If your traditional withdrawals are your only income, and you are withdrawing the same ($110k, ignoring inflation) as you were making in your earning years, then your effective tax rate on your traditional withdrawals would only be 18.81% (using this year's tax tables). However, there are important differences and it may help you to take them into account when saving for retirement. This is put into the traditional 401k (no Roth option. If you work in a state with income tax and retire in a state without income tax, traditional gets an advantage. Pay little now, more later, the roth is good. Roth IRA – Contributions are made with after-tax dollars, meaning that you pay taxes on the money before it ever gets put into the account. Traditional vs. Roth IRA – The Similarities. A lot. Building Wealth, Personal Finance. In other words, i don't really expect a change in income tax up or down. You're contributing about $11,500, which at 7% in 40 years will be $172,206 under both options. With a traditional IRA, investments inside the account grow tax-deferred. TL;DR - I'd stick with the Roth as you're young and began building this nest egg when you started working. Roth IRA Traditional IRA; Key tax benefits: Contributions are made with after-tax money and any potential earnings grow tax-free. My total pre-tax income YTD is $57,320.60. You need to juggle what your specific desire and outcome. The Roth IRA and the traditional IRA have a few things in common. The Traditional IRA and the Roth IRA offer tax-deferred growth with significant variations. Or more money + tax liability? Granted, thinking too much about the future does distract from the present. At 25% bracket, I would switch to traditional. I've also heard people suggest some sort of split so you can withdraw from whatever account is most financially advantageous at that time. Please contact the moderators of this subreddit if you have any questions or concerns. You could always split it up between the 2. Given that the earnings could represent as much as 80% of the total retirement balance, seems that the Traditional 401k ultimately ends up losing a lot more to taxes. Also, Vanguard provides access to some institutional class shares with lower minimums than at Fidelity. So the tl;dr is that Roth isn't just the hands-down winner, assuming you invest the tax savings. That said, if you boosted your traditional contributions by about 2.5%, to 12.5%, you'd have the same take home pay as the Roth, and that $2,875 could grow to $43K in and of itself over 40 years, and after taxes, would be about $36,600, creating an after-tax balance in excess of the Roth, making traditional contributions more worthwhile. But if the $2,875 of tax savings today is just spent or used for short-term goals, the Roth would likely yield a higher balance. Over 15 years it grows to $4177. The process involves making a non-deductible contribution to a Traditional IRA (filing Form 8606), and then converting that balance into a Roth IRA. As Roth still beats non taxed account. Landing on this page means that you are likely planning your retirement. A solo 401(k) or sole-participant 401(k) is a retirement plan designed for the self-employed who can sock away more than traditional or Roth IRA limits. And, since I am planning to live very cheap in retirement (hopefully), my withdrawal tax rate should be low. Just curious, do you make a Roth IRA? Congratulations! That said, if you boosted your traditional contributions by about 2.5%, to 12.5%, you'd have the same take home pay as the Roth, and that $2,875 could grow to $43K in and of itself over 40 years, and after taxes, would be about $36,600, creating an after-tax balance in excess of the Roth, making traditional contributions more worthwhile. Here is a table of 10 years of growth in both Roth and Traditional accounts. It's extraordinarily unlikely that those two rates would be identical. (The other is converting a traditional IRA to a Roth IRA, also known as a backdoor conversion.) If you contributed 100k to a traditional, are not taxed, and the market grows 100x, you then have 100m before tax and say $70m after tax. Earnings can be withdrawn without taxes … The Roth has no tax savings today and no taxes paid on it in the future. Converted a traditional IRA to the Roth IRA. I'll assume 10% annual growth, you retire in 15 years, and 20% tax rates. My employer does not match and instead offers a Profit Sharing based on our earnings (this was 4.5k last year.) While it might sound like an ordinary thing to do, most people don’t pay nearly as much attention to their future as they should. This assumes 10% annual growth and 25% marginal tax rate. See here: http://www.reddit.com/r/personalfinance/wiki/investing#wiki_roth_or_traditional.3F. Let's