100% Traditional 401K, or 50/50 Traditional & Roth?

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Topic Author
OxfordComma
Posts: 16
Joined: Wed Mar 03, 2021 8:39 pm

100% Traditional 401K, or 50/50 Traditional & Roth?

Post by OxfordComma »

Emergency funds: Yes

Debt: None

Salary: $107,000

Tax Filing Status: Single

Tax Rate: 22% Federal (if my 401K contributions are 100% traditional), 5.75% State

State of Residence: Virginia

Age: 29

Desired Asset allocation: 100% stocks / 0% bonds

Current portfolio around $200,000

Current retirement assets

Taxable
40% Vanguard Total Stock Market Index Fund (VTSAX) (0.04%) (I might sell some of these shares pre-retirement to increase my house down payment. However, I will only do this if the market is up)

401k
50% Federal Thrift Savings Plan (TSP) “C” Fund tracking the S&P 500 Index (0.051%)
There’s an employer match at 5% of salary

Roth IRA at Vanguard
10% Vanguard Total Stock Market Index Fund (VTSAX) (0.04%)
_______________________________________________________________

Contributions

New annual Contributions
$19,500 401k (plus $5,350 employer match)
$6,000 Roth IRA
Up to $25,000 taxable. (Considering shifting to a 50/50 strategy with $12,500 going into taxable, and the other $12,500 going into my online savings account. That way, I’ll have more cash on hand for a home purchase ~5 years from now. My home purchase date is flexible, particularly because I’m not entirely sure that I want to remain in my current geographical area)

If I remain in the government, I’ll also have a pension. However, that’s not set in stone as I can see myself joining the private sector at some point.


Question - For the last 1.5 years, I’ve been contributing 50% of my annual $19,500 401K contributions into Traditional, and 50% into Roth. I liked the idea of having more tax free money in retirement (beyond my Roth IRA), and I figured that with a 50/50 split in my 401K, I would never be more than 50% wrong. However, now I’m thinking about doing 100% Traditional 401K contributions. This will give me more cash on hand now to build life experiences, travel, and perhaps dump some more money into a future home down payment. This shift in 401K strategy would also coincide with a 50/50 split of my ~$25,000 non-retirement savings rate into my taxable account and online savings account. Is this a sound strategy, or am I way off here? Should I go all Traditional 401K, a 50/50 split, or even all Roth? Should I move forward with my idea of splitting non-retirement savings into my taxable and online savings account, or should I continue to dump it all into my taxable account?

Thanks in advance for your advice and input.
02nz
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Joined: Wed Feb 21, 2018 3:17 pm

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by 02nz »

For a single high-ish earner, I'd go 100% traditional. Some will point out that the pension shifts things in Roth's favor, but the FERS pension isn't that big.
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LadyGeek
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Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by LadyGeek »

OxfordComma - You had a duplicate post in the personal finance forum which I've removed. There were no replies.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
sycamore
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Joined: Tue May 08, 2018 12:06 pm

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by sycamore »

LadyGeek wrote: Sun Jul 18, 2021 7:18 pm OxfordComma - You had a duplicate post in the personal finance forum which I've removed. There were no replies.
Interesting, I was composing a reply to that other thread in the meanwhile... when I clicked Submit it said "The requested topic does not exist." and my reply was gone :( I suspect that's bug/feature of phpBB, c'est la vie.

I'll type it up again...
sycamore
Posts: 2566
Joined: Tue May 08, 2018 12:06 pm

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by sycamore »

OxfordComma wrote: Sun Jul 18, 2021 6:33 pm Question - For the last 1.5 years, I’ve been contributing 50% of my annual $19,500 401K contributions into Traditional, and 50% into Roth. I liked the idea of having more tax free money in retirement (beyond my Roth IRA), and I figured that with a 50/50 split in my 401K, I would never be more than 50% wrong. However, now I’m thinking about doing 100% Traditional 401K contributions. This will give me more cash on hand now to build life experiences, travel, and perhaps dump some more money into a future home down payment. This shift in 401K strategy would also coincide with a 50/50 split of my ~$25,000 non-retirement savings rate into my taxable account and online savings account. Is this a sound strategy, or am I way off here? Should I go all Roth, all Traditional, or split? Should I move forward with my idea of splitting non-retirement savings into my taxable and online savings account, or should I continue to dump it all into my taxable account?
First off, your financial position looks pretty good. Congrats!

