401k Roth or Traditional

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Shanzeh19
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Joined: Mon Sep 13, 2021 12:12 pm

401k Roth or Traditional

Post by Shanzeh19 »

Hello all,

I am in the process of trying to set up my 401k. My company matched up to 5% for the traditional or roth 401k. I am trying to decide which to contribute to. I do expect to be in a higher tax bracket later in life so I was leaning toward the roth 401k.

Where I am confused is - I want to open a Roth IRA as well and contribute the max. Does the roth 401k contribution go towards that limit 6000 limit?

Is there a benefit to have a mix of - traditional 401k and the Roth IRA, instead of the Roth 401k and Roth IRA? Please let me know your opinions! Thank you!
tashnewbie
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Re: 401k Roth or Traditional

Post by tashnewbie »

The 401k contributions don't affect IRA contribution limits.

You say you'll be in a higher tax bracket later in life. But will you be in a higher tax bracket in retirement? That's the key, and obviously it can be difficult to forecast if retirement is many decades away.

What's your current total traditional/tax-deferred 401k/403b/IRA/etc balance?

Will you have a pension?

Sizeable Social Security?

Retire early (before SS age)?
Topic Author
Shanzeh19
Posts: 2
Joined: Mon Sep 13, 2021 12:12 pm

Re: 401k Roth or Traditional

Post by Shanzeh19 »

Hello,

Thanks for the reply. I’ll try to answer to the best of my ability.
I’m not sure I understand the difference between being in a higher tax bracket later in life and in retirement.

I am 23 years old, I have no balance in my 401k or roth. I am opening up new accounts this week.

I expect to work until 65. I have a corporate job in the finance/accounting field. I expect my income to increase the closer I get to retirement. As far as SS goes… I’m not too informed about that… will it even be around when I’m 65?
an_asker
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Re: 401k Roth or Traditional

Post by an_asker »

Shanzeh19 wrote: Mon Sep 13, 2021 12:21 pm Hello all,

I am in the process of trying to set up my 401k. My company matched up to 5% for the traditional or roth 401k. I am trying to decide which to contribute to. I do expect to be in a higher tax bracket later in life so I was leaning toward the roth 401k.

Where I am confused is - I want to open a Roth IRA as well and contribute the max. Does the roth 401k contribution go towards that limit 6000 limit?

Is there a benefit to have a mix of - traditional 401k and the Roth IRA, instead of the Roth 401k and Roth IRA? Please let me know your opinions! Thank you!
Roth 401k and Roth IRA are mutually exclusive. The limits for one don't apply to the other. You are better off going for the Roth 401k unless your income is where a contribution to the traditional 401k would bring you to a lower marginal tax bracket.
tashnewbie
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Re: 401k Roth or Traditional

Post by tashnewbie »

Shanzeh19 wrote: Mon Sep 13, 2021 2:01 pm Hello,

Thanks for the reply. I’ll try to answer to the best of my ability.
I’m not sure I understand the difference between being in a higher tax bracket later in life and in retirement.

I am 23 years old, I have no balance in my 401k or roth. I am opening up new accounts this week.

I expect to work until 65. I have a corporate job in the finance/accounting field. I expect my income to increase the closer I get to retirement. As far as SS goes… I’m not too informed about that… will it even be around when I’m 65?
Good for you to start saving so young.

What are your federal and state marginal tax bracket(s) expected to be in 2021 and 2022? You can use this link to see brackets for 2021 (make sure you're looking at 2021 table): https://www.nerdwallet.com/article/taxe ... x-brackets. Taxable income is generally your AGI minus the standard or itemized deductions (~$12.5k for a single filer). Example: if your total income is $60k and you max traditional 401k contributions, then your AGI is no more than $40.5k (probably less because a lot of people pay health insurance premiums, which also reduce AGI), and your taxable income would be ~$28k, which falls in the 12% bracket for a single filer.

