After contributing Trad 401K to company match, then on to Roth 401k or Roth IRA?

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ForeverInvestorILL
Posts: 60
Joined: Mon Feb 29, 2016 11:48 pm

After contributing Trad 401K to company match, then on to Roth 401k or Roth IRA?

Postby ForeverInvestorILL » Tue Dec 27, 2016 2:31 pm

Hello BH's, question as I am completing my asset allocation for my contributions to my 401K plan for 2017 and I have a dilemma.

Background on me:
Age: 23
Salary: ~60K
Tax Bracket: 25%, 3.75% State
State: IL
Assets: ~12K, 1K in Roth 401K (VILVX) and 11K in Roth IRA (VTTSX)

I have posted the funds in my company's 401K before but they offer the Vanguard Target Date 2060 with a 0.08% ER so that is the fund that I am going to use. My company matches up to 4% if I contribute 8%. Please give me advice on the my plan for 2017.

My plan for 2017:
10% to Traditional 401k in VILVX
2% to Roth 401K (basically acting as a Roth IRA but having a lower ER than VTTSX that is currently in my Roth IRA)
2% to Roth IRA (contributing to VTTSX)

I know people will tell me to contribute more than total % above but I am still working to beef up my Emergency Fund so those are my goals for 2017 and hopefully by 2018, I will be able to max retirement accounts.

Does this make sense? I know most say Trad 401K to the match, Roth IRA, and then rest to tradtional 401K but my company has a very good 401K and I want to make sure I am taking full advantage of it. The only additional fee to my company 401K plan is a $32/year recordkeeping fee.

Please help!! Thanks
Last edited by ForeverInvestorILL on Tue Dec 27, 2016 3:13 pm, edited 1 time in total.

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Epsilon Delta
Posts: 6458
Joined: Thu Apr 28, 2011 7:00 pm

Re: Does it make sense to contribute to Roth 401K instead of Roth IRA?

Postby Epsilon Delta » Tue Dec 27, 2016 2:49 pm

A Roth 401(k) and a Roth IRA are rather similar. Preferring one over the other comes down to things like piking up an employer match, expense ratios, availability of desired asset classes in the 401(k) and if your hitting any of the contribution limits. In your case it looks like a wash.

Being a lazy soul I see no reason to split the Roth. I'd go for the lower expense ratio and one less thing to manage:
10% to Traditional 401k in VILVX
4% to Roth 401K

But the differnce from your plan is microscopic, perhaps nanoscopic :happy

I think the 401(k) to get match, then Roth IRA then 401(k) was written before there were Roth 401(k)s.
Last edited by Epsilon Delta on Tue Dec 27, 2016 2:51 pm, edited 1 time in total.

dfitz247
Posts: 49
Joined: Tue Jul 12, 2016 8:44 pm

Re: Does it make sense to contribute to Roth 401K instead of Roth IRA?

Postby dfitz247 » Tue Dec 27, 2016 2:49 pm

I would Max out the 401k as a Traditional 401k so contribute the 18,000 to take advantage of the Tax System. As long as you can max out your 401k and your Roth IRA. Then if you ever leave you can just roll the 401k before tax dollars into your Roth.

Your question was should I do a Roth IRA or a Roth 401k? You can do both, but I would do your 401k as a Traditional for tax benefits as I previously stated.

Also once you find it easy to do the 18k and 5,500 into those two accounts there will be other accounts to look at such as the HSA and Brokerage account to really maximize your taxes:

1- Get Match on 401k. Switch it to a traditional.
2- Fill up Roth IRA.
3- Go back to 401k to max out.

Saving 23,500 at age 23 on a 60k income is a great savings rate if you can do so.

Once you do those 3 tasks look to an HSA, brokerage account, and real estate as you see the income rise.
Best Regards, | Devin R. Fitzgerald

furwut
Posts: 1200
Joined: Tue Jun 05, 2012 8:54 pm

Re: Does it make sense to contribute to Roth 401K instead of Roth IRA?

Postby furwut » Tue Dec 27, 2016 2:51 pm

The conventional wisdom is to max out your contributions on a pre-tax basis first.

Edited for clarity.

dsmil
Posts: 481
Joined: Tue Sep 08, 2009 10:51 am

Re: Does it make sense to contribute to Roth 401K instead of Roth IRA?

Postby dsmil » Tue Dec 27, 2016 3:02 pm

Many will argue that everything should go to the traditional 401k while in the 25% bracket. If you've already decided that you want some money to go into a Roth, the difference is pretty marginal so I think you'll be fine either way. The Roth IRA gives you more flexibility but the Roth 401k gives you a slightly lower expense ratio when comparing the target retirement funds only. Personally, I'd choose the Roth because the contributions could be withdrawn without penalty and at your age, you probably don't have many resources in case of an emergency. Plus, you'll eventually have enough in the Roth to look into other funds in the admiral class which could have even lower expense ratios than what is in your 401k.

