Roth 401K Question

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Topic Author
wbarabas
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Joined: Mon Dec 21, 2020 9:26 am

Roth 401K Question

Post by wbarabas »

I have 20 years till retiring. I am able to max out my Roth IRA yearly. I put 4% in my Traditional 401k to get their max match. Should I add another 4% into a Roth 401K with my employer of just add that money into index funds in my brokerage account?

Any advice would be great. Thanks
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retired@50
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Re: Roth 401K Question

Post by retired@50 »

wbarabas wrote: Thu Dec 31, 2020 12:07 pm I have 20 years till retiring. I am able to max out my Roth IRA yearly. I put 4% in my Traditional 401k to get their max match. Should I add another 4% into a Roth 401K with my employer of just add that money into index funds in my brokerage account?

Any advice would be great. Thanks
Welcome to the forum. :happy

The best answer for you can depend on your current tax bracket.

See link and come back to post additional questions.

Roth_vs_Traditional: https://www.bogleheads.org/wiki/Traditional_versus_Roth

Regards,
This is one person's opinion. Nothing more.
02nz
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Re: Roth 401K Question

Post by 02nz »

The main data needed to answer this question usefully:

- Pension?
- What age will you be at retirement (i.e. early retirement?)
- Size of existing tax-deferred (traditional) balance?
- Current tax bracket?

Knowing nothing else I'd say max traditional not Roth 401k, which is the wrong choice for the majority of people. But individual circumstances vary.
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ruralavalon
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Location: Illinois

Re: Roth 401K Question

Post by ruralavalon »

wbarabas wrote: Thu Dec 31, 2020 12:07 pm I have 20 years till retiring. I am able to max out my Roth IRA yearly. I put 4% in my Traditional 401k to get their max match. Should I add another 4% into a Roth 401K with my employer of just add that money into index funds in my brokerage account?

Any advice would be great. Thanks
(1) 401k versus taxable brokerage account?
In general it's best to make maximum annual contributions to both the 401k and IRA as a priority ahead of investing in a taxable brokerage account.

In other words don't limit yourself to contributing just enough to your employer's 401k plan to get the employer match. Wiki article, "Prioritizing investments", link.


(2) Roth versus traditional?
For most people traditional 401k contributions will likely be better than Roth 401k contributions.

Will you be eligible for a substantial pension in addition to Social Security? What is your profession or occupation? How much do you currently have in traditional tax-deferred accounts? What is your tax bracket, both federal and state?
Last edited by ruralavalon on Thu Dec 31, 2020 12:24 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Topic Author
wbarabas
Posts: 20
Joined: Mon Dec 21, 2020 9:26 am

Re: Roth 401K Question

Post by wbarabas »

retired@50 wrote: Thu Dec 31, 2020 12:13 pm
wbarabas wrote: Thu Dec 31, 2020 12:07 pm I have 20 years till retiring. I am able to max out my Roth IRA yearly. I put 4% in my Traditional 401k to get their max match. Should I add another 4% into a Roth 401K with my employer of just add that money into index funds in my brokerage account?

Any advice would be great. Thanks
Welcome to the forum. :happy

The best answer for you can depend on your current tax bracket.

See link and come back to post additional questions.

Roth_vs_Traditional: https://www.bogleheads.org/wiki/Traditional_versus_Roth

Regards,
It looks like I'm in the 24% tax bracket. I read the link. Definitely difficult for me to understand, I'm still learning a lot of this.
Topic Author
wbarabas
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Joined: Mon Dec 21, 2020 9:26 am

Re: Roth 401K Question

Post by wbarabas »

02nz wrote: Thu Dec 31, 2020 12:16 pm The main data needed to answer this question usefully:

- Pension?
- What age will you be at retirement (i.e. early retirement?)
- Size of existing tax-deferred (traditional) balance?
- Current tax bracket?

Knowing nothing else I'd say max traditional not Roth 401k, which is the wrong choice for the majority of people. But individual circumstances vary.
I won't have any pension
I'll be around 65 yo for retirement
My current 401K balance around 35k
24% tax bracket
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ruralavalon
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Location: Illinois

Re: Roth 401K Question

Post by ruralavalon »

wbarabas wrote: Thu Dec 31, 2020 12:24 pm
retired@50 wrote: Thu Dec 31, 2020 12:13 pm
wbarabas wrote: Thu Dec 31, 2020 12:07 pm I have 20 years till retiring. I am able to max out my Roth IRA yearly. I put 4% in my Traditional 401k to get their max match. Should I add another 4% into a Roth 401K with my employer of just add that money into index funds in my brokerage account?

Any advice would be great. Thanks
Welcome to the forum. :happy

The best answer for you can depend on your current tax bracket.

See link and come back to post additional questions.