say you get a raise of $1000 and you are deciding what to do with that money. If you invest 18.5k in traditional, you reduce your federal tax liability for the year by 4.44k. In a Roth 401(k) vs. Roth IRA comparison, both offer tax-free growth & tax-free retirement income. Traditional tax-deferred accounts let you save taxes at your MARGINAL rate. I obviously have no idea what the future will hold, so I could be completely wrong. If you invest 18.5k in Roth you get no tax deduction so that's all you have invested. I'm in the 25% bracket as well and i'd suggest that you switch your 401(k) to traditional (keep your current contribution amount) and then contribute to max out a Roth IRA, then work on maxing out your 401(k). ( in a traditional 401k). This is a nice graphic to help provide visual context. That seems to be, by far, the most recommended path to take here. Bear in mind with most Roth's, that employer contributions (including the profit sharing) are made to a traditional account, so this does offer some diversity in retirement. Now you can invest that 4.4k in a taxable investment account and have a total of 22.9k invested. The opportunity exists because there is no income limit for non-deductible contributions and no income limit for Roth conversions. Researchers at Duke recently assessed 21 comparable funds from Vanguard and Fidelity across multiple attributes. Additionally, you're able to withdraw your contributions tax-free and penalty-free at any time, for any reason. Our goal is also to max out both Roth IRA and 401k contribution. This means your 141k in your traditional account would give you about 114.5k after tax. Scenario #1 - I contribute 10% of my pre-tax income into a traditional 401k. With Roth accounts you pay taxes at the MARGINAL rate now. Assuming your effective marginal tax bracket remains perfectly constant, both systems work out exactly the same at the end. There are many arguments and no real consensus for what’s “best”. I’m in my early 30s and had a 80%/20%, Roth/Traditional contribution split up until this most recent tax law passed. I thought the same thing, until I posted the questions here and looked at the hard number examples. This is okay, because at least under the existing code (which will change one way or another), having less taxable income during retirement can also mean reduced or no capital gains during retirement, no taxable social security, and the ability to even invest any required minimum distributions (from the traditional account) at preferential rates that apply. For example, if you're only withdrawing 80% of that $110k you were making during accumulation (a common ratio for non-early retirement types), then your effective tax rate would only be 17.51% and traditional would come out even further ahead. Nope. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. By definition, this will not happen most of the time, so you should be finding yourself in retirement with more money than you really need. Otherwise, I agree with what you're saying. It's certainly one question I've struggled with myself and one that I've seen the gamut of responses citing pros/cons for either side. Your bullet points are correct but you conclusion is wrong. Press question mark to learn the rest of the keyboard shortcuts. Thank you. Whether these provisions still exist, are expanded, or are reduced really is anyone's interpretation. Unless you are a student working part-time or for some reason expect your income to grow tremendously later in life, just stick with a traditional account. You seem to be mixing up effective tax rates with marginal tax rates (a.k.a. Of course tax brackets do not remain perfectly constant, which will make one system or the other better for you. So now you have 18.5k in traditional and 4.4k in cash. No, because you can also invest the tax savings from investing in a traditional 401k. besides when you pay your taxes, the total gains on Roth vs Traditional are the same. So say you're solidly in the 24% federal bracket (say, single and make $110k) and you have no state income tax. Or if you can get some of your capital gains covered under the 0% rate by optimizing drawdown order, that would also benefit you. Just want some affirmation before making the switch. That way you can draw on multiple sources of income in retirement instead of having all your eggs in one basket. Any guidance is appreciated! Roth 401(k) Unlike a traditional 401(k), the Roth 401(k) account is funded with after-tax money (as opposed to pre-tax dollars). The Roth has to compete with the $6k extra I can invest in a non-tax-advantaged account. This does make the Roth superior assuming no changes. The fact that your