How to Contribute if Employer Doesn't Offer Traditional IRA

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Cwh3322
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How to Contribute if Employer Doesn't Offer Traditional IRA

Post by Cwh3322 »

Hello everyone!

The current company I work for only offers a 401k and Roth 401k option, but not a Traditional IRA option. How do pre-tax contributions work in a Vanguard Traditional IRA if they don't have access to my paycheck? (My company uses Fidelity)

I am currently at the start of my career, maxing out my 401k and Roth IRA. Should I keep it this way? I heard it's wise to invest instead in a Traditional IRA rather than a Roth IRA as you can do a Roth Conversion Ladder.

Any help/advice would be appreciated!

Thanks.
Last edited by Cwh3322 on Thu Jul 18, 2019 10:39 pm, edited 1 time in total.
02nz
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by 02nz »

You open an IRA (the I stands for individual) on your own,with Vanguard, Fidelity, Schwab, or other custodian of your choosing. Unlike a 401k, it is not offered through employers. Presumably you opened the Roth IRA on your own and contribute to it independently of your payroll. The traditional IRA works the same way. However, you can only contribute a total of $6000/year to a traditional IRA, Roth IRA, or mix of the two, but the total contribution cannot exceed $6000/year.

Whether it's better to contribute to Roth/traditional IRA and Roth/traditional 401k depends a lot on your circumstances, can't really answer the question without knowing your income, federal and state income tax rates, filing status (married or single), at a minimum.
Last edited by 02nz on Thu Jul 18, 2019 10:27 pm, edited 1 time in total.
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Cwh3322
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by Cwh3322 »

02nz wrote: Thu Jul 18, 2019 10:22 pm You open an IRA (the I stands for individual) on your own, it is not offered through employers. Presumably you opened the Roth IRA on your own, the traditional IRA works the same way. However, you can only contribute a total of $6000/year to traditional IRA, Roth IRA, or mix of the two, not exceeding $6000/year, unless you qualify for the age-based additional ("catchup") contribution.
Ah, ha I see. Any specific IRA you recommend given the following? I am 23 yrs old with $70,000 gross income. Don't know if this Roth Conversion Ladder is legitimate (or will even be allowed by the time I retire). I feel comfortable contributing post-tax to my Roth IRA and maxing that out now. I feel $6,000 post-tax is worth more today than $6,000 pre-tax.
Last edited by Cwh3322 on Thu Jul 18, 2019 10:39 pm, edited 1 time in total.
02nz
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by 02nz »

(Ladder not latter.) Roth conversions are not going away, for a simple reason - the government gets tax revenue when you do Roth conversions. (The government also gets tax revenue when people withdraw from traditional IRAs or 401k's, but Roth conversions often mean giving the government tax money earlier, and that makes the government's budget numbers look better. Politicians love that about Roth.)

Assuming you're single, at $70K you have quite a bit of income that is taxed at 22% federal. At that level I would probably defer as much income tax as possible via traditional 401k contributions first. Then I'd max out the Roth IRA. See https://www.bogleheads.org/wiki/Priorit ... nvestments. If you can do both, that puts you on a great path in retirement savings.

Traditional vs Roth comes down to expectations about tax rates when you withdraw the money vs what you'd pay now: https://www.bogleheads.org/wiki/Traditional_versus_Roth
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Cwh3322
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by Cwh3322 »

02nz wrote: Thu Jul 18, 2019 10:33 pm (Ladder not latter.) Roth conversions are not going away, for a simple reason - the government gets tax revenue when you do Roth conversions. (The government also gets tax revenue when people withdraw from traditional IRAs or 401k's, but Roth conversions often mean giving the government tax money earlier, and that makes the government's budget numbers look better. Politicians love that about Roth.)

Assuming you're single, at $70K you have quite a bit of income that is taxed at 22% federal. At that level I would probably defer as much income tax as possible via traditional 401k contributions first. Then I'd max out the Roth IRA. See https://www.bogleheads.org/wiki/Priorit ... nvestments. If you can do both, that puts you on a great path in retirement savings.

