401k vs Roth question

[DaveSimmons]

Are you living within your means so you can afford to put the full 5% (or more) into the 401k? If so, I'd go with the Roth 401k and after-tax contributions so you get the tax-free growth.

If money is tight, it will be easier to max out the Traditional 401k since it lowers your taxes a little now, because you are taxed at retirement.

Try to pick low-expense stock index funds instead of actively managed funds. If you have the option of a Vanguard "Target (year)" fund like Target 2050 you can safely put 100% of your contributions into that.

 

[CountZero]

It depends. Any answer that just says one is always better than the other has no idea what the are talking about.

If you are very high in the tax brackets (and live in a high income tax state) then a ROTH is less appealing. The tax savings of a regular 401k will be substantial.

That being said at 23 you are probably not in a high bracket and are likely to move up in income in the future. Now is the time to do the ROTH thing. Get at least the full match and go for ROTH, the match will go into traditional.

As you move up in income/tax brackets you may want to reconsider the mix.

In addition to that you could also put it towards the traditional 401k and put extra money towards a ROTH IRA. Then you control exactly how much post tax money you can afford to put away but are limited to $5500 max contributions in a year. ROTH IRAs are also pretty lenient about withdrawing the money you have invested (not the money you have made though which has similar restrictions to a 401k) I'm not sure if a ROTH 401k is as lenient.

 

[s0me0nesmind1]

One additional consideration for a Roth IRA is there is no required Minimum Distribution when the owner reaches age 70 1/2 as with a normal IRA/401k. At some point with a traditional IRA you will be required to withdraw a set amount of money even if you don't want to.

A bill is already in the works under ol' Baracky to change that one.

 

[s0me0nesmind1]

In addition to that you could also put it towards the traditional 401k and put extra money towards a ROTH IRA. Then you control exactly how much post tax money you can afford to put away but are limited to $5500 max contributions in a year. ROTH IRAs are also pretty lenient about withdrawing the money you have invested (not the money you have made though which has similar restrictions to a 401k) I'm not sure if a ROTH 401k is as lenient.

Does it really matter if OP contributes to 401k Roth or Roth IRA? In the end he could just roll over his 401k Roth to a Roth IRA.

 

[Brovane]

A bill is already in the works under ol' Baracky to change that one.

Has that Bill gone anywhere in Congress?

 

[stlc8tr]

Does it really matter if OP contributes to 401k Roth or Roth IRA? In the end he could just roll over his 401k Roth to a Roth IRA.

Depends on the choices in the 401K plan. Unless the OP has access to institutional funds in the 401K, it's likely he'll have lower cost and better choices outside the 401K.

 

[s0me0nesmind1]

Has that Bill gone anywhere in Congress?

Not yet, it is part of an entire budget change, so it is just one part of a big change list. Of course, it's one change that pisses off a ton of people that actually pay attention to their retirement funds (You know, the top 10% )

http://www.fatwallet.com/forums/finance/1389035/

 

[Balt]

What's your current adjusted gross income? Since you're 23, I'm guessing you're probably not making HUGE amounts of money, but you're probably also taking the standard deduction on your income taxes.

When more of my money started getting eaten up in the 25% federal income tax bracket, I started putting more into the traditional 401k to lower my AGI. If you're currently topping out below that, it may make sense to put some in the Roth 401k since you won't need to lower your AGI. It all depends on how much you're earning (and getting taxed) now versus how much you will be taking home (and getting taxed) in the future. It's impossible to predict exactly what the tax code is going to look like by the time you retire, though.

In any case, max the employer's matching if you can afford to without going into high interest debt. It's free money.

 

[rsbennett00]

Is it free money? What if the investment company goes bankrupt before you hit retirement?

 

[brianmanahan]

Is it free money? What if the investment company goes bankrupt before you hit retirement?

if an investment company goes bankrupt you get the underlying value of the holdings

see this: http://www.mymoneyblog.com/what-if-vanguard-or-fidelity-went-bankrupt.html

 

[rsbennett00]

if an investment company goes bankrupt you get the underlying value of the holdings

see this: http://www.mymoneyblog.com/what-if-vanguard-or-fidelity-went-bankrupt.html

Ok so bankruptcy is highly unlikely but poor investing isn't, so that's how we lose. I hate this crap and I'll never work for another company with mandatory retirement investing, you just can't trust those people.