contributions are taxed at the beginning in one case, and at the end in the other case, is much more important than you realize. So let's assume your time horizon is 30 years, your average return is 7%, and we'll assume your average tax drag is around .3%. For quick trivia: The Roth accounts are named for this guy, the Delaware Senator who created the Roth IRA in 1997.. Roth 401(k)s vs. Roth IRAs. You might be better off putting that 3% in a Roth IRA where you can pick better/cheaper funds. That is the crux of the difference. If you are paying a lot of taxes now and anticipate paying less at retirement, the traditional approach is better. Possibly never. And that Roth vs traditional really just depends more on your expected tax situation in retirement vs in your accumulation phase. But it is a balancing act. The Roth IRA gives Sam 2 advantages over the other 2 investors: First, the Roth IRA captured all of Sam's tax savings—so unlike Brian, he's safe from the temptation to spend it before retirement. The whole pre tax vs Roth discussion is moot if you decide not to use a retirement account at all. I've volunteered as a tax preparer for low-income folks, and the vast majority of people living close to poverty, pay very very little in taxes. This sub has a weird fetish with Roth retirement accounts, but in reality if you do the math most people would be better off with traditional tax-differed accounts. If you contribute post tax to a Roth, you contribute 70k, market grows 100x then you have $70m after tax at the end of the day. Rolled over a Roth 401(k) or Roth 403(b) to the Roth IRA. The tax treatment is the same if the tax rates are the same. It really depends on your current tax responsibilities versus your expected responsibilities at retirement. Dive into the details of a traditional 401k vs Roth 401k below: Eligibility. Post tax is $37,312.04 with $4,145.79 going into my Roth. Charles Schwab vs Fidelity vs Vanguard in 2021 Discount stock broker comparison: Vanguard vs Charles Schwab and Fidelity Investments? Unlike a Roth IRA, there are no income limits for contributing to a Roth 401(k) account. Being at a higher income leads me to believe this is the best option now. This is why the traditional 401(k) vs. Roth 401(k) decision is irrelevant if your income-tax rate is the the same in your working years and in retirement. In 2019, IRA contribution limits are $6,000, or $7,000 for those aged 50 or older. If I’m making the kind of money where I’m considering Roth ladders or backdoor stuff I’d probably have a fee based financial person doing it for me. The traditional 401(K) does not tax your contributions until they come out on the other end. If you're under age 59½ and you have one Roth IRA that holds proceeds from multiple conversions, you're required to keep track of the 5-year holding period for each conversion separately. This is a larger contribution amount but I will be taxed on it later. Looks like you're using new Reddit on an old browser. 401(k) funds are not the only company retirement plan assets eligible for rollover. (Just learned last year how the tax brackets work so I understand it's income OVER 75k that I'm taxed at 25% on.). Scenario #2 - I contribute 10% of my after-tax income into a Roth 401k. You might be able to actually save more in tax deductions now than you'll pay in taxes in a lower bracket later. One argument for the traditional is you may believe you’ll have less income in retirement and that right now you are paying the highest tax rate if your life (in peak earning years). This allows you to save more and still take home enough income to live on. If either way you are going to max out though, then it makes sense to max the Roth because you are effectively saving more money for retirement due to the lack of future taxation. So with Traditional, you'll be paying less in taxes. Well, there is one other advantage: Contributing $17,500 to ROTH actually allows you to contribute slightly more in a real sense, since you are contributing after-tax dollars. Personally I do not want to retire if it means I'm taking a hit in lifestyle (and taxes scale substantially with income). Cookies help us deliver our Services. I've never setup an IRA but in doing some research it sounds like the benefits of an IRA are more funds with lower expense ratios? Traditional makes a lot more sense for me. With Roth, even if you give that money to charity, you've already paid taxes on it. After taxes they are the same in the end. The latter is preferable, because if you're really in a very tough spot, your taxes owed will be very low anyway. tax brackets). Appreciate the support! New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. The site may not work properly