Welcome to the forum, by the way!
joe_the_buckeye
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Re: 401k Roth or Traditional

Post by joe_the_buckeye »

Depending on what you can afford to contribute, I would suggest the following:

1) Contribute up to the full match amount in your job's traditional 401k
2) Contribute separately to a Roth IRA up to $6,000 (the reason being that you can withdraw contributions from a Roth IRA at any point, but not from a Roth 401k until after you convert to a Roth IRA-which is usually done after leaving employment).
3) Contribute any additional amount (if desired up to $19,500) to a 50-50 split of Roth 401k and traditional 401k with your employer. (this gives you tax diversification and means you can't go too far wrong with either side).

I think the exceptions would be :

a) if you are likely to experience significant career income gains in the future (favors Roth 401k) or
b) if you think you're likely to have some employment challenges/instability in the future (favors traditional 401k).

I kindly suggest splitting it 50-50 and not losing any sleep over the debate.

-Joe
LittleMaggieMae
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Re: 401k Roth or Traditional

Post by LittleMaggieMae »


1) Contribute up to the full match amount in your job's traditional 401k
2) Contribute separately to a Roth IRA up to $6,000 (the reason being that you can withdraw contributions from a Roth IRA at any point, but not from a Roth 401k until after you convert to a Roth IRA-which is usually done after leaving employment).
3) Contribute any additional amount (if desired up to $19,500) to a 50-50 split of Roth 401k and traditional 401k with your employer. (this gives you tax diversification and means you can't go too far wrong with either side).
AS you are just starting out - I agree with the advice Joe_the_Buckeye outlined.

#1 forces you to understand how your employer's 401K employer match works. There's a lot of variety in how employer contributions work.

#2 This gets you to set up a Roth IRA at Fidelity, Vanguard, Schwab. As you are just starting out - you could consider the first 6K into your Roth as part of your EF (keep the dollars in something low risk.) that you never expect to spend. Let next years contribution get invested.

#3 gets you going and is a good plan to follow - it allows you spend some time learning about investing and lets you get comfortable with your job and "career path".

Assume that you will review and maybe revise this plan in a few years as your income grows or as your circumstances change.

ADDED: if you aren't saving 15% or 20% of your income for retirement - don't forget to bump up your contribution amount a % or 2 everytime you get raise or when you switch jobs (and get a pay increase).

ADDED SOMEMORE: I would also come up with a Plan for dealing with bonuses and windfalls from your employer. Give yourself 10% (or 20%) as fun money to spend as you wish. Then some % to debt paydown (or towards some future purchase: car, wedding, house, move across country, a big once in a blue moon vacation) and then some % to retirement after tax savings.
(I am VERY happy my past self didn't spend every penny of bonuses or unexpected money (vacation day buy out!) over the years.)

I would assume that as your income goes up and if you remain single - contributing to the traditional 401K will become your biggest and best way to "lower your current tax burden" AND be able to stuff more into retirement accounts (because it's pretax and might be the $$ that pushes you into a higher bracket if you didn't save it pretax).
billfromct
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Re: 401k Roth or Traditional

Post by billfromct »

At age 23 with 40 or more years until retirement, and for your Roth retirement accounts (Roth IRA & Roth 401k) to grow tax free & taken out state & Federal tax free after age 59.5, you want to put as much as possible into those Roth retirement accounts while in your early working years when you are probably in your lowest Federal tax bracket of your lifetime.

I maxed out my Roth IRA when they started in 1998 while in my early 50s until retirement. When a Roth 401k
become available at work, I was in my mid 50s & in my highest earning years where I needed the tax deduction of a traditional tax deductible 401k.

When I left the work force at age 69, my retirement accounts were 96% tax deductible & 6% Roth. Again, maxing out my Roth IRA for 20 years.

After starting SS & rollover IRA RMDs (required minimum distributions) at age 70, I was bumped up a tax bracket compared to my full time working years & bumped up 2 or 3 brackets for the Medicare income penalty. If Roth retirement accounts were available when I was 23, I could probably have retired with a 50%/50% or 60%/40%, tax deductible/Roth retirement account makeup.

I would suggest maxing the Roth 401k at least through your 20s. Then at age 30 re-evaluate you Roth 401k contributions based on your tax bracket at that age.

