- May 23, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Deciding Between Roth and Pretax Contributions for Retirement Savings
### Background Information
I am currently 35 years old and my employer offers a matching contribution of up to 6% for both Roth and pretax retirement savings options. I am unsure whether I should continue with pretax contributions or switch to Roth to potentially save on taxes during retirement.
### Explaining the Options
Roth contributions are made with after-tax dollars, meaning that the funds will not be taxed upon withdrawal in retirement. On the other hand, pretax contributions are made with pre-tax dollars, but will be taxed when withdrawn in retirement.
### Making a Decision
Given my age and current financial situation, it may be beneficial to consider switching to Roth contributions. By contributing to a Roth account now, I can potentially save on taxes in the long run as withdrawals will not be taxed.
### How AI Legalese Decoder Can Help
AI Legalese Decoder can assist in simplifying the complex language surrounding retirement savings options. By using this tool, I can gain a better understanding of the tax implications and benefits associated with choosing between Roth and pretax contributions. This can help me make an informed decision that aligns with my financial goals and retirement plans.
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Do you have a spouse that also works and with whom you file taxes jointly?
At that income, you’re within Saver’s Credit territory here. This complicates the picture a bit.
* https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit
Very basic advice/rule of thumb, if you expect your income and tax liability to go up in the future, do Roth now to pay taxes at a lower bracket than later. Vice versa if you think it will go down.
Considering you’re already at a very low tax bracket, I’m assuming you’ll be making more in the future so pay the tax now before later.
So it depends on your cash flow situation and your career trajectory.
Roth makes sense if you’ll be in a higher tax bracket when you retire than you’re in now. We don’t know what the tax situation will look like in 30 years, but you may take a guess based on your career trajectory and personal aspirations (will you have a large investment portfolio that you want to live off the dividends from, are you going to be a landlord and take in rental income, etc). if, for some reason, you think that taxes will go up by the time you retire, then taking the hit now instead of the would be an advantage since today’s rates would be lower.
Traditional is the play for most people since they will wind up in a lower tax bracket when they retire.
then there’s cash flow – if you contribute $100 roth bucks vs $100 traditional bucks, your take home will be marginally higher under traditional.
if you make 1k at a 10% tax rate, contributing $100 under roth leaves you with a take home of $800 ($1000- 10% tax = $900. $900 – $100 to roth = $800), while contributing traditional leaves you with a take home of $810 ($1000- $100 to traditional = $900. $900 – 10% tax = 810).
of course, that evens out when you break in to your retirement, but if you’re barely scraping by and need every penny, that small difference could help.
Probably, especially if you anticipate higher earnings in the future. Nice job saving!
You may find these links helpful:
– [Roth or Traditional](/r/personalfinance/wiki/rothortraditional)
– [General Information on Rollovers](/r/personalfinance/wiki/retirementaccounts/rollovers)
– [Retirement Accounts](/r/personalfinance/wiki/index#wiki_retirement)
– [“How to handle $”](/r/personalfinance/wiki/commontopics)
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at your income level you are going to be at a fairly low marginal tax rate so a traditional 401k likely isn’t going to be advantageous from a tax perspective. you’d be better off having your contribution go in as roth since you will likely retire at a higher tax bracket than your current due to your relatively low income now and relatively high investment rate. as a side note all of your employer match will always go in as “pre-tax” and would be tax differed with RMDs in retirement where as this would not apply to the contributions in your roth portion.
The question is do you want to pay tax now or later?
That answer depends on your MARGINAL tax rate now and your expected MARGINAL tax rate in retirement.
I can explain marginal tax rate, if you don’t fully understand it but that’s a key point to understanding this.
As an example, if now you’re making $200K per year, then your marginal tax rate is around 43%. If in retirement you expect to be withdrawing around $90K per year, then your expected marginal tax rate will be around 39%. In that scenario, it would be better to defer paying taxes now, so that you will pay the lower marginal tax rate in the future.
In another example, you’re making $200K per year, with a marginal tax rate of 43%. If you anticipate to be extremely wealth and in retirement you expect to be withdrawing around $400K per year, then your expected marginal tax rate will be around 49%. In that scenario, it would be better to paying taxes now, so that you will not pay the higher marginal tax rate in the future.
Another factor is changes in tax rates. In the future Congress may increase or decrease taxes. We don’t know. Some people choose Roth so that they can hedge against this.
My strategy is to have both traditional and Roth. Contribute to my traditional until it’s a healthy level, then do Roth. In retirement I’ll be withdrawing a steady low amount from traditional ie $50k per year. That will keep my marginal tax rate low. Then I withdraw from the Roth as needed. The amounts will vary based on what I have.
My thoughts is yes. Couple of reasons.
1. You are paying in a low tax bracket and the pre-earnings tax break is not benefiting you later.
2. The nice thing about Roth is you are paying some tax now, but your withdrawals after XX years of compounding all come out without taxes. This means if you need 40k you can draw 40k without needing to draw 45k because 5k has to go to pay taxes for example.
