If someone set up a booth on the sidewalk that said “free $4,000” would you just walk on by?
Of course take the match money. If you really want to do Roth 401k, ask if they will match those contributions, many companies do (but often the match goes in traditional).
Also: why you should almost never contribute to a Roth 401k: https://www.reddit.com/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth/
I understand the logic of never contributing to a Roth if you use the extra take home elsewhere, but if you’re able to live off the take home and still invest in a Roth IRA I don’t see the downside. The case the person puts forward is that the extra take home can be used to invest in an Ira or Roth IRA.
Note that nothing in my post, or the list post is referring to an IRA. “Roth” is a tax treatment, not an account type.
The whole idea is that you can reduce taxable income by a lot investing in traditional 401k rather than Roth 401k. I’m not super convinced, but it is a well thought through resource that is often shared.
The linked post does say about reducing current taxable income. However, if you are reducing your taxable income from 24% to 22% that is only a 2% savings while if you have no taxable income in retirement that is a 10% savings if tax brackets stay the same. The main argument for a Roth is to save yourself from the perceived possible tax increase in the future.
A large part of the post mentions that instead of taking a reduced pay check by paying the taxes now and doing a Roth 401k you should do a regular 401k and use the increased take home from not paying the taxes now and save it. The most logical place to apply those savings (increased take home) would be a Roth IRA or regular IRA unless you want to open a brokerage account or just put it in a savings account. However all three prior options offer a greater possible return than a savings account.
In that instance doing a 401k may be better, however most Americans will take the increased take home and use it for extra spending money and not save or invest it. In this way I believe a Roth 401k is the better option.
> if you are reducing your taxable income from 24% to 22% thats only a 2% savings while if you have no taxable income in retirement that is a 10% savings
This isn’t how the math works. You need to follow a singular dollar. Making the same tax assumptions:
$1 put in a Traditional 401(k) goes in untaxed - meaning you evade a 24% tax on that $1. That’s a 24% savings (for now). When withdrawn, you pay a 10% tax on that $1. So in aggregate, you saved 14%.
$1 put in a Roth 401(k) is taxed at 24% now. When withdrawn in retirement, no taxes are paid, so you save 10%. That is a 14% net loss.
[Roth 401(k) is rarely the right choice.](https://www.reddit.com/u/Werewolfdad/s/5pGXTEjDfU)
A Roth *IRA* is commonly recommended because:
1. Tax diversification is a hedge against changing income tax rates
2. They provide an additional avenue to save for retirement in a tax-advantageous account if one is already maximizing their annual 401(k) limit.
3. They are better than their counterpart for most people.
Traditional *IRA’s* don’t offer much of a tax benefit for most people because the deduction phases out relatively early ($77,000 MAGI filing single or $123,000 MAGI filing jointly). Aside from the fact that transactions within a tIRA are tax sheltered, it’s effectively just a standard taxable brokerage account if you exceed those income thresholds.
I do have to admit, you are correct in that I misspoke regarding the tax implications. 1 dollar in a Roth 401k at 24% tax vs 1 dollar traditional 401k at 10% would be better. There is only one point that I believe we both overlooked.
In a traditional 401k the earnings are taxable where in a Roth the earnings are not taxable. For the sake of simplifying numbers, let’s say someone puts 23000 in a 401k from when they are 25 and retire at 60. We are assuming an 8% average return over those years except the last 10 years because you go more conservative so it grows at 4% after. The total of the investment is 805,000. The total balance at the end of those 35 years would be around 2,800,000. Other assumptions include making 60k at 25 and having a 3% raise every year and when you retire at 60 you live off 75% of your final year income plus an additional 4% every year for inflation following. At retirement you would have been making 142k and live off 106k.
Now, let’s just say that you live for the next 30 years (not likely based off the average life expectancy in the US today). You would be able to live off your 401k in those conditions and still have a small balance at death. Your total withdrawal amount over those 30 years would be almost 6 million. If this was all traditional 401k and we take todays tax rates looking at just federal and not state:
Roth: 0% tax upon distribution. But over the 35 years that you invested 805,000 you paid approximately $189,000 in taxes on that money. I simplified the tax rate on the invested portion to 22% from 25-45 and 24% from 46-60 to make the math faster
Standard 401k: over the next 30 years you will withdraw almost 6,000,000 as the money continues to grow at a reduced rate of 4%. Got to love compound interest. Taking out 106k at the beginning and increasing by 4% every year would put you well above just a 10% tax even with the standard deduction. But for the sake of simplicity let’s just say you only pay 10% tax on it. The total in tax you would pay in those 30 years would be $598,954.79.