Traditional vs Roth comes down to expectations about tax rates when you withdraw the money vs what you'd pay now: https://www.bogleheads.org/wiki/Traditional_versus_Roth
(Thanks for that catch... boy it's getting late)... Appreciate that input. Glad I am maxing my Traditional 401k first then the Roth IRA. :)
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Watty
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by Watty »

You can only make deductible IRA contributions if your income is below certain limits. These income numbers are after a bunch of deductions and adjustments so you need to dig through the details of your numbers to figure out if you can make a deductible IRA contribution.

The easiest thing to do is to defer the decision until you are doing your taxes and you can decide if you want to make a Roth contribution or a deductible IRA contribution then. You can make your contribution for either of these for 2019 up until April 15th of 2020 when your taxes are due.

https://www.irs.gov/retirement-plans/20 ... an-at-work
Cwh3322 wrote: Thu Jul 18, 2019 10:14 pm I am currently at the start of my career, maxing out my 401k and Roth IRA. Should I keep it this way? I heard it's wise to invest instead in a Traditional IRA rather than a Roth IRA as you can do a Roth Conversion Latter.
It depends on your what tax bracket you are in and if you are eligible to make a deductible traditional IRA and a lot of other details.

It is risky to generalize but if you are in a federal tax bracket that is above 12% then it would take a compelling reason(which is possible) to choose to do use a Roth IRA when you could make a deductible IRA contribution. Situations where this might make sense are things like if you are a doctor in training and will eventually have higher income or if you live in a state with no income tax but expect to eventually move to a state with high state taxes.
Spirit Rider
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by Spirit Rider »

In 2019 a single individual who is an active participant in an employer retirement plan (401k) can only fully deduct a traditional IRA if their MAGI is <= $64K. If you are maxing ($19K) a 401k pre-tax employee deferral with a $70K salary will result in a W-2 Box 1 of $51K. Unless you have a lot of other income, you IRA AGI will be well below the limit.

You are in the 22% marginal tax bracket. If you anticipate that your income will significantly increase in your career and you will continue to be able to make substantial pre-tax contributions. I might be inclined to do Roth IRA contributions.

Although another way of looking at it. You might only be eligible for deductible traditional IRA contributions for a short time in your career. It might make sense to take advantage of the opportunity while it exists.
billfromct
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by billfromct »

If I was in my early 20s with 40-45 years before retirement, I would max out my Roth IRA contributions in order to grow my Roth assets tax free with the ability to take out my Roth retirement investments state & Federal tax free after age 59.5.

You need to build up some retirement tax diversity (Roth vs tax deductible) while you are young.

Roth accounts didn't come into being until late in my career so my retirement accounts are about 94% taxable & 6% Roth. I would have liked to have at least 25% or more of my retirement assets in Roth accounts.

I started required minimum distributions from my tax deductible IRA as well as started to receive SS this year & will be pushed into a higher tax bracket in retirement. That higher tax bracket will also push me into higher Medicare charges as well.

Make those Roth contributions while you are young & probably the lowest tax bracket of your career. If you get married with a stay at home spouse, that may keep you in a lower tax bracket.

bill
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celia
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by celia »

Cwh3322 wrote: Thu Jul 18, 2019 10:14 pm I am currently at the start of my career, maxing out my 401k and Roth IRA. Should I keep it this way?
Since you are young and at the start of your career, it is recommended that you contribute to Roths (IRAs or 401Ks) first. As you gain more work experience, your wages will tend to go up, thus pushing you into higher tax brackets as time goes by. As you go into higher tax brackets, then you can switch to tax-deferred contributions.

The only difference between traditional and Roth IRA is that the taxes are deferred in traditional IRAs until you withdraw from the accounts, whereas Roth IRAs have the taxes paid up front, at the time of contribution. This allows the Roth to grow tax free as long as you are over 59.5 and the account is at least 5 years old when you withdraw.

Another way of looking at this is do you want to pay the taxes at your current marginal tax bracket or at the tax bracket you are in when you withdraw? Note that when you withdraw, the account values in both IRAs will have grown a lot over time. There will be a lot more dollars to be taxed on traditional IRA withdrawals whereas for Roths, only the contributions (or Roth conversions) will have been taxed earlier.