ForeverInvestorILL
Posts: 60
Joined: Mon Feb 29, 2016 11:48 pm

Re: Does it make sense to contribute to Roth 401K instead of Roth IRA?

Postby ForeverInvestorILL » Tue Dec 27, 2016 3:05 pm

dfitz247 wrote:I would Max out the 401k as a Traditional 401k so contribute the 18,000 to take advantage of the Tax System. As long as you can max out your 401k and your Roth IRA. Then if you ever leave you can just roll the 401k before tax dollars into your Roth.

Your question was should I do a Roth IRA or a Roth 401k? You can do both, but I would do your 401k as a Traditional for tax benefits as I previously stated.

Also once you find it easy to do the 18k and 5,500 into those two accounts there will be other accounts to look at such as the HSA and Brokerage account to really maximize your taxes:

1- Get Match on 401k. Switch it to a traditional.
2- Fill up Roth IRA.
3- Go back to 401k to max out.

Saving 23,500 at age 23 on a 60k income is a great savings rate if you can do so.

Once you do those 3 tasks look to an HSA, brokerage account, and real estate as you see the income rise.


DFitz, thanks for the response. When I get to a point where I can max, that will definitely be the plan. But for now, I cannot contribute to the max. Therefore, I was leaning towards 10% Trad 401K, then the rest to either the Roth 401K or Roth IRA.

ForeverInvestorILL
Posts: 60
Joined: Mon Feb 29, 2016 11:48 pm

Re: Does it make sense to contribute to Roth 401K instead of Roth IRA?

Postby ForeverInvestorILL » Tue Dec 27, 2016 3:07 pm

dsmil wrote:Many will argue that everything should go to the traditional 401k while in the 25% bracket. If you've already decided that you want some money to go into a Roth, the difference is pretty marginal so I think you'll be fine either way. The Roth IRA gives you more flexibility but the Roth 401k gives you a slightly lower expense ratio when comparing the target retirement funds only. Personally, I'd choose the Roth because the contributions could be withdrawn without penalty and at your age, you probably don't have many resources in case of an emergency. Plus, you'll eventually have enough in the Roth to look into other funds in the admiral class which could have even lower expense ratios than what is in your 401k.


Thanks DSMIL. Correct, that is one of the main reasons why I wanted a small % to go into the Roth IRA is because I am in the Target Date 2060 right now but eventually want to get into the Admiral Shares of the 3 fund portfolio. I appreciate your response.

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jimb_fromATL
Posts: 2010
Joined: Sun Nov 10, 2013 12:00 pm
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Does it make sense to contribute to Roth 401K instead of Roth IRA?

Postby jimb_fromATL » Tue Dec 27, 2016 3:23 pm

ForeverInvestorILL wrote:
dfitz247 wrote:I would Max out the 401k as a Traditional 401k so contribute the 18,000 to take advantage of the Tax System. As long as you can max out your 401k and your Roth IRA. Then if you ever leave you can just roll the 401k before tax dollars into your Roth.

Your question was should I do a Roth IRA or a Roth 401k? You can do both, but I would do your 401k as a Traditional for tax benefits as I previously stated.

Also once you find it easy to do the 18k and 5,500 into those two accounts there will be other accounts to look at such as the HSA and Brokerage account to really maximize your taxes:

1- Get Match on 401k. Switch it to a traditional.
2- Fill up Roth IRA.
3- Go back to 401k to max out.

Saving 23,500 at age 23 on a 60k income is a great savings rate if you can do so.

Once you do those 3 tasks look to an HSA, brokerage account, and real estate as you see the income rise.


DFitz, thanks for the response. When I get to a point where I can max, that will definitely be the plan. But for now, I cannot contribute to the max. Therefore, I was leaning towards 10% Trad 401K, then the rest to either the Roth 401K or Roth IRA.


After getting the maximum match in the 401(k), max the Roth IRA. You can kill two birds with one stone because you can withdraw your contributions from a Roth IRA at any time with no tax or penalty. So the Roth IRA can serve as a secondary source of emergency funds in case of a bad financial setback such as a job loss or cut in pay or terrible unexpected expenses. On the other hand, the Roth 401(k) money is not really accessible until you retire ... or at least leave the company.

Plus the Roth 401(k) has RMDs (Required Minimum Distributions) after age 70. So you're forced to take the money out and lose the tax shelter on the earnings even if you don't need the money at the time.

If you've gotten the maximum company match and have maxed a Roth IRA and can still afford to invest more, chances are your income tax bracket is high enough to make it a better bet to contribute the remainder to the tax-deferred 401(k) up to the max allowed. Unless you expect to have a HUGE pension and other income after retirement that will be higher than you had when you were working, adjusted for inflation, then chances are you'll less total tax on the withdrawals in retirement than the taxes you got to defer and invest for yourself during your working years.

jimb


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