Post by keweenawlove on Nov 29, 2018 17:17:58 GMT -5
I'm currently putting in 17% to regular and 7% to Roth. I'm also maxing out my Roth IRA. It feels like a guessing game since I have no idea what taxes will look like in 30 years so I went for roughly a 50/50 split.
Post by dragon's breath on Nov 29, 2018 18:29:18 GMT -5
This is one of those "it depends" situations. It's a bit of your current situation, combined with fortune telling of your future situation, and hedging your bets.
I max my traditional and have a separate Roth where I put money in away from my work account.
If you have a lot of dependents and don't pay much at all in taxes right now, Roth is the way to go. If you have a great pension plan, Roth could still be a way to go. If you are low income now, but on the path to higher incomes, do a Roth. If you can max your traditional and still have some to put in a Roth, do it.
If you think your taxes might go down when you retire, you should put it in traditional.
I didn't have a Roth option when I started, so by the time it became available at work, it wasn't worth it (due to the compounding interest of my traditional account, after years of putting money there). However, I did like the idea of a separate account once I realized I could do both. I just wish I'd started a Roth earlier, when my taxes were lower.
For my son, who only works part time with very low taxes, I encourage 100% going to Roth. Eventually that will change, but for now it's perfect.
This is one of those "it depends" situations. It's a bit of your current situation, combined with fortune telling of your future situation, and hedging your bets.
I max my traditional and have a separate Roth where I put money in away from my work account.
If you have a lot of dependents and don't pay much at all in taxes right now, Roth is the way to go. If you have a great pension plan, Roth could still be a way to go. If you are low income now, but on the path to higher incomes, do a Roth. If you can max your traditional and still have some to put in a Roth, do it.
If you think your taxes might go down when you retire, you should put it in traditional.
I didn't have a Roth option when I started, so by the time it became available at work, it wasn't worth it (due to the compounding interest of my traditional account, after years of putting money there). However, I did like the idea of a separate account once I realized I could do both. I just wish I'd started a Roth earlier, when my taxes were lower.
For my son, who only works part time with very low taxes, I encourage 100% going to Roth. Eventually that will change, but for now it's perfect.
At my company, I was told that I could only put the max into my total retirement (401k and Roth 401k). Thus, why wouldn’t I choose to put my total $19k (next year) into my pre-tax 401k? And, wouldn’t I be in a lower tax bracket when I retire and withdraw the money bc then I wouldn’t have an income?
We aren’t allowed to do a Roth based on our income. We were advised to max both pre-tax 401k before we try to do a backdoor Roth, but that is a different situation.
If you are eligible it is best to have a mix of different tax situations when you retire so you aren’t paying taxes on everything. I would talk to a financial planner for the exact math as they have calculators that can expand out.
ETA- I was just googling and I guess no limit for income for 401k Roth’s but 5500 max. Is that true?
We aren’t allowed to do a Roth based on our income. We were advised to max both pre-tax 401k before we try to do a backdoor Roth, but that is a different situation.
If you are eligible it is best to have a mix of different tax situations when you retire so you aren’t paying taxes on everything. I would talk to a financial planner for the exact math as they have calculators that can expand out.
We can’t do a Roth IRA due to our incomes but we can put towards a a Roth 401k since there isn’t an income limitation. We will talk to our financial advisor when we see him.
This is one of those "it depends" situations. It's a bit of your current situation, combined with fortune telling of your future situation, and hedging your bets.
I max my traditional and have a separate Roth where I put money in away from my work account.
If you have a lot of dependents and don't pay much at all in taxes right now, Roth is the way to go. If you have a great pension plan, Roth could still be a way to go. If you are low income now, but on the path to higher incomes, do a Roth. If you can max your traditional and still have some to put in a Roth, do it.
If you think your taxes might go down when you retire, you should put it in traditional.
I didn't have a Roth option when I started, so by the time it became available at work, it wasn't worth it (due to the compounding interest of my traditional account, after years of putting money there). However, I did like the idea of a separate account once I realized I could do both. I just wish I'd started a Roth earlier, when my taxes were lower.
For my son, who only works part time with very low taxes, I encourage 100% going to Roth. Eventually that will change, but for now it's perfect.
At my company, I was told that I could only put the max into my total retirement (401k and Roth 401k). Thus, why wouldn’t I choose to put my total $19k (next year) into my pre-tax 401k? And, wouldn’t I be in a lower tax bracket when I retire and withdraw the money bc then I wouldn’t have an income?
I'm a little tired, so not following the first part (I'm allowed to max both a traditional and a Roth, so $19k next year plus $6k next year, although if I work a ton of OT again, I may be phased down for the Roth, and won't be able to max it because of income.)
