Why go for roth vs traditional, why did you choose one vs another? i know the difference but wanna know understand what makes sense.
I’ve switched to Roth 401k only. 1) I expect my taxes to be higher in the future. 2) The limit for Roth contributions is effectively higher since they are post-tax.
Why do you expect your taxes to be higher in the future? Guessing you are at least in the 24% rate now and in retirement it will be low teens.
1) I expect tax rates to change significantly, generally in the higher direction. 2) Retirement income includes investments, rental properties, etc. 3) Eventual goal is have both Roth and traditional for the optionality and tax control, but since I’m early in career I prefer to contribute Roth now
The vast majority of people (employees) earn less money when they retire, so their income tax is lower at the time. I personally expect to have only 60% of my current income during retirement, so I would be in a lower tax bracket even if income tax rate is slightly higher in the future. Traditional IRA makes sense in this case because you only pay tax when you withdraw the money. Roth makes sense if you’re also a business owner who may earn more money during retirement (due to the growth of the business). It’s better to pay the lower tax today while you still earn less. Other rare scenarios for Roth: - You’re one of the very few super savers who have maxed out their traditional 401k contribution for the year, yet still want to invest more for retirement. - You know the stock market really well. Plan administrators typically limit your 401k investment to a few mutual funds. Instead of increasing your 401k contribution beyond the employer-matched amount and earning ~7% a year, you use after tax money in a Roth IRA and invest in individual stocks, ETF, and other instruments that can earn higher returns.
If your in the Bay Area and don’t plan to stay there, traditional all the way, since the CoL is so heavily inflated If your in the south and plan to retire in NYC, Roth all the way TL;DR it depends on where you plan to retire. There’s a reason Florida is full of old people (low CoL and no taxes)
Cost of living has zero bearing on taxes.
It does in retirement. Taxable withdrawals means higher tax paid in high CoL. So, if you want to retire in high CoL it might help to pay taxes now. If you want to retire low CoL, makes sense to defer since your tax burden would be proportionally lower. (at least I think that’s the point they were trying to make)
I do half and half. While my income will definitely be lower in the future, given the US fiscal situation, it's naive to think that taxes can't be higher in the future. Half and half is a great hedge, because you can control your taxable vs non taxable income, only take from the traditional exactly the amount you want to pay taxes on, and the rest from the roth.
Agreed but then it makes more sense to do Roth early in career and traditional later on, instead of half and half each year
Actually an interesting approach and one that I never thought about. One possible issue I see is that given growth, your Roth will be far larger than your traditional, given that it will have an extra 2 decades of growth (assuming a 40 year career). This may or may not be an actual downside, but something to think about
All the people saying “roth because taxes may be higher in the future” I’m afraid are missing the point that what matters is an individual’s *marginal* tax rate. If the tax code didn’t change it all then what would matter is whether your income is higher when you’re 70+ than now. For 95% of us the answer to that question is obvious. Go with traditional. If you have a crystal ball and know the tax code will change enough that your marginal rate will still be higher somehow when your income is close to zero OR if you somehow know 30 years from now you’ll have a successful business making close to your current total comp, then go with roth. It seems to me that it’s so obvious that you should go with traditional it makes me question if the people suggesting or even considering roth actually understand the situation.
It’s not at all obvious to me. I expect the tax code to change significantly to have higher income taxes, and I expect retirement income to be fairly high given it includes investments, rentals properties, etc. it seems to me that having both traditional and Roth incomes to draw on gives you a lot more options - which is why I would recommend Roth early in career and than traditional later on
Still most people will not be landlords in the future and of the ones that are an even smaller percentage of them will have enough properties to match their current total comp. Maybe you’re one of those people. I don’t know. For the vast majority of people, it won’t even be close. The tax code would have to change quite drastically for the answer to not be obvious *for most people.*
Do 50/50 split - you can withdraw some of each in retirement and keep your tax bracket low.
If you're on a work visa and might be leaving the US Roth contributions can be withdrawn without penalty. Any tax penalty for closing the 401k would only be on accumulated earnings. Contributions can also be taken out in an emergency or to help fund a down payment.
Depends heavily on your tax situation. If you think you'll pay more taxes later then Roth, otherwise traditional. Tax rates are pretty low right now, but you're probably making a ton of money and in a higher tax bracket.