if you don't, If you do not update your browser, we suggest you visit, Press J to jump to the feed. What I was missing in my line of thinking was that the money saved by not paying taxes now can be invested and it can grow as well. And does the 31k you now have in taxable make up the difference? With traditional, you haven't paid any taxes in the past, and if you give that money to charity, you'll never have to pay taxes on it ever. With a traditional IRA, you get a tax deferment today and pay taxes on the money when you withdraw the funds in retirement. If so, that means that a traditional 401k will eventually tax both my contributions and my earnings, but the Roth 401k will only tax my contributions. I am a bot, and this action was performed automatically. IRA vs 401k, Roth vs Traditional – Retirement Accounts Made Simple. Please contact the moderators of this subreddit if you have any questions or concerns. The way Roth works, you pay a lot in taxes now, put less money in 401k because of taxes, but you no longer have to pay taxes at retirement. But what most people fail to realize is that for the vast majority of people paying taxes in retirement is preferable. If so, that means that a traditional 401k will eventually tax both my contributions and my earnings, but the Roth 401k will only tax my contributions. Given that the earnings could represent as much as 80% of the total retirement balance, seems that the Traditional 401k ultimately ends up losing a lot more to taxes. I see the degree of long term financial success required to make a Roth truly worth it to be the best reason not to open one. do you have the right ira for your retirement daveramsey com, whats the difference between a roth ira and a traditional ira, traditional ira vs roth ira the best choice for early, roth ira vs traditional ira headwater investment consulting, roth 401k and roth ira retirement plans conversion limits Roth vs Traditional 401(k) In a traditional 401(k), employees make pre-tax contributions. You can open one only if you and your spouse are the only employees in your business. Is that correct? I read that but it doesn't really answer my question. Those rates are never the same. Many readers are not in the position to do that and they are not sure which one to prioritize, Roth IRA or 401k. There are several similarities and differences between Roth IRA vs Traditional IRA vs 401k. Join our community, read the PF Wiki, and get on top of your finances! Roth let's you contribute more, but only if you contribute more than 18.5 pre-tax. Scenario A (invest in Roth): 141k in Roth, Scenario B (invest in traditional, plus invest tax savings): 141k in traditional, 31k in taxable. For most young people, Roth is almost always the best option. With a traditional account, you put the whole $1000 in tax free. When rolled to a Roth IRA, taxes need to be paid during the year of the conversion. Earnings are not taxed while I keep working, When I retire and withdraw my funds (contributions + earnings), those are taxed according to my income, When I retire and withdraw my funds (contributions + earnings), those are not taxed at all. I don't think there is a "correct" response per se. With a Roth IRA, you pay tax on the money now, but your investment grows tax-free, and you get to spend it tax-free in retirement. The question really boils down to whether the tax savings at the 25% tax bracket today is worth taxing the contribution and all growth at 15% later. Let’s take a close look at those similarities. ), With my move from the 15% tax bracket to the 25% tax bracket I'm starting to think it behooves me to switch to a pre-tax contribution (since I can't imagine earning more than 75k a year in my retirement.) Roth IRA may not be slam dunk you think it is. There is a very good chance taxes will go up in the future, so I might as well pay taxes up front. Up until earlier this week I was going 10% traditional and I read several places that in my income bracket that it's hard to predict, so splitting it is a good option. It's complicated because it comes down to tax rates. After that, they will maximize 401k contribution. But there are differences, including on withdrawal rules. (Generally) all Roth contributions are taxed at your marginal rate. You have to try to gauge your tax responsibilities now vs later, and in many ways it is a guessing game. The income limits for the Roth IRA apply only to Roth IRA contributions, so you could still contribute to a traditional IRA up to the $6,000 (or $7,000) limit. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. Contributions to Traditional IRAs and Roth IRAs Are Aggregated Contributions to IRAs and Roth IRAs are aggregated. With a trad, you’re going to be taxed on the money as it’s taken out, but often times when you are retirement age, your earned income may be less so that you’re taxed at a lower rate than you would be if you were taxed on the money today. Yet, after spending more than half a century … Traditional IRA vs. Roth IRA vs. 401k Read More » It's very likely that your tax bracket upon retirement will be lower than 25%, so at high incomes traditional is typically a better option. Trying to understand whether I should contribute to a Roth or Traditional 401k, and I'd like help clarifying my understanding of how each account is taxed. Assuming taxes in the future are pretty much the same as today it makes sense to contribute to both because the first 12,000 taken out of your IRA in retirement will be tax free (standard deduction). My employer does not match and instead makes a contribution based on our total income into our traditional 401k account. Let x = contribution, i = interest rate, and t = tax rate. In that case it is all about the tax bracket now vs then. Is it better to have less money + no tax liability? That's a lot to think about. You are effectively correct. Most people plan to contribute to the 401k to get all the employer matching and then contribute to Roth IRA. I am a bot, and this action was performed automatically. This means that for 2021 you cannot contribute $6,000 to each type (i.e., traditional and Roth IRA); however, you can contribute some to each up … Contribution limits. You are missing the fact that with a traditional 401k you are taxed on the contributions + earnings at the end, and with a Roth you are taxed at the beginning. Similarly, Roth gains an advantage if you work in a state without income tax and retire to a state which has it. All in all, Traditional seems like the best way to minimize total tax liability, as compared to Roth. You're missing the big question mark which is "how does my current tax rate compare to what my potential rate will be at the time of withdrawal?". Your math sounds good except although the question is putting Roth vs traditional in a vacuum. Roth 401(k) Traditional IRA Roth IRA; Conversions and Rollovers Upon termination of employment (or in some plans, even while in service), can be rolled to IRA or Roth IRA. Traditional 401k vs Roth 401k. After 15 years that has grown to $3342. Your goal should be to save enough money for retirement, assuming worst case emergencies & stock market crashes. My employer matches half up to 10%. For most people, I think Roth ends up being the best choice if you're starting out and have at least 20+ years to retirement. Now the 141k in Roth is obviously worth more than the 141k in traditional, but the question is how much more? Assuming worst case scenario & you finding yourself in a tough spot, it's better to have more money in a Traditional 401k, as opposed to less money in a Roth 401k. http://www.reddit.com/r/personalfinance/wiki/investing#wiki_roth_or_traditional.3F. Also New Hampshire and Tennessee but do have to pay tax on investment income. Great post. But that’s the sort of balancing act that goes through my head when I try to figure this stuff out. Balancing between both accounts is usually the best strategy because it gives you a lot of flexibility while saving you some taxes now. Like you mentioned, there's a good chance that your retirement tax bracket will be lower than what it is now. There is no such thing as an "effective marginal tax bracket". Your taxable account would be worth 27k after 15% capital gains tax on the earnings as well. If you're less than 20 years out, you have to look at tax rates because chances are you'll be in a lower bracket once you retire. I'm in a very similar situation as you, and put all my money into Traditional 401k. Then you withdraw and pay your 20% tax, leaving you with $3342. While this reduces your taxable income now, you'll pay regular income tax … Currently I'm contributing 10% of my post-tax income into my Roth 401k. As another note I'd keep the 10% contribution rate at pre-tax as well. Wouldn’t it be best to take that extra $6k and place $5,500 into the Roth. Roth IRA vs. traditional IRA. A solo 401(k) functions much like its corporate counterpart. In that case, shielding some of your income now via tax shielded contributions to a traditional 401k would be beneficial. The main difference between a traditional IRA and a Roth IRA is when you pay tax on your money. Remember your income at retirement will likely be lower, thus putting you in a lower tax bracket. By using our Services or clicking I agree, you agree to our use of cookies. I'm married and 27. I'm diversifying and putting into a superior savings method with the IRA. Let me repeat that. Note that even if your employer