Author Topic: Roth 401k or Traditional 401k?  (Read 4456 times)

Keekster

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Roth 401k or Traditional 401k?
« on: October 06, 2014, 03:05:23 PM »
Hello All,

First time on the forums here. So I am a 23 yr old male working in public accounting making 50k a year. I am currently contributing the max $17,500 to a Roth 401k via my employer and an additional $5,550 to a Roth IRA.

Should I be making all my contributions to Roth accounts?

I thought that I should contribute to a traditional 401k to get my taxable income from the 25% bracket down to the 15% bracket, and then contribute to a Roth from there. But my mom, who is a CPA as well, seems to think I should contribute the full $23,000 to a Roth. Is she right? I talked to her about the "backdoor" Roth idea and she didn't seem to think it was feasible. She also said you don't know what tax rates will be in 30 or 40 years so you could end up paying more tax after you retire with a traditional 401k than a Roth.

Opinions/advice?

seattlecyclone

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Re: Roth 401k or Traditional 401k?
« Reply #1 on: October 06, 2014, 03:12:02 PM »
We generally recommend tax-deferred contributions when possible. The reason is that as Mustachians with a high savings rate during our working years, we expect to need a much smaller taxable income during retirement than what we earn at our jobs. Tax rates change all the time, but they would have to increase by a whole heck of a lot in the lower brackets before a Roth becomes preferable for someone with a high savings rate.

dandarc

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Re: Roth 401k or Traditional 401k?
« Reply #2 on: October 06, 2014, 03:23:44 PM »
Generally, the higher your marginal tax-rate is today (including state income tax), the more you should lean traditional.  Some draw the line between the 15% and 25% brackets.  I think there's a case to be made for traditional over Roth, even down to the 10% bracket, depending on your spending level and expected retirement spending.  In the 0% bracket (AGI is less than or equal to your deductions), then Roth is the obvious way to go - anything above that and you've got a decision to make.

http://jlcollinsnh.com/

has a good stock series, and covers a lot of concerns of this nature.

dandarc

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Re: Roth 401k or Traditional 401k?
« Reply #3 on: October 06, 2014, 03:36:57 PM »
A couple of other points - at 50K, assuming you don't have a lot of other income you're not telling us about, you don't have to do a backdoor Roth IRA - you're way under the income limit (114K for singles).  You're also under the income limit to make deductible traditional IRA contributions (60K), so you've got all the options available without having to do any kinds of backflips to get into them.

And a side-note - CPA does not necessarily mean "Expert at Personal Taxes / Finances".  Some CPAs work in the individual / small business arenas, but I'd venture a guess that most are working in government / corporate areas.  I wound up being a computer programmer, however at the school I got my Accounting BA at, they really focused on corporate accounting and taxes - there were around 3 weeks of one course focused on personal income taxes, and that was about it for personal tax / finance / accounting in the whole 4 years.  So even with an accounting degree, there is a lot to learn in this area.

Cheddar Stacker

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Re: Roth 401k or Traditional 401k?
« Reply #4 on: October 06, 2014, 03:49:07 PM »
Go traditional, at least with some of the deferrals.

50K -
10K standard deduction/exemption -
10K Traditional 401K =
30K Taxable

This would put you well into the 15% bracket. Then do Roth for the rest. I would use your 401K as the vehicle for the traditional because it lowers your MAGI. If you go all Roth in the 401K then try to do a T.IRA, your MAGI might limit you, particularly if your income goes up, which it will soon and often.

Another CPA here and dandarc is correct. And no, we're not trying to call out your mom. I would've said the same thing as her a few years ago but I've seen the light. We do things a bit differently than 99% of the population here in the early retirement community.

Welcome to the forum.

MDM

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Re: Roth 401k or Traditional 401k?
« Reply #5 on: October 06, 2014, 03:52:29 PM »
Some reading, arranged roughly in order of increasing complexity, on this topic:
http://www.madfientist.com/traditional-ira-vs-roth-ira/
http://www.bogleheads.org/wiki/Traditional_versus_Roth
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=141909
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=140758

Nothing that contradicts what other posts here have summarized.  Good luck!

Keekster

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Re: Roth 401k or Traditional 401k?
« Reply #6 on: October 06, 2014, 03:56:36 PM »
Thanks, guys. I appreciate the information.