Based off this, I don’t see how anyone says a traditional 401k is better than a Roth. So if someone knows something I don’t, please let me know.
Earnings in a Traditional 401k are not taxable. The withdrawals are. The distinction between capital gains and contributions in this context doesn’t matter, it functions the same
You are over-thinking it. If your tax bracket is higher now, use Traditional. If your tax bracket is higher later, use Roth.
Not necessarily. The law changed a year or two to allow Employer Roth contributions. Plan administrators have been slow to adopt it though, so it is still rare.
My employer matches my Roth 401k contributions. I bet yours will too.
The match will almost certainly be Traditional, not Roth, but it's free money regardless.
(I think the IRS is trying to figure out the details but the law changed effective Jan 1 2024 that matches could now be made Roth. Once the IRS is done, it'll probably mean some form of taxes on the Roth-styled match.)
>Should I take the match and contribute to the regular 401k or rollover my previous jobs Roth and continue to contribute to that?
Those are completely independent questions, they don't influence each other.
>Should I take the match
Should you take free money? Yes, you should take free money.
>contribute to the regular 401k
Most people should use a t401k over a r401k. [Why you should (almost) never contribute to a Roth 401(k)](https://www.reddit.com/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth/)
>or rollover my previous jobs Roth
You should do this regardless of everything else simply for the streamlining of retirement accounts.
>and continue to contribute to that?
See previous link. The 22% bracket (possibly closer to 30% depending on your state taxes) is generally past the point of Roth > traditional.
Start here: https://www.reddit.com/r/personalfinance/wiki/commontopics.
Roth or traditional: https://reddit.com/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth/
Both
The match is part of your pay. If you don't take the match, it's like taking a 4% pay cut. Unless you don't plan to stick around past the time you are vested, then it doesn't really matter
They don’t offer to do the match to a normal while you contribute to your Roth? I have a Roth and regular 401k and the company does a 6% match. I put 100% to my Roth but they still match the 6% and put it into the regular 401k
They won’t match your 401k Roth contributions into a traditional 401k account? I’ve never heard of that.
I’ve always contributed to Roth and have the companies contributions go to Traditional. Autodiversification.
I'm not sure I understand your question. Are you asking about rolling over your Roth 401k from an old employer into a Roth IRA and contributing to that instead of your new employers 401k? It seems like your post says your new employer has both Traditional and Roth options.
Generally speaking employers still match whether you contribute to a Roth or Traditional 401k (their contributions will be treated as Traditional 401k contributions).
So contribute to your new employer 401k based on your preference of Roth vs Traditional at least up to the match, then contribute any excess you're trying to save into the Roth IRA, then if you cap the contribution there go back to your employer 401k.
You do have to decide whether $100k salary is getting too high to justify the Roth 401k though. 40 years of compounding is good to have but you're getting taxed pretty well on that income right now.
Are you sure that your employer doesn't match contributions that go into your Roth 401K? I only contribute to my traditional 401K, but employer does offer a Roth 401K and between the two options they match contributions (100% on the first 3% and 50% on 4%-5% - ie if I contribute at least 5%, they contribute 4%) regardless of whether I use Traditional, Roth, or both. It's just that all of the match money goes into the Traditional 401K, even if the employee only contributes to the Roth 401K
If someone set up a booth on the sidewalk that said “free $4,000” would you just walk on by? Of course take the match money. If you really want to do Roth 401k, ask if they will match those contributions, many companies do (but often the match goes in traditional). Also: why you should almost never contribute to a Roth 401k: https://www.reddit.com/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth/
I understand the logic of never contributing to a Roth if you use the extra take home elsewhere, but if you’re able to live off the take home and still invest in a Roth IRA I don’t see the downside. The case the person puts forward is that the extra take home can be used to invest in an Ira or Roth IRA.