To help decide Traditional versus Roth, I suggest reading a couple of Boglehead wiki articles:
https://www.bogleheads.org/wiki/Traditional_versus_Roth
https://www.bogleheads.org/wiki/Traditi ... h_examples

Back when I was your age, I would've chosen 100% Traditional. Actually back when I was your age they didn't Roth yet, but if they did that's what I would've done. And later when I did have a choice between Roth and Traditional, I chose Traditional.

One common scenario for many/most people is they'll be in a lower tax bracket when they retire (and make withdrawals from tax-deferred accounts) than when they were saving. In this scenario traditional contributions would've been better.

But of course one problem is that the future is uncertain in regards to tax rates. And another problem is that you may not be "most people". You may end up in a higher tax bracket for some reason (like an inheritance?) in which case Roth contributions would've been better.

You just won't know which was right until the future. I went with the odds (well, what I think the odds are) and chose Traditional. Some people go 50/50 like you did and that's entirely reasonable, too.

Not sure if you're saying the Trad vs Roth question is related to how you split your non-retirement money but I would say they are not related and should be considered unrelated decisions. I.e., first decide on your goals, then how much of your income to put toward each goal, and then how to allocate the money toward specific investments.

What's your purpose for the annual $25k ? If it's intended to help meet your retirement goal, I would invest it according to your asset allocation. If it's intended for some other goal (e.g., buying real estate, remodeling, new car, whatever), I would invest based on when you think you'll need the money: typically short-term bonds or high-yield savings accounts for things needed in a few years or less, intermediate-term bonds / CDs for things a few years beyond that, start putting a portion in to stocks for things not needed for 7 or 10 years, etc.

If you don't have a goal for that money, you're in even better shape! Just keep saving and enjoy life :-)
lakpr
Posts: 8003
Joined: Fri Mar 18, 2011 9:59 am

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by lakpr »

Of the $25k in taxable investment, that you intend to split 50:50 towards stocks and future home purchase -- I suggest that you buy I bonds. They are redeemable 1 year after initial purchase (actually can be as little as 11 months and two days, as it counts calendar months and not precise purchase dates), currently yielding 3.54% far higher than any CD or High Yield Savings out there. You can only buy $10k per year per SSN.
02nz
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Joined: Wed Feb 21, 2018 3:17 pm

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by 02nz »

lakpr wrote: Sun Jul 18, 2021 7:45 pm Of the $25k in taxable investment, that you intend to split 50:50 towards stocks and future home purchase -- I suggest that you buy I bonds. They are redeemable 1 year after initial purchase (actually can be as little as 11 months and two days, as it counts calendar months and not precise purchase dates), currently yielding 3.54% far higher than any CD or High Yield Savings out there. You can only buy $10k per year per SSN.
I like I bonds as well, but note that redeeming before 5 years means losing the last 3 months interest, e.g., redeeming after a year, you only get 9 months interest.
lakpr
Posts: 8003
Joined: Fri Mar 18, 2011 9:59 am

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by lakpr »

02nz wrote: Sun Jul 18, 2021 9:24 pm
lakpr wrote: Sun Jul 18, 2021 7:45 pm Of the $25k in taxable investment, that you intend to split 50:50 towards stocks and future home purchase -- I suggest that you buy I bonds. They are redeemable 1 year after initial purchase (actually can be as little as 11 months and two days, as it counts calendar months and not precise purchase dates), currently yielding 3.54% far higher than any CD or High Yield Savings out there. You can only buy $10k per year per SSN.
I like I bonds as well, but note that redeeming before 5 years means losing the last 3 months interest, e.g., redeeming after a year, you only get 9 months interest.
Right, so look at it as a 5 year CD with a 3 month early redemption penalty.

