#Roth401k vs #Regular401k: Making the Right Choice for Your Salary
Are you debating between a Roth 401k and a regular 401k? You may be wondering at what salary it makes more sense to choose one over the other. 🤔 In this article, we’ll explore the factors to consider when deciding whether a Roth 401k or a regular 401k is the best option for your salary level.
What is a Roth 401k?
Before we jump into the salary considerations, let’s quickly review what a Roth 401k is. A Roth 401k is a retirement savings account that allows you to contribute after-tax dollars. This means that your contributions are not tax-deductible, but your withdrawals in retirement are tax-free.
What is a Regular 401k?
On the other hand, a regular 401k is a traditional retirement savings account where you contribute pre-tax dollars. This means that your contributions are tax-deductible, but you will pay taxes on your withdrawals in retirement.
Salary Level Comparison
Now, let’s delve into the salary level at which it makes more sense to choose a Roth 401k over a regular 401k.
1. Lower Salary Range
– If you are in a lower salary range, it may make sense to choose a Roth 401k. Since you are in a lower tax bracket, paying taxes on your contributions now may be more advantageous. Additionally, if you expect your income to increase over time, having tax-free withdrawals in retirement can be beneficial.
2. Higher Salary Range
– Conversely, if you are in a higher salary range, a regular 401k may be the better option. Your contributions are tax-deductible, which can result in immediate tax savings, especially if you are in a high tax bracket. Additionally, if you anticipate being in a lower tax bracket in retirement, you may benefit from deferring taxes until then.
Maxing Out Your 401k
You mentioned that you have the ability to max out your 401k. When considering the salary level at which a Roth 401k makes more sense, it’s important to take into account the maximum contribution limits for both types of 401k accounts.
– For 2021, the maximum contribution limit for a 401k is $19,500, with an additional catch-up contribution of $6,500 for those age 50 and over. If you are able to max out your 401k, the tax advantages of a Roth 401k become even more significant.
Future Tax Rates
You also brought up the potential impact of future tax rates on your decision. While it’s difficult to predict future tax rates, it’s important to consider how tax laws may change over time. If you anticipate that tax rates will increase in the future, opting for a Roth 401k now could protect you from higher taxes on your retirement withdrawals.
Consider Consultation with a Financial Advisor
Ultimately, the decision between a Roth 401k and a regular 401k depends on various factors specific to your financial situation. Consider seeking guidance from a financial advisor to help you assess your current salary level, future income projections, and potential tax implications.
Conclusion
In conclusion, the salary level at which a Roth 401k makes more sense than a regular 401k depends on your individual circumstances. Factors such as your current tax bracket, future income expectations, ability to max out your 401k, and anticipated future tax rates all play a role in this decision. By considering these factors and seeking advice from a financial professional, you can make an informed choice that aligns with your long-term financial goals.
Making the right choice between a Roth 401k and a regular 401k can have a significant impact on your retirement savings. It’s important to weigh the tax implications and future outlook for your income when deciding which option is best for your salary level. Keep in mind that the information provided here serves as a guide, and consulting with a financial advisor is the best way to make a well-informed decision tailored to your specific financial situation.
This analysis can get complicated, but if you’re in the 10% or 12% tax brackets it’s nearly a no-brainer to do Roth; if 32% bracket or higher then almost certainly do traditional. Anywhere in between it gets too complicated to just use a rule of thumb. There are also plenty of exceptions to the rules of thumb I already gave.
It rarely makes sense unless you have a ton of pretax assets that will push you into high tax bracket during retirement, say from an inheritance.
If you are low income when working you’ll most likely be low income when you retire. So your tax rate in retirement will likely be as low if not lower than when working. Therefore traditional is most likely going to wind up being better.
The usual advice is traditional but personally I split my contributions between traditional and Roth in an effort to diversify the tax status of my retirement $. 3/4 trad 1/4 Roth or so.
I always wondered why so many people go gangbusters over Roth. My income will go down in retirement compared to when I was working. The untaxed gains part is interesting about the Roth but the last bit of contributions may not have significant gains, especially if it’s a risk adjusted retirement date fund.
Not to mention you are gambling with political climate. Maybe tax law will change in decades? Who is to say there wouldn’t be a change to your thesis negating any perceived benefit.
For these reasons I keep some Roth and some traditional. Weighted towards traditional.
I’ve always done traditional because I have access to after-tax in my 401k. This year, for example, will be $23,000 pre-tax + say 12k employer match puts me at 35k/69k limit. Then 34k can go into after-tax which roll into Roth IRA every check.
Current tax break of traditional + Roth from after-tax
I err on the side of Roth because you’ll never have to deal with RMDs.
If you have a tithing obligation it makes some sense to have some traditional because you can make a qualified charitable distribution for your tithes.