 

[Brovane]

Not yet, it is part of an entire budget change, so it is just one part of a big change list. Of course, it's one change that pisses off a ton of people that actually pay attention to their retirement funds (You know, the top 10% )

http://www.fatwallet.com/forums/finance/1389035/

I had never even heard that it was on the plate until now. However from some research online I doubt it will go anywhere considering the amount of people with deep pockets that it will piss off. Several years ago I worked with my Mother to convert her IRA to a Roth before she hit 70. She has a excellent pension from being a teacher and has no need to touch the money she has in a IRA. So I worked with her to get it switched over to a Roth.

 

[s0me0nesmind1]

I had never even heard that it was on the plate until now. However from some research online I doubt it will go anywhere considering the amount of people with deep pockets that it will piss off. Several years ago I worked with my Mother to convert her IRA to a Roth before she hit 70. She has a excellent pension from being a teacher and has no need to touch the money she has in a IRA. So I worked with her to get it switched over to a Roth.

What do you expect? Anything with "Roth" attached to it is seen as "untouchable" to the government. That means they want it even more. It's like a pinata hanging above them and they are screaming like a little girl going "I want it I want it I want it!".

If we aren't headed for higher tax brackets, we sure as fuck are headed for other problems. Maybe a combination of Sales and VAT. The rest of the world has gone to VAT.

 

[Wuzup101]

Not quite.

For myself it's more simple. I'm keeping my 401k strictly pre-tax.

I have an Roth IRA that I max out ($5500) every year for that.


Order of operations for maxing out:
1) Contribute max amount to 401k to get max amount of company match
2) Max out Roth IRA ($5500)
3) Max out 401k ($17,500)

To each there own, there is no "Perfect step process". However whatever you do in life when it comes to investments, NEVER FORGET to fucking diversify. The number of people that fail to realize this need to be beat over the head with a tire iron.

And no, diversify isn't limited to just stocks vs. bonds. Large Cap vs. Small Cap. Pre-tax vs. Post-tax. It's a combination of EVERYTHING.

This is what I do and would suggest.

 

[JimKiler]

A bill is already in the works under ol' Baracky to change that one.

OP also remember that a Roth IRA or Roth 401K is not taxes to withdraw funds as of now... There is no guarantee Congress will keep that the same when you retire. Social Security checks where not income to be taxed originally to but that is not true now. So set your expectations now then decide where to put your money.

 

[brianmanahan]

Ok so bankruptcy is highly unlikely but poor investing isn't, so that's how we lose. I hate this crap and I'll never work for another company with mandatory retirement investing, you just can't trust those people.

what, like 401ks?

just invest in index funds, lol

 

[DaveSimmons]

OP also remember that a Roth IRA or Roth 401K is not taxes to withdraw funds as of now... There is no guarantee Congress will keep that the same when you retire. Social Security checks where not income to be taxed originally to but that is not true now. So set your expectations now then decide where to put your money.

This is technically true, and Congress could in theory also pass a bill to seize all your monies and shoot your dog. But SS income was never promised to be tax-free:

http://www.ssa.gov/history/InternetMyths.html

Growth on any Roth contributions made now are by law not taxable, as the exchange for them being after-tax instead of pre-tax. You're speculating that Congress would reach back and change the law for contributions that were already made, breaking that legal agreement.

Breaking an agreement like that would anger tens of millions of registered voters, and send a shock through financial markets similar to what a debt limit default would have caused. A government breaking financial promises like that is much more serious than a politician not keeping an election promise.

 

[s0me0nesmind1]

This is technically true, and Congress could in theory also pass a bill to seize all your monies and shoot your dog. But SS income was never promised to be tax-free:

http://www.ssa.gov/history/InternetMyths.html

Growth on any Roth contributions made now are by law not taxable, as the exchange for them being after-tax instead of pre-tax. You're speculating that Congress would reach back and change the law for contributions that were already made, breaking that legal agreement.

Breaking an agreement like that would anger tens of millions of registered voters, and send a shock through financial markets similar to what a debt limit default would have caused. A government breaking financial promises like that is much more serious than a politician not keeping an election promise.

Bwaahahahahhahahahaahhaha

Look at this poor bastard. Thinks just because tax was paid once there isn't a chance it will be paid again.

Have you heard of the death tax?
Have you ever purchased a used vehicle?

It might not be called "income tax" but it sure as hell is taxing the same dollars twice. They will find plenty MORE ways to do this. Not less ways.

 

[DaveSimmons]

Bwaahahahahhahahahaahhaha

Look at this poor bastard. Thinks just because tax was paid once there isn't a chance it will be paid again.