For the second part-- will your tax rate be lower in retirement? Again, depends on your tax rate now (do you have a bunch of dependents who keep your tax rate right now?), but also future tax rates-- will taxes go up? If so, how much? You might make a lower income, but the tax rate for the tax bracket might increase. No one knows what the tax brackets will be in 20 years.
My retirement income is going to mostly depend on how well my retirement fund does. With pension (36% if I retire at my minimum age) + Social Security (how much I actually get is up in the air right now with all of the SS issues) + 401k (I started it when I was 21, and currently max it. That's a lot of time for compound interest accumulation, and if the markets do well...!) I could very well retire and make more money than I made while working. Or, markets could crash, take a long time to recover, and then crash again right before/after I retire, and I could bring home quite a bit less in retirement.
That why there is no real "one size fits all" answer. I don't know your tax rate and personal situation enough to take an educated guess on whether or not you'll have a higher or lower tax rate in retirement than you do now.
I do know one of my coworkers (we make exactly the same wage), who has three kids and a SAHW pays a lot less in taxes than I do right now, and the Roth is the best deal for him (he maxes that before contributing to his traditional account).
At my company, I was told that I could only put the max into my total retirement (401k and Roth 401k). Thus, why wouldn’t I choose to put my total $19k (next year) into my pre-tax 401k? And, wouldn’t I be in a lower tax bracket when I retire and withdraw the money bc then I wouldn’t have an income?
I'm a little tired, so not following the first part (I'm allowed to max both a traditional and a Roth, so $19k next year plus $6k next year, although if I work a ton of OT again, I may be phased down for the Roth, and won't be able to max it because of income.)
For the second part-- will your tax rate be lower in retirement? Again, depends on your tax rate now (do you have a bunch of dependents who keep your tax rate right now?), but also future tax rates-- will taxes go up? If so, how much? You might make a lower income, but the tax rate for the tax bracket might increase. No one knows what the tax brackets will be in 20 years.
My retirement income is going to mostly depend on how well my retirement fund does. With pension (36% if I retire at my minimum age) + Social Security (how much I actually get is up in the air right now with all of the SS issues) + 401k (I started it when I was 21, and currently max it. That's a lot of time for compound interest accumulation, and if the markets do well...!) I could very well retire and make more money than I made while working. Or, markets could crash, take a long time to recover, and then crash again right before/after I retire, and I could bring home quite a bit less in retirement.
That why there is no real "one size fits all" answer. I don't know your tax rate and personal situation enough to take an educated guess on whether or not you'll have a higher or lower tax rate in retirement than you do now.
I do know one of my coworkers (we make exactly the same wage), who has three kids and a SAHW pays a lot less in taxes than I do right now, and the Roth is the best deal for him (he maxes that before contributing to his traditional account).
You are confusing a Roth IRA (limit of $6,000 next year) and a Roth 401(k), which has the same contribution limits as a Traditional 401(k), except the contributions to that do not lower taxable income now, and is what the poster is asking about here.
We aren’t allowed to do a Roth based on our income. We were advised to max both pre-tax 401k before we try to do a backdoor Roth, but that is a different situation.
If you are eligible it is best to have a mix of different tax situations when you retire so you aren’t paying taxes on everything. I would talk to a financial planner for the exact math as they have calculators that can expand out.
ETA- I was just googling and I guess no limit for income for 401k Roth’s but 5500 max. Is that true?
$5,500 is the Roth IRA max this year, not a Roth 401(k). There are income limits to a Roth IRA, and contribution limit of $5,500 (up to $6,000 next year). The limits on the Roth 401(k) are the same as a regular 401(k), $18,500 this year.
I'm a little tired, so not following the first part (I'm allowed to max both a traditional and a Roth, so $19k next year plus $6k next year, although if I work a ton of OT again, I may be phased down for the Roth, and won't be able to max it because of income.)
For the second part-- will your tax rate be lower in retirement? Again, depends on your tax rate now (do you have a bunch of dependents who keep your tax rate right now?), but also future tax rates-- will taxes go up? If so, how much? You might make a lower income, but the tax rate for the tax bracket might increase. No one knows what the tax brackets will be in 20 years.
My retirement income is going to mostly depend on how well my retirement fund does. With pension (36% if I retire at my minimum age) + Social Security (how much I actually get is up in the air right now with all of the SS issues) + 401k (I started it when I was 21, and currently max it. That's a lot of time for compound interest accumulation, and if the markets do well...!) I could very well retire and make more money than I made while working. Or, markets could crash, take a long time to recover, and then crash again right before/after I retire, and I could bring home quite a bit less in retirement.
