Traditional VS Pre-tax 401k

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mikenike1990
Posts: 5
Joined: Sun Feb 11, 2018 3:19 am

Traditional VS Pre-tax 401k

Post by mikenike1990 » Sun Feb 11, 2018 3:43 am

Hello everyone,

First of all I wanted to say thank you to everyone on this forum, its been very educational for me! I have a question about my 401k. Any advice would be appreciated. Currently, my yearly salary is 44,761 a year, without overtime, bonuses and differentials and I contribute 15% of my salary to a ROTH 401k, which is 6,714 a year. Any overtime, bonuses and differentials are not calculated into my 401k . Between my overtime, bonuses and differentials I usually end up with a yearly salary of between 84,000-90,000 a year. Would it be smart to switch from a ROTH to a traditional 401k until the overtime disappears and my salary is reduced? Currently, I live home with my parents and don't have any added tax deductions, except the standard deduction, so I pay a pretty hefty amount in taxes each year. I would like to increase my 401k contributions, but currently I am trying to save up to purchase a house.

Thank you,

Michael

pkcrafter
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Re: Traditional VS Pre-tax 401k

Post by pkcrafter » Sun Feb 11, 2018 12:23 pm

mikenike1990 wrote:
Sun Feb 11, 2018 3:43 am
Hello everyone,

First of all I wanted to say thank you to everyone on this forum, its been very educational for me! I have a question about my 401k. Any advice would be appreciated. Currently, my yearly salary is 44,761 a year, without overtime, bonuses and differentials and I contribute 15% of my salary to a ROTH 401k, which is 6,714 a year. Any overtime, bonuses and differentials are not calculated into my 401k . Between my overtime, bonuses and differentials I usually end up with a yearly salary of between 84,000-90,000 a year. Would it be smart to switch from a ROTH to a traditional 401k until the overtime disappears and my salary is reduced? Currently, I live home with my parents and don't have any added tax deductions, except the standard deduction, so I pay a pretty hefty amount in taxes each year. I would like to increase my 401k contributions, but currently I am trying to save up to purchase a house.

Thank you,

Michael
Welcome, I would suggest traditional pre-tax contributions right now because of taxes. Also, 15% of income is a very good savings rate, but maybe you should be counting total income. Definitely increase contributions even while saving for house. Loading a 401k early allows more time for compounding and it will really pay off over the years. Is there a match?

Here's a chart showing what happens with long time compounding.

http://www.getrichslowly.org/2008/04/02 ... -interest/

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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whodidntante
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Joined: Thu Jan 21, 2016 11:11 pm

Re: Traditional VS Pre-tax 401k

Post by whodidntante » Sun Feb 11, 2018 12:30 pm

Switch to pre-tax and also invest the tax savings by increasing your contribution percentage. Your take home pay will be similar, you'll save some tax right away, and you'll build your retirement account faster.

LOLC2k
Posts: 5
Joined: Fri Feb 09, 2018 8:42 pm

Re: Traditional VS Pre-tax 401k

Post by LOLC2k » Sun Feb 11, 2018 1:30 pm

You mayneed to talk to HR, this sounds similar to how my job is investing my money, based on my base rather than my gross. And at least online, there's no way to add more deductions than 15%. HR should have forms that allow you to take up to the max, however.

mikenike1990
Posts: 5
Joined: Sun Feb 11, 2018 3:19 am

Re: Traditional VS Pre-tax 401k

Post by mikenike1990 » Sun Feb 11, 2018 3:24 pm

Thank you, everyone! I will switch from a ROTH to a Traditional and up my contributions.

mikenike1990
Posts: 5
Joined: Sun Feb 11, 2018 3:19 am

Re: Traditional VS Pre-tax 401k

Post by mikenike1990 » Sun Feb 11, 2018 3:26 pm

pkcrafter wrote:
Sun Feb 11, 2018 12:23 pm
mikenike1990 wrote:
Sun Feb 11, 2018 3:43 am
Hello everyone,

