Board 8 > 401k question

(+) Yeah! (+)

I figure someone here is probably knowledgeable enough about this.

Does it make sense to put some percentage of my contribution into a Roth 401k? At some point I was splitting it 50/50 because I didn't care enough to figure this out, but it seems from what I've read that most people advise others to go either fully traditional with an optional Roth IRA, or mostly traditional with a very small percentage Roth 401k.

Is a Roth 401k only worth it if I plan to have large amounts of income from investments after retirement?
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Our investment advisors recommend going 50/50. It gives you more flexibility when you retire.

But keep in mind the the employer match and profit sharing, if they do that, will likely be traditional so you may consider putting even more towards Roth.
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How old are you?
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30
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Okay, so, like with me, that would put your retirement at 30+ years out. Roth contributions are taxed, meaning when you take the money out, there's no penalty - it's yours. Traditional means you pay taxes when you make a withdrawal.

All of my retirement income (I mean, it's 6% of my paycheque since that's all I can afford, but it counts for something) is being put into a Roth 401k right now because I'm young enough that the money will grow far more than it would if I put it in later in life. I won't have to pay taxes on a dime of that money I currently have in there, which is sitting around $10,000 right now. That's going to look like a lot more when retirement is closer. And it will be all mine for the taking.

Investing in the Roth is far preferable while you're still young. As you age, switching to the traditional account might be more valuable because your taxes won't be as damning when you withdraw it. You'll also be making a higher annual salary, of course, so you'll be able to invest more, which will grow at least somewhat.

Regardless of where you put the money, you should be glad that you're setting aside this money now, because the older you will be very thankful for that income. Starting to invest at 25 (I started at 26) will allow you to actually retire and not have to end up working at Walmart 20 hours a week just to sustain life.
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VintageGin posted...

30

HAPPY BIRTHDAY WOOOO
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If you're contributing to a Roth IRA as well, there's no real need for a 50/50 split IMO since the IRA contributes to that balance too, but you should definitely be using both just because hedging against future tax rates and law changes is a good idea

You definitely want a good mix though even ignoring that, especially because the standard deduction amount is effectively tax free money even coming out of the traditional bucket, and pulling Roth money reduces the amount of traditional money you need to pull, which further reduces the tax impact. I'm not sure 50/50 is the "right" split, but I'm also not sure there is a well-defined "right" split for this. Just personal preference based on trying to predict the future.
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Reg posted...

If you're contributing to a Roth IRA as well, there's no real need for a 50/50 split IMO since the IRA contributes to that balance too, but you should definitely be using both just because hedging against future tax rates and law changes is a good idea

You definitely want a good mix though even ignoring that, especially because the standard deduction amount is effectively tax free money even coming out of the traditional bucket, and pulling Roth money reduces the amount of traditional money you need to pull, which further reduces the tax impact. I'm not sure 50/50 is the "right" split, but I'm also not sure there is a well-defined "right" split for this. Just personal preference based on trying to predict the future.

Generally the split should depend on what tax bracket you are in now and what tax bracket you expect to be in when you retire. If you expect to be in a higher tax bracket when you retire you want to have a higher percentage of roth now (basically you want to pay the taxes now when they are less). Of course this all assumes the tax rate won't change is why you want to hedge somewhat. I'd probably say you want somewhere between a 70/30 and a 30/70 depending on how you feel about your current tax rate and your future
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Colegreen_c12 posted...

Generally the split should depend on what tax bracket you are in now and what tax bracket you expect to be in when you retire. If you expect to be in a higher tax bracket when you retire you want to have a higher percentage of roth now (basically you want to pay the taxes now when they are less).

Literally exactly why I said this:
Reg posted...

I'm not sure 50/50 is the "right" split, but I'm also not sure there is a well-defined "right" split for this. Just personal preference based on trying to predict the future.

But even if you're somehow saving 100% of your income in 401k and IRA right now (23k/yr), you still wouldn't want it all Roth even though you can all but guarantee you'll be in a higher tax bracket (Not accounting for the fact that Roth money is untaxed) in retirement. Is the point I was making.
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Another factor is what tax bracket you are in now vs what you expect to be be in retirement. For example, if you are in the 10 or 12% brackets now, Roth is probably the better option because you won't be saving as much in tax deductions.

Too much traditional withdrawals in retirement can cause social security to be taxed as well.

There are many things to consider and everybody's situation is different.

I guess I didn't dig deep enough into this when I made my decision, though I don't plan on changing anything at this time - but will when I get a new job.

I'm more confused than I was before lol
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BlueCrystalTear posted...

I guess I didn't dig deep enough into this when I made my decision, though I don't plan on changing anything at this time - but will when I get a new job.

I'm more confused than I was before lol

tl;dr as long as you're putting in some mix of both, and that mix skews at least a bit (But not too much, because too much either way is silly) based on when you expect to have more income (now vs withdrawing in retirement) without being heavily imbalanced, you're probably at least okay with whatever you're doing
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I think the argument I've heard for not investing in a Roth 401k is that effective income after retirement is generally lower, and thus you'll usually fall into a lower tax bracket unless you have some moneymaking investments.

Still, I guess I'll keep my current Roth contribution and maybe consider going back to 50:50
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Also I'm in the 28% tax bracket if that makes a difference
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Weakupedia posted...

VintageGin posted...

30

HAPPY BIRTHDAY WOOOO

give me more whiskey and oreo-os
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Effective income is generally lower in retirement for two reasons:

1) Your expenses are generally lower (e.g you're probably not paying a mortgage/car payment/other debt), so you just don't need as much money on hand (Especially since you're probably not concerned about building your savings on top of that - You withdraw what you need and let the rest sit)
2) Roth balances reduce the amount of taxable income without reducing the amount of money you're actually withdrawing

Without doing the math I don't know how much a Roth IRA + full Traditional 401k balances out in terms of tax impact, but at current limits that's roughly a 75/25 split if you max out both (18k traditional/5.5k Roth), just for reference
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I don't even know what tax bracket I'm in because I do the short forms. I also have no idea what I want to do with my life and therefore cannot predict where I'll be when I'm 60.