That why there is no real "one size fits all" answer. I don't know your tax rate and personal situation enough to take an educated guess on whether or not you'll have a higher or lower tax rate in retirement than you do now.
I do know one of my coworkers (we make exactly the same wage), who has three kids and a SAHW pays a lot less in taxes than I do right now, and the Roth is the best deal for him (he maxes that before contributing to his traditional account).
You are confusing a Roth IRA (limit of $6,000 next year) and a Roth 401(k), which has the same contribution limits as a Traditional 401(k), except the contributions to that do not lower taxable income now, and is what the poster is asking about here.
Yes, I was talking about Roth IRA and Traditional 401k. However, the tax considerations for pre-tax/not pre-tax are the same: what is "your" situation now compared to what it will be in the future?
Do you need to reduce taxes now, and are pretty sure they will be less when you retire? Traditional.
Do you have low taxes now and they will be higher later? Roth (at least for now).
Do you really have no clue because it's just too much of a crapshoot with your personal situation? May as well diversify.
I split my contributions about 50-50 between my traditional 401k and Roth 401k. No insightful reason other than that it seems like a sensible decision since I really don’t have a good sense at this point of what our finances could look like when we are at retirement age.
I second the "it depends" comment from dragon's breath. I contribute only to post-tax options - 401k Roth and Roth IRA. However, I'm older, so all of my early retirement savings are in a pre-tax IRA. I do convert some of it occasionally, but given compounding, I still have a larger amount in pre-tax savings than post-tax and probably always will.
Ultimately, I believe tax rates must increase so the more I can have in post-tax now will save me later, but my magic 8 ball is on the fritz, so it's just my gut feeling.
My company only lets us contribute 15% of our salary in total. I started out doing 8%/7% to ROTH/regular. At some point I've had to lower my contributions so as to not go over the fed max, so I've lowered the regular percentage and still have 8% going into the ROTH.
I have no idea if this is a good strategy or not, lol.
Post by bostonmichelle on Nov 30, 2018 10:18:24 GMT -5
It totally depends on your situation.
DH and I are in a unique situation that I have a very large inherited IRA and based on the RMDs and such we are doing 50/50 of the $19k next year in DH’s 401k and maxing out my Roth IRA. If we continued on fully doing pretax we were going to have income tax problems from 70-80 based on calculations we did with our financial planners.
Post by hurricanedrunk on Nov 30, 2018 12:38:06 GMT -5
I currently have 33% of my contributions allocated to Roth 401K and fully fund a Roth IRA. I will be tweaking this in the upcoming year to flip it to 66%.
I was advised by the 401K guy who manages our funds to put more into the Roth 401k if we could afford the additional taxes. He did some fancy calculations on what our taxes would be and how it would effect the outlook. Ultimately it was positive. I have a similar feeling as other posters that taxes can only go up.
I'm late to this but wanted to mention some other considerations aside from the obvious question of whether you want to pay taxes today or in retirement.
Roth accounts don't have any required minimum distributions (RMDs). With traditional IRAs and 401(k)s, under current laws you'll have to start withdrawing set amounts once you turn 70.5 years old (and paying taxes), regardless of whether you need the money from those accounts yet. This is admittedly not an issue for everyone, but it's worth mentioning so you have a fuller picture.
You can also withdraw your contributions to Roth accounts at any time, with no penalty, taxes, or payback requirement. Again, this only applies to amounts you've contributed, not to any gains. Some people like the added security of knowing they can access that money if they ever really needed to. If you can't afford to do both an emergency cash fund and fully fund a Roth IRA or 401(k), you can think about your Roth contributions as a sort of emergency fund, but always keep in mind that unlike a cash emergency fund, your Roth accounts can decrease in value depending on how your investments perform.
Finally, back to the tax topic but in a different way: when you withdraw from a Roth account in retirement you don't pay any taxes at all, even on the gains (you did, of course, already pay taxes on the contributions). When you withdraw from a traditional account, you pay ordinary income tax on all withdrawals. That might still work out for you if you're in a lower tax bracket in retirement, but you're also paying ordinary income tax rates on your gains instead of the lower capital gains tax rates you'd get if the money weren't in an IRA.
Bottom line, as everyone said it's pretty complicated and there's no way to know what math will work out best. As a result, many people choose to hedge their bets and but some in both types of accounts. Whether you should split that 70/30, 60/40, 50/50 is anyone's guess.
I must be missing the obvious, but aren’t you already in a lower tax bracket in retirement because you aren’t making any money?