Roth_vs_Traditional: https://www.bogleheads.org/wiki/Traditional_versus_Roth

Regards,
It looks like I'm in the 24% tax bracket. I read the link. Definitely difficult for me to understand, I'm still learning a lot of this.
Will you be eligible for a substantial pension in addition to Social Security? What is your profession or occupation? How much do you currently have in traditional tax-deferred accounts?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
KlangFool
Posts: 20936
Joined: Sat Oct 11, 2008 12:35 pm

Re: Roth 401K Question

Post by KlangFool »

wbarabas,

It is not difficult. Max up your Trad 401K and put your tax savings into the Roth IRA.

https://taxfoundation.org/2020-tax-brackets/

At the 24% tax bracket and filing single, you need to generate 85K + 12K (standard deduction) = 97K of gross income in order to reach 24% at retirement. In order to generate 95K of income, your tax-deferred account needs to be 25X ~ 2.5 million. You are not reaching that number over the next 10 to 20 years.


It is a bad idea to contribute to Roth 401K. And, you should contribute as much as you can to the Trad 401K.


You should read the following URL too.

https://www.madfientist.com/how-to-acce ... nds-early/


401K and IRA are tax-advantaged accounts. They are not retirement accounts. You can get the money out tax-free and penalty-free before 59 1/2 years old.


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: Roth 401K Question

Post by KlangFool »

wbarabas wrote: Thu Dec 31, 2020 12:27 pm
02nz wrote: Thu Dec 31, 2020 12:16 pm The main data needed to answer this question usefully:

- Pension?
- What age will you be at retirement (i.e. early retirement?)
- Size of existing tax-deferred (traditional) balance?
- Current tax bracket?

Knowing nothing else I'd say max traditional not Roth 401k, which is the wrong choice for the majority of people. But individual circumstances vary.
I won't have any pension
I'll be around 65 yo for retirement
My current 401K balance around 35k
24% tax bracket
wbarabas,


You will be paying 0% taxes with 35K. 35K only generates less than 2K of income . In order for you to pay more than 0%, the account balance needs to be 12K X 25 = 300K.

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
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ruralavalon
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Location: Illinois

Re: Roth 401K Question

Post by ruralavalon »

wbarabas wrote: Thu Dec 31, 2020 12:27 pm
02nz wrote: Thu Dec 31, 2020 12:16 pm The main data needed to answer this question usefully:

- Pension?
- What age will you be at retirement (i.e. early retirement?)
- Size of existing tax-deferred (traditional) balance?
- Current tax bracket?

Knowing nothing else I'd say max traditional not Roth 401k, which is the wrong choice for the majority of people. But individual circumstances vary.
I won't have any pension
I'll be around 65 yo for retirement
My current 401K balance around 35k
24% tax bracket
Make the maximum annual employee contribution ($19.5k) to the 401k. Make traditional 401k contributions, not Roth.

If you are able to contribute more than $25.5k annually to investing ($19.5k to the traditional 401k, plus $6k to your Roth IRA), then contribute more to your taxable brokerage account.

What funds you you use in each account? What funds are offered in your employer's 401k plan? Please give fund names, tickers and expense ratios.

For more comprehensive ideas you need to post more details. Please see this for information needed and format: Asking Portfolio Questions.
Last edited by ruralavalon on Thu Dec 31, 2020 12:42 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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retired@50
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Re: Roth 401K Question

Post by retired@50 »

wbarabas wrote: Thu Dec 31, 2020 12:27 pm
I won't have any pension
I'll be around 65 yo for retirement
My current 401K balance around 35k
24% tax bracket
Given these additional facts, I'd suggest continuing to use the Traditional 401k at work. If you can max out that workplace account annually, great. If you do contribute the max at work, then you can also use the Roth IRA outside of work.

Regards,
This is one person's opinion. Nothing more.
02nz
Posts: 6680
Joined: Wed Feb 21, 2018 3:17 pm

Re: Roth 401K Question

Post by 02nz »

Assuming your 401k’s costs are reasonable: not only should you be making all-traditional contributions but also you should be prioritizing those above the Roth IRA. You’ll be paying MUCH lower taxes on those dollars than 24% when withdrawn in retirement.
Topic Author
wbarabas
Posts: 20
Joined: Mon Dec 21, 2020 9:26 am

Re: Roth 401K Question

Post by wbarabas »

ruralavalon wrote: Thu Dec 31, 2020 12:38 pm
wbarabas wrote: Thu Dec 31, 2020 12:27 pm
02nz wrote: Thu Dec 31, 2020 12:16 pm The main data needed to answer this question usefully:

- Pension?
- What age will you be at retirement (i.e. early retirement?)
- Size of existing tax-deferred (traditional) balance?
- Current tax bracket?

