Traditional vs Roth 401k

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Topic Author
kbr0125
Posts: 12
Joined: Tue Oct 26, 2021 10:49 am

Traditional vs Roth 401k

Post by kbr0125 »

Hello,

Im trying to get input how the best way to contribute to my 401k. I will max out my 401k next year, my Roth IRA and my HSA. My work just changed 401k providers and i need to figure out what is best to do PRE or POST tax 401k based on my income / tax bracket.

Salary: 90k
Single Filer
NY state

What would you all reccomend?

Does the 20,500 limit next year apply to both combined? Like 10250 in each and that is the max of 20500 or can i do 20500 in to each for a total of 41000.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional vs Roth 401k

Post by KlangFool »

OP,

It is very simple.

You should not contribute to Roth 401K unless you enjoy paying a lot more unnecessary taxes. If you have extra saving, invest on 100% stock index fund at your taxable account.

20.5K is for both Trad 401K and Roth 401K combined.

Please check whether your 401K provider offer after-tax 401K. No, this is not Roth 401K. This is another kind of 401K account. It does not count in the 20.5K limit.

KlangFool
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Xanadu
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Re: Traditional vs Roth 401k

Post by Xanadu »

If your tax rate in retirement will be lower then pre-tax is better. If your tax rate in retirement will be higher then Roth is better.

For most people, the pretax option is best because usually taxes are lower in retirement due to less taxable income.

Yes, the 20,500 is max for combined pretax and Roth 401k contributions. However if your plan offers after-tax 401k option then you can contribute additional amount and then convert to Roth (search for mega back door Roth)

I personally max out my pre-tax 401k, and then contribute additional amount to after-tax 401k and do the mega back door Roth conversion.
LittleMaggieMae
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Re: Traditional vs Roth 401k

Post by LittleMaggieMae »

I'm single and have spent many years of my career earning in that 90K range. I would contribute the max to your pre-tax 401K. Doing this lets you get MORE money invested than if you were investing after tax money.

I would also consider contributing something to a Roth IRA every year (even if you don't max it) especially if you are young (and the money will have decades to grow tax free.) If you are young -- say your goal is to save up the "rule of thumb" 6 months of expenses (or income) as an EF. But, you might not really need to have that much in "cash". You could keep 3 months Cash/savings and then as you build the next 3 months - put that into your Roth. This assumes that it will take some time - months or a year or longer to build up the EF. The money is still available as an EF - but you've also gotten money into your Roth. Even if you don't immediately invest the money.

90,000 - 12,550 (Single deduction for 2021) - 20,500 = 56,950
The 22% tax bracket for 2021 is: $40,526 to $86,375

So, any money you are putting into a Roth would have been taxed at 22%. ADDED If I did the math wrong let me know - and I will fix!

I kind of wished I had contributed a bit to a Roth instead of to "generic savings" after I had filled up all my pre tax accounts, and had filled my after tax savings/investing goals, and I still had some additional money to "save" that wasn't allocated to anything specific - plopping into a Roth would have been a better option than leaving it CDs or a Savings account for a Decade. Even if i left it in a cash reserve or something 'safe' in the Roth - I could now, years later decide to invest it.... it would already be in the Roth.
Last edited by LittleMaggieMae on Wed Dec 01, 2021 9:51 am, edited 2 times in total.
Topic Author
kbr0125
Posts: 12
Joined: Tue Oct 26, 2021 10:49 am

Re: Traditional vs Roth 401k

Post by kbr0125 »

https://imgur.com/n9RxC4m

Here is my options for election.

I max my Roth IRA on top of my 401k every year, just dont know if i should also do roth 401k.

Also, the new 401k provider funds seem to be higher fees. My old provider had mostly vanguard, and i just did the s and p 500, mid cap and small cap, to equal a total market index.
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ruralavalon
Posts: 26351
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Location: Illinois

Re: Traditional vs Roth 401k

Post by ruralavalon »

kbr0125 wrote: Wed Dec 01, 2021 9:08 am Hello,

Im trying to get input how the best way to contribute to my 401k. I will max out my 401k next year, my Roth IRA and my HSA. My work just changed 401k providers and i need to figure out what is best to do PRE or POST tax 401k based on my income / tax bracket.

