The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: nexus on April 03, 2019, 03:49:40 PM
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Sorry if there's already content out there regarding this topic. My current web browser is not cooperating with the 'Search' feature.
As a Mustachian, I've been nodding and following along with the principles of MMM. I've also delved into MadFientist's content which has been really helpful. I haven't heard (or perhaps missed) much mention of ROTH 401k's in either's content though. From what I understand you can have EITHER a traditional 401k OR a ROTH 401k.
For the first time since I have started investing, I will max out my normal 401k this year. I'll max it out over the next 4-5 years and end up with a balance between $120-$150k (30-35% of my FI nest egg).I then plan on maxing my HSA each year as well, then funneling the rest into a taxable brokerage account. Based on the content I've read, early retiree's typically have a lower tax rate (and lower income) in retirement than they do during their career. Because of this, I've always assumed the plan would be to stick to the regular 401k and when I hit my number to begin the ROTH conversion ladder while living off my taxable brokerage account.
My company happens to offer both, and recently I spoke with a colleague who is very passionate about his ROTH 401k. He is not planning on retiring early, nor does he really have any inkling as to how soon I'll be giving FIRE a shot. Depending on the market, I'll probably be ready for greener pastures as early as 2022 or as late as 2024. I feel like I have pretty well accounted for most hurdles.
Questions:
Am I missing anything when it comes to the advantages of a ROTH 401k over my normal 401k? My position is that my regular 401k is better.
Would a ROTH 401k destroy the chance of a 'conversion ladder' method?
Even in my colleague's case
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Following.
I am doing the same as you are.
Maxing a traditional 401k ($19,000 x 2)
Maxing a traditional IRA -> backdoor roth conversion ($6,000 x 2)
Maxing a HSA ($7,000 x 1)
Remainder into taxable accounts
We are in a high tax state (CA) in a high tax bracket. Plan is to be in a much lower bracket come FIRE time.
Still not sure as to what we will do for the first 5 years of FIRE (live off of cash? or start a ladder via the IRA money?) Or start converting chunks of our 401k into ROTH? Have yet to really investigate, I assume others have already worked this out :)
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search feature always stinks on this forum. Type the below into google
search:https://forum.mrmoneymustache.com/ask-a-mustachian/ + "Traditional vs ROTH"
As for your situation, it depends. Especially considering the new tax brackets. I max my traditional accounts because my taxe burden will be less in retirement (hopefully zero!).
Mad fientist does a good summary of roth vs traditional accounts (using IRA but it is the same principal).
https://www.madfientist.com/traditional-ira-vs-roth-ira/
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See toward the bottom of the Investment Order (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153) for a way to estimate your withdrawal marginal tax rate for your traditional accounts.
Assuming it is as low as the OP suggests, and the current marginal tax saving rate for traditional contributions is significantly higher, then using traditional now is likely best.
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Thanks everyone for the great and insightful responses! I’m going to keep on keepin’ on and not worry about <colleague’s> assertions.
I’m also in CA, and may potentially relocate to a LCOL state depending on my SO’s ambitions. I do expect my tax to be low/nonexistent in retirement. My annual expenses will be between $15-$18k, and supplemented with a part-time side hustle.
As far as those first 5 years of retirement, I’ll be drawing from my taxable account (and the PT work) while I get the conversion ladder going.
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Thanks everyone for the great and insightful responses! I’m going to keep on keepin’ on and not worry about <colleague’s> assertions.
100%. Find you're own path because you are better educated in Financial Independence/Responsibility than virtually all of your coworkers. I see myself and the folks on this forum as the experts.
I remember when I was in college I had a friend that said your credit score would be harmed if you had no credit card debt utilization. She said you should always keep 30% utilization. My credit cards keep upping my limit so I could now borrow up to 75K on credit cards alone. A 30% utilization means I would carry $22,500 on my credit card month to month?! That's ridiculous! After some research I figured out myself how to raise my credit score. And mainly that's by years of borrowing and making regular payments. (Thanks student loans)
If you plan on only spending 18K in retirement and if this new tax law sticks after the "expiration" than you could just as likely pay zero taxes with a standard deduction of 24K. Right on!