401k vs Roth question

[zokudu]

Have a question regarding a Roth IRA vs a 401k. I just got offered my first full time position yesterday and my company matches both a Roth and 401k. They match dollar for dollar 3% of my income and half a percent for the next 2%. So if I put in 5% of my income they match 4%. If they're matching my roth contributions their match goes into a traditional 401k. Do I want my contributions going to a Roth or a 401k? It's my understanding the Roth is better than a 401k but I'm not 100% sure. Please enlighten me on retirement accounts.

 

[moonbogg]

You are about to be flooded by expert ATOT financial wizards.

 

[Muse]

The thing to understand about Roth is that you pay taxes on the money before it goes into the account, this has to be money you earn that year, IIRC. You never have to pay taxes on the account money again. It may balloon, say, 5 times, and the increase does not get taxed.

A traditional IRA (401k, say), has pre-tax income and doesn't get taxed until you take the money out. Then it gets taxed as income that year.

There's probably someone at your company who you can have a personal conversation with about the details.

 

[pete6032]

If you're young and they match both Roth and 401K you want to max out the Roth first because

A) Your tax bracket right now is probably lower than your tax bracket will be upon retirement, so you should take the tax hit now in the form of a Roth contribution rather than later in the form of a 401K withdrawal.

B) Contributing to a Roth you are probably able to pick your own funds with lower expense ratios than if you contributed to a company 401K plan.

Roth max is $5,500 this year.

 

[dn7309]

Always contribute to the Roth. Since you already paid taxes on it, you will only paid taxes on your earning when you withdraw it in the future. So if you contributed 100k and you earn an additional 50k in returns over time. But you need to withdraw from your 401k for any reason, any amount under 100lk will not be taxed because you already paid tax on it.

 

[Lifted]

Always contribute to the Roth. Since you already paid taxes on it, you will only paid taxes on your earning when you withdraw it in the future. So if you contributed 100k and you earn an additional 50k in returns over time. But you need to withdraw from your 401k for any reason, any amount under 100lk will not be taxed because you already paid tax on it.

No.

 

[s0me0nesmind1]

There is no "Roth is better than non-Roth (401k)".

It's VERY simple. It's called diversification. What are the chances that in 20-30 years when you hit retirement that the tax brackets (% that goes to taxes) is going to go up or down? A lot of people feel confident in saying the tax brackets are only going to go higher, hence why they advocate paying taxes NOW with a Roth (while they are lower) instead of paying the taxes later when they MIGHT be higher with a traditional 401k.

What is the true answer from any real financial expert? Diversify. Nuff said.

 

[TwiceOver]

... But you need to withdraw from your 401k for any reason, any amount under 100lk will not be taxed because you already paid tax on it.

Ummm. NO.

Yes, max into your roth, then 401k.

 

[s0me0nesmind1]

Always contribute to the Roth. Since you already paid taxes on it, you will only paid taxes on your earning when you withdraw it in the future. So if you contributed 100k and you earn an additional 50k in returns over time. But you need to withdraw from your 401k for any reason, any amount under 100lk will not be taxed because you already paid tax on it.

No.

Yeah No, just no.

Don't listen to anyone as retarded as dn7309 please for the love of fuck.

 

[zokudu]

There is no "Roth is better than non-Roth (401k)".

It's VERY simple. It's called diversification. What are the chances that in 20-30 years when you hit retirement that the tax brackets (% that goes to taxes) is going to go up or down? A lot of people feel confident in saying the tax brackets are only going to go higher, hence why they advocate paying taxes NOW with a Roth (while they are lower) instead of paying the taxes later when they MIGHT be higher with a traditional 401k.

What is the true answer from any real financial expert? Diversify. Nuff said.

So you're saying put into the Roth and have the company match to the 401k? Got it. :biggrin:

 

[kranky]

Be careful with the terminology. Your choices are a Roth 401k or a traditional 401k. You can't just say "Roth" vs. "401k" because there's a big difference between a Roth 401k and a Roth IRA.

I'm not convinced that there's a clearcut right answer. For people with 40 years to go until retirement, we can't be guaranteed that a Roth 401k or Roth IRA will remain tax-free. Yes, that's today's rule, but if the government sees billions of tax-free dollars piling up and wants more money, what would be easier to implement - future taxing of Roth profits on withdrawal, or higher taxes today? I'm betting on future taxing of Roth profits.