Have you heard of the death tax?
Have you ever purchased a used vehicle?

It might not be called "income tax" but it sure as hell is taxing the same dollars twice. They will find plenty MORE ways to do this. Not less ways.

Sigh. Yes, they can shoot your dog, harvest your organs and grab your guns too. It would be political suicide for all who voted for it but it could, in theory, happen.

 

[s0me0nesmind1]

Sigh. Yes, they can shoot your dog, harvest your organs and grab your guns too. It would be political suicide for all who voted for it but it could, in theory, happen.

Sorry for the harsh post

I guess the point being, given Social Security and Medicaid.... SOMETHING has to be done in the next 10-20 years regarding taxes. That isn't even accounting for the already horrendous national debt. There is no question whatsoever as far as that goes. Too many people taking from the pot, not enough people putting into the pot.

 

[xaeniac]

The issue with a Roth is that the government can change this law at any time, thus making you pay taxes on money you already paid it on.

 

[DaveSimmons]

The issue with a Roth is that the government can change this law at any time, thus making you pay taxes on money you already paid it on.

See posts above. Generally such a change in tax law would only apply to new contributions made after some point.

The whole point of Roth vs. Traditional was the treatment of future gains. It makes little sense to offer a Roth IRA without it.

It would be breaking a promise made to the registered voters who also make the largest campaign contributions (by individuals). So the congresscritters would lose votes and anger a major source of their funding.

Tax law changes are usually not retroactive. If the capital gains rate is set at 20% for 2016 they don't "just decide" to change the 20% rate to 30% for 2016 in 2017. Corporations expect certainty about the tax laws for the current year even when future years are uncertain. Angering corporations would jeopardize the other source of the critters' re-election funding.

I do expect federal tax rates to climb back up again from their current lows, but I consider it very unlikely that congress will shoot itself in the collective head by breaking the promise that Roth gains will be tax-free.

 

[xaeniac]

See posts above. Generally such a change in tax law would only apply to new contributions made after some point.

The whole point of Roth vs. Traditional was the treatment of future gains. It makes little sense to offer a Roth IRA without it.

It would be breaking a promise made to the registered voters who also make the largest campaign contributions (by individuals). So the congresscritters would lose votes and anger a major source of their funding.

Tax law changes are usually not retroactive. If the capital gains rate is set at 20% for 2016 they don't "just decide" to change the 20% rate to 30% for 2016 in 2017. Corporations expect certainty about the tax laws for the current year even when future years are uncertain. Angering corporations would jeopardize the other source of the critters' re-election funding.

I do expect federal tax rates to climb back up again from their current lows, but I consider it very unlikely that congress will shoot itself in the collective head by breaking the promise that Roth gains will be tax-free.

Dave don't be too sure of yourself as the government can do whatever they please. Especially when it comes down to getting their grimey hands on our money.

 

[Fox5]

1. Always put enough in to get the company matching. That's free money, and a 100% profit on that money immediately (well, upon vesting anyhow).

2. The Roth 401k versus traditional 401k issue of taxes now or taxes later is even if tax rates don't change. Tax rates will likely go up in the future, but your income may go down (you're not working, just living off of savings) putting you into a lower tax bracket, and you can move to a state with lower or no income tax and cut off a significant percentage. So it's really is a gamble based off future plans and tax rates as to which is better. Also, a traditional 401k lets you have more money now when you need it to put into savings to grow, while a roth will hit you harder while you're young and have little flexible savings.
Most of the better paying states (California, Maryland, New York, New Jersey, for example) have really high state income tax, but retirement states (Florida for instance) do not.


3. If you can afford to max out the 401k, the Roth is better as it has a higher effective match (since it's post tax, but the limit is the same limit either way), so you can save more.

Besides your 401k, it's possible to maintain an IRA. And through high deductible health care plans, you can open an HSA account, which is a completely tax free savings account for health purposes. An HSA is a good savings plan for later in life when your health expenses will be greater.

 

[DaveSimmons]

Dave don't be too sure of yourself as the government can do whatever they please. Especially when it comes down to getting their grimey hands on our money.

I have no faith in our congresscritters caring about us, but they do care very much about being re-elected. I've listed reasons why retroactively changing tax law for prior years is likely to end their careers, even if the change survived the inevitable legal challenges.

It's much more likely to me that they would just raise income taxes for everyone to get their paws on more money.