Others will disagree with me but when you retire in your 60s, you won’t remember the extra taxes you paid in your 20s.

bill
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FiveK
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Re: 401k Roth or Traditional

Post by FiveK »

Shanzeh19 wrote: Mon Sep 13, 2021 2:01 pm I’m not sure I understand the difference between being in a higher tax bracket later in life and in retirement.
"later in life" could mean "while you are still working" - if so, that is of secondary importance.

To maximize Roth or traditional benefits, you want to contribute to traditional when your marginal tax rate is "high" and contribute to Roth when that rate is "low". The definition of "high" and "low" is "compared with the marginal tax rate you'll pay when withdrawing from traditional accounts in the future."

Such withdrawals usually occur after you have retired.
I am 23 years old, I have no balance in my 401k or roth. I am opening up new accounts this week.
I expect to work until 65. I have a corporate job in the finance/accounting field. I expect my income to increase the closer I get to retirement.
If you expect to become your company's CFO, then making Roth contributions now is a logical choice: your "unavoidable" retirement income will likely be so high that whatever tax rate you are paying now will be "low" in comparison.

If you acknowledge that you might not work until 65 (or even 55), whether by choice or not, then making traditional contributions now and until your traditional balance is high enough that you expect withdrawals from that account will hit your current marginal tax rate is also a logical choice.

Of course, if you have just started full time work so this year is a "half income" year then all Roth (unless you are very close to a saver's or other credit tier) is probably best in any case.
Last edited by FiveK on Tue Sep 14, 2021 1:40 am, edited 1 time in total.
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sarabayo
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Re: 401k Roth or Traditional

Post by sarabayo »

This article provides some strong reasons why most people are better off with Traditional (and some exceptions are listed at the end of the article too, so make sure to check those): https://thefinancebuff.com/case-against-roth-401k.html
dboeger1
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Re: 401k Roth or Traditional

Post by dboeger1 »

joe_the_buckeye wrote: Mon Sep 13, 2021 2:57 pm I kindly suggest splitting it 50-50 and not losing any sleep over the debate.
+1. A common approach for people who expect to be better off with traditional but want diversification is to max out traditional 401k and Roth IRA, which is more or less what I did under "normal" circumstances. I'm doing more of an even split now with the mega backdoor Roth method, but I don'y expect every job to provide that option. I know we're not supposed to talk about proposed legislation here, but this is somewhat tangential. I was reading a post today about proposed changes to eligibility for various account types, and it was quite a relief to remember that I have a good split between both account types. One may be more optimal than the other by the time I retire, but a lot can change by then, so having a mix hedges against unforeseen changes on either side.
bradpevans
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Re: 401k Roth or Traditional

Post by bradpevans »

dboeger1 wrote: Tue Sep 14, 2021 2:37 am
joe_the_buckeye wrote: Mon Sep 13, 2021 2:57 pm I kindly suggest splitting it 50-50 and not losing any sleep over the debate.
+1. A common approach for people who expect to be better off with traditional but want diversification is to max out traditional 401k and Roth IRA, which is more or less what I did under "normal" circumstances. I'm doing more of an even split now with the mega backdoor Roth method, but I don'y expect every job to provide that option. I know we're not supposed to talk about proposed legislation here, but this is somewhat tangential. I was reading a post today about proposed changes to eligibility for various account types, and it was quite a relief to remember that I have a good split between both account types. One may be more optimal than the other by the time I retire, but a lot can change by then, so having a mix hedges against unforeseen changes on either side.
Kitces has some thoughts on this https://www.kitces.com/blog/tax-diversi ... tax-alpha/

One thing he points out is that once you go Roth <while working, not conversion> then you have decided what the tax impact shall be,
specifically:

Splitting dollars between traditional and Roth accounts is not akin to ‘investment diversification'; instead, it’s more analogous to taking money out of the markets altogether and just holding zero-risk-zero-opportunity cash instead. https://www.kitces.com/blog/tax-diversi ... tax-alpha/ via @MichaelKitces
wrongfunds
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Re: 401k Roth or Traditional

Post by wrongfunds »

FiveK gave you the advice that I concur with. Only medical residents who are guaranteed to have higher earning growth in later years a single person starting out should first fill up regular 401k.