Personally I like splitting the money across the traditional 401k and a Roth 401k. You get a little tax break today on the traditional 401k contribution, and don't have all your eggs in one basket with the Roth 401k hoping the tax law won't change for the rest of your life.

However, whatever you choose, the most important thing is to save early and often! You can't make a bad choice either way.

 

[TwiceOver]

So you're saying put into the Roth and have the company match to the 401k? Got it. :biggrin:

I don't think they have a choice. No expert here, but I believe I read somewhere that companies can't match into a ROTH.

 

[Exterous]

Depends a little bit on how much you are going to contribute. Roth has a much lower max than a 401k. You typically have more freedom in a rIRA or IRA as you can choose the company you invest with. You may or may not have good funds in your 401k as your company chooses the plans or chooses the financial advisor who chooses your plans.

I'd probably go Roth given my assumptions on age (young) and tax bracket (low) since it will give you both a Roth and a 401k this way

 

[s0me0nesmind1]

Ummm. NO.

Yes, max into your roth, then 401k.

Ummm, No. I think you are mixing up the IRA and 401k. OP is talking about his new company offering a 401k option that is ROTH.

Your 401k is your 401k, regardless of Roth or Traditional.

 

[Exterous]

You are about to be flooded by expert ATOT financial wizards.

What do you expect from a board filled with millionaires?

Be careful with the terminology. Your choices are a Roth 401k or a traditional 401k. You can't just say "Roth" vs. "401k" because there's a big difference between a Roth 401k and a Roth IRA.

Maybe not. I worked for a company that matched payroll deductions to a Roth account with contributions to a 401k account. This was years ago and I am not sure the logistics but there was some paperwork or proving that the account was a Roth account and they did it for the large companies (vanguard, fidelity etc).

 

[s0me0nesmind1]

So you're saying put into the Roth and have the company match to the 401k? Got it. :biggrin:

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.

 

[brianmanahan]

What do you expect from a board filled with millionaires?

scratch that, we are billionaires

 

[brianmanahan]

Order of operations for maxing out:
1) Contribute max amount to 401k to get max amount of company match
2) Max out Roth IRA
3) Max out 401k

^ do this

and read this: http://www.bogleheads.org/wiki/401(k)

and this: http://www.bogleheads.org/wiki/Roth_IRA

 

[edro]

omg

Do the full 5% to get the match and that will likely all go into a traditional 401k.
Then, do as much Roth IRA as you can afford, then do as much more 401k you can afford.

I think I do ~13% 401k (I get 3% match) and then another ~5% into Roth.

 

[zokudu]

Okay, just have to clear something up. After reading krankys post I double checked and he is right it is a Roth 401k vs Traditional 401k. If i contribute to the Roth 401k they will match into the Traditional 401k. Carry on the discussion.

 

[Schfifty Five]

Remember, the most you can put into a 401k is $17,500 which can be all pre-tax (traditional), post-tax (Roth), or a mix of both. If you're over 50, (which OP is probably not), then you can contribute an additional $5,500.

Also, FYI to everyone, a Roth IRA and Traditional IRA are completely separate things than a Roth 401k and Traditional 401k.

 

[brianmanahan]

Also, FYI to everyone, a Roth IRA and Traditional IRA are completely separate things than a Roth 401k and Traditional 401k.

everyone knows this

 

[zokudu]

I am not over 50. I am 23. I did not know that a Roth 401k was a thing but now I know, I was just told this morning that a Roth 401k was a contribution option and it was only being refered to as "a roth" so I was confused. Many apologies. So would my best option be to contribute to the Roth 401k. my match goes into a traditional 401k then put anything additional into a Roth IRA?

 

[brianmanahan]

what is your tax rate now? if you think your tax rates will be lower in retirement (which they historically have been for like %90-some of people), a traditional 401k and/or IRA would be better. if you think they will be higher, a Roth 401k and/or IRA would be better.

i diversify by using a traditional 401k (saves me 4000$ a year now on taxes) and a Roth IRA (wont be taxed when i withdraw from it). also note that if your income is above say 60k with deductions, you can't use traditional IRA, have to use Roth. and if your income is above around 110k you can't use Roth IRA unless you do a backdoor Roth IRA technique.

 

[Brovane]

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.