When I change jobs next, I'll probably put like 4% of my income in each. I'm putting 6% in Roth 401k and only that right now, but my dad told me that's what's best when you're in your 20s and just starting out. I'll be 30 in under a month so it's getting to the point where it's going to change...
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BlueCrystalTear posted...

I'm more confused than I was before lol

The basic concept is simple.

The money in an IRA (like all investments) is going to be taxed exactly once. In traditional, you are taxed on that money after it comes out. In a Roth, you are taxed when it goes in.

So, let's pretend that you'll be taxed 28% on both ends. In the Roth, that money will be income this year, and you'll pay 28% of that amount in taxes for 2018. In the traditional, that money will be income in the year it comes out of your retirement, and you'll pay 28% of that amount in taxes for ~2050. Taking the 28% hit on either end will work out exactly the same.

So unless there are other, sneakier factors at work like the way your employer matches your investments, the only thing you have to ask is, "Will I be paying taxes at a higher or lower rate when I'm going to be taking this money out?"

Good luck guessing the tax code in thirty years, though. I can already promise you won't be in the 28% tax bracket next year.
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Oh right, new brackets...kinda forgot about that
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instead of worrying about roth vs. traditional, just make sure to be putting in as much as you can afford

the cap is $18,500 per year for a 401k. until you're hitting that cap, the best thing you can do is simply put more in

then, if you somehow reach that, put $5,000 per year into an IRA

difference between traditional and roth is not going to be so huge
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for what it's worth, i am personally dumping everything into a traditional 401k, although the smartest choice is probably a 50/50 split.

i figure if i'm somehow so rich when i retire that i'll be in a higher tax bracket, the 5% or whatever effective difference won't matter

however, if i'm in a lower tax bracket when i retire, i imagine every cent will count
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banananor posted...

instead of worrying about roth vs. traditional, just make sure to be putting in as much as you can afford

the cap is $18,500 per year for a 401k. until you're hitting that cap, the best thing you can do is simply put more in

then, if you somehow reach that, put $5,000 per year into an IRA

difference between traditional and roth is not going to be so huge

I'm hitting the cap, which is why I asked. Although I don't yet have an IRA.
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I'll offer up a bit of a counter-narrative here:

You should absolutely contribute to a retirement plan to the extent that your company is making matching contributions - it's free money. What you contribute beyond that point should depend on how disciplined you are at managing your finances. If you tend to spend whatever hits your bank account, then by all means go ahead and max out your contributions. If you're a saver, though, there's an argument to be made for just investing the cash on your own. Namely, you gain flexibility in how you invest (there are more options available to you, for better or for worse), and you retain the ability to access that cash at any time & for any reason without having to worry about withdrawal penalties.

BeTheMan posted...

Namely, you gain flexibility in how you invest (there are more options available to you, for better or for worse)

This is the argument for maxing out an IRA before maxing out a 401k (But still not after the match, because as you said free money)

The big reason to save in retirement accounts is for the tax benefits, though. You're trading the flexibility in withdrawal timings for an additional 20+% return via the tax savings. As long as you have other savings squared away already, that's a pretty strong reason IMO.
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Reg posted...

BeTheMan posted...

Namely, you gain flexibility in how you invest (there are more options available to you, for better or for worse)

This is the argument for maxing out an IRA before maxing out a 401k (But still not after the match, because as you said free money)

The big reason to save in retirement accounts is for the tax benefits, though. You're trading the flexibility in withdrawal timings for an additional 20+% return via the tax savings. As long as you have other savings squared away already, that's a pretty strong reason IMO.

There are still certain types of investments (like rental real estate) that can be more advantageous to invest in outside of a retirement account, and other, emerging asset classes that may not be available for investment at all (again, for better or for worse). And of course, there's no telling what the coming decades will bring, from a regulatory perspective or otherwise. I'd argue that the further away you are from retirement, the greater the likelihood that unknown factors will emerge, and just like we've seen with pension plans and social security, the actual long-term benefits of these retirement plans may not be as favorable as they currently appear to be. I'll admit to be a little bit of a control freak and a little more pessimistic than most, FWIW.

Cash it all out now and invest in sex robots
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I put the maximum my company will match into a regular 401k and then max out my roth IRA every year. That seems to produce a decent balance for me
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Sadly, my company doesn't do matching.
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So, if you've already reached the cap, be aware that $18,500 in a Roth account is worth more than $18,500 in a traditional account.

But with traditional, you have some extra money sitting in your bank via the tax break traditional gets you. Be sure to invest that money!
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azuarc posted...

Good luck guessing the tax code in thirty years, though

Uh it's not guessing. You just take a break from working for a year and then you're in the lowest tax bracket and can withdraw everything optimally.
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Uh it's not guessing. You just take a break from working for a year and then you're in the lowest tax bracket and can withdraw everything optimally.

What if the tax code changes to tax total net worth rather than annual income?
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how rich are all you people? Jeesh.
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SmartMuffin posted...

What if the tax code changes to tax total net worth rather than annual income?

Did rich people go extinct or something in this future to allow this to happen? In that case you would want to pay more taxes to appease the communist hordes so it seems like a win-win to me
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banananor posted...

So, if you've already reached the cap, be aware that $18,500 in a Roth account is worth more than $18,500 in a traditional account.

But with traditional, you have some extra money sitting in your bank via the tax break traditional gets you. Be sure to invest that money!

So put it all into cryptocurrency? Got it
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