Knowing nothing else I'd say max traditional not Roth 401k, which is the wrong choice for the majority of people. But individual circumstances vary.
I won't have any pension
I'll be around 65 yo for retirement
My current 401K balance around 35k
24% tax bracket
Make the maximum annual employee contribution ($19.5k) to the 401k. Make traditional 401k contributions, not Roth.

If you are able to contribute more than $25.5k annually to investing ($19.5k to the traditional 401k, plus $6k to your Roth IRA), then contribute more to your taxable brokerage account.

What funds you you use in each account? What funds are offered in your employer's 401k plan? Please give fund names, tickers and expense ratios.

For more comprehensive ideas you need to post more details. Please see this for information needed and format: Asking Portfolio Questions.
MY 401K is in the following 3:
iShares Russell 2000 small cap ER .07% 20%
iShares Russell Mid Cap index fund .07% ER 30%
iShares S&P 500 index fund .03% ER 50%

iShares were the only ones with low expense ratios. A lot of T Rowe price was around .5%
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ruralavalon
Posts: 21390
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Location: Illinois

Re: Roth 401K Question

Post by ruralavalon »

wbarabas wrote: Thu Dec 31, 2020 1:44 pm
ruralavalon wrote: Thu Dec 31, 2020 12:38 pm
wbarabas wrote: Thu Dec 31, 2020 12:27 pm
02nz wrote: Thu Dec 31, 2020 12:16 pm The main data needed to answer this question usefully:

- Pension?
- What age will you be at retirement (i.e. early retirement?)
- Size of existing tax-deferred (traditional) balance?
- Current tax bracket?

Knowing nothing else I'd say max traditional not Roth 401k, which is the wrong choice for the majority of people. But individual circumstances vary.
I won't have any pension
I'll be around 65 yo for retirement
My current 401K balance around 35k
24% tax bracket
Make the maximum annual employee contribution ($19.5k) to the 401k. Make traditional 401k contributions, not Roth.

If you are able to contribute more than $25.5k annually to investing ($19.5k to the traditional 401k, plus $6k to your Roth IRA), then contribute more to your taxable brokerage account.

What funds you you use in each account? What funds are offered in your employer's 401k plan? Please give fund names, tickers and expense ratios.

For more comprehensive ideas you need to post more details. Please see this for information needed and format: Asking Portfolio Questions.
MY 401K is in the following 3:
iShares Russell 2000 small cap ER .07% 20%
iShares Russell Mid Cap index fund .07% ER 30%
iShares S&P 500 index fund .03% ER 50%

iShares were the only ones with low expense ratios. A lot of T Rowe price was around .5%
Those are excellent diversified stock funds with low expense ratios. You are fortunate to have them available.

You should definitely make the maximum annual employee contribution ($19.k) to your 401k account as a priority ahead of investing in a taxable brokerage account.

What are the lowest expense international stock funds offered in your employer's 401k plan? What are the lowest expense bond funds offered in your employer's 401k plan?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
LittleMaggieMae
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Re: Roth 401K Question

Post by LittleMaggieMae »

just an FYI for the OP: assuming you are 45 yo. At 50 you will be able to add "catchup contributions" to your 401K and Roth. I'm assuming you won't be able to "find" the full 19500 (401K) + 6000 (roth) in your spending right now. Review your spending/budget and start planning to get the 401K up to the max contribution AND be prepared to bump your contributions to get the Max with the "catchup" amount (currently the catchup is $6500 for 401K and 1K for Roth) The catchup amounts are highly likely to go up - so in 5 years it might be 7500 for 401K.

Now is the time to design and start working a multi year plan to get you saving as much as possible.

I did something like this back in 2005 (at 40 years old) it took me 4 years to build up to maxing my 401K and roth. and then when I turned 50 (I heard about the 'catchup' contributions the year before I turned 50) it took me 2 years to get that maxed as well. Since I was actively working a long term/range financial plan - it would have helped if I would have known about the catchup amounts sooner and could have planned a bit better.

The first few years were weird and sometimes tough (old spending habits were hard to change. Learning about all the expenses I just paid without thought and figuring out how to pay less for them was hard. Making sure I was spending on things I truly enjoyed/valued took time. ) but the end result was totally worth it. I'm looking at a reasonable retirement (maybe even an "early" retirement.)

Also, pay attention to the income limit for contributing to a Roth. You may need to do a back door Roth contribution at some time in the future as your income increases.
Topic Author
wbarabas
Posts: 20
Joined: Mon Dec 21, 2020 9:26 am

Re: Roth 401K Question

Post by wbarabas »

ruralavalon wrote: Thu Dec 31, 2020 1:59 pm
wbarabas wrote: Thu Dec 31, 2020 1:44 pm
ruralavalon wrote: Thu Dec 31, 2020 12:38 pm
wbarabas wrote: Thu Dec 31, 2020 12:27 pm
02nz wrote: Thu Dec 31, 2020 12:16 pm The main data needed to answer this question usefully:

- Pension?
- What age will you be at retirement (i.e. early retirement?)
- Size of existing tax-deferred (traditional) balance?
- Current tax bracket?

