Help with first 401K - traditional vs Roth at 22% bracket

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Jeeperscrow
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Help with first 401K - traditional vs Roth at 22% bracket

Post by Jeeperscrow » Mon Jan 13, 2020 7:50 pm

Im 22 years old and get to contribute to my first 401K (yay no more minimum wage college jobs)

This year I will make between 70-75k gross. I have a maxed Roth IRA this year already.

My company offers a Roth 401K and a traditional 401K. How do I decide when I am currently in the 22% bracket? Or should I do a mixture of both

fabdog
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Location: Williamsburg VA

Re: Help with first 401K - traditional vs Roth at 22% bracket

Post by fabdog » Mon Jan 13, 2020 8:28 pm

If this is your first job out of school... you gotta think your income will be higher (and your tax rate will move up) in the future. I'd do ROTH to maximize the long term tax free growth

Mike

cavman22
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Re: Help with first 401K - traditional vs Roth at 22% bracket

Post by cavman22 » Mon Jan 13, 2020 8:32 pm

Most here will tell you traditional. It will take quite a large savings to hit 22% in retirement. But other factors come to play. Will you have a pension? Inheritance?

Personally I am in the 22% and I split trad/Roth 50/50. I am trying to take advantage of the lower tax rates (3% lower) under the current tax law, as I believe they will revert back in 2025. I also want 25% of my total portfolio in Roth when I retire, so I’m playing catch up.

Supurdueper
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Re: Help with first 401K - traditional vs Roth at 22% bracket

Post by Supurdueper » Mon Jan 13, 2020 8:55 pm

Most will say traditional on here. However I’d go all ROTH. First job out of school your earnings will go up, plus tax rates are at historical lows. When the tax rates change at the end of 2025 I’d reevaluate

rkhusky
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Re: Help with first 401K - traditional vs Roth at 22% bracket

Post by rkhusky » Tue Jan 14, 2020 9:10 am

Traditional 401k and use the tax savings to fund a Roth IRA and/or taxable account. That provides a nice mix of Traditional and Roth.

Or, if you are able to max your 401k and expect your salary to increase faster than inflation, going with Roth 401K now is also not a bad solution.

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rh00p
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Re: Help with first 401K - traditional vs Roth at 22% bracket

Post by rh00p » Tue Jan 14, 2020 9:19 am

rkhusky wrote:
Tue Jan 14, 2020 9:10 am
Traditional 401k and use the tax savings to fund a Roth IRA and/or taxable account. That provides a nice mix of Traditional and Roth.

Or, if you are able to max your 401k and expect your salary to increase faster than inflation, going with Roth 401K now is also not a bad solution.
I would go Roth for now but later on when your salary increases in your peak earning years and the
Tax Cuts and Jobs Act eventually expires then do as above.
Preparing for the worst. Hoping for the best.

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TomatoTomahto
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Re: Help with first 401K - traditional vs Roth at 22% bracket

Post by TomatoTomahto » Tue Jan 14, 2020 9:22 am

If your company does a match, it will by law go to traditional. So, personally, I would do a Roth 401k.
Okay, I get it; I won't be political or controversial. The Earth is flat.

petulant
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Re: Help with first 401K - traditional vs Roth at 22% bracket

Post by petulant » Tue Jan 14, 2020 9:23 am

Fill up traditional to the bottom of 22% while your future retirement still has a lot of 0% and 10% space. In other words, you save 22% for a deduction today, but then in 2060 you will be able to take out $35K or so with no or low taxes. It might take $500K to $1M in today's dollars to fill up this space across your older years, if not more. So until you have saved a lot, the best idea in 22% is pretax.

As a single with $70-75K gross, you have 0-12% space today essentially to about $53K. Above that is taxed 22% plus state income tax, if any. You can do $17-22K in workplace health and retirement benefits to avoid tax. I would plan to do as much as you are comfortable to use up this $17-22K.

As a young person, you may need cash for major purchases like cars, trips, marriage, etc. Since traditional saves taxes today, you will have more cash to save for these expenses.

This kind of saving is very important. Living below your means and having flexibility from a healthy cash balance will help you feel free, you can take appropriate risks in your career, and you can avoid consumer debt with bad terms.

Follow this advice for 5 years and then let's see where you're at.

lakpr
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Re: Help with first 401K - traditional vs Roth at 22% bracket

Post by lakpr » Tue Jan 14, 2020 9:25 am

I would strongly suggest Traditional 401k and max out. If you are expected to earn 70k to 75k, this year, and I am assuming you are single, maxing out the Traditional 401k would drop you down to the 12% bracket. $40,125 taxable income is the top of the 12% tax bracket. Add $12,400 standard deduction to it, to get an AGI of $52,625. If you max out the $19,500 Traditional 401k contribution, then your AGI will be $73k (mean of your projected salary this year) less $19,500 max = $52,500. RIGHT at the top of the 12% bracket.

What this means is that, the money you contributed to the Roth IRA of $6000, you will have contributed at a 12% tax rate. If you do not max out the Traditional 401k, then you will have contributed to the Roth IRA at a 22% tax rate. In retirement, you are far more likely to be in a higher tax bracket than 12%, especially if you continue to max out the Traditional 401k. That's a difference of $600 per year, extra you will be paying Uncle Sam.

As your salary grows, there will come a point where even if you max out the Traditional 401k, your Roth IRA contributions will still be made at a 22% bracket. THAT'S WHEN you should be questioning yourself which route to take - Trad 401k or Roth 401k. Not yet ...

Edit: I see @petulant has made the same point, got to it earlier than I did.

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