The exact same thinking applies to traditional 401Ks and Roth 401Ks.


P.S. I also think you meant to say "you can do a Roth conversion later". I've never hear of anyone having a "Roth conversion ladder" as you are free to convert any amount at any time from a traditional IRA to a Roth IRA. Most commonly, this is done when someone has a signficant drop in income (and tax bracket) when unemployed, going back to school, or in early retirement (before RMDs kick in).
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by ruralavalon »

Cwh3322 wrote: Thu Jul 18, 2019 10:14 pm Hello everyone!

The current company I work for only offers a 401k and Roth 401k option, but not a Traditional IRA option. How do pre-tax contributions work in a Vanguard Traditional IRA if they don't have access to my paycheck? (My company uses Fidelity)

I am currently at the start of my career, maxing out my 401k and Roth IRA. Should I keep it this way? I heard it's wise to invest instead in a Traditional IRA rather than a Roth IRA as you can do a Roth Conversion Ladder.

Any help/advice would be appreciated!

Thanks.
Cwh3322 wrote: Thu Jul 18, 2019 10:39 pm
02nz wrote: Thu Jul 18, 2019 10:33 pm (Ladder not latter.) Roth conversions are not going away, for a simple reason - the government gets tax revenue when you do Roth conversions. (The government also gets tax revenue when people withdraw from traditional IRAs or 401k's, but Roth conversions often mean giving the government tax money earlier, and that makes the government's budget numbers look better. Politicians love that about Roth.)

Assuming you're single, at $70K you have quite a bit of income that is taxed at 22% federal. At that level I would probably defer as much income tax as possible via traditional 401k contributions first. Then I'd max out the Roth IRA. See https://www.bogleheads.org/wiki/Priorit ... nvestments. If you can do both, that puts you on a great path in retirement savings.

Traditional vs Roth comes down to expectations about tax rates when you withdraw the money vs what you'd pay now: https://www.bogleheads.org/wiki/Traditional_versus_Roth
(Thanks for that catch... boy it's getting late)... Appreciate that input. Glad I am maxing my Traditional 401k first then the Roth IRA. :)
What is your occupation or profession?

In my opinion maxing the traditional 401k and a Roth IRA is likely the better way to go. For most people traditional 401k contributions will likely be better.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional 401k contributions will probably be better.

In addition when you withdraw from your 401k in retirement, the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

Will you be eligible for a substantial pension? A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".
"Tax considerations:
* If your current marginal tax rate is 15% or less, prefer a Roth.
* If you expect to have higher marginal rates than your current marginal rate for most of your career, prefer a Roth.
* If you will have a traditional account or a pension large enough to meet your expected retirement expenses (and you expect to take that pension shortly after retiring), prefer a Roth.
* Otherwise, prefer a traditional account."
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by bloom2708 »

Pre-tax 401k (as much as you can save up to $19k) + Roth IRA ($6k).

You defer 22% tax + state tax if you do pre-tax. This means you have more money to save in your Roth IRA.

An IRA can be Roth, Traditional (pre-tax) or Non-deductible. With the 401k, Roth is your best option in combination with your pre-tax 401k.
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by retiredjg »

The combination of traditional 401k and Roth IRA is a good one for most people. There are some exceptions - for instance if your tax bracket is going way up in the next few years (starting physician for example) and you'll never see 22% again, there is a good argument to use all Roth right now.

Forget the Roth conversion ladder. It does not really apply to you and you don't need it anyway - since you can contribute directly to Roth IRA.
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by Spirit Rider »

retiredjg wrote: Fri Jul 19, 2019 8:21 am Forget the Roth conversion ladder. It does not really apply to you and you don't need it anyway - since you can contribute directly to Roth IRA.
Not entirely true. The OP very well want to make Roth IRA contributions instead of deductible traditional IRA contributions.

However, a significant source of pre-tax money to do Roth conversions in retirement can come from employer plan assets. If the OP makes maximum pre-tax employee deferrals for their entire career, they very likely will need/want to do Roth conversions in retirement.
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by retiredjg »

Spirit Rider wrote: Fri Jul 19, 2019 12:28 pm
retiredjg wrote: Fri Jul 19, 2019 8:21 am Forget the Roth conversion ladder. It does not really apply to you and you don't need it anyway - since you can contribute directly to Roth IRA.
Not entirely true. The OP very well want to make Roth IRA contributions instead of deductible traditional IRA contributions.

