#Roth401k #Traditional401k #RetirementPlanning
Understanding the Difference: Roth 401k vs. Traditional 401k
When starting your first job and deciding on retirement contributions, it’s important to understand the difference between a Roth 401k and a Traditional 401k. A Roth 401k allows you to contribute after-tax income, meaning withdrawals in retirement are tax-free. On the other hand, a Traditional 401k allows you to contribute pre-tax income, but withdrawals are taxed at your ordinary income tax rate.
Consider Your Current Tax Situation
Given that you started your job in June and your taxable income for the year will be lower than your annual salary, it may be beneficial to contribute to a Roth 401k. By contributing after-tax income now, you can take advantage of your lower tax bracket and potentially reduce your tax burden in retirement.
Maximizing Your Retirement Savings
Since you are making $100k a year, you have the option to contribute to either a Roth or Traditional 401k. By contributing to a Roth 401k now while your income is lower, you can diversify your tax liability in retirement. Additionally, a Roth 401k offers tax-free growth on your investments, providing more flexibility and potentially greater savings in the long run.
Long-Term Retirement Planning
While your current tax situation may favor a Roth 401k, it’s essential to consider your long-term retirement goals. If you anticipate your income increasing significantly in the future, you may want to consider contributing to a Traditional 401k to take advantage of tax savings at higher income levels. Ultimately, your decision should align with your retirement planning strategy and financial goals.
In conclusion, as you navigate your first job and begin planning for retirement, it’s crucial to weigh the benefits of both Roth and Traditional 401k options. By understanding your current tax situation, maximizing your retirement savings, and thinking about long-term planning, you can make an informed decision that sets you on the path towards a secure financial future.
Yes, I think that’s a good plan. You’re in a low tax bracket so Roth makes sense for now. My belief is that taxes will only increase so I put as much in Roth accounts as I can
Damn. I am impressed at the young ‘uns making this kind of money. Good for you! What field are you in?
As to your question. This year, you will have about 4500$ of your income in the 22% bracket, ~990$ in tax.
You can save that if you put in 4500$ in 401k and bring your taxable income to under ~44700$.
Most of your income is going to be taxed at 12%, except the amount above that 44000.
Next year, you can aim to follow the prime directive linked in the sidebar. Essentially, contribute to 401k to the match, then ira, than the rest….
Can you do 50/50? I always do 50/50 with 401k because i already max my Roth ira while i can below 160k income, and i figure i never know what the future holds for my income status, tax status, or the government will do when it comes to taxes (could be high as fuck when you retire and have to pay even if you do traditional next year at 100k which lets face it. Is crazy money for your age but just above fuck all in society nowadays) congrats on the job tho, cuz that is a shit ton at 22 haha
Roth better under the liklihood of tax rates going up in future. Also more beneficial for heirs, if inherited.
Yes, probably. At 50,000 you are probably in 12%, at 100,000 at 22% (assuming single). That is a pretty big difference.
I might even stay with Roth next year as well since rates are schedule to go up in 2026, and since you are pretty close to the 24% bracket (which will probably turn into 28%). You will want traditional money some time, but no reason to deduct now at 12% when you can take it at 22%, and no reason to get it at 22% when you can at 28%.
The most important thing is that you maximize any employer contributions. If you can do that with roth contributions then sure!
Note that employer contributions are always traditional, so your balance at the end of the year will have a mix of roth and traditional.
Get that company match first if there is any
It all comes down to your tax bracket. Traditional vs Roth will come out with the same amount of spendable money if you invest them the same and if the taxes paid on Roth going in are the same as the traditional when taken out. Of course
100k minus the single filer standard deduction puts you at $86,150. So you will be solidly in the 22% tax bracket. Not exactly low but not high. Generally this is the area where it’s up to you to decide if you want to do Roth or traditional.
Some things to consider in deciding
Do you expect your income to keep going up and this will be the lowest tax bracket you’ll be in? If so, more Roth now probably makes the most sense as when you hit the 32% tax bracket traditional definitely wins over Roth.
Do you think there will be any lean years in the future like going back to school? If so, you can do traditional now and convert to Roth later when you have significantly less income. Remember you can always covert to Roth but can go back the other way.
Do you think you’ll have a pension? Pensions are great, but it will eat up some of the benefit of traditional contributions.
We don’t know what will happen with taxes in the future and you’re a long way from retiring. So having both roth and traditional will give you options when you get close to, and into, retirement.
Ultimately the most important thing to do is to save as much as you can more than worrying TOO much about tax optimization. 15% will put you on solid financial fitting. But if you are willing to do 25% or even Max out your 401k and IRA (30k) you may be able to save up enough money on the next decade that you can easily cut back contributions later when life gets more complicated (marriage, family, ECT) without any impact on your retirement.