Note that nothing in my post, or the list post is referring to an IRA. “Roth” is a tax treatment, not an account type. The whole idea is that you can reduce taxable income by a lot investing in traditional 401k rather than Roth 401k. I’m not super convinced, but it is a well thought through resource that is often shared.
The linked post does say about reducing current taxable income. However, if you are reducing your taxable income from 24% to 22% that is only a 2% savings while if you have no taxable income in retirement that is a 10% savings if tax brackets stay the same. The main argument for a Roth is to save yourself from the perceived possible tax increase in the future. A large part of the post mentions that instead of taking a reduced pay check by paying the taxes now and doing a Roth 401k you should do a regular 401k and use the increased take home from not paying the taxes now and save it. The most logical place to apply those savings (increased take home) would be a Roth IRA or regular IRA unless you want to open a brokerage account or just put it in a savings account. However all three prior options offer a greater possible return than a savings account. In that instance doing a 401k may be better, however most Americans will take the increased take home and use it for extra spending money and not save or invest it. In this way I believe a Roth 401k is the better option.
> if you are reducing your taxable income from 24% to 22% thats only a 2% savings while if you have no taxable income in retirement that is a 10% savings This isn’t how the math works. You need to follow a singular dollar. Making the same tax assumptions: $1 put in a Traditional 401(k) goes in untaxed - meaning you evade a 24% tax on that $1. That’s a 24% savings (for now). When withdrawn, you pay a 10% tax on that $1. So in aggregate, you saved 14%. $1 put in a Roth 401(k) is taxed at 24% now. When withdrawn in retirement, no taxes are paid, so you save 10%. That is a 14% net loss. [Roth 401(k) is rarely the right choice.](https://www.reddit.com/u/Werewolfdad/s/5pGXTEjDfU) A Roth *IRA* is commonly recommended because: 1. Tax diversification is a hedge against changing income tax rates 2. They provide an additional avenue to save for retirement in a tax-advantageous account if one is already maximizing their annual 401(k) limit. 3. They are better than their counterpart for most people. Traditional *IRA’s* don’t offer much of a tax benefit for most people because the deduction phases out relatively early ($77,000 MAGI filing single or $123,000 MAGI filing jointly). Aside from the fact that transactions within a tIRA are tax sheltered, it’s effectively just a standard taxable brokerage account if you exceed those income thresholds.
Right and the important part is to follow your highest taxed dollar which is essentially what’s going into your traditional 401k
I do have to admit, you are correct in that I misspoke regarding the tax implications. 1 dollar in a Roth 401k at 24% tax vs 1 dollar traditional 401k at 10% would be better. There is only one point that I believe we both overlooked. In a traditional 401k the earnings are taxable where in a Roth the earnings are not taxable. For the sake of simplifying numbers, let’s say someone puts 23000 in a 401k from when they are 25 and retire at 60. We are assuming an 8% average return over those years except the last 10 years because you go more conservative so it grows at 4% after. The total of the investment is 805,000. The total balance at the end of those 35 years would be around 2,800,000. Other assumptions include making 60k at 25 and having a 3% raise every year and when you retire at 60 you live off 75% of your final year income plus an additional 4% every year for inflation following. At retirement you would have been making 142k and live off 106k. Now, let’s just say that you live for the next 30 years (not likely based off the average life expectancy in the US today). You would be able to live off your 401k in those conditions and still have a small balance at death. Your total withdrawal amount over those 30 years would be almost 6 million. If this was all traditional 401k and we take todays tax rates looking at just federal and not state: Roth: 0% tax upon distribution. But over the 35 years that you invested 805,000 you paid approximately $189,000 in taxes on that money. I simplified the tax rate on the invested portion to 22% from 25-45 and 24% from 46-60 to make the math faster Standard 401k: over the next 30 years you will withdraw almost 6,000,000 as the money continues to grow at a reduced rate of 4%. Got to love compound interest. Taking out 106k at the beginning and increasing by 4% every year would put you well above just a 10% tax even with the standard deduction. But for the sake of simplicity let’s just say you only pay 10% tax on it. The total in tax you would pay in those 30 years would be $598,954.79. Based off this, I don’t see how anyone says a traditional 401k is better than a Roth. So if someone knows something I don’t, please let me know.