However, a significant source of pre-tax money to do Roth conversions in retirement can come from employer plan assets. If the OP makes maximum pre-tax employee deferrals for their entire career, they very likely will need/want to do Roth conversions in retirement.
I think we are talking about different things.

My understanding is that a "Roth conversion ladder" is a strategy for people to be able to use IRA money before age 59.5. They do Roth conversions for 5 or more years before retirement so that there is Roth money available to live on without penalty each year before age 59.5. I consider it a bit of a gimmick and question a strategy that has someone doing large Roth conversions while they are likely at their highest lifetime tax bracket.

Unless I'm mistaken, a "Roth conversion ladder" is something completely different from making Roth conversions in retirement which is not a gimmick at all.

Have I completely misunderstood your meaning?
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by Spirit Rider »

Nothing prevents Roth conversion ladders from being accomplished during early retirement and nothing prevents them coming from current or previous pre-tax assets of employer retirement plans.
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by retiredjg »

I still think we are talking about different things (Roth conversion "ladder" vs successive Roth conversions). But even if we aren't, how would this benefit a 23 year old?
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by retiredjg »

This is what I'm thinking the original poster is talking about. Feels gimmicky to me and there are things that do not seem like sound investing practice.

https://www.iwillteachyoutoberich.com/b ... on-ladder/

Successive Roth conversions during low income years or early retirement are not the same thing in my way of thinking.
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by Eagle33 »

When I first heard of the Roth IRA, I funded my rIRA with the tax savings caused by my pre-tax 401k contribution. We didn't want to spend our tax reduction, rather save it tax free.
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by Wakefield1 »

I simply like my Roth IRA( :happy ) better than my "traditional" IRA( :x ) what with no "required minimum distributions" even if the numbers favored the "traditional" (they didn't since I am in a higher tax bracket in retirement).
If you have to make "non-deductible" "traditional IRA" contributions instead of Roth it might still be advantageous for future Roth conversion.
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by teen persuasion »

retiredjg wrote: Fri Jul 19, 2019 10:21 pm This is what I'm thinking the original poster is talking about. Feels gimmicky to me and there are things that do not seem like sound investing practice.

https://www.iwillteachyoutoberich.com/b ... on-ladder/

Successive Roth conversions during low income years or early retirement are not the same thing in my way of thinking.
That Roth conversion ladder is just a special case of general Roth conversions, for the purpose of accessing IRA accounts before age 59.5 without penalty.

If you retire just a few years before age 59.5, and have enough Roth IRA contributions, you could simply withdraw those to cover expenses while waiting for age 59.5 access to tIRA accounts. But then you are drawing down Roth balances, and leaving tIRA balances to grow, the reverse of usual advice. Using the laddered conversions lets you effectively shift the balance - you are spending Roth withdrawals, but you are shifting an equivalent amount from tIRA to Roth IRA, so it's as if you are really spending from the tIRA, drawing that account down.

If you retire earlier, it's less likely you have enough in Roth IRAs to completely cover expenses until you reach 59.5, but the 5 year ladder is probably doable, especially if a couple does two annual Roth IRA contributions (it will be for us).

Your linked explanation is a little clumsy, he kind of hand-waved the 5 years of expenses before you can access the first conversion, but basically correct.

OP hasn't expressed a desire to FIRE, but starting at age 23, OP has a great chance to reach FIRE before 59.5, so might want a way to access IRA balances penalty free.
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by Spirit Rider »

retiredjg wrote: Fri Jul 19, 2019 9:58 pm I still think we are talking about different things (Roth conversion "ladder" vs successive Roth conversions). But even if we aren't, how would this benefit a 23 year old?
Whether yearly Roth conversions occur at age 50, 55, 59 1/2 etc... If they are done to provide rolling 5-year tax-free income, they are a Roth conversion ladder. In the end it really doesn't matter what the conversions are called. They are worth knowing about.