Salary: 90k
Single Filer
NY state

What would you all reccomend?

Does the 20,500 limit next year apply to both combined? Like 10250 in each and that is the max of 20500 or can i do 20500 in to each for a total of 41000.
What is your current tax bracket, both federal and state? About how much do you currently have in traditional tax-deferred accounts? Will you be eligible for both a substantial pension and Social Security benefits? What is your profession or occupation?

For most people traditional tax-deductible contributions will likely be better. Most people will likely be in lower tax bracket in retirement.

The $20.5k is the maximum annual employee contribution limit for contributions to a 401k plan. You do NOT double the limit by doing both traditional and Roth 401k contributions.
Last edited by ruralavalon on Wed Dec 01, 2021 9:56 am, edited 2 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional vs Roth 401k

Post by KlangFool »

kbr0125 wrote: Wed Dec 01, 2021 9:46 am https://imgur.com/n9RxC4m

Here is my options for election.

I max my Roth IRA on top of my 401k every year, just dont know if i should also do roth 401k.

Also, the new 401k provider funds seem to be higher fees. My old provider had mostly vanguard, and i just did the s and p 500, mid cap and small cap, to equal a total market index.
You should not. You would pay more taxes by contributing to Roth 401K and taking space away from the Trad 401K.

<<i just did the s and p 500, mid cap and small cap, to equal a total market index.>>

Why? You should only contribute to S&P 500 and it is good enough. It is not necessary to contribute to mid cap and small cap.

KlangFool
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willthrill81
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Re: Traditional vs Roth 401k

Post by willthrill81 »

KlangFool wrote: Wed Dec 01, 2021 9:52 am
kbr0125 wrote: Wed Dec 01, 2021 9:46 am https://imgur.com/n9RxC4m

Here is my options for election.

I max my Roth IRA on top of my 401k every year, just dont know if i should also do roth 401k.

Also, the new 401k provider funds seem to be higher fees. My old provider had mostly vanguard, and i just did the s and p 500, mid cap and small cap, to equal a total market index.
You should not. You would pay more taxes by contributing to Roth 401K and taking space away from the Trad 401K.

<<i just did the s and p 500, mid cap and small cap, to equal a total market index.>>

Why? You should only contribute to S&P 500 and it is good enough. It is not necessary to contribute to mid cap and small cap.

KlangFool
It's not necessary, but tilting toward smaller companies like this would have improved returns significantly over the long-term.
The Sensible Steward
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Traditional vs Roth 401k

Post by KlangFool »

willthrill81 wrote: Wed Dec 01, 2021 9:56 am
KlangFool wrote: Wed Dec 01, 2021 9:52 am
kbr0125 wrote: Wed Dec 01, 2021 9:46 am https://imgur.com/n9RxC4m

Here is my options for election.

I max my Roth IRA on top of my 401k every year, just dont know if i should also do roth 401k.

Also, the new 401k provider funds seem to be higher fees. My old provider had mostly vanguard, and i just did the s and p 500, mid cap and small cap, to equal a total market index.
You should not. You would pay more taxes by contributing to Roth 401K and taking space away from the Trad 401K.

<<i just did the s and p 500, mid cap and small cap, to equal a total market index.>>

Why? You should only contribute to S&P 500 and it is good enough. It is not necessary to contribute to mid cap and small cap.

KlangFool
It's not necessary, but tilting toward smaller companies like this would have improved returns significantly over the long-term.
Only if the expense ratios of the mid cap and small cap are not high. That are usually not true.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
kbr0125
Posts: 12
Joined: Tue Oct 26, 2021 10:49 am

Re: Traditional vs Roth 401k

Post by kbr0125 »

ruralavalon wrote: Wed Dec 01, 2021 9:52 am
kbr0125 wrote: Wed Dec 01, 2021 9:08 am Hello,

Im trying to get input how the best way to contribute to my 401k. I will max out my 401k next year, my Roth IRA and my HSA. My work just changed 401k providers and i need to figure out what is best to do PRE or POST tax 401k based on my income / tax bracket.

