retirement expenses tend to go down as your housing cost is ideally locked in and you’re not commuting/working and 3. many people blend in gains from traditional brokerages and other ‘as cash’ savings with advantageous tax structures (15% gains rate) as income and 4. social security is taxed at a lower rate than ordinary income.
Outside of some exceptions for folks early in their careers with low incomes, people who were unemployed for a chunk of the year deflating income, or people that plan to retire extravagantly from no income tax states into states with high taxes a traditional account will typically be advantageous.
….What’s your tax bracket?
If you’re in the 26% or higher tax bracket, contributing the max to a traditional 401k will save you enough in income tax to also max out a Roth (or backdoor Roth) IRA with a few bucks left over.
I did full Roth 401k a couple years ago and got eaten alive in taxes.
Anytime you expect your tax obligation to be lower now than in retirement, you should take advantage of the ability to contribute to Traditional/tax-deferred retirement savings accounts.
If you expect to be in a lower tax bracket after retirement go with mostly traditional. If you want to set up your own go with Roth so you have more tax options to play with in retirement.
Roth only really makes sense as a way of keeping your taxable income lower in retirement or in the case of early retirement allowing you to withdraw from it penalty free until you have reached retirement age.
To optimize, we would need other details of your finances and goals, but in general pretax is almost always the better choice.
Keep in mind the growth for Roth 401k is tax free. If you are young have years to retirement, Roth maybe better. If you are close to retirement, traditional 401k may make more sense.
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