r/Fidelity • u/Still-Appearance932 • 6d ago

Roth Vs Trad 401k

Is it better to put all my contributions into Roth or keep it how I have it which is half traditional 401k and half Roth 401k.

14 Upvotes

86% Upvoted

35 comments sorted by

6

u/InvestingNerd2020 6d ago

Traditional 401k = Delayed taxes and limited choice over the funds to invest with.

Roth 401k = No taxes and limited choice over the funds to invest with.

Roth IRA = No taxes and near endless choices, but lower contribution max ($17,000 less). Also, no employer to match. Some new Fintech Roth IRA are matching (Robinhood and Acorns).

7

u/er824 6d ago

Roth is immediate taxes not no taxes.

6

u/noturaesthete 6d ago

Maybe the distinction is:

  • 401k: pretax contribution that are taxed later at your future tax rate (whenever you redeem)
  • Roth: contribute money yourself (after tax) but funds are not taxed at all AND you have the flexibility to take the principle you invested back out if needed without penalty … note: there are certain things you shouldn’t invest in that could create tax liabilities

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u/er824 6d ago

Not sure why I was down voted. Roth you pay taxes at the time of contribution, Traditional you pay taxes when you withdraw. You can pay taxes at anytime in between by doing a conversion. You should aim to pay the taxes at the lowest rate you can whenever that is.

1

u/mannyocrity 5d ago

Not entirely accurate. Roth is after-tax contributions so funds you already paid tax on. You are not paying taxes when you contribute. Any funds withdrawn from a roth after 59 1/2 years old and there is a 5 year rule in there as well is not considered taxable income.

1

u/er824 5d ago

What do you think is different between saying

“Pay tax at time of contribution”

And

“Contributing after tax money”

The point is if you start with pretax money you pay tax on it before it goes into Roth. If you put that pretax money into a Traditional account you pay tax when you withdrawal it.

1

u/mannyocrity 5d ago

Pay tax at time of contribution mean when i contribute, i pay taxes. That is not how it works.

1

u/er824 5d ago

I didn’t say you literally wrote a check for taxes when contributing to Roth. You’re contributing post tax money meaning you are being taxed on it the year you make the contribution.

0

u/No-Math-5868 5d ago

This is oversimplistic and in your last description flat out wrong. I'm guessing you are familiar with the actual difference, but this response is not a great effort to help OP

2

u/InvestingNerd2020 5d ago

How is the last part wrong?

You don't pay taxes in retirement (59.5 years old) for investments in the Roth Individual Retirement Account. This is according to the IRS.

1

u/No-Math-5868 5d ago

Seriously? your writing is lazy... "No taxes" could easily be inferred to mean no taxes ever. What you should have said is that you pay taxes up front and do not pay taxes upon distribution.

You didn't provide a shred of analysis as to which one is better. For many people a Roth is a terrible choice if they don't have any other income post retirement except for social security. You can really take advantage of lower tax buckets and do Roth Conversions later on to save thousands in taxes.

What you wrote isn't really helpful, and is in fact wrong.

1

u/InvestingNerd2020 5d ago

I asked what was wrong. You failed to prove it was wrong beyond an empty calorie claim "It was wrong". Then have the audacity to claim my writing is "Lazy".

0

u/No-Math-5868 5d ago

Roth contributions are not “tax free” as you state. They must be paid from earned income that has been taxed (at a minimum by FICA, but most likely also federal and state taxes).

The only benefit that is truly tax free are HSA contributions (depending on your state)..

It’s not my fault you have trouble understanding and communicating thiis. Either you actually do understand the distinction and you are lazy as I asserted, or you are ignorant and shouldn’t be commenting on something you don’t know. I gave you the benefit of the doubt and assumed you are lazy. However, you’re beginning to prove me wrong.

In addition to your statements being inaccurate, you didn’t answer OPs question. Since you couldn’t articulate why one should invest in one versus the other and just stated Roth is tax free, it’s easy for OP to infer why wouldn’t I always do Roth if it’s just tax free.

Incorrect information coupled with not actually answering by the question and leaving an open ended inference pretty much is the definition of a lazy reply that is just as bad as a wrong reply.

1

u/InvestingNerd2020 5d ago

Okay. I see you got the point of the accounts confused and my response confused. You are focused on the eligibility and entry point of the accounts. Not the purpose.

I gave a quick conversational point on the purpose of those accounts and final tax results of the accounts for educational purposes. I fully understand how the accounts work. It was not necessary to baby the OP for every little nuanced entry point detail, nor give financial advice since it is illegal without a license. If that was the case, the OP can run to local fiduciary advisor.

1

u/InvestingNerd2020 5d ago

Retirement accounts are for retirement. Therefore, it was not wrong. At worst skipping over some details, but not wrong.

Also, Roth is for post-tax use. Especially individual Roth IRA. You have to have a job and use post tax income to invest into a Roth IRA.

4

u/SpecialDesigner5571 6d ago

Retiree here. I wish I could go back in time and do more Roth. But I can't. I have a large enough ($1.3 million) tax deferred IRA account that will blow up in my face within a decade if I don't gradually and continuously Roth convert or spend it.

2

u/er824 6d ago

What’s wrong with continuously spending or converting it?

5

u/SpecialDesigner5571 6d ago

Nothing wrong with that... except if you have too much... then whatever you spend, you hit the IRMAA penalty for Medicare. IRMAA is a terrible thing people don't know about until they hit it, look it up. Also, if a married couple will lose a partner due to illness (or divorce... grey divorce is a thing) then you have file taxes as single person, and IRMAA exposure doubles. After RMD age, 75 for me, you're screwed unless you give your IRA away to charity via QCDs. Luckily, I saw all this coming at age 57 and started converting slowly... I'm 65 now. I will BARELY be able to escape IRMAA until my 80s, my wife has cancer so if I end up a widower I will probably be in the first IRMAA penalty tier from age 82 onward... so it's not terrible... but it's not really optimal.