Salary: 90k
Single Filer
NY state

What would you all reccomend?

Does the 20,500 limit next year apply to both combined? Like 10250 in each and that is the max of 20500 or can i do 20500 in to each for a total of 41000.
What is your current tax bracket, both federal and state? About how much do you currently have in traditional tax-deferred accounts? Will you be eligible for both a substantial pension and Social Security benefits? What is your profession or occupation?

For most people traditional tax-deductible contributions will likely be better. Most people will likely be in lower tax bracket in retirement.

The $20.5k is the maximum annual employee contribution limit for contributions to a 401k plan. You do NOT double the limit by doing both traditional and Roth 401k contributions.
22% federal / 5.97% State
30 year old, dont have much in retirment, just started to save this year.

6500 in Roth IRA, 4,000 in my HSA, and 14,000 in my 401k. I just started this all this year.
Admiral
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Joined: Mon Oct 27, 2014 12:35 pm

Re: Traditional vs Roth 401k

Post by Admiral »

kbr0125 wrote: Wed Dec 01, 2021 10:18 am
ruralavalon wrote: Wed Dec 01, 2021 9:52 am
kbr0125 wrote: Wed Dec 01, 2021 9:08 am Hello,

Im trying to get input how the best way to contribute to my 401k. I will max out my 401k next year, my Roth IRA and my HSA. My work just changed 401k providers and i need to figure out what is best to do PRE or POST tax 401k based on my income / tax bracket.

Salary: 90k
Single Filer
NY state

What would you all reccomend?

Does the 20,500 limit next year apply to both combined? Like 10250 in each and that is the max of 20500 or can i do 20500 in to each for a total of 41000.
What is your current tax bracket, both federal and state? About how much do you currently have in traditional tax-deferred accounts? Will you be eligible for both a substantial pension and Social Security benefits? What is your profession or occupation?

For most people traditional tax-deductible contributions will likely be better. Most people will likely be in lower tax bracket in retirement.

The $20.5k is the maximum annual employee contribution limit for contributions to a 401k plan. You do NOT double the limit by doing both traditional and Roth 401k contributions.
22% federal / 5.97% State
30 year old, dont have much in retirment, just started to save this year.

6500 in Roth IRA, 4,000 in my HSA, and 14,000 in my 401k. I just started this all this year.
With this added info:

Do not, repeat do not contribute to Roth! Pre-tax only, and max it out. Unless you end up making A LOT (and thus saving A LOT) of money later in your career you will probably not be in a higher tax bracket when you face RMDs (and you may be married, with more favorable tax brackets). Take the tax break now and worry about RMDs in 35 years.
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ruralavalon
Posts: 26351
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Location: Illinois

Re: Traditional vs Roth 401k

Post by ruralavalon »

kbr0125 wrote: Wed Dec 01, 2021 10:18 am
ruralavalon wrote: Wed Dec 01, 2021 9:52 am
kbr0125 wrote: Wed Dec 01, 2021 9:08 am Hello,

Im trying to get input how the best way to contribute to my 401k. I will max out my 401k next year, my Roth IRA and my HSA. My work just changed 401k providers and i need to figure out what is best to do PRE or POST tax 401k based on my income / tax bracket.

Salary: 90k
Single Filer
NY state

What would you all reccomend?

Does the 20,500 limit next year apply to both combined? Like 10250 in each and that is the max of 20500 or can i do 20500 in to each for a total of 41000.
What is your current tax bracket, both federal and state? About how much do you currently have in traditional tax-deferred accounts? Will you be eligible for both a substantial pension and Social Security benefits? What is your profession or occupation?

For most people traditional tax-deductible contributions will likely be better. Most people will likely be in lower tax bracket in retirement.

The $20.5k is the maximum annual employee contribution limit for contributions to a 401k plan. You do NOT double the limit by doing both traditional and Roth 401k contributions.
22% federal / 5.97% State
30 year old, dont have much in retirment, just started to save this year.

6500 in Roth IRA, 4,000 in my HSA, and 14,000 in my 401k. I just started this all this year.
I suggest traditional tax-deductible 401k contributions.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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