So you get 75% of the 3.54% annualized rate, or 2.65% only for the last 12 months prior to the date you redeem, which is still greater than the yield of any 5 year CD available in the market anywhere.

Bankrate shows the max yield on a 5 year CD is 1.06%.
babystep
Posts: 540
Joined: Tue Apr 09, 2019 9:44 am

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by babystep »

OxfordComma wrote: Sun Jul 18, 2021 7:12 pm Emergency funds: Yes

Debt: None

Salary: $107,000

Tax Filing Status: Single

Tax Rate: 22% Federal (if my 401K contributions are 100% traditional), 5.75% State

State of Residence: Virginia

Age: 29

Desired Asset allocation: 100% stocks / 0% bonds

Current portfolio around $200,000

Current retirement assets

Taxable
40% Vanguard Total Stock Market Index Fund (VTSAX) (0.04%) (I might sell some of these shares pre-retirement to increase my house down payment. However, I will only do this if the market is up)

401k
50% Federal Thrift Savings Plan (TSP) “C” Fund tracking the S&P 500 Index (0.051%)
There’s an employer match at 5% of salary

Roth IRA at Vanguard
10% Vanguard Total Stock Market Index Fund (VTSAX) (0.04%)
_______________________________________________________________

Contributions

New annual Contributions
$19,500 401k (plus $5,350 employer match)
$6,000 Roth IRA
Up to $25,000 taxable. (Considering shifting to a 50/50 strategy with $12,500 going into taxable, and the other $12,500 going into my online savings account. That way, I’ll have more cash on hand for a home purchase ~5 years from now. My home purchase date is flexible, particularly because I’m not entirely sure that I want to remain in my current geographical area)

If I remain in the government, I’ll also have a pension. However, that’s not set in stone as I can see myself joining the private sector at some point.


Question - For the last 1.5 years, I’ve been contributing 50% of my annual $19,500 401K contributions into Traditional, and 50% into Roth. I liked the idea of having more tax free money in retirement (beyond my Roth IRA), and I figured that with a 50/50 split in my 401K, I would never be more than 50% wrong. However, now I’m thinking about doing 100% Traditional 401K contributions. This will give me more cash on hand now to build life experiences, travel, and perhaps dump some more money into a future home down payment. This shift in 401K strategy would also coincide with a 50/50 split of my ~$25,000 non-retirement savings rate into my taxable account and online savings account. Is this a sound strategy, or am I way off here? Should I go all Traditional 401K, a 50/50 split, or even all Roth? Should I move forward with my idea of splitting non-retirement savings into my taxable and online savings account, or should I continue to dump it all into my taxable account?

Thanks in advance for your advice and input.
Agree with shift to 100% traditional 401k and 6k Roth. I would keep doing 100% traditional and re-evaluate every few years.
Calculate the down-payment needed, number of years from now that you wanna buy home and then decide the ratio of savings vs taxable investment.
e.g.
down-payment = 50k
years to buy home = 4 years.
12.5 goes to savings, 12.5k goes to taxable.
12.5k in savings * 4 years = 50k.

down-payment = 50k
years to buy home = 2 years.
25k goes to savings, 0k goes to taxable.
25k in savings * 2 years = 50k.
Lee_WSP
Posts: 5442
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by Lee_WSP »

During your working years, the tie should go to trad.

But the factors that favor Roth are:

1. You may earn more later in life.
2. Tax rates are scheduled to increase in 2026.
3. You are unlikely to be in a lower tax bracket in the future.

