So I have been doing an all roth investment strategy for my 401k including mega backdoor roth. Just wanted other peoples opinions in Tech, as to what do they think - saving tax now vs later what is better? Please also explain your choice. What do most people close to retirement think about this? What is more advantageous for a tech worker at retirement that lives off investment and 401k/rental real estate income? #tech #google #faang #meta #google #amazon #apple #netflix
What is this Roth thing?
It’s taxed on pricipal
Let’s put it differently. I contribute some peanuts to 401k. What would be the difference if I chose this Roth stuff? Not sure if I can though.
I don’t understand mega backdoor - contribute up to $40,500 extra. Vanguard told me that my contribution is automatically capped at $20,500, so once that number is reached. They will not take any extra contributions
20.5k is the normal 401k limit. With mega backdoor you basically put post-tax income into your 401k account, up to like 55kish. This is normally awful, because you’re taxed in and out just like a normal brokerage account, but it’s in you’re 401k. A backdoor roth is when your employer plan lets you roll that post-tax income you contributed into a Roth IRA account. This is technically a loophole that’s never been closed. Not all employers let you do this. I’d say most don’t.
I don't understand the need of keeping money in normal brokerage account vs Roth IRA if it's post tax? I know the gains are not taxable, but you lose flexibility, there is a chance one can make more than standard 9% annualized return, why to remove that possibility by blocking you more until retirement age? Any suggestions ?
Answer this question: will your income tax rate be hire in retirement? Or now? If retirement - then Roth is better If now - normal 401k is better
Not sure. Which should I choose when I’m not sure? I would like to eventually open my own business but there’s too many unknowns.
The lack of sound advise and misinfo... for example Marathon above me failing to recognize you need both. Why not have a little traditional nest egg along side your Roth pot of gold? After all the first few tax brackets almost surely are lower than you would be earning in your prime and you could supplement your roth by taking out 20-40k per year from your traditional and only paying tax on that. You WANT to pay some taxes to an extent here.
Ah this is the best advice on here. Thank you. That makes perfect sense to me. Op approves this response.
Nope. Only difference in final value is driven by tax bracket now vs later. It’s a multiplication problem and multiplication is commutative. Roth: ($income)(1-tax.marg)(1.07)^20 Trad: (income)(1.07)^20(1-tax.retire) Roth also has some estate planning benefits. Heirs dont have to cash it out. It also avoids minimum required disbursements. Some people do 50-50 to hedge against the future. The value of avoiding RMDs maybe worth looking at. I haven’t run the full figures to see what that could be worth. https://www.schwab.com/learn/story/roth-vs-traditional-401k-which-is-better
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If you’re making enough money to do a mega backdoor you’re making too much money to be doing Roth 401k
So just do traditional 401k then? I think you’re talking about a Roth IRA which is an entirely different account (the 7000$ limit one).
My logic is I don’t need need any more than inflation-adjusted $200k when I’m in retirement age per year. Probably more like $120k. Whereas now I’m taxed at much more than that. So I’d rather be taxed later than now, which is why I do traditional. I’m assuming if you make enough to be putting money in a mega backdoor you’d be in a similar situation. Also, doing both kinda hedges. If for some reason taxes go up incredibly and somehow pre-tax would’ve been better, well the mega backdoor roth was pretax. Just my thoughts. I’m not nearly as savvy as dedicated FIRE folks. I’m not too sure what you mean by putting backdoor in a separate account. Would that just be a traditional brokerage?