I'm late to this but wanted to mention some other considerations aside from the obvious question of whether you want to pay taxes today or in retirement.
Roth accounts don't have any required minimum distributions (RMDs). With traditional IRAs and 401(k)s, under current laws you'll have to start withdrawing set amounts once you turn 70.5 years old (and paying taxes), regardless of whether you need the money from those accounts yet. This is admittedly not an issue for everyone, but it's worth mentioning so you have a fuller picture.
You can also withdraw your contributions to Roth accounts at any time, with no penalty, taxes, or payback requirement. Again, this only applies to amounts you've contributed, not to any gains. Some people like the added security of knowing they can access that money if they ever really needed to. If you can't afford to do both an emergency cash fund and fully fund a Roth IRA or 401(k), you can think about your Roth contributions as a sort of emergency fund, but always keep in mind that unlike a cash emergency fund, your Roth accounts can decrease in value depending on how your investments perform.
Finally, back to the tax topic but in a different way: when you withdraw from a Roth account in retirement you don't pay any taxes at all, even on the gains (you did, of course, already pay taxes on the contributions). When you withdraw from a traditional account, you pay ordinary income tax on all withdrawals. That might still work out for you if you're in a lower tax bracket in retirement, but you're also paying ordinary income tax rates on your gains instead of the lower capital gains tax rates you'd get if the money weren't in an IRA.
Bottom line, as everyone said it's pretty complicated and there's no way to know what math will work out best. As a result, many people choose to hedge their bets and but some in both types of accounts. Whether you should split that 70/30, 60/40, 50/50 is anyone's guess.
I must be missing the obvious, but aren’t you already in a lower tax bracket in retirement because you aren’t making any money?
But you are making money, whether it is income from investments or social security. SS is not taxable for the low end (e.g., if you have no other income from investments and a small SS portion), but after a certain point, it is taxable income. So if your goal in retirement is to replace a large portion of your salary (let's say 80%) with SS and investments, and all of your investments are pre-tax, then all of your income will be taxable.
Ultimately, if tax rates don't change, and you stay in the same bracket, then there isn't a huge financial difference between paying taxes now or later … if you run the numbers, you end up at roughly the same place. The big question is, will tax rates go up? And that's what a lot of us believe so we go with paying taxes now.
And kudos to RockNVoll, to bring up the RMDs - I'd forgotten about them, but it is an important consideration. And RMDs follow the account, so if you die and the IRA moves to someone else, they must also take the RMDs even if they are not of retirement age.
I must be missing the obvious, but aren’t you already in a lower tax bracket in retirement because you aren’t making any money?
But you are making money, whether it is income from investments or social security. SS is not taxable for the low end (e.g., if you have no other income from investments and a small SS portion), but after a certain point, it is taxable income. So if your goal in retirement is to replace a large portion of your salary (let's say 80%) with SS and investments, and all of your investments are pre-tax, then all of your income will be taxable.
Ultimately, if tax rates don't change, and you stay in the same bracket, then there isn't a huge financial difference between paying taxes now or later … if you run the numbers, you end up at roughly the same place. The big question is, will tax rates go up? And that's what a lot of us believe so we go with paying taxes now.
And kudos to RockNVoll, to bring up the RMDs - I'd forgotten about them, but it is an important consideration. And RMDs follow the account, so if you die and the IRA moves to someone else, they must also take the RMDs even if they are not of retirement age.
And a lot of deductions that you have now - mortgage interest, student loan interest, child deductions, etc - will be lower or zero and if you downsize your home or choose to rent, lower/no property tax deduction. My dad is retired and my mom is semi-retired, both collect SS, my mom doesn’t have RMDs yet (my dad does but his are small) and their effective tax rate is higher now than it ever was.
I currently have 33% of my contributions allocated to Roth 401K and fully fund a Roth IRA. I will be tweaking this in the upcoming year to flip it to 66%.
I was advised by the 401K guy who manages our funds to put more into the Roth 401k if we could afford the additional taxes. He did some fancy calculations on what our taxes would be and how it would effect the outlook. Ultimately it was positive. I have a similar feeling as other posters that taxes can only go up.
I rarely post on here but my financial advisor walked me through a similar equation that I don’t remember how to replicate but it ended up with the Roth 401k being the winner over the regular.
Post by marathon55 on Dec 12, 2018 23:20:01 GMT -5
We contribute the full max for both of us to the pre-tax. We are fairly high earners and live a life far less than our income may justify. We don’t need to replace more than 40% of our income in retirement and want to retire early so unless tax rates jump a crazy amount we estimated it will be better to save now and pay later.
The one wild card is healthcare but we do build a decent amount in our HSA for that.