But, I would not suggest going too far. If you think your income will increase, 100% Roth could turn out in your favor, but it might not, 50/50 is a good hedge. Reiterating my earlier point that if you firmly believe your income will increase, then do the above. It’s basically the same choice as doing a Roth conversion later in life when you’re retired but before social security.
Topic Author
OxfordComma
Posts: 16
Joined: Wed Mar 03, 2021 8:39 pm

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by OxfordComma »

02nz wrote: Sun Jul 18, 2021 7:16 pm For a single high-ish earner, I'd go 100% traditional. Some will point out that the pension shifts things in Roth's favor, but the FERS pension isn't that big.
Thanks for your recommendation. Others have told me the same about the FERS pension size, particularly if I decide to leave Federal service early. Those two factors seem to point me more toward traditional contributions.
Topic Author
OxfordComma
Posts: 16
Joined: Wed Mar 03, 2021 8:39 pm

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by OxfordComma »

LadyGeek wrote: Sun Jul 18, 2021 7:18 pm OxfordComma - You had a duplicate post in the personal finance forum which I've removed. There were no replies.
That was my mistake. Thank you for correcting the error.

sycamore wrote: Sun Jul 18, 2021 7:34 pm
LadyGeek wrote: Sun Jul 18, 2021 7:18 pm OxfordComma - You had a duplicate post in the personal finance forum which I've removed. There were no replies.
Interesting, I was composing a reply to that other thread in the meanwhile... when I clicked Submit it said "The requested topic does not exist." and my reply was gone :( I suspect that's bug/feature of phpBB, c'est la vie.

I'll type it up again...
My apologies!
sycamore wrote: Sun Jul 18, 2021 7:36 pm
OxfordComma wrote: Sun Jul 18, 2021 6:33 pm Question - For the last 1.5 years, I’ve been contributing 50% of my annual $19,500 401K contributions into Traditional, and 50% into Roth. I liked the idea of having more tax free money in retirement (beyond my Roth IRA), and I figured that with a 50/50 split in my 401K, I would never be more than 50% wrong. However, now I’m thinking about doing 100% Traditional 401K contributions. This will give me more cash on hand now to build life experiences, travel, and perhaps dump some more money into a future home down payment. This shift in 401K strategy would also coincide with a 50/50 split of my ~$25,000 non-retirement savings rate into my taxable account and online savings account. Is this a sound strategy, or am I way off here? Should I go all Roth, all Traditional, or split? Should I move forward with my idea of splitting non-retirement savings into my taxable and online savings account, or should I continue to dump it all into my taxable account?
First off, your financial position looks pretty good. Congrats!

To help decide Traditional versus Roth, I suggest reading a couple of Boglehead wiki articles:
https://www.bogleheads.org/wiki/Traditional_versus_Roth
https://www.bogleheads.org/wiki/Traditi ... h_examples

Back when I was your age, I would've chosen 100% Traditional. Actually back when I was your age they didn't Roth yet, but if they did that's what I would've done. And later when I did have a choice between Roth and Traditional, I chose Traditional.

One common scenario for many/most people is they'll be in a lower tax bracket when they retire (and make withdrawals from tax-deferred accounts) than when they were saving. In this scenario traditional contributions would've been better.

But of course one problem is that the future is uncertain in regards to tax rates. And another problem is that you may not be "most people". You may end up in a higher tax bracket for some reason (like an inheritance?) in which case Roth contributions would've been better.

You just won't know which was right until the future. I went with the odds (well, what I think the odds are) and chose Traditional. Some people go 50/50 like you did and that's entirely reasonable, too.

Not sure if you're saying the Trad vs Roth question is related to how you split your non-retirement money but I would say they are not related and should be considered unrelated decisions. I.e., first decide on your goals, then how much of your income to put toward each goal, and then how to allocate the money toward specific investments.