On the other hand if you are able to save 70k or more then use Roth 401k as that will get more effective dollars in your retirement account
KlangFool
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Re: 401k Roth or Traditional

Post by KlangFool »

Shanzeh19 wrote: Mon Sep 13, 2021 2:01 pm Hello,

Thanks for the reply. I’ll try to answer to the best of my ability.
I’m not sure I understand the difference between being in a higher tax bracket later in life and in retirement.

I am 23 years old, I have no balance in my 401k or roth. I am opening up new accounts this week.

I expect to work until 65. I have a corporate job in the finance/accounting field. I expect my income to increase the closer I get to retirement. As far as SS goes… I’m not too informed about that… will it even be around when I’m 65?
Shanzeh19,

<<I expect to work until 65. I have a corporate job in the finance/accounting field.>>

That is not likely to be true.

<< I expect my income to increase the closer I get to retirement.>>

That is not true either.

In summary, max up your Trad 401K and put your tax savings into Roth IRA. If you are lucky, you would voluntary retire at the 50s before being forced to retire.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
KlangFool
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Re: 401k Roth or Traditional

Post by KlangFool »

wrongfunds wrote: Tue Sep 14, 2021 6:49 am FiveK gave you the advice that I concur with. Only medical residents who are guaranteed to have higher earning growth in later years a single person starting out should first fill up regular 401k.

On the other hand if you are able to save 70k or more then use Roth 401k as that will get more effective dollars in your retirement account
wrongfunds,

That is not true. If he can saves 70K per year, he can retire early and do Roth conversion. Why pay high current marginal taxes by contributing to Roth 401k?

KlangFool
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wrongfunds
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Re: 401k Roth or Traditional

Post by wrongfunds »

Because he is creating effectively larger retirement account at the higher cost.

I suspect this is only theoretical and OP is not pulling in that kind of compensation neither is OP working for CEO dad who has straight path to become the next CEO of the family Fortune 500 company.

All kidding aside given OP situation do regular 401k and then Roth IRA and then mega back door Roth. If all are filled then come back here for more advice
wrongfunds
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Re: 401k Roth or Traditional

Post by wrongfunds »

sarabayo wrote: Tue Sep 14, 2021 12:59 am This article provides some strong reasons why most people are better off with Traditional (and some exceptions are listed at the end of the article too, so make sure to check those): https://thefinancebuff.com/case-against-roth-401k.html
The above is an excellent link. Please read that and another one which is also listed there. ( https://thefinancebuff.com/roth-401k-fo ... e-max.html )

A telling reply from that one is posted below. Point? If you had guessed the tax rate would be lower in 2021 than in 2008, you were deemed "to have lost your mind!". Don't go crazy in estimating future tax rates.
Xxxx says

AUGUST 27, 2008 AT 7:51 AM

Whoever thinks taxes are going to be lower at in the future is just not thinking, infact anyone thinking this, in my opinion has lost their mind!

We are at a ALL time low over the last 30 years, as far as tax brackets. Right NOW we pay less taxes they we ever have in 30 YEARS!! ( fedral taxes) THAT IS A FACT!

The IRS and congress are going to face a HUGE problem in the next 15 years with all the baby boomers. HOW do you think they are going to pay for all of SS benefits? How do you think they are going to pay for all the medicare? The list goes on and on……..

I will tell you how………MORE TAXES!! Its a FACT and I garantee reguardless of who becomes president TAXES ARE GOING UP.

So the person who wrote the post about you should invest in a Traditional 401 over a ROTH 401k is simply WRONG and should not be giving financial advice!
DSInvestor
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Re: 401k Roth or Traditional

Post by DSInvestor »

Traditional 401k contributions may allow OP to max out match and save on taxes to help some other financial goals like saving for car, home, paying student loans. I think Traditional 401k and Roth IRA contributions would be good default plan.

Roth 401k contributions, once made, are irrevocable. There is no changing your mind and changing that Roth money back to Traditional.

