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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: spolicas on November 17, 2016, 06:32:53 AM

Title: Company offers Traditional 401(k) and Roth 401(k). Which should I choose?
Post by: spolicas on November 17, 2016, 06:32:53 AM
My company currently offers a Traditional 401(k) and a Roth 401(k). We can contribute to both or select just one. The Roth 401(k) is rather new and was offered to us starting last year. I'm currently contributing 7% to the Traditional and 8% to the Roth.

My question is, should I just be contributing to the Roth or am I on the right track with hedging both vehicles? I'm debating whether or not I should put the total 15% into the Roth 401(k). I'm 31 and make $94k per year and also have a Roth IRA, which I invest $325 per month, if that helps.

Please let me know your thoughts!

Much appreciate any and all comments.
Title: Re: Company offers Traditional 401(k) and Roth 401(k). Which should I choose?
Post by: ShoulderThingThatGoesUp on November 17, 2016, 06:42:01 AM
It doesn't matter much: you pay taxes now or later. I prefer to put them off because the rules on Roth accounts could change.
Title: Re: Company offers Traditional 401(k) and Roth 401(k). Which should I choose?
Post by: boarder42 on November 17, 2016, 06:44:23 AM
depends on what you plan to live on in retirement you're in the 25% bracket now if you plan to be in the 15% or lower then you should do traditional and take the tax savings now.  if you plan to be in 25% or higher with your income roth would make more sense vs doing trad and putting the rest in taxable.
Title: Re: Company offers Traditional 401(k) and Roth 401(k). Which should I choose?
Post by: Enigma on November 17, 2016, 07:56:23 AM
My vote is all Traditional 401(k) & Traditional IRA...

First, if you plan to retire early and dip into your IRA at a later date before retirement age you will want to do a Tax Ladder conversion (bypassing the 10% early withdrawal penalty).  Also I feel like I will be taxed now at a higher tax bracket while working than when I retire early.  Thus another reason to opt for the Traditional (Reducing my tax burden now, knowing I will have a smaller tax burden later).

I figure the rules for Roth and the rules for retirement age could change.  Good luck!
Title: Re: Company offers Traditional 401(k) and Roth 401(k). Which should I choose?
Post by: JLee on November 17, 2016, 07:58:05 AM
I would do 100% to traditional, and max it at $18k/year even if that means foregoing some of the Roth IRA contributions.  Once you've maxed the 401k (ideally an HSA before the 401k), then knock out the Roth IRA.
Title: Re: Company offers Traditional 401(k) and Roth 401(k). Which should I choose?
Post by: spolicas on November 17, 2016, 11:04:05 AM
It really depends on your income level and retirement plans.  Lower income may benefit from Roth as the tax burden isn't as high.  High income will want to max out the traditional 401k and then max out a Roth as well.  You want to have a taxable and a tax free bucket to draw on in retirement - many ways to get there.

I don't anticipate my income level to increase dramatically over the next several years. My goal is to retire by age 52 if I continue to save and keep my eye on the prize.

I would do 100% to traditional, and max it at $18k/year even if that means foregoing some of the Roth IRA contributions.  Once you've maxed the 401k (ideally an HSA before the 401k), then knock out the Roth IRA.


I've been working towards maxing out the 401(k), but should hopefully get there in a year or so. I do have an HSA that I contribute to, but this isn't maxed out yet either.

My vote is all Traditional 401(k) & Traditional IRA...

First, if you plan to retire early and dip into your IRA at a later date before retirement age you will want to do a Tax Ladder conversion (bypassing the 10% early withdrawal penalty).  Also I feel like I will be taxed now at a higher tax bracket while working than when I retire early.  Thus another reason to opt for the Traditional (Reducing my tax burden now, knowing I will have a smaller tax burden later).

I figure the rules for Roth and the rules for retirement age could change.  Good luck!

Good point. I've read about the Tax Ladder before, so this might be the approach to take.

Thank you all for your input!
Title: Re: Company offers Traditional 401(k) and Roth 401(k). Which should I choose?
Post by: MDM on November 17, 2016, 12:01:14 PM
I don't anticipate my income level to increase dramatically over the next several years. My goal is to retire by age 52 if I continue to save and keep my eye on the prize.
In that case, max traditional 401k and IRA and then taxable investing with any extra is likely best.  If you "have" to use Roth IRA instead of traditional because your income is too high, so be it.

See https://www.bogleheads.org/wiki/Traditional_versus_Roth and http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/ for more details.
Title: Re: Company offers Traditional 401(k) and Roth 401(k). Which should I choose?
Post by: Slee_stack on November 17, 2016, 02:22:24 PM
I've had a Traditional/Roth 401k option for years.  I've changed back and forth over the years from as high as 70% Roth to 70% Traditional.

Beyond ensuring your Traditional 401k has at least knocked you under a certain AGI to receive a tax advantage, I'm still stumped as to how to divvy up traditional vs Roth 401k investments.



I'm starting to lean towards just doing 100% Traditional.
Title: Re: Company offers Traditional 401(k) and Roth 401(k). Which should I choose?
Post by: MDM on November 17, 2016, 02:34:28 PM
I'm still stumped as to how to divvy up traditional vs Roth 401k investments.

Is https://www.bogleheads.org/wiki/Traditional_versus_Roth helpful?  If not, what information would be useful?
Title: Re: Company offers Traditional 401(k) and Roth 401(k). Which should I choose?
Post by: fattest_foot on November 17, 2016, 03:21:43 PM
Considering the audience here is MMM readers, you should go with Traditional.

Roth is good if you're currently low income, or if it's the only money you'll be saving. For a mustachian, however, you're likely going to save any dollar amount above $x.

This means the Traditional will cost you less (since you need less gross income to max it out -- no taxes included), and you can use the difference to open a separate account. That separate account can then grow with compound interest.

Mad Fientist has a good article on it: http://www.madfientist.com/traditional-ira-vs-roth-ira/
Title: Re: Company offers Traditional 401(k) and Roth 401(k). Which should I choose?
Post by: boarder42 on November 18, 2016, 05:45:50 AM
Considering the audience here is MMM readers, you should go with Traditional.

Roth is good if you're currently low income, or if it's the only money you'll be saving. For a mustachian, however, you're likely going to save any dollar amount above $x.

This means the Traditional will cost you less (since you need less gross income to max it out -- no taxes included), and you can use the difference to open a separate account. That separate account can then grow with compound interest.

Mad Fientist has a good article on it: http://www.madfientist.com/traditional-ira-vs-roth-ira/

this assumes you follow MMM and cut to a lower tax bracket when FIRE.  if you're over the 15% bracket with your AGI and you cant contribute to a trad IRA due to income limitations and your marginal tax rate will be the same or higher in FIRE then Roth makes more sense than Trad + putting the extra in taxable
Title: Re: Company offers Traditional 401(k) and Roth 401(k). Which should I choose?
Post by: spolicas on November 18, 2016, 01:37:18 PM
Thanks all! I think I'll shoot for moving towards the Traditional 401(k) and look into the Roth Pipeline strategy.