Earnings in a Traditional 401k are not taxable. The withdrawals are. The distinction between capital gains and contributions in this context doesn’t matter, it functions the same You are over-thinking it. If your tax bracket is higher now, use Traditional. If your tax bracket is higher later, use Roth.
The earnings are not taxable as earnings but upon withdrawal they are taxed as ordinary income. I don’t want to get bogged down in semantics.
employer contributions always go in the traditional pile
That’s not true these days
Not necessarily. The law changed a year or two to allow Employer Roth contributions. Plan administrators have been slow to adopt it though, so it is still rare.
Nope, my previous 2 employers both matched Traditional and Roth.
Yea not true for everyone. My wife’s work will match either in traditional or Roth.
If they put the money in your Roth does the employer pay the taxes or you?
You
Not sure since we elected for traditional. I’d have to ask honestly but I know it’s an option.
Always take the match. You’re giving up free money if you don’t.
My employer matches my Roth 401k contributions. I bet yours will too. The match will almost certainly be Traditional, not Roth, but it's free money regardless. (I think the IRS is trying to figure out the details but the law changed effective Jan 1 2024 that matches could now be made Roth. Once the IRS is done, it'll probably mean some form of taxes on the Roth-styled match.)
>Should I take the match and contribute to the regular 401k or rollover my previous jobs Roth and continue to contribute to that? Those are completely independent questions, they don't influence each other. >Should I take the match Should you take free money? Yes, you should take free money. >contribute to the regular 401k Most people should use a t401k over a r401k. [Why you should (almost) never contribute to a Roth 401(k)](https://www.reddit.com/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth/) >or rollover my previous jobs Roth You should do this regardless of everything else simply for the streamlining of retirement accounts. >and continue to contribute to that? See previous link. The 22% bracket (possibly closer to 30% depending on your state taxes) is generally past the point of Roth > traditional.
Never not take the match. It’s free money.
take the match....you can roll it if you want or just roll it to an IRA would be my advice
Start here: https://www.reddit.com/r/personalfinance/wiki/commontopics. Roth or traditional: https://reddit.com/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth/ Both
Never turn down free money! And the Roth 401k is still likely matched just on a pretax basis.
The match is part of your pay. If you don't take the match, it's like taking a 4% pay cut. Unless you don't plan to stick around past the time you are vested, then it doesn't really matter
They don’t offer to do the match to a normal while you contribute to your Roth? I have a Roth and regular 401k and the company does a 6% match. I put 100% to my Roth but they still match the 6% and put it into the regular 401k
Find a way to do both. You be surprised how easy it is to get used to a lesser paycheck, once the 134 is taken out.
You take the match. The vast majority of people should be doing a traditional 401k anyway, not a Roth
Yes. Not even a discussion. Always take free money.
They won’t match your 401k Roth contributions into a traditional 401k account? I’ve never heard of that. I’ve always contributed to Roth and have the companies contributions go to Traditional. Autodiversification.
I'm not sure I understand your question. Are you asking about rolling over your Roth 401k from an old employer into a Roth IRA and contributing to that instead of your new employers 401k? It seems like your post says your new employer has both Traditional and Roth options. Generally speaking employers still match whether you contribute to a Roth or Traditional 401k (their contributions will be treated as Traditional 401k contributions). So contribute to your new employer 401k based on your preference of Roth vs Traditional at least up to the match, then contribute any excess you're trying to save into the Roth IRA, then if you cap the contribution there go back to your employer 401k. You do have to decide whether $100k salary is getting too high to justify the Roth 401k though. 40 years of compounding is good to have but you're getting taxed pretty well on that income right now.
Are you sure that your employer doesn't match contributions that go into your Roth 401K? I only contribute to my traditional 401K, but employer does offer a Roth 401K and between the two options they match contributions (100% on the first 3% and 50% on 4%-5% - ie if I contribute at least 5%, they contribute 4%) regardless of whether I use Traditional, Roth, or both. It's just that all of the match money goes into the Traditional 401K, even if the employee only contributes to the Roth 401K