Traditional 401k assets could be converted to Roth later which provides options in case OP changes his/her mind.
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invest4
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Re: 401k Roth or Traditional

Post by invest4 »

We are lacking some details from OP (ex: current tax bracket), but appears to be first job and first time investing. Based upon what has been provided and making some assumptions on my part, I would recommend that OP go both feet in with their employee Roth contributions (indicated employer match is eligible for traditional or Roth 401k) at this stage and modify the approach as income increases.

I think the focus on employee Roth contributions now with tax rates currently planned to revert (increase) in future is a great opportunity to lay a solid foundation in this tax space with decades of tax free growth ahead. As any employer contributions will be pre-tax, OP gets a bit of both in any case. Although we don't know the future for OP, I believe it is a reasonable expectation their income will eventually create a situation where a shift to traditional will make more sense and then do the usual walk to maximize all options...traditional->HSA / Roth->taxable, etc...which may take quite a few years to accomplish (maxing all...if ever)

I was completely unaware of Roth when it was initially introduced early in my career and thus had contributed to traditional from the onset and it took quite a few years before I could max it out and then also contribute to Roth...both for me and my wife (I am sole income in our family), then HSA, etc. To the extent I am working to get a good mix in my portfolio, it is a struggle to build Roth up as a % of my portfolio as traditional had such a head start and continues to grow with both employee and employer contributions. In hindsight, I would have appreciated to start with Roth and transition as income grew with the expectation that traditional would catch and overtake Roth while having the advantage of the long track of a growing Roth base established early on.
dboeger1
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Re: 401k Roth or Traditional

Post by dboeger1 »

bradpevans wrote: Tue Sep 14, 2021 6:06 am
dboeger1 wrote: Tue Sep 14, 2021 2:37 am
joe_the_buckeye wrote: Mon Sep 13, 2021 2:57 pm I kindly suggest splitting it 50-50 and not losing any sleep over the debate.
+1. A common approach for people who expect to be better off with traditional but want diversification is to max out traditional 401k and Roth IRA, which is more or less what I did under "normal" circumstances. I'm doing more of an even split now with the mega backdoor Roth method, but I don'y expect every job to provide that option. I know we're not supposed to talk about proposed legislation here, but this is somewhat tangential. I was reading a post today about proposed changes to eligibility for various account types, and it was quite a relief to remember that I have a good split between both account types. One may be more optimal than the other by the time I retire, but a lot can change by then, so having a mix hedges against unforeseen changes on either side.
Kitces has some thoughts on this https://www.kitces.com/blog/tax-diversi ... tax-alpha/

One thing he points out is that once you go Roth <while working, not conversion> then you have decided what the tax impact shall be,
specifically:

Splitting dollars between traditional and Roth accounts is not akin to ‘investment diversification'; instead, it’s more analogous to taking money out of the markets altogether and just holding zero-risk-zero-opportunity cash instead. https://www.kitces.com/blog/tax-diversi ... tax-alpha/ via @MichaelKitces
Admittedly, I don't have an academic background in finance, nor have I read the page you linked to, and Kitces is clearly more qualified to speak on this topic than I am... but that just seems flat out wrong to me.

1) The eligibility requirements for the various types of accounts differ, so it may not even be a matter of choice to begin with. There are many people who would benefit more from traditional but are only eligible to contribute to Roth after a certain point based on access to various backdoor methods and such.
2) The effective contribution limits aren't even equal, so there is some nuance to the comparison of the accounts when maxing them out.
3) There are practical tax considerations beyond just marginal tax rate, such as qualifying for credits or avoiding AMT.
4) There are key differences between both accounts, such as being able to withdraw Roth contributions without penalty, or employer matches only going into traditional.
5) The legislation around the various account types is generally separate, so even if there's an argument to be made that there's no actual tax diversification benefit, there is definitely a legislation diversification benefit (and much of that legislation is around taxation, so by extension, it's hard to argue there's no tax diversification benefit).
6) I just followed your link, and the gist of Kitces' argument seems to be that the motivation behind tax diversification between account types is to account for changing tax rates. That's ignoring the generally much bigger motivation that people asking such questions have, which is how much retirement income one can expect to have. That's a massive unknown for people just diligently saving away for a career of unknown duration. Kitces seems to be making the assumption that one's income will remain within tight bands, not just while working but through retirement, and that the only consideration is making Roth conversions in down years. However, that is absolutely not the case for people whose income varies significantly more than their projections, such as someone who gets a huge promotion they never expected, or someone who goes on disability at a young age. They cannot accurately make any optimal decisions about income levels decades in the future, independently of whether or not tax rates change. Diversifying between traditional and Roth is a hedge against a very wide distribution of possibilities that can surprise to either the downside or upside.
7) Not only might tax rates change, but many people expect other sources of income such as social security, pensions, healthcare subsidies, inheritances, etc. Good luck making an optimal decision on those decades in advance. Again, diversifying account types is a hedge against a wide distribution of outcomes with regards to these things as well.