What's your purpose for the annual $25k ? If it's intended to help meet your retirement goal, I would invest it according to your asset allocation. If it's intended for some other goal (e.g., buying real estate, remodeling, new car, whatever), I would invest based on when you think you'll need the money: typically short-term bonds or high-yield savings accounts for things needed in a few years or less, intermediate-term bonds / CDs for things a few years beyond that, start putting a portion in to stocks for things not needed for 7 or 10 years, etc.

If you don't have a goal for that money, you're in even better shape! Just keep saving and enjoy life :-)
Thanks for the suggested readings on deciding Traditional vs Roth contributions. That’s helpful! And I appreciate the “you just won’t know which was right until the future.”

As for the annual $25k non-retirement savings rate, I don’t really have a concrete goal for it quite yet. I see myself buying a primary residence at some point in the next 5-7 years, but I didn’t want to throw $25k annually into a savings account when my home purchase date is so flexible. And I definitely didn’t want to inflate my lifestyle and spend that money on trivial things. So I figured that a low cost index fund was the next best thing. Now I’m thinking that a 50/50 split between saving in an online savings account (or I bonds as others on here have suggested) and investing would give me the best of both worlds - potential investment growth, but also cash on hand for a future down payment. As my home purchase date becomes clearer and nears closer, I would devote 100% of that annual $25k into savings.
Topic Author
OxfordComma
Posts: 16
Joined: Wed Mar 03, 2021 8:39 pm

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by OxfordComma »

lakpr wrote: Sun Jul 18, 2021 7:45 pm Of the $25k in taxable investment, that you intend to split 50:50 towards stocks and future home purchase -- I suggest that you buy I bonds. They are redeemable 1 year after initial purchase (actually can be as little as 11 months and two days, as it counts calendar months and not precise purchase dates), currently yielding 3.54% far higher than any CD or High Yield Savings out there. You can only buy $10k per year per SSN.
02nz wrote: Sun Jul 18, 2021 9:24 pm
lakpr wrote: Sun Jul 18, 2021 7:45 pm Of the $25k in taxable investment, that you intend to split 50:50 towards stocks and future home purchase -- I suggest that you buy I bonds. They are redeemable 1 year after initial purchase (actually can be as little as 11 months and two days, as it counts calendar months and not precise purchase dates), currently yielding 3.54% far higher than any CD or High Yield Savings out there. You can only buy $10k per year per SSN.
I like I bonds as well, but note that redeeming before 5 years means losing the last 3 months interest, e.g., redeeming after a year, you only get 9 months interest.
lakpr wrote: Sun Jul 18, 2021 10:33 pm
02nz wrote: Sun Jul 18, 2021 9:24 pm
lakpr wrote: Sun Jul 18, 2021 7:45 pm Of the $25k in taxable investment, that you intend to split 50:50 towards stocks and future home purchase -- I suggest that you buy I bonds. They are redeemable 1 year after initial purchase (actually can be as little as 11 months and two days, as it counts calendar months and not precise purchase dates), currently yielding 3.54% far higher than any CD or High Yield Savings out there. You can only buy $10k per year per SSN.
I like I bonds as well, but note that redeeming before 5 years means losing the last 3 months interest, e.g., redeeming after a year, you only get 9 months interest.
Right, so look at it as a 5 year CD with a 3 month early redemption penalty.

So you get 75% of the 3.54% annualized rate, or 2.65% only for the last 12 months prior to the date you redeem, which is still greater than the yield of any 5 year CD available in the market anywhere.

