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401K vs ROTH IRA Question

G

Garet Jax

Diamond Member
Assume there is no company match for either the ROTH or the 401K.

I think it is better to max out the 401K before putting any money into the ROTH (assuming the investment choices are identical). I say this because presumably when I cash out the 401K I will be paying a lower tax rate than I am right now (because I have retired).

Agree/disagree and opinions please. Thanks.
 
That's possible... but you won't pay any tax on your interest made on the roth. It's a crap shoot. For me... I'm 25, and max my 401k. Don't have a roth yet, but I'd like to start one soon.
 
it depends on how much you take out.

My thinking is, put enough into the 401k to get into a lower bracket than you're in.

I put enough in to get into the 15% bracket, then max out a Roth. That way, I'm not paying any dollars to the feds @ 25%.
 
Originally posted by: snoopdoug1
That's possible... but you won't pay any tax on your interest made on the roth. It's a crap shoot. For me... I'm 25, and max my 401k. Don't have a roth yet, but I'd like to start one soon.
Click to expand...

I agree. That is why I think it is better to max 401K first. The tax I would've paid gets deferred until my tax rate is lower.
 
I am not an expert by any means but I have heard balance is best. Basically this way when you retire you pull steady income (and therefore taxes) from your 401k and incidentals from your Roth. Maxing out a Roth comes much lower than a 401k so its not too difficult to do so (its like 4k or 5k I think). In any case I'm sure others will have better advice.
 
But you pay taxes on both your original contribution and all growth with the 401k when you cash it out at retirement.

With the Roth you pay taxes now on the original contribution, but all growth is free.

Say, 25% on $10,000 now vs. 20% on $239,000 later (35 years, 9.5% average growth, reasonable for an S&P 500 fund)
 
The rule I follow is:
Matched 401K > Roth IRA > Unmatched 401K

1. Put into the 401K up to the amount that the employer matches
2. Max out Roth IRA
3. Put in more to max out the 401K up to the contribution limit.
 
Nobody knows the future. Nobody knows what future tax brackets will look like. Will SS/Medicare cause a catastrophic rise in tax rates in the future?

Regardless, I would say if you're at a high tax bracket now, it might be better to place into 401k. Also, who is to say the Congress will not later tax Roth's?

Easy way: Max both out! 😀
 
Originally posted by: Jadow
it depends on how much you take out.

My thinking is, put enough into the 401k to get into a lower bracket than you're in.

I put enough in to get into the 15% bracket, then max out a Roth. That way, I'm not paying any dollars to the feds @ 25%.
Click to expand...

Thanks checked and cannot get to the lower tax bracket with 401K contributions.
 
my company matches 401K contributions w/ company stock. is this common? is it even worth putting in for the stock match?
 
yeah, it's fairly common. even a company stock match is still better than nothing. I wouldn't put any of your own money into company stock though.
 
Originally posted by: DaveSimmons
But you pay taxes on both your original contribution and all growth with the 401k when you cash it out at retirement.

With the Roth you pay taxes now on the original contribution, but all growth is free.

Say, 25% on $10,000 now vs. 20% on $239,000 later (35 years, 9.5% average growth, reasonable for an S&P 500 fund)
Click to expand...

Somewhat compelling.....
 
If I get the Raise I'm hoping for, in March, I'm going to try to max out both. $15,500 in 401k, and $4000 in Roth.

Man, I'll be sick rich if I can do that for 30 years.
 
Qualified distributions from the ROTH are tax free. Plus the distributions won't cause additional taxing of any SS benefits. Finally, annual contributions can be taken from a ROTH free of tax and penalty, whereas 401K you must pay normal income tax and a 10% penalty.

Therefore, it depends on what the rest of your financial landscape looks like. If you have other forms of large savings you can access quickly, max out the 401k then contribute to the ROTH. Otherwise, if you have no other substantial savings, you may want to max out the ROTH since there's no penalty for withdrawal of annual contributions.

 

Here's my take:

Roth (either roth 401k or roth ira):
You pay taxes now on a relatively small amount. It then grows to a large amount which you do not pay any taxes on. Taxes now on $5000 is MUCH less than taxes later on $100,000.


401k (either matched or unmatched):
You do not pay taxes now, but rather defer them until later. So you reduce your taxable income by $5000 now, but then you pay taxes on the 100,000 that your $5000 grew into.


Note that this is a 26 year old's take on things. I'm counting on many years of high % growth. Things may look significantly different to a 45 year old, for example.
 
Originally posted by: DaveSimmons
But you pay taxes on both your original contribution and all growth with the 401k when you cash it out at retirement.

With the Roth you pay taxes now on the original contribution, but all growth is free.

Say, 25% on $10,000 now vs. 20% on $239,000 later (35 years, 9.5% average growth, reasonable for an S&P 500 fund)
Click to expand...

All? Do you not get standard or itemized deductions after you retire (using only retirement money)? Considering that it's $3,300 per dependent and $10,300 standard deduction per family (less for head of household) and both are rising for inflation, seems like some of the money from a 401k used for retirement would indeed be tax free.

By the way OP, the new Roth 401k rules (permanent now) will really make you think!
 
Originally posted by: Engineer

By the way OP, the new Roth 401k rules (permanent now) will really make you think!
Click to expand...

That's like me saying I know this hottie and pics are to follow. 😀

What are these new rules and how do they change the landscape?
 
Originally posted by: Garet Jax
Originally posted by: Engineer

By the way OP, the new Roth 401k rules (permanent now) will really make you think!
Click to expand...

That's like me saying I know this hottie and pics are to follow. 😀

What are these new rules and how do they change the landscape?
Click to expand...

The new rules are that it's permanent now. Not really new rules, just "extended forever" rules. Companies were reluctant to offer Roth 401k's because of the fact that they expired in 2010. Now that they do not expire, look for many companies to offer them soon. Mine is looking at next year.
 
All? Do you not get standard or itemized deductions after you retire (using only retirement money)?
Click to expand...
It's safe to assume almost everyone reading this will have some IRA rollovers from the jobs that did have a 401k with matching, or jobs where they made both 410k and Roth contributions.

So assume people will have enough traditional IRA / 401k taxable income to cover their standard deduction, and that this is a choice of what to do on top of that.

There's a consensus that for most younger investors the best strategy is:
1. pay off CC debt and keep it paid off (while also doing (2.))
2. contribute to your 401k up to the employer match
3. max out Roth IRA
4. then max out 401k


(Edit: this does get a little trickier if your company offers a Roth 401k! Then the main reason to do a Roth IRA outside of your employer would be if you don't like the mutual funds offered in the 401k.)
 
Originally posted by: DaveSimmons

(Edit: this does get a little trickier if your company offers a Roth 401k! Then the main reason to do a Roth IRA outside of your employer would be if you don't like the mutual funds offered in the 401k.)
Click to expand...

Or you have already maxed out your employer accounts.

Also, anyone know if you can take your contributions out of a Roth 401k at any time without a penalty? I know that you can with a Roth IRA. Since you have already paid taxes on your contributions in a Roth IRA, it's your money to remove without penalty at any time. Not sure of a Roth 401k though...
 
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