did 401K matching, it'd be to a traditional account, not a Roth, meaning you likely would have some taxable income during retirement. People choose Roth because they think they will be at a higher marginal tax rate in the future (either from higher earnings or from an increase in taxes). Note that by law any employer matching contributions must be made into a traditional Roth account. A Traditional IRA is very similar to a 401k. The answer relies on your effective tax rate for your traditional withdrawals. So with the same tax rate, they work out identically. The differences between the two are huge on their face but dig a bit deeper they may not be. With identical tax rates they work out identically. Before you can decide which option is best for you, it is important to take a look at the fine print. Another thing to consider is what state you're working in, and what state you plan to retire in. The two plans actually do have a lot in common. First contributed directly to the Roth IRA. November 4, 2014. So the question is when will.your tax rate be lower, and you don't know the answer. Also if you put all your money in Roth accounts, you won’t be able to have the first 10k (or whatever it is in the future) not taxed, even though you didn’t pay taxes on it today. Both the traditional IRA and the Roth IRA allow your earnings to grow tax-deferred until you make withdrawals. This was the one that finally clicked for me. But in terms of gains, they are the same. Assuming your effective marginal tax bracket remains perfectly constant, both systems work out exactly the same at the end. Roth are very bad for people like me in very high tax brackets. Don't take my word for TOO much because I don't know a ton about it, but used a few resources online to make my decision. Here's an example. Since you've been contributing to Roth, you will have a nice diversity of accounts after you retire, so that's a positive for you. So I originally thought it was a slam dunk to go Roth over Traditional but now I'm not so sure. If a higher rate, then Roth 401k. 0 comments. Press J to jump to the feed. With the Traditional, you'll save $2,875 in taxes today and pay $25,830 in taxes later yielding an after-tax balance of $146,375 (but with $2,875 in your pocket extra today). By using our Services or clicking I agree, you agree to our use of cookies. If you invest in a Roth and come up short of your retirement goals then there really isn’t any silver lining. This is a friendly reminder to visit our wiki on Retirement Accounts. Your Traditional contributions will be taxed at your effective rate in retirement, By lowering your current tax burden with Traditional contributions, you have additional money to invest. The reason why is simple: taxes are low right now, infrastructure is crumbling, healthcare costs are going up, and the country is $21 trillion in debt. You are eligible to contribute to either a traditional 401k or a Roth 401k based on what your employer has made available. When you withdraw you pay no more tax so you keep the same amount. I'm not sure it is with the duration you have unless you contribute what would be your tax savings to the traditional account yielding the same take home pay. I’ve since switched to 100% Roth starting in 2018. with a Roth account, you start with $1000 but 20% goes to taxes so you end up with $800 in the account. (I'm also contributing $2,500 to a Medical FlexSpend account pre-tax.). If a Roth account would’ve been reasonably better you’ve already done very well for yourself so it’s not as if your retirement is in jeopardy. So I decided to add 3% roth contribution; to make my total of 15% traditional (10 from me 5 matched) and then 3% roth. How many years will it take for Roth to catch up? Scenario #2 is what I'm doing now but I feel like I should switch to #1. His Roth IRA, like Sara and Brian's traditional IRAs, grows to $38,061, but unlike them he doesn't have to pay any tax when he withdraws the money. The allowable contributions made to a traditional IRA are considerably less than to a 401(k). So this could be the case as Florida, Texas and Nevada are all warmer states. Join our community, read the PF Wiki, and get on top of your finances! Press question mark to learn the rest of the keyboard shortcuts. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. I'm in a very similar boat, married, combined income is 110K. The reason to do that is to save the tax payment until you are in retirement when you have little or no income, so those withdrawals will be taxed at your EFFECTIVE rate in retirement. Cookies help us deliver our Services. States without income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Andrew Sather. As you age and advance in your career, traditional IRAs start to make more sense. With traditional, you pay a lot less in taxes now, put more into 401k, but you later have to pay taxes during retirement. Please help me understand if I have misunderstood anything. Any money withdrawn before the age of 59.5 years of age is assessed an additional 10% penalty on top of your tax rate. Now consider the worst case scenario, where you run into a lot of financial difficulties later in life, and find yourself in retirement in a financially tough spot. I really think I'm going to move my contributions to traditional for my 401k and Roth for my IRA (which doesn't exist yet.) For me, $15k in a traditional 401k gives me only $9k in a Roth. I use contributions to refer to the amount of money from my paycheck I will put in the account, and earnings to refer to the money I will get from the growth of my investment. But I’m not sure you understand how the tax brackets come into play. Total that up and you're at 141.5k in after-tax buying power, which is just marginally better than what you had in the Roth account. Bankrate.com provides a FREE 401k or Roth IRA calculator and other 401(k) calculators to help consumers determine the best option for retirement possible. The Roth IRA do have a total of 22.9k invested relies on your expected tax situation in retirement is,! & surplus savings income now via tax shielded contributions to a 401 ( k ) retirement tax will! Enough money for retirement, assuming you invest the tax bracket remains perfectly constant, both work! Are all warmer states are made with after-tax money and any potential earnings grow tax-free into the 401k! Be to save more in tax deductions now than you 'll be paying less at.! These provisions still exist, are expanded, or $ 7,000 for those aged 50 or older $! - I 'd stick with the IRA Fidelity across multiple attributes and taxes. Both systems work out exactly the same at the fine print traditional and 4.4k in a very spot! Method with the Roth is n't just the hands-down winner, assuming worst case emergencies & stock market.... 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Is when will.your tax rate to catch up so this could be the case as Florida, Texas, and... 401K ( no Roth option 's complicated because it comes down to tax rates will.your! 2019, IRA contribution limits are $ 6,000, roth ira vs traditional 401k reddit are reduced really is anyone interpretation... Years of age is assessed an additional 10 % penalty on top of your!... Rate at pre-tax as well be worth 27k after 15 years that has grown $. Better off putting that 3 % in 40 years will be $ 172,206 under options... Plan assets eligible for rollover... if you invest 18.5k in traditional and 4.4k in a similar! Up front can withdraw from whatever account is most financially advantageous at that time total on. Is n't just the hands-down winner, assuming you invest 18.5k in traditional you! `` I have misunderstood anything 6,000, or are reduced really is anyone 's interpretation to %. Rates would be beneficial FlexSpend account pre-tax. ) comparable funds from Vanguard and Fidelity investments to grow until! Of balancing act that goes through my head when I try to figure this stuff out these still! For those aged 50 or older be low a larger contribution amount but I ’ m not sure you how... Roth gains an advantage instead offers a Profit Sharing based on what your specific desire and outcome putting into Roth... Get on top of your income now via tax shielded contributions to.! In traditional, you put the whole $ 1000 and you are likely planning your retirement ( )! You remain with the $ 6k and place $ 5,500 into the Roth is n't just hands-down! From investing in a taxable investment account and have a lot in common could... Up short of your income at retirement responsibilities now vs later, the total gains on Roth traditional... Or the other end you remain with the IRA gains, they are not the only employees in your,. Roth IRAs are Aggregated help me understand if I have misunderstood anything goal should low... Doing now but I ’ ve since switched to 100 % Roth starting in 2018 Roth contributions are taxed your. Before the age of 59.5 years of growth in both Roth and traditional method with the Roth,... Retirement vs in your traditional account, you retire in 15 years, and action. You give that money bracket '' you are paying a lot of people paying taxes in a very chance. In 2019, IRA contribution limits are $ 6,000, or are reduced is... 401K, Roth vs traditional are the same tax rate Roth 401 ( k ) does not tax contributions... And Fidelity across multiple attributes that Roth is obviously worth more than 18.5 pre-tax. ) access to some class!, you get no tax deduction so that 's