traditional 401k vs roth 401k

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HomeAlon3

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HomeAlon3
Jul 21, 2020 19 Comments

which of these should one invest in now?
traditional or roth 401k
#401k #personalfinance

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  • Apple
    EAYk50

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    EAYk50
    Roth if you think your income tax rate in retirement will be higher than right now, traditional if otherwise (you are basically deciding when do you want to pay tax on income )
    I’m just mixing it up 20:80 ratio (Roth:traditional )
    Jul 21, 2020 8
    • Lyft: ok yes and no. I think everyone should have enough in their Traditional retirement accounts to cover at minimum the standard deduction and lowest income tax brackets, to be smart. Then depending on tax bracket, you'll want to fill up more and more of those marginal tax buckets. Once you have a certain amount already in traditional accounts, though, any marginal increase in the balance will lead to future marginal taxes

      And you'd still prefer to fill up those lower buckets in the years where you have the largest marginal tax rate
      Nov 17, 2020
    • So the reason trad accounts are good isn't because you start with a larger amount that grows. It's because the tax rate you save is different from the tax rate you pay on withdrawals
      Nov 17, 2020
  • Why would retirement income be higher than current income? Sounds like a rare case, right? So 401k almost always better option?
    Jul 21, 2020 3
  • Let's assume that the current tax rates won't change, except that the brackets are adjusted for inflation. A simplified way to look at it is to compare your current taxable income to your retirement income.

    If your current income is higher than your target retirement income, you'll want to go Traditional. If your current income is lower than your target retirement income, you'll want Roth.

    Of course this is simplified. If you put all of your money into Roth accounts, and don't work in retirement, you'd have 0 taxable income. Therefore you could have increased your retirement assets by putting some of that money into a pre-tax account. Details like this are probably best handled with advice from a professional
    Jul 21, 2020 2
  • eBay
    HomeAlon3

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    HomeAlon3
    OP
    When I am retiring. I may not have direct income when i withdraw my funds from my 401k acct. In that case, do I have to pay tax on whatever amount I’m withdrawing and calculate using that tax bracket
    Jul 21, 2020 1
    • Withdrawals from a Traditional 401k or IRA will count as taxable income, so you will pay based on tax brackets for that income.

      Withdrawals from a Roth aren't taxed and don't affect your tax brackets, but they're paid from your income that was already taxed.
      Jul 21, 2020
  • Apple / Eng
    hikbfy57

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     hikbfy57
    I max traditional 401k then use mega backdoor to contribute rest to roth.
    Jul 21, 2020 0