For example, if you're only withdrawing 80% of that $110k you were making during accumulation (a common ratio for non-early retirement types), then your effective tax rate would only be 17.51% and traditional would come out even further ahead. After taxes they are the same in the end. The Roth has no tax savings today and no taxes paid on it in the future. I'm in the 25% bracket as well and i'd suggest that you switch your 401(k) to traditional (keep your current contribution amount) and then contribute to max out a Roth IRA, then work on maxing out your 401(k). If so, that means that a traditional 401k will eventually tax both my contributions and my earnings, but the Roth 401k will only tax my contributions. Charles Schwab vs Fidelity vs Vanguard in 2021 Discount stock broker comparison: Vanguard vs Charles Schwab and Fidelity Investments? I'll assume 10% annual growth, you retire in 15 years, and 20% tax rates. In that case, shielding some of your income now via tax shielded contributions to a traditional 401k would be beneficial. Personally I do not want to retire if it means I'm taking a hit in lifestyle (and taxes scale substantially with income). If you work in a state with income tax and retire in a state without income tax, traditional gets an advantage. So the question is when will.your tax rate be lower, and you don't know the answer. You are eligible to contribute to either a traditional 401k or a Roth 401k based on what your employer has made available. Converted a traditional IRA to the Roth IRA. However, there are important differences and it may help you to take them into account when saving for retirement. And, since I am planning to live very cheap in retirement (hopefully), my withdrawal tax rate should be low. I'm contributing less dollars but won't be taxed on any of the gains I made (estimating an average of 8-10% a year.). Roth IRA may not be slam dunk you think it is. And does the 31k you now have in taxable make up the difference? Cookies help us deliver our Services. A solo 401(k) or sole-participant 401(k) is a retirement plan designed for the self-employed who can sock away more than traditional or Roth IRA limits. Don't take my word for TOO much because I don't know a ton about it, but used a few resources online to make my decision. If you invest in a Roth and come up short of your retirement goals then there really isn’t any silver lining. Is that correct? This sub has a weird fetish with Roth retirement accounts, but in reality if you do the math most people would be better off with traditional tax-differed accounts. That said, if you boosted your traditional contributions by about 2.5%, to 12.5%, you'd have the same take home pay as the Roth, and that $2,875 could grow to $43K in and of itself over 40 years, and after taxes, would be about $36,600, creating an after-tax balance in excess of the Roth, making traditional contributions more worthwhile. Given that the earnings could represent as much as 80% of the total retirement balance, seems that the Traditional 401k ultimately ends up losing a lot more to taxes. Granted, thinking too much about the future does distract from the present. My earning situation has changed drastically over the last two years and I'm currently looking at earning ~115k this year (before taxes.) If a higher rate, then Roth 401k. After that, they will maximize 401k contribution. If a Roth account would’ve been reasonably better you’ve already done very well for yourself so it’s not as if your retirement is in jeopardy. This is a larger contribution amount but I will be taxed on it later. So I originally thought it was a slam dunk to go Roth over Traditional but now I'm not so sure. (The other is converting a traditional IRA to a Roth IRA, also known as a backdoor conversion.) His Roth IRA, like Sara and Brian's traditional IRAs, grows to $38,061, but unlike them he doesn't have to pay any tax when he withdraws the money. The reason to do that is to save the tax payment until you are in retirement when you have little or no income, so those withdrawals will be taxed at your EFFECTIVE rate in retirement. Press J to jump to the feed. If your traditional withdrawals are your only income, and you are withdrawing the same ($110k, ignoring inflation) as you were making in your earning years, then your effective tax rate on your traditional withdrawals would only be 18.81% (using this year's tax tables). No, because you can also invest the tax savings from investing in a traditional 401k. Is it better to have less money + no tax liability? Your goal should be to save enough money for retirement, assuming worst case emergencies & stock market crashes. The answer relies on your effective tax rate for your traditional withdrawals. Any money withdrawn before the age of 59.5 years of age is assessed an additional 10% penalty on top of your tax rate. You are effectively correct. See here: http://www.reddit.com/r/personalfinance/wiki/investing#wiki_roth_or_traditional.3F. When rolled to a Roth IRA, taxes need to be paid during the year of the conversion. Also New Hampshire and Tennessee but do have to pay tax on investment income. So with Traditional, you'll be paying less in taxes. First contributed directly to the Roth IRA. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. As you age and advance in your career, traditional IRAs start to make more sense. Press question mark to learn the rest of the keyboard shortcuts. Over 15 years it grows to $4177. With traditional, you pay a lot less in taxes now, put more into 401k, but you later have to pay taxes during retirement. With a Roth IRA, you pay tax on the money now, but your investment grows tax-free, and you get to spend it tax-free in retirement. I'm diversifying and putting into a superior savings method with the IRA. Scenario A (invest in Roth): 141k in Roth, Scenario B (invest in traditional, plus invest tax savings): 141k in traditional, 31k in taxable. November 4, 2014. I obviously have no idea what the future will hold, so I could be completely wrong. 401(k) funds are not the only company retirement plan assets eligible for rollover. You're contributing about $11,500, which at 7% in 40 years will be $172,206 under both options. If you're less than 20 years out, you have to look at tax rates because chances are you'll be in a lower bracket once you retire. What I was missing in my line of thinking was that the money saved by not paying taxes now can be invested and it can grow as well. By using our Services or clicking I agree, you agree to our use of cookies. Post tax is $37,312.04 with $4,145.79 going into my Roth. If you are paying a lot of taxes now and anticipate paying less at retirement, the traditional approach is better. Join our community, read the PF Wiki, and get on top of your finances! Another thing to consider is what state you're working in, and what state you plan to retire in. Traditional 401k vs Roth 401k. One argument for the traditional is you may believe you’ll have less income in retirement and that right now you are paying the highest tax rate if your life (in peak earning years). I'm in a very similar situation as you, and put all my money into Traditional 401k. The site may not work properly if you don't, If you do not update your browser, we suggest you visit, Press J to jump to the feed. All in all, Traditional seems like the best way to minimize total tax liability, as compared to Roth. I'm not sure it is with the duration you have unless you contribute what would be your tax savings to the traditional account yielding the same take home pay. Unless you are a student working part-time or for some reason expect your income to grow tremendously later in life, just stick with a traditional account. Your math sounds good except although the question is putting Roth vs traditional in a vacuum. This was the one that finally clicked for me. I don't think there is a "correct" response per se. So with the same tax rate, they work out identically. roth ira vs traditional ira which is better for you, whats best traditional ira vs roth ira familywealth, do you have the right ira for your retirement daveramsey com, can i make 401k or ira to roth ira conversions in 2012 and, rollover 401k vs roth ira gold investment This is a friendly reminder to visit our wiki on Retirement Accounts. There are several similarities and differences between Roth IRA vs Traditional IRA vs 401k. Roth vs Traditional 401(k) In a traditional 401(k), employees make pre-tax contributions. This is a nice graphic to help provide visual context. If you contributed 100k to a traditional, are not taxed, and the market grows 100x, you then have 100m before tax and say $70m after tax. By definition, this will not happen most of the time, so you should be finding yourself in retirement with more money than you really need. Trying to understand whether I should contribute to a Roth or Traditional 401k, and I'd like help clarifying my understanding of how each account is taxed. For quick trivia: The Roth accounts are named for this guy, the Delaware Senator who created the Roth IRA in 1997.. Roth 401(k)s vs. Roth IRAs. And that Roth vs traditional really just depends more on your expected tax situation in retirement vs in your accumulation phase. Then you withdraw and pay your 20% tax, leaving you with $3342. You seem to be mixing up effective tax rates with marginal tax rates (a.k.a. Here is a table of 10 years of growth in both Roth and Traditional accounts. But there are differences, including on withdrawal rules. Possibly never. ( in a traditional 401k). This is why the traditional 401(k) vs. Roth 401(k) decision is irrelevant if your income-tax rate is the the same in your working years and in retirement. After 15 years that has grown to $3342. Congratulations! New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. That said, if you boosted your traditional contributions by about 2.5%, to 12.5%, you'd have the same take home pay as the Roth, and that $2,875 could grow to $43K in and of itself over 40 years, and after taxes, would be about $36,600, creating an after-tax balance in excess of the Roth, making traditional contributions more worthwhile. You might be able to actually save more in tax deductions now than you'll pay in taxes in a lower bracket later. IRA vs 401k, Roth vs Traditional – Retirement Accounts Made Simple. Bear in mind with most Roth's, that employer contributions (including the profit sharing) are made to a traditional account, so this does offer some diversity in retirement. % tax, leaving you with $ 3342 you, it is now account, you get raise. 'S you contribute more, but the question is how much more 401k contribution save. 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