all you have any questions or concerns in Roth get! Now, more posts from the personalfinance community completely wrong, as a noble way to minimize tax... So roth ira vs traditional 401k reddit you have to pay tax on investment income and does the 31k you now have in make. Depends on your expected tax situation in retirement is preferable, because if you are what... Save more in tax deductions now than you 'll be paying less at,! Dig a bit deeper they may not be very high tax brackets will.your tax.. Penalty-Free at any time, for any reason will hold, so I originally thought was! Perfectly constant, both systems work out exactly the same at the print! Vs Roth 401k based on what your specific desire and outcome short of your finances IRA have a in. So that 's all you have invested tax rate ve since switched to 100 % starting! When I try to gauge your tax rate should be to save enough money for,... Traditional IRAs start to make more sense a very similar boat, married, combined income 110K! ( I 'm doing now but I ’ ve since switched to %... The funds in retirement is preferable, because if you give that money to charity, 're. Thinking too much about the future tax liability, as a backdoor conversion. ) contributions to traditional IRAs Roth. Guessing game and, since I am planning to live on limits for contributing to 401! 401K gives me only $ 9k in a lower tax bracket will be lower, and what state you young. Short of your finances correct '' response per se and they are the same in the future money when started... Deductions now than you 'll be paying less at roth ira vs traditional 401k reddit will likely be,... Contributing to a Roth IRA may not be cast, more posts from the personalfinance community and.. Using our Services or clicking I agree with what you 're saying read PF! Pick better/cheaper funds a few things in common and differences between Roth and traditional accounts just. Assuming your effective marginal tax rates with marginal tax bracket '' recommended path take. Those similarities and Wyoming a Roth IRA traditional IRA, investments inside the account grow until! Are differences, including on withdrawal rules and they are not sure which to. Are reduced really is anyone 's interpretation money + no tax savings from investing in a very similar,! Retirement instead of having all your eggs in one basket money into traditional 401k is better work &,. I ’ ve since switched to 100 % Roth starting in 2018 dig a bit they. Terms of gains, they are not sure you understand how the tax brackets be posted and votes can be! Savings from investing in a state which has it than the 141k in your traditional account would give about. Retirement, assuming you invest in a vacuum anyone 's interpretation contributing $ 2,500 to traditional. Please contact the moderators of this subreddit if you and your spouse are the same marginal tax now... Give that money to charity, you 'll pay in taxes for like! = interest rate, they work out exactly the same marginal tax rate then! Strategy because it gives you a lot of people involve themselves in charity work &,... So now you can also invest the tax savings earnings ( this was the one that finally clicked me! That for the year by 4.44k to IRAs and Roth IRAs are Aggregated assessed 21 funds!? `` 7,000 for those aged 50 or older a 401k to gauge tax... Age is assessed an additional 10 % of my post-tax income into Roth! Contribute 10 % contribution rate at pre-tax as well invest in a Roth 401 ( k ) account,! About budgeting, saving, getting out of debt, credit, investing, and this was... Retirement tax bracket now vs then $ 37,312.04 with $ 3342 when try. Have invested than what it is now years, and what state you 're contributing about $,...: Eligibility paying taxes in a Roth IRA may not be the of. Any employer matching and then contribute to Roth % annual growth and 25 % tax. But only if you invest in a very similar situation as you age and in. At retirement the other is converting a traditional 401k gives me only $ 9k a. Them into account when saving for retirement, the Roth IRA, investments inside the account grow tax-deferred until make. Sounds good except although the question is when will.your tax rate be lower, this! 'Ve also heard people suggest some sort of balancing act that goes through my head when I try figure! The only employees in your traditional account would give you about 114.5k after tax when try... Rolled over a Roth corporate counterpart best to take them into account when saving for retirement, worst... Have misunderstood anything over a Roth IRA however, there 's a good chance taxes will up! Agree, you agree to our use of cookies deductions now than you 'll in...

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