Dodge

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Re: Roth 401k or Traditional 401k?
« Reply #7 on: October 06, 2014, 04:17:06 PM »
I agree with everything already stated. Traditional 401k and IRA all the way. Especially for Mustachacians, where you will likely come out way ahead.

Homey The Clown

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Re: Roth 401k or Traditional 401k?
« Reply #8 on: October 06, 2014, 09:21:16 PM »
I've got another question regarding traditional vs Roth. In looking at mandatory withdrawals, it seems that having a big stash at retirement could force large enough mandatory withdrawals that you would be in a higher tax bracket. What say ye?

Cheddar Stacker

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Re: Roth 401k or Traditional 401k?
« Reply #9 on: October 06, 2014, 09:30:32 PM »
I've got another question regarding traditional vs Roth. In looking at mandatory withdrawals, it seems that having a big stash at retirement could force large enough mandatory withdrawals that you would be in a higher tax bracket. What say ye?

Put as much as possible into traditional. Save everything you can. Reduce spending to get expenses low. Retire very early. Begin converting from Traditional to Roth very slowly keeping the taxable income low. If you do it correctly, and early enough, you should be able to get all traditional money out and into Roth IRA's before the RMD's kick in at 70.5 years of age.

I plan to retire at 45 and convert about $900K over 25 years.

dandarc

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Re: Roth 401k or Traditional 401k?
« Reply #10 on: October 07, 2014, 08:37:09 AM »
Also OP - props on having a 46% savings rate at 23 (or higher - assuming the 50K is after tax income, it works out to 46% - 23K / 50K).  Keep those living expenses low even as you get raises, and you're looking at MMM's time-frame for FI - early 30's and you can be done with the grind if you want to.

Keekster

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Re: Roth 401k or Traditional 401k?
« Reply #11 on: October 07, 2014, 09:59:31 AM »
@ Dandarc: Thanks man! Just got a raise after 6 mo. of employment so my salary is now $53,025 before taxes. It definitely makes it easier to save more of your money when your parents are still paying for some expenses, like keeping you on the family cell phone plan :)

Keekster

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Re: Roth 401k or Traditional 401k?
« Reply #12 on: October 07, 2014, 10:03:15 AM »
All my co-workers my age like to tease me and say it is crazy to sock away that much money for retirement. They are in the mindset of "the 20's are the best time of my life and I need to live it up" and "life won't be fun anymore once I'm old so money spent now will give me more enjoyment than money spent in 25 years".

LordSquidworth

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Re: Roth 401k or Traditional 401k?
« Reply #13 on: October 07, 2014, 10:44:50 AM »
Hello All,

First time on the forums here. So I am a 23 yr old male working in public accounting making 50k a year. I am currently contributing the max $17,500 to a Roth 401k via my employer and an additional $5,550 to a Roth IRA.

Should I be making all my contributions to Roth accounts?

I thought that I should contribute to a traditional 401k to get my taxable income from the 25% bracket down to the 15% bracket, and then contribute to a Roth from there. But my mom, who is a CPA as well, seems to think I should contribute the full $23,000 to a Roth. Is she right? I talked to her about the "backdoor" Roth idea and she didn't seem to think it was feasible. She also said you don't know what tax rates will be in 30 or 40 years so you could end up paying more tax after you retire with a traditional 401k than a Roth.

Opinions/advice?

I'd second the split idea.

At 23 (I'm two years older) my honest feelings are that by the time you/we retire tax rates will be higher. They're the lowest they've been in decades and I don't see them going lower with the many things coming up. I wouldn't be surprised if 40 years from now we're much closer to European taxes (at least the Brits anyways).

Using your standard deduction + enough in the 401k to get you to the 15% bracket, then going Roth would probably make the most sense. Depending on how much income you're looking for in retirement would be the real question asked to decide. IE: I plan on having a high income, so personally prefer a Roth like vehicle. If you're shooting for a lower income, you'll be able to roll over regular 401k type money to the Roth tax efficiently later in life.

All my co-workers my age like to tease me and say it is crazy to sock away that much money for retirement. They are in the mindset of "the 20's are the best time of my life and I need to live it up" and "life won't be fun anymore once I'm old so money spent now will give me more enjoyment than money spent in 25 years".

They don't understand compounding then.

Sock it away in your twenties. If you want to live it up a little, your thirties will probably be better (you'll theoretically be more stable in life). If two people save the same amount, but one does it mostly in their twenties, that one will have more later on. Statistically.
« Last Edit: October 07, 2014, 10:46:41 AM by LordSquidworth »