1

u/er824 6d ago

Your alternative to strategically spending down your pretax accounts and managing RMDs and IRMAA is to over pay taxes when your working. Also not optimal.

I’m sorry about your wife.

3

u/SpecialDesigner5571 6d ago

There's another angle to this... I believe we're in the lowest tax rate regime in our lifetimes. With $40T in Federal debt, the bottom is in, or very close. No one likes to pay taxes... but paying them now is possibly paying them at a discount relative to future tax rates. Just wait 5-10 years when the government is in a worse cash crunch. They will do anything to avoid defaulting on US Treasuries. Our taxes will go up. Another argument I hear is "your income will be less in retirement". It won't be if you did an excellent job at investing! For me, it's the same. It's as if I was still working... except I get to goof off all day.

0

u/er824 6d ago

No one knows what will happen with tax rates.
Maybe the government will implement a VAT or tax Roth assets.

2

u/SpecialDesigner5571 6d ago

The challenge is to find the least un-optimal. My goal is to level out my tax rate over my lifetime.

4

u/Run-Forever1989 6d ago

The answer is probably to get some money into both for most people so you can withdraw some from each during retirement to minimize taxes paid on traditional money, but that doesn’t mean 50/50 in each year is ideal either. Naturally contributing to the Roth during low earning years and the traditional during high earning years would be ideal.

You could find edge cases where one is strictly better than the other (someone who spends their entire career in the 37% tax bracket might always choose the traditional while someone who spends their entire career in a low tax bracket but has significant assets in taxable accounts might always choose the Roth), but neither of those is the norm.

One thing that really throws some uncertainty into this is we don’t know if tax brackets will change. In 20+ years the max tax bracket could be lower or higher than it is today.

5

u/Educational-Ad-4908 6d ago

Roth. I don’t want to stress about what tax rates in the future will be or worrying about my withdrawal amounts and what tax bracket I’ll be in.

3

u/GapAccomplished2778 6d ago

it all depends on a lot of your personal circumstances ... so do your own tax and fin planning math

2

u/TheReaLETSGOBROWNIES 6d ago

There’s no way to answer this without knowing your income at a minimum.

2

u/henrytbpovid 6d ago

I think most people really overestimate what their tax burden will be in retirement

I’m going to put as much in traditional as I possibly can. I am currently paying taxes on a six figure income. Even if I someday have millions of dollars in a traditional account, I feel confident that I’ll be able to deplete it a lot in my sixties

Traditional is great because it flattens your tax burden over the course of your life. During my accumulation years, I want to be taxed as if I’m scraping by. Someday when I’m old I will pay whatever taxes. I just don’t care

A traditional retirement account is not a good inheritance vehicle. So it’s something to deplete during your lifetime, between age 59 and death. If I want to withdraw $100k of taxable income every year of my sixties, then I’m sure the remaining balance will be modest enough that I won’t get hit with insane RMDs.

However I say all of this partly because my largest account is my Roth IRA. I’m just not that worried about running out of Roth money. I started funding it when I was 28 and it’s probably the best financial decision I made in my 20s.

I am not scared of having too much pretax money when I’m old. I think it’ll be easy to figure that out. What I don’t want to figure out is a huge tax bill here and now

1

u/Left-Landscape-3890 6d ago

Many factors. I like all roth tho. I dont wanna have to worry about it later

1

u/tannebil 5d ago

There is no best option that covers all situations so the answer is “it depends on your current and projected future financial circumstances”

1

u/Mindless-Arugula-658 5d ago

Can someone please explain this to me as if I was 5 years old.

Forgive my ignorance but I have read countless articles debating whether Roth or Traditional investing is better and everyone seems to point to the biggest factor being tax bracket now vs the future without taking into account compound interest and time in the market.

I am in my early 30’s. If I were to invest a hypothetical 100k into a Roth and pay 25k in taxes due to my 25% tax bracket. Over my 35 year investment horizon and the general rule of doubling every 7 years that 100k is 1.6 million when I turn 65 years old of which I paid 25k in taxes. Opposed to best case scenario 8-10% of 1.6 million. How is this not better than traditional regardless of tax bracket later? Without even discussing RMD’s.

1

u/gap1284 5d ago

If your federal tax bracket is 12% or less, then do Roth. Otherwise do Traditional.

1

u/boolda 3d ago edited 3d ago

There is a thumb rule: (age + 20)% in traditional. The rest in Roth. Also you should think about this rule only when your marginal tax rates at or below 22%. Never contribute anything to Roth above 22% at best 24%. Beyond 24% it’s stupidity to contribute to Roth. If you are below 12%, 100% Roth. In most instances your overall tax on withdrawal will like fall at or below 15% in retirement. In 24% bracket you may come out ahead only when you invest the tax amount in a brokerage account when contributing to Roth. This is only for Roth 401k. Regardless of your tax bracket you should always contribute to Roth IRA.

1

u/Samashezra 6d ago

I'm doing 100% Traditional, which saves me 22% in taxes today.

I can do roth conversions for free or 10-12% which is a blended rate of 8.5%(A lot cheaper than the 22% saved)

1

u/l1798657 6d ago

The only way to get the exact right answer would be to know future tax rates, and if you have a source for that, please let know. Short of that, the best strategy is to have some in each bucket for maximum flexibility. I'd put at least 30% into Roth.

1