3. This allows you to gain more than you contribute tax free and have psychological well-being knowing that the amount in your account is actual funds that are usable. Not paying to Uncle Sam later.
100% a Roth for as long as you can
What state are you in?
More power to you. That’s the lower end to survive currently. Good on you for being consistent with your investment
Keep in mind that every penny you take out of Roth is tax free. When you’re making a lot more money and almost ready to retire, sure, make pretax contributions. But any money you invest in a Roth now, those hundreds of thousands of dollars you earn in interest (if you put it in good accounts) is totally free money. No taxes.
I was unable to save when I was younger and I of course regret tf out of that. Especially seeing how much the little bit I have invested over the last 10 years has grown. If I had done that 25 years ago, I’d be a millionaire right now. And if I had been able to invest when I was younger, every dime would have gone into a Roth and I would have sucked it up paying taxes up front.
And as far as good accounts go, of what I have available to me through work, I use Fidelity OTC and T Rowe Price Large Cap Growth.
*edit – and that’s phenomenal that your depositing 15%
I’m aways torn on this. My employer does the same. Benefit of traditional is your contribution is more than Roth because the tax money is in the pile that grows compounded, so it’s great for young people. I do 6% match traditional 401k and I max out my Roth IRA every year. M25 100k/yr.
No. Roth sucks, because it doesn’t grow as fast due to lower $$$ going in (since it’s post-tax).
It is useful for 2 things though. Some diversification, and if you think you’ll be in a higher tax bracket once you retire. But this is rare! Most retired people are elderly and on a “fixed income”. They made more when they were working, no surprise.
It really depends which tax bracket you are in if you don’t pretax. Are you married and file jointly? Are you the only one working in the family? If you are, you should Roth instead of pretax for your 401K because you are in a lower tax bracket if you are the only one working. On top of that, you should Roth IRA too if you can.
FYI if you stayed in the same income tax bracket in retirement and taxes never change when you got to that date, it mathematically doesn’t matter which one you choose because they both would produce the same outcome.
If you believe taxes will go up in the future, contribute to the Roth, but make sure to always maintain your maximum match in your 401k through your employer (that is free money, and who doesn’t like free money).
6% to each, then max out roth, then back to 401k if you still have more to invest. Aways get matching money first, then max roth, then keep putting away if you can afford it. The more you stockpile in a roth the happier you will be when you retire and take it out tax free.
I would vote yes to the switch. With your income your tax bracket is not that high unless you have other income. You have 25 or more years for growth and all gains will be tax free.
Wish I would have done the same even though I have done alright I would be in better shape if more of my investments were tax free. I do not see a downside. Best of luck. I am not a professional but would be happy to provide you with any information I can. Will put in a plug for any fund available to you that tracks the S&P 500.
Always do Roth. You pay less taxes in the long run every time. I’d rather pay taxes upfront and then let that money grow exponentially tax free.
use the time it took you to write this and search the reddit forum and you will see this answer all over the place
If you don’t know for sure you want to do Roth. Then you want to do Traditional.
“so that a big chunk of it isn’t taxed come retirement” this is logical fallacy. Remember from elementary school when you got told how the order of factors does not matter. That still holds true here.
Read and understand tax brackets and estimate your earnings in your future and then you can start evaluating what you need. but nothing in this post will give anyone enough information to do anything besides randomly guess.
Just a heads up, if you switch your 401k contributions from pre tax to Roth, not only is less going into your 401k, but you will also take home less (I just made the switch myself). Always good to go Roth if you’re in a low tax bracket. If you bleed into the 32% bracket, that would be a more ideal time to do pretax contributions. Good luck. 👍
Roth is worth consideration. Just be aware that your paycheck will be less if you put the same $ amount in. May want to reduce the % to target the same pretax/gross amount.
I would say Roth. Trad is good higher from 70k to million etc
100%. Put all of the money in a Roth. Max it out.
Switch to Roth – the saying goes like this “Match beats Roth beats traditional. If you have a match- take the free money-if you don’t, do the Roth- if you don’t have match or Roth go with traditional. But since they are giving you a match in both just go full Roth
Can you try and make more money? Maybe even double? Credits and 401k here can be important but getting the salary up may be realistic and more much important
Roth 401k’s are better in the long run, if your employer plan offers it. Can be more of hit on your current paycheck though. Switching the entire amount currently in your regular 401K to a Roth 401k is not recommended, just making the change for go forward contributions
401Ks are littered with hidden fees, the % of the money in your 401K that is actually yours and not the governments can and will change and they hope you do not live to see that money. There are better options. If you are getting a match and want to max that out and are not struggling to live now at your salary OK, but if you’re not getting a match I would not invest into a 401k. You should open a free Fidelity account and invest in mutual funds, Gold, Large Defense Contractors, Microchips, and African EFTS
I always push for ROTH.
It grows tax free and when you retire it’s what you have… vs. 401k you’ll pay future tax rates so you’ll need to subtract the taxes…which will only go up imo.