It isn't that any Roth conversions would benefit a 23 year-old now. However, it is especially relevant to someone as young as 23 who is maxing 401k contributions now. Even in the 22% bracket, it probably makes sense to do pre-tax contributions now and plan on do Roth conversions later. THAT is the benefit of understanding the options.
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by retiredjg »

Teen and Spirit, I think we are all on the same page here.

Cwh3322, sorry that our discussion may have distracted from your original question. My concern was that you apparently you had read something you consider "good" about Roth Conversion Ladders causing you to think it might be "...wise to invest instead in a Traditional IRA rather than a Roth IRA as you can do a Roth Conversion Ladder." That was a red flag for me.

There's a fair amount of hype out there about "the Roth Conversion Ladder" and some people are getting the idea that it is a magical way to have enough money retire earlier. Nothing could be further from the truth. As teen persuasion has pointed out so well, it is simply a way to shift retirement income from a non-accessible account to an accessible account.

Nothing magic there. You still have to have the same amount of money - meaning you have to have ENOUGH money to retire earlier than 59.5 in the first place.

The reason you don't need to do Roth conversions is that you can and apparently are contributing directly to Roth IRA each year. If you can contribute directly, there is no reason to take two steps to get the same money to Roth IRA, along with extra forms on your tax return. So no, you don't want to switch that to traditional IRA just so you can convert it to Roth IRA. That accomplishes nothing.

And I agree with Spirit Rider that contributing to traditional 401k now will give you assets later on in life that you may (or may not) want to convert to Roth at that time. Much will change between now and then so there is no predicting what you will want to do.

The fact that you are starting your investing so early in life gives you a very good chance of having enough money to retire earlier than most.
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teen persuasion
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by teen persuasion »

I am currently at the start of my career, maxing out my 401k and Roth IRA. Should I keep it this way? I heard it's wise to invest instead in a Traditional IRA rather than a Roth IRA as you can do a Roth Conversion Ladder.
Retiredjg, I think we are nearly on the same page, just interpreting the OP in slightly different ways based on our own biases.

I read the above part of the OP to mean he wanted to know if contributing to all traditional (401k + IRA) would be better (than his split traditional 401k + Roth IRA) BECAUSE he always had the option to convert to Roth later (presumably at a lower tax period of his life), VS locking in paying 22% for Roth IRA contributions now.

Without knowing his future plans/income/tax-rate, it's a toss up which is better. So we all started making assumptions based on the bits of info included: started saving young, maxing 401k + IRA, $70k income at 23, mentioned Roth conversion ladder... My MMM brain saw someone possibly interested in FIRE, and how to achieve that. Some one else may focus on maxing all traditional, for maximum tax deferral now. Another poster, maybe facing large RMDs, might advise more Roth now at OP's relatively lower income (compared to future earnings) and shift to traditional at higher marginal tax rates in a longer career.


Maybe we'd be better explaining WHY each of us gives the advice we do.

I'd advise sticking with his traditional 401k + Roth IRA contributions, for tax diversity. It's also useful to build up a base of Roth IRA contributions to have to withdraw from when starting a Roth conversion ladder. I'd also avoid contributions to tIRA, if his future MAGI could rise enough to require the use of a backdoor Roth IRA. TIRA balances interfere with the backdoor Roth IRA, so it's probably best to avoid them altogether. So contribute to traditional for 401k (for tax deferral), and to Roth for IRA (for diversity, future early withdrawal options, and to make future backdoor Roth IRA contributions easily possible).
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Re: How to Contribute if Employer Doesn't Offer Traditional IRA

Post by retiredjg »

teen persuasion wrote: Sat Jul 20, 2019 4:39 pm I read the above part of the OP to mean he wanted to know if contributing to all traditional (401k + IRA) would be better (than his split traditional 401k + Roth IRA) BECAUSE he always had the option to convert to Roth later (presumably at a lower tax period of his life), VS locking in paying 22% for Roth IRA contributions now.
I see. Definitely not how I read it. :happy

My thinking is that the maximum contributions to traditional 401k starting this young will be plenty to convert to Roth later on while in a lower bracket. In the meantime, I'm also in favor or traditional 401k and Roth IRA.
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