Knowing nothing else I'd say max traditional not Roth 401k, which is the wrong choice for the majority of people. But individual circumstances vary.
I won't have any pension
I'll be around 65 yo for retirement
My current 401K balance around 35k
24% tax bracket
Make the maximum annual employee contribution ($19.5k) to the 401k. Make traditional 401k contributions, not Roth.

If you are able to contribute more than $25.5k annually to investing ($19.5k to the traditional 401k, plus $6k to your Roth IRA), then contribute more to your taxable brokerage account.

What funds you you use in each account? What funds are offered in your employer's 401k plan? Please give fund names, tickers and expense ratios.

For more comprehensive ideas you need to post more details. Please see this for information needed and format: Asking Portfolio Questions.
MY 401K is in the following 3:
iShares Russell 2000 small cap ER .07% 20%
iShares Russell Mid Cap index fund .07% ER 30%
iShares S&P 500 index fund .03% ER 50%

iShares were the only ones with low expense ratios. A lot of T Rowe price was around .5%
Those are excellent diversified stock funds with low expense ratios. You are fortunate to have them available.

You should definitely make the maximum annual employee contribution ($19.k) to your 401k account as a priority ahead of investing in a taxable brokerage account.

What are the lowest expense international stock funds offered in your employer's 401k plan? What are the lowest expense bond funds offered in your employer's 401k plan?
iShares US Aggregrate Bond Index K ER .06%
iShares MSCI EAFE International Index K ER .03%
User avatar
ruralavalon
Posts: 21390
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Location: Illinois

Re: Roth 401K Question

Post by ruralavalon »

wbarabas wrote: Thu Dec 31, 2020 2:47 pm
ruralavalon wrote: Thu Dec 31, 2020 1:59 pm
wbarabas wrote: Thu Dec 31, 2020 1:44 pm
ruralavalon wrote: Thu Dec 31, 2020 12:38 pm
wbarabas wrote: Thu Dec 31, 2020 12:27 pm

I won't have any pension
I'll be around 65 yo for retirement
My current 401K balance around 35k
24% tax bracket
Make the maximum annual employee contribution ($19.5k) to the 401k. Make traditional 401k contributions, not Roth.

If you are able to contribute more than $25.5k annually to investing ($19.5k to the traditional 401k, plus $6k to your Roth IRA), then contribute more to your taxable brokerage account.

What funds you you use in each account? What funds are offered in your employer's 401k plan? Please give fund names, tickers and expense ratios.

For more comprehensive ideas you need to post more details. Please see this for information needed and format: Asking Portfolio Questions.
MY 401K is in the following 3:
iShares Russell 2000 small cap ER .07% 20%
iShares Russell Mid Cap index fund .07% ER 30%
iShares S&P 500 index fund .03% ER 50%

iShares were the only ones with low expense ratios. A lot of T Rowe price was around .5%
Those are excellent diversified stock funds with low expense ratios. You are fortunate to have them available.

You should definitely make the maximum annual employee contribution ($19.k) to your 401k account as a priority ahead of investing in a taxable brokerage account.

What are the lowest expense international stock funds offered in your employer's 401k plan? What are the lowest expense bond funds offered in your employer's 401k plan?
iShares US Aggregrate Bond Index K ER .06%
iShares MSCI EAFE International Index K ER .03%
Both excellent funds if you wish to diversify further in your 401k, reinforcing the idea that you should prioritize making maximum annual contributions to your 401k plan.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
02nz
Posts: 6680
Joined: Wed Feb 21, 2018 3:17 pm

Re: Roth 401K Question

Post by 02nz »

wbarabas wrote: Thu Dec 31, 2020 12:27 pm
02nz wrote: Thu Dec 31, 2020 12:16 pm The main data needed to answer this question usefully:

- Pension?
- What age will you be at retirement (i.e. early retirement?)
- Size of existing tax-deferred (traditional) balance?
- Current tax bracket?

Knowing nothing else I'd say max traditional not Roth 401k, which is the wrong choice for the majority of people. But individual circumstances vary.
I won't have any pension
I'll be around 65 yo for retirement
My current 401K balance around 35k
24% tax bracket
OP, you make a good income, but unless there are other pots of retirement savings you haven't told us about, with $35K at around age 45, you're WAY behind in retirement savings. Fidelity suggests you should have around 4X your salary saved at age 45 (https://www.fidelity.com/viewpoints/ret ... -to-retire). That's a very rough guideline, of course, but gives you an idea. Make it a goal to max your 401k with traditional contributions, and only then fund a Roth IRA.
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