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Traditional 401K or Roth 401K?

by ampham on 6/24/22, 4:36 PM with 8 comments

• by toast0 on 6/24/22, 9:13 PM

  If your choices are Roth or not 401k, you want to do not if your tax rate is currently high, and roth if it's currently low. Both rates relative to your estimated rate when you plan to take distributions.

  Note that the more of each flavor you have, the more it pushes you to the other flavor. If you have a large regular 401k balance, your taxable income will be high in retirement, so you may not want to defer more taxes until retirement age. And if your Roth balance is large, you have access to a lot of untaxable income, so you may want to defer more taxes until retirement.

  Otoh, if you expect to have taxable invesments, and retire early, living off of taxable, you may have the opportunity to convert to Roth at low rates.

  It kind of depends on how much you want to optimize.

  Also, some companies offer an after tax 401k, some with automatic conversion to Roth. Then you can take the limit of tax deferred contributions and contribute a significant amount to (effectively) Roth and have both.

  Oh and one more thing. The contribution limit is the same number of dollars, but Roth dollars are more valuable than traditional dollars, so Roth contributions gets you more money into tax priviledged accounts (of course, Roth contributions are more expensive, too).

• by fsflyer on 6/24/22, 9:45 PM

  It depends on a number of issues. For example, if you want to retire early, you can withdraw Roth contributions after five years, but need to wait until 59 1/2 years old (or 55 in some circumstances) to withdraw from a traditional 401K or IRA.

  If retiring early, it may be better to do traditional contributions while working and then do Roth conversions at lower tax rates during early retirement.

  Bogleheads maintains a list [0] of many retirement calculators that can use the additional specifics of your situation to give a higher quality answer. It will generally require you to give it a plan for the rest of your life, so you'll want to try a number of scenarios to see if/how the plan changes.

  Bogleheads also has an active forum that variations of this question have been asked many times. If you want to see what situations others have asked about in the Boglehead forums and the recommendations they got you can search with [1].

  [0] https://www.bogleheads.org/wiki/Retirement_calculators_and_s...

  [1] search for: traditional or roth 401k contributions site:bogleheads.org

• by theandrewbailey on 6/24/22, 5:16 PM

  Depends on if you think your tax rates will be higher or lower than now. FWIW, I do a little of both.

  Roth: invest post-tax money. Withdraws in retirement are tax free. You're betting that your taxes will be higher in the future.

  Traditional: invest pre-tax money. Withdraws are considered income and are taxed. You're betting that your taxes will be lower in the future.

  Employers usually match contributions to traditional accounts (never seen any match Roth). I've never seen any analysis if matches would offset any tax disadvantages.

• by prirun on 6/24/22, 10:08 PM

  If you think you might do a self-funded startup down the road, having a traditional IRA can be very useful. I was a co-founder of a startup and it took us 3 years of self-funding to get it off the ground. During those years, the payments into the startup are a loss that can either be carried forward to offset future earnings or can be used to offset Roth conversion income, allowing tax-free Roth conversions.

• by codegeek on 6/24/22, 5:06 PM

  Do both if you are eligible. Roth IRA has income limits so you may not be eligible depending on your income.

• by WalterGR on 6/24/22, 4:39 PM

  Both. My understanding is that they hedge against each other re. future income tax rates. (At least, 401k's and Roth IRAs. I'm not super familiar with Roth 401k's.)

• by WheelsAtLarge on 6/25/22, 7:37 AM

  One to think about, if you expect to have a high growth asset then you go the Roth route since you only pay the tax on the initial investment not the growth.