I’m targeting currently a 50/50 split. I expect my household to contribute significantly more to Roth over the long run.
Ideal answer is it is a complicated math thing with a mixture of the 2 funds. In retirement for example you will stop pulling from your traditional when you get close to the top tax bracket of your income and supplement the rest from Roth. Or pull from Roth on say a year you would be risking really high taxes that year.
The amount you put in again depends on what tax bracket you are in now vs your future one when you retire and do a mixture as like above Roth pulling from is math problem.
In the end no hard and fast rule. It more about assets allocation. Maybe put a few percentage to it and adjust to more and more traditional as your income goes up. It is messy.
It’s worth noting that most of the back of the envelope calculations involving current vs future income assume that your 401(k)/IRA will be your only source of income in retirement. If you expect to have a pension, business, real estate, or other income that will push the needle towards Roth.
You always want some traditional because the first 12k or so is 0% tax.
Other than that, Roth until you hit the higher tax brackets.
My opinion is more of a psychological one, but I would rather do ROTH always. Reason is that you are getting all of the growth tax free and once you actually reach retirement age you can look at the amount you want to withdraw and pull that amount without having to worry about the tax implications.
Plus if you think about the National Debt there is a very high likelihood that tax rates will be much higher in the future, so you are future proofing your retirement.
Depends on your age and salary. Younger and higher salary is better for a Roth. If you’re behind on your retirement and a higher earner, traditional often makes more sense. Another factor is your salary and your ability to max out. If you’re a high earner but not maxing out, you can contribute more into a traditional and have it feel the same to your take home pay
I am in the 32% range but I do Roth because it offers some tax protection during retirement
Depends. If you can, contribute to traditional 401k until your drop to a lower tax bracket, then adding Roth make sense.
It also makes sense to split the contribution simply because you do not know tax rates in the future in order to hedge.
People are going to try and give you numbers but everyone’s situation is different and there are always going to be unknowns. Just a little example:
What are tax rates going to be when I retire in 8 years?
Can I use my Roth 401k to make my income look lower so that I can sign up for ACA at a lower rate? How much will this save me?
When I get old enough for RMA’s, how will this impact my total tax burden?
Since there is no right/wrong answer, my goal is to have about 50% of my retirement savings in Roth/Post tax money. This will allow me to play tax games during retirement.
I do a mix of both. Once I hit my max company match for the year (which tends to happen around October), I switch my contributions to Roth.
For most people, both are “good” options for retirement savings. Which ultimately ends up being “best” in terms of minimizing overall tax paid on those dollars (either when earned/contributed or with withdrawn) depends on future factors that can’t be reliably predicted. The longer you are from retirement, the harder those predictions are going to be. So you should consider each tax year in isolation to make your choice for that year. Once contributed, you can leave that money’s tax treatment as-is, even if your future situation changes where you put your retirement savings.
In extremely broad terms, going Roth is probably more likely to be more beneficial when your top tax bracket at time of contribution is 12% or below. The tax cost of that contribution is relatively low, and you no longer have to worry about future tax changes impacting your retirement. Traditional is more likely to end up better when your top tax bracket is in the high 20s or above, since today’s savings will probably outweigh the tax cost of your future withdrawals.
In between (which covers a lot of people) things are fuzzier. In a best case scenario, the tax difference is small between the two, so you end up in a pretty similar situation either way.
Other factors can cause you to go one way or the other. While you can’t withdraw just contributions from a Roth 401k, you can (once leaving that job) roll its balance into a Roth IRA. At that point, your past 401k contributions become as accessible as regular Roth IRA contributions, with no mixing of taxable earnings or owing penalty. Having that “tax/penalty free” balance available in a Roth IRA can be a part of some strategies for early (before turning 60) retirement.
32% bracket here. I do 100% traditional. It’s tough to beat saving 32% in taxes right off the bat.
It’s your taxable income, not necessarily salary. You could be a higher earner with a spouse who doesn’t work or stays home with a baby and have Roth still make sense.
For me personally, 12% or lower should be entirely Roth. At 22% I’d personally still do some Roth, maybe hedge and do both. 24% and up, I’d do all traditional.
But there are state tax implications and other variables to consider as well. Age, personal plans for your retirement, etc.
Also consider being married or a head of household. Once that is no longer the case taxes rise.
I do 5% traditional (+ 3% company match) and 5% Roth; my wife does 10% Roth (+ 6% company contribution to traditional). In total this year we’ll get to $20k into Roth and $23k into traditional.
For me, I like the combo approach for a few reasons:
1. I don’t know what the future will hold. Will our income rise so substantially that our effective tax rate in retirement exceeds 24% (our current marginal rate)? Will tax law increase the rates by bracket or reduce the income thresholds for brackets such that our effective rate exceeds 24%? Maybe!