I just don't see how anyone can seriously dismiss the diversification benefits of having both traditional and Roth, especially when so many people don't necessarily have the choice to go all in on one versus the other. Maybe I didn't skim that page long enough to grasp the argument, but Kitces seems to be saying, "Well, if we assume someone will be in the same tax bracket for life except for a few opportune years, then the optimal approach is to do Roth conversions/contributions in those years." Well, yeah, sure, but is that not a really big if? Has nobody every gotten either a positive or negative surprise that changed their career and savings trajectory significantly enough to put them in different tax brackets?
wrongfunds
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Re: 401k Roth or Traditional

Post by wrongfunds »

dboeger1 wrote: Wed Sep 15, 2021 4:29 pm I just don't see how anyone can seriously dismiss the diversification benefits of having both traditional and Roth, especially when so many people don't necessarily have the choice to go all in on one versus the other. Maybe I didn't skim that page long enough to grasp the argument, but Kitces seems to be saying, "Well, if we assume someone will be in the same tax bracket for life except for a few opportune years, then the optimal approach is to do Roth conversions/contributions in those years." Well, yeah, sure, but is that not a really big if? Has nobody every gotten either a positive or negative surprise that changed their career and savings trajectory significantly enough to put them in different tax brackets?
You are making valid points but don't you come up with a different decision if you think you will have positive surprise vs if you think you will end up with negative surprise? Or are you saying plan for both and do little bit of both? If so, then I do agree with you.
dboeger1
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Re: 401k Roth or Traditional

Post by dboeger1 »

The latter. I have both Roth and Traditional because I am considering the possibilities that I might either become extremely poor or extremely wealthy. I have become poor due to life events beyond my control before, so I know that's possible. I have also had significant upside surprises, primarily in the form of a spouse whose career trajectory went from nothing to better than mine. For all I know, she could become a very successful executive and I could end up beating myself up over not putting everything in Roth now, even though I believe traditional is optimal for us. Splitting the difference means I won't have to beat myself up too much either way. I don't know enough about our future to commit to one versus the other.
bradpevans
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Re: 401k Roth or Traditional

Post by bradpevans »

dboeger1 wrote: Wed Sep 15, 2021 5:01 pm The latter. I have both Roth and Traditional because I am considering the possibilities that I might either become extremely poor or extremely wealthy. I have become poor due to life events beyond my control before, so I know that's possible. I have also had significant upside surprises, primarily in the form of a spouse whose career trajectory went from nothing to better than mine. For all I know, she could become a very successful executive and I could end up beating myself up over not putting everything in Roth now, even though I believe traditional is optimal for us. Splitting the difference means I won't have to beat myself up too much either way. I don't know enough about our future to commit to one versus the other.
I didn't read Kitces as saying its a bad idea.

I read it more as "removing alpha" because, as soon you go Roth that tax is paid and no other scenario remains.
In other words, he doesn't view (X traditional, 100-X Roth) the same way he views (Y Stocks, 100-Y bonds)

For many on this forum, they save more than traditional allows, so for many its not "either or" but "both"
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willthrill81
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Re: 401k Roth or Traditional

Post by willthrill81 »

If your income grows substantially in inflation-adjusted dollars over the course of your career, it's possible that Roth contributions now while you're in a lower tax bracket and tax-deferred contributions later would come out ahead. But this is a big unknown, and there are many ways that such a plan could be derailed (e.g., income not growing much, early retirement).