Bankrate shows the max yield on a 5 year CD is 1.06%.
Interesting..... I've never considered I bonds. Are there any general rules of thumb for deciding between I bonds vs. a high yield savings account? For example, I bonds are better for purchases 3-5 years out whereas a high yield savings account is more optimal for purchases 1-2 years down the road?
Topic Author
OxfordComma
Posts: 16
Joined: Wed Mar 03, 2021 8:39 pm

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by OxfordComma »

babystep wrote: Sun Jul 18, 2021 11:09 pm
OxfordComma wrote: Sun Jul 18, 2021 7:12 pm Emergency funds: Yes

Debt: None

Salary: $107,000

Tax Filing Status: Single

Tax Rate: 22% Federal (if my 401K contributions are 100% traditional), 5.75% State

State of Residence: Virginia

Age: 29

Desired Asset allocation: 100% stocks / 0% bonds

Current portfolio around $200,000

Current retirement assets

Taxable
40% Vanguard Total Stock Market Index Fund (VTSAX) (0.04%) (I might sell some of these shares pre-retirement to increase my house down payment. However, I will only do this if the market is up)

401k
50% Federal Thrift Savings Plan (TSP) “C” Fund tracking the S&P 500 Index (0.051%)
There’s an employer match at 5% of salary

Roth IRA at Vanguard
10% Vanguard Total Stock Market Index Fund (VTSAX) (0.04%)
_______________________________________________________________

Contributions

New annual Contributions
$19,500 401k (plus $5,350 employer match)
$6,000 Roth IRA
Up to $25,000 taxable. (Considering shifting to a 50/50 strategy with $12,500 going into taxable, and the other $12,500 going into my online savings account. That way, I’ll have more cash on hand for a home purchase ~5 years from now. My home purchase date is flexible, particularly because I’m not entirely sure that I want to remain in my current geographical area)

If I remain in the government, I’ll also have a pension. However, that’s not set in stone as I can see myself joining the private sector at some point.


Question - For the last 1.5 years, I’ve been contributing 50% of my annual $19,500 401K contributions into Traditional, and 50% into Roth. I liked the idea of having more tax free money in retirement (beyond my Roth IRA), and I figured that with a 50/50 split in my 401K, I would never be more than 50% wrong. However, now I’m thinking about doing 100% Traditional 401K contributions. This will give me more cash on hand now to build life experiences, travel, and perhaps dump some more money into a future home down payment. This shift in 401K strategy would also coincide with a 50/50 split of my ~$25,000 non-retirement savings rate into my taxable account and online savings account. Is this a sound strategy, or am I way off here? Should I go all Traditional 401K, a 50/50 split, or even all Roth? Should I move forward with my idea of splitting non-retirement savings into my taxable and online savings account, or should I continue to dump it all into my taxable account?

Thanks in advance for your advice and input.
Agree with shift to 100% traditional 401k and 6k Roth. I would keep doing 100% traditional and re-evaluate every few years.
Calculate the down-payment needed, number of years from now that you wanna buy home and then decide the ratio of savings vs taxable investment.
e.g.
down-payment = 50k
years to buy home = 4 years.
12.5 goes to savings, 12.5k goes to taxable.
12.5k in savings * 4 years = 50k.

down-payment = 50k
years to buy home = 2 years.
25k goes to savings, 0k goes to taxable.
25k in savings * 2 years = 50k.
Thanks for the advice on doing 100% traditional contributions and then re-evaluating every few years. I need to keep in mind that my current strategy should be revisited every few years as my life situation and goals change!

Calculate the down-payment needed, number of years from now that you wanna buy home and then decide the ratio of savings vs taxable investment.
e.g.


That's exactly what I'm thinking now that I've read through all these great comments and recommendations. This forum is always so helpful and gives me the gut check that I really need. Now I just need to develop a clearer timeframe for my home purchase and then do those calculations for saving vs. investing.
Topic Author
OxfordComma
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Joined: Wed Mar 03, 2021 8:39 pm

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by OxfordComma »

deleted
lakpr
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Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by lakpr »

OxfordComma wrote: Tue Jul 20, 2021 5:42 pm Interesting..... I've never considered I bonds. Are there any general rules of thumb for deciding between I bonds vs. a high yield savings account? For example, I bonds are better for purchases 3-5 years out whereas a high yield savings account is more optimal for purchases 1-2 years down the road?
I bonds cannot be redeemed for 1 year regardless of the reason, including emergencies. Hence I bonds are suitable only for any expenses that DEFINITELY cross the 1 year mark.