First of all I wanted to say thank you to everyone on this forum, its been very educational for me! I have a question about my 401k. Any advice would be appreciated. Currently, my yearly salary is 44,761 a year, without overtime, bonuses and differentials and I contribute 15% of my salary to a ROTH 401k, which is 6,714 a year. Any overtime, bonuses and differentials are not calculated into my 401k . Between my overtime, bonuses and differentials I usually end up with a yearly salary of between 84,000-90,000 a year. Would it be smart to switch from a ROTH to a traditional 401k until the overtime disappears and my salary is reduced? Currently, I live home with my parents and don't have any added tax deductions, except the standard deduction, so I pay a pretty hefty amount in taxes each year. I would like to increase my 401k contributions, but currently I am trying to save up to purchase a house.

Thank you,

Michael
Welcome, I would suggest traditional pre-tax contributions right now because of taxes. Also, 15% of income is a very good savings rate, but maybe you should be counting total income. Definitely increase contributions even while saving for house. Loading a 401k early allows more time for compounding and it will really pay off over the years. Is there a match?

Here's a chart showing what happens with long time compounding.

http://www.getrichslowly.org/2008/04/02 ... -interest/

Paul
Thank you, Paul! Currently, my employer matches 50% of the first 4%.

mikenike1990
Posts: 5
Joined: Sun Feb 11, 2018 3:19 am

Re: Traditional VS Pre-tax 401k

Post by mikenike1990 » Sun Feb 11, 2018 3:26 pm

LOLC2k wrote:
Sun Feb 11, 2018 1:30 pm
You mayneed to talk to HR, this sounds similar to how my job is investing my money, based on my base rather than my gross. And at least online, there's no way to add more deductions than 15%. HR should have forms that allow you to take up to the max, however.
Great idea! I will have to talk to HR and see my available options.

mdavis6890
Posts: 30
Joined: Wed Jan 27, 2016 12:19 pm

Re: Traditional VS Pre-tax 401k

Post by mdavis6890 » Sun Feb 11, 2018 6:09 pm

15% is a very low savings rate, especially for someone living at home and probably with not much else to spend money on.

Start by increasing your contribution up to 18500 for this year. Subtract the amount you've already put in, then divide what's left by the number of paychecks remain this year. Then take that number and divide by your monthly base to figure the percentage to contribute. Round up so you make sure to get all the way to 18500 by end of year. I'm guessing that will be about 45% or so.

You'll have a lot of money later, and save a lot on taxes too. Now is the time. It will never be easier to max your 401k than it is now, but once you start it will actually continue to be easy for you as you'll already be used to it.

Also if you needed to down the road you'll be able to borrow 50% up to $50k from your 401k, like if you were going to buy a house or something.

mikenike1990
Posts: 5
Joined: Sun Feb 11, 2018 3:19 am

Re: Traditional VS Pre-tax 401k

Post by mikenike1990 » Tue Feb 13, 2018 2:54 am

I would love to max my 401k out, but if I do I am going to have to significantly reduce the amount of money that I am able to save for a home. I did increase my 401k from 15% to 17%. I want a house in a few years and if I max out my 401k, I am going to have to wait longer.

mdavis6890
Posts: 30
Joined: Wed Jan 27, 2016 12:19 pm

Re: Traditional VS Pre-tax 401k

Post by mdavis6890 » Tue Feb 13, 2018 10:51 am

Perhaps, but not necessarily:
- Switch from Roth to regular 401k - it's a better option for you at your income level.
- You'll be saving money on taxes, and that will offset some of the reduced house savings. That is, you won't have 18500 less, you might have 14000 less or so.
- You can always borrow half the money out, up to 50k. If you're really serious about that house, maybe then stop when you get to 100k in your 401k
- Your 401k may increase in value, helping you get to that house faster.
- You may not need the house when/where you think you will right now. Things change. You can always get money OUT of your 401k, but there's no way to get all that money back IN if you miss your opportunities now.

On top of all that, remember that if you want a house, there are always creative ways to finance one when and if the time comes (you actually might not need that house - you never know). For example taking a really low down payment like 3% is pretty common. That has drawbacks as well of course, but it's possible. It is NOT possible to borrow money to finance your retirement. You simply have to have the money.

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