Contributing to the traditional 401(k) is what I would recommend in the absence of compelling information otherwise.
DSInvestor wrote: Wed Sep 15, 2021 12:39 am Traditional 401k contributions may allow OP to max out match and save on taxes to help some other financial goals like saving for car, home, paying student loans. I think Traditional 401k and Roth IRA contributions would be good default plan.

Roth 401k contributions, once made, are irrevocable. There is no changing your mind and changing that Roth money back to Traditional.

Traditional 401k assets could be converted to Roth later which provides options in case OP changes his/her mind.
Good points. The irrevocability of Roth 401(k) contributions is a big issue that many gloss over. Another is the asymmetric risk in tax-deferred vs. Roth assets.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
dboeger1
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Re: 401k Roth or Traditional

Post by dboeger1 »

bradpevans wrote: Thu Sep 16, 2021 9:29 am
dboeger1 wrote: Wed Sep 15, 2021 5:01 pm The latter. I have both Roth and Traditional because I am considering the possibilities that I might either become extremely poor or extremely wealthy. I have become poor due to life events beyond my control before, so I know that's possible. I have also had significant upside surprises, primarily in the form of a spouse whose career trajectory went from nothing to better than mine. For all I know, she could become a very successful executive and I could end up beating myself up over not putting everything in Roth now, even though I believe traditional is optimal for us. Splitting the difference means I won't have to beat myself up too much either way. I don't know enough about our future to commit to one versus the other.
I didn't read Kitces as saying its a bad idea.

I read it more as "removing alpha" because, as soon you go Roth that tax is paid and no other scenario remains.
In other words, he doesn't view (X traditional, 100-X Roth) the same way he views (Y Stocks, 100-Y bonds)

For many on this forum, they save more than traditional allows, so for many its not "either or" but "both"
By that logic, the choice of traditional contributions in any given year is irrevocable as well (ignoring edge cases like performing a Roth conversion in the same year as a traditional contribution). In other words, if I decide to put money in a traditional 401k this year, and then my income goes up substantially next year to the point that I can project higher taxes in retirement and Roth would be more optimal, I can't go back and exchange that traditional contribution for Roth at my previous tax bracket without reducing my income, which kind of defeats the point.

I'm not suggesting to let the diversification tail wag the risk/tax dog. For better or worse, most people are better off maxing out traditional 401k and Roth IRA for most of their careers. Most people expect to have lower real income in retirement (or intend to retire early to make it so), so traditional is better to start off with. At that point, lower income earners will have reduced their tax liability by so much that a Roth IRA becomes a natural supplement, if they can even afford to invest more. Higher incomes earners will phase out of traditional IRA eligibility before Roth IRA, so Roth IRA becomes the only option they have left.

The conscious decision to diversify actually never enters the equation for most people, so in some sense, I think we're agreeing on the relative importance of the diversification argument. I just wouldn't go so far as to say the diversification benefit doesn't exist. Again, I can't get into the specifics of the proposed legislation I was reading about, but suffice to say the relative "irrevocability" of either contribution type is not set in stone, so I don't think it can necessarily be used as the basis for any argument about which decision will be optimal decades from now. By the time I retire, these account types may behave very differently from how they do now, and having both protects me from that, if nothing else.
wrongfunds
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Re: 401k Roth or Traditional

Post by wrongfunds »

I believe irrevocability concept applies to the conversion i.e. traditional can be converted in to Roth but reverse is NOT allowed. That concept does not seem to apply to the contribution.
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willthrill81
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Re: 401k Roth or Traditional

Post by willthrill81 »

wrongfunds wrote: Thu Sep 16, 2021 1:13 pm I believe irrevocability concept applies to the conversion i.e. traditional can be converted in to Roth but reverse is NOT allowed. That concept does not seem to apply to the contribution.
Roth contributions cannot be converted to traditional contributions at a later date, but traditional contributions can be converted to Roth.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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