After that 1 year mark, you can partially redeem the I bonds, as little as $25, and in pennies increments thereafter. You can partially redeem an I bond for $25.01, if you want, for example.

I bonds for everything beyond 1 year, High Yield Savings (or Rewards Checking accounts) for anything that is less than 1 year. If you are laddering the I bonds correctly, you probably will not need to have HYS at all as emergency fund after the first year.
Topic Author
OxfordComma
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Joined: Wed Mar 03, 2021 8:39 pm

Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by OxfordComma »

Lee_WSP wrote: Sun Jul 18, 2021 11:20 pm During your working years, the tie should go to trad.

But the factors that favor Roth are:

1. You may earn more later in life.
2. Tax rates are scheduled to increase in 2026.

3. You are unlikely to be in a lower tax bracket in the future.

But, I would not suggest going too far. If you think your income will increase, 100% Roth could turn out in your favor, but it might not, 50/50 is a good hedge. Reiterating my earlier point that if you firmly believe your income will increase, then do the above. It’s basically the same choice as doing a Roth conversion later in life when you’re retired but before social security.
All great points to consider. Thank you. I've been wracking my brain about this and appreciate all of the great insights and tips on this forum. The general rule of thumb that "the tie should go to traditional" gives me comfort, and I know that I'll always have the Roth IRA on the side for tax-free growth.
TropikThunder
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Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by TropikThunder »

One of the things I've noticed on this site is that there is a pretty strong pro-Roth contingent, and for very good reasons for the most part. Unfortunately there are some who focus almost entirely on the fact you can never be taxed on Roth withdrawals. One in particular has a signature line that says something to the effect of "a dollar in Roth is worth more than a dollar in traditional". True on the surface, but they seem to forget or gloss over the fact that it costs more in income to contribute a dollar into a Roth 401k than it does to contribute a dollar into a traditional 401k.

You never know what tax changes may come in the future, so I think the smart move is to take the known deduction now (traditional 401k) and hedge the unknown future (Roth IRA). Plus, there are so many other potential tax credits/savings that are AGI-based: student loan deduction, childcare credits, saver's credit, EITC, CARES Act payments, etc. If a traditional 401k contribution lowers your AGI enough to take the credit but a Roth doesn't, that's a big check mark on the traditional side. Also, a tiebreaker for traditional vs Roth is often what do you do with the tax savings. At your bracket, a full $19,500 traditional 401k contributions saves you $4,290. Put that in your Roth IRA, win win.
retiredjg
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Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by retiredjg »

You are young and already making a lot of money. You are also a bit of a super-saver.

If you stay with the government you will have a pension and SS and may never need much or any of your tax-deferred savings. If you leave, your salary is likely to go up quite a bit in the private sector.

To me, both the possible pension and the potential for significantly higher income later on support Roth contributions now.

In the past, I would have said "100% traditional", but time and observing others' situations has changed my mind. I suggest using half and half now and move to a higher percentage of traditional when/if you move into high enough income that it is obvious that traditional is the better choice.
retiredjg
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Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by retiredjg »

PS. Your TSP is like a 401k but it is not a 401k. You should refer to it here as the TSP so people will know which one you have.
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Re: 100% Traditional 401K, or 50/50 Traditional & Roth?

Post by LadyGeek »

^^^ To emphasize retiredjg's point, we know the TSP. See: Thrift Savings Plan
The Federal Thrift Savings Plan (TSP) is a retirement savings plan for civilian and military employees of the United States Government. It is similar to a 401(k) in that it is a defined contribution plan that is managed by the employee, and it has the same contribution limits and very favorable fees.
We know the plan limitations and the exact funds available to you.

The Asking Portfolio Questions template you followed is generic so it can be used by everyone. Using "TSP" in your posts where it applies (not 401(k)) is more clear to us and helps keep things straight.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
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