Graduated last year...Currently 27 y.o. Its been ~8 months now I have started with working in US and after clearing education loans, I was thinking of possible options to invest/save for the future. I have started maxing out (15%) of ESPP since this period. Regarding 401k, shall I max it out given that I want to buy a property in a year or two (and dont have much savings right now). Also, per my understanding it will be a good option to go for pre-tax (roth) contrivutions rather than traditional 401k contribution. Which one should I go? Can someone please give some financial advise? Thanks.
Roth is post tax. Also Roth vs regular 401k is a question of whether you expect your tax rate to he higher or lower when you retire.
"With a Roth 401(k), you pay taxes up front. In other words, you contribute to your retirement account with money from your paycheck after it has already been taxed". Wont the tax rate grow with the TC which will raise with age/retirement? So I dont get why people would still choose the traditional 401k in which the taxes will be imposed at the time of withdrawal and not right now.
When you retire, you’ll need to withdraw less income, since you don’t have to save for retirement. You’ll only withdraw what you want to spend, so you’ll realize less of the income.
Do max it out. After you leave MSFT, you will have the option of rolling out to IRA, which can be converted to Roth IRA without tax. You will essentially get the 401k money out tax free
How it will be tax free ?
After leaving the US, If your US income is less than say $20k, total income (including foreign income) is less than say $100k, your US tax rate is 0% and your state income tax rate is 0% if you manage your Roth conversion correctly.
Max it out, it's free money... EVEN IF you withdraw with the penalty (which you shouldn't have to do if you roll over your IRA), it is definitely worth it.
Once you roll over to ira, are there no penalties on withdrawal ? So you have to just pay regular income tax on withdrawal ?
I will be moving back to India in a couple years, have started planning for it already. Even if u decide to withdraw all the money right before u leave, you should be able to get a little more than what you invested after penalties and taxes, provided u invested well. Otherwise convert it to Roth IRA and set it aside for retirement. I do recommend u to invest in 401 because it helps u set aside money and not spend it all.
Max out, I was in the same situation, I wasted 3 years. Think of next 5 years and make the investment, you can worry about what will happen after, later
Thanks. Can you please suggest which option shall I go (per my situation) for and why?