Traditional vs Roth 401k
Which is the better option? Please comment why. I do the Roth 401k. TC 225k in my 30's.
If you expect your tax rate to be lower in retirement, go with traditional. If you think you might need to pull out contributions for some reason before retirement, choose Roth.
Thanks. What's a scenario where I'd have a higher tax rate in retirement?
Tax rates go up (as planned in 2026), income goes up and required withdrawals, move to state with higher income tax, taxable investments or real estate. That said, if you are in California and might retire in another state or potentially considering early retirement then traditional is clear winner
Both?
Can you do 18.5k for each?
No you can't.
Max 401(K) pretax, then contribute 27250 post tax, then do a mega backdoor Roth to move all of that to your Roth IRA.
You can do 18500 combined in Roth and traditional 401K. How are you doing the 27250 post tax?
You can do 55000 total and 18500 pretax to your 401(K) if your company allows it. I do this every year.
Your TC right now is high enough to put you in a high tax bracket. You either pay taxes now or later with these options. In retirement you are not likely to have this high of income, so your tax bracket will be lower in the future. Hence a pretax 401k makes the most sense.
There's calculators for this. You should probably ask a calculator
Then take my results and put them into a Tablows dashboard?
You could. It'd certainly look better than something you made in BI.
If you plan on retiring early: traditional 401(k) -> roll over to traditional IRA -> roll over into Roth IRA in small chunks after you retire. See this: https://www.madfientist.com/traditional-ira-vs-roth-ira/
After tax 401(k) to Roth IRA. Every $1 you put in now will be worth $30 when you’re retiring. Do you think your taxes will be 1/30th of what they are now? Also you can pull out the principle you put into the Roth penalty free, giving you additional flexibility. This works if you want to retire early. Also Roth IRAs aren’t subject to minimal distributions.
Paying x% tax, then growing y%, then withdrawing tax-free gives you exactly the same amount as contributing tax-free, growing y%, and then paying x% in taxes upon withdrawal.
Check your math. You don’t withdrawal all of your savings at once, you do so year by year paying on some fixed rate of withdrawal. So you pay tax every year you live past retirement. Also because you are paying taxes from your accrued growth your balance available to grow will grow at a slower rate, which means you have a smaller withdrawal every year. Pull out a spreadsheet & check yourself. Assume $18,500 in Roth vs traditional. A single contribution paid in at 35 growing at 7% annually will grow to $161,233 by age 67. With the traditionally you save $6,475 in taxes assuming 35% tax rate. At 67 you retire & start drawing that contribution at 3% annually. The traditional account you also have to pull extra to cover the 35% taxes. The Roth you don’t. For simplicity let’s assume no growth in either account. Assuming you live to 100 the traditional account will have $41,204 in it. The Roth: $59,009. Not only that but because the Roth was shrinking as a slower rate you pulled out an extra $13,847 during retirement. So the Roth 401(k) yielded an extra $31,653; while the traditional saved you $6,475. And again, this ignores all portfolio growth post retirement. In reality the gap will be much larger. And that’s assuming a Roth 401(k). If you do what I said & go with After Tax 401(k) + Roth IRA conversion you can save up to $55,000 annually not just the $18,500. Realistically you max out pre-tax 401(k), then max out After Tax 401(k). Best of both worlds. That also let’s you vary you’re investment strategy. You put the riskier growth assets in your Roth & keep a more balanced mix in the traditional.
Predicting tax law 25 years into the future at my age and 40+ for those of you under 30 is a mug's game. I split my contributions to hedge my bets, but keep in mind that the traditional is somewhat safer: you've already had the tax benefit while if the law changes in the future you could lose some or all of the benefit of the Roth.
What benefit? You're just deferring taxes. With a Roth, you've paid at today's rate and there's no uncertainty.
With the Roth, they could decide to tax the growth. For that matter, they could decide to tax the principal again.
Traditional is precious space. You have Roth IRA space, and most on Blind can’t use a deductible IRA. You also have taxable accounts, which you can donate to kids or charity with a step up in basis. So why is traditional precious? Well, basically, you want to pay some taxes in retirement, because taxes are always going to be progressive (sorry libertarians) and the lowest rates go to the lower dollars. If you’re not working, you need some of them low dollars of income, to try to smooth out your income instead of hitting a cliff when you stop working. You have no pension. Therefore, you want some traditional 401k money. Unless you have specific reasons otherwise, a good rule of thumb if you’re over ~150k TC is maxing your traditional 401k and (backdoor) Roth IRA, then seeing if you can save more and if so where. (HSA of course if you use one, mega backdoor Roth 401k, etc).
Depends if you want to pay taxes now or later. Red or blue pill you decide.