2. Roth provides a LOT of flexibility. Let’s say we retire at 60 and all laws are the same. For 5 years, we’ll need health insurance coverage. For this exercise, assume all of today’s laws still apply exactly as-is.
1. Let’s say, for the sake of argument, that we pull out about 60% of our current $300k income, and for the sake of simplicity, all $180k of it traditional with no Social Security complexity to add to the mix. In our area, we would get a tax credit of $242/mo and probably pay $1,275/mo for ACA insurance.
2. If, instead, we pull $30k from traditional and the rest from Roth, there are two benefits for us:
1. Our ACA benefit jumps to $1,515 and our monthly premium effectively nothing, meaning an extra $1,273/mo or $15,276.
2. With the extra $15k in our pockets (less the deductibility of that $15k), we would only need to take out $128,500 from our Roth IRA. This means that $158,500 of retirement account distributions split between Roth and Traditional would have the same spending power as $180,000 strictly from Traditional, allowing $21.5k to continue growing with the market.
3. The ACA benefit would only matter for a few years, but it’s a pretty big deal.
1. Assuming 2.5% average inflation for the next 25 years (I plan to retire in 25 years), the $128.5k would actually be $238.4k.
2. Assuming 8% average returns on my Roth accounts, that means $34.8k in today’s account value would be needed to pull out $238.4k at retirement. I’d have paid $8.4k in taxes on that money (24%). This means that I am paying $8.4k today to save whatever the future value of $15.3k today is.
Basically, the primary value driver for Roth for an upper-middle income household is future flexibility in what their reportable income will be. Paying extra in taxes today will help you to fill the gap of earlier retirement.
Personally, I max my Roth IRA every year. All of the investing I do after that is traditional 401k.
I’m sure I could get a spreadsheet and try to predict the exact way I could save 1-3% more… but I really don’t care that much.
For reference, I’m under 40 and I make less than $80k a year in a LCOL state.
It depends. I do 100% traditional because I’m also saving a good amount of money per year in an individual investment account. Having some tax diversity is good like others have mentioned but the other way to do that is to max your traditional 401k and put extra funds in an individual investment account.
From a purely tax perspective, if you can afford to max out the 401k, you probably want 100% Traditional. Take the tax break now while your working. It’s extremely unlikely that you’d owe more taxes in retirement than you would right now. The main reason is because of the way the progressive tax brackets work. Every dollar you contribute to a Traditional 401k comes off the TOP of your taxes at your highest marginal tax rate. Every dollar you withdraw in retirement fills up all tax the brackets starting from the BOTTOM including the standard deduction, which can be thought of like a 0% bracket.
I think this blog post explains some of it better:
[The Great Roth Controversy](https://www.gocurrycracker.com/roth-sucks/)
I am assuming that I’ll coast rather than aim for retiring early. So even though I’m contributing in the 22% and 24% income tax bracket right now, I’m contributing 100% Roth. And once I hit CoastFI, or close to it, I’ll drop my contributions back to just get the full match with a traditional contribution and continue working. Im assuming that my income will go up and then will be a better time to contribute to traditional, I’m assuming that I’ll be receiving social security income which will be taxable, I’m giving myself more flexibility later in life to not worry or care about taxes and withdrawal strategies, and finally freeing up more money to withdraw before age 59.5 should I decide to retire early, as the contributions are able to be withdrawn at any time.
When you ask this, Everyone talks about a dozen factors that will vary person to person and talks about what tax rates and your income are going to be in the future. For me, I never know half the terms they’re talking about, and I don’t presume to know what the economy or tax laws or anything else is going to look like in 30 years, so I make sure I’m getting the full employer match through traditional, then after that go about 2/3 Roth, 1/3 traditional. To my eye, that’ll end up with a good balance in both, and I can figure the rest out when I’m actually close to retiring. Better that than basing my decisions now off of wild guesses about what tax laws are going to be passed in 2050-2055.
Don’t know if this has been mentioned, but if you plan to retire early, it’s probably better to do traditional and take the deduction while you’re working, and then do roth conversions after you retire. In 2024, if you had zero income, and MFJ, you could do up to 123,499 in roth conversions and still be in the 12% bracket. If you retired when you’re 50, you could theoretically do conversions for 20 years until you start SS at 70.
I personally do roth up to the top of the 12% bracket and then pretax the rest. Hope to retire around 55.
One thing that is often not considered is leaving money as an inheritance. Iff I understand it correctly, Inherited traditional 401k must drain down the within 10 years paying taxes on the proceeds. Inherited roth 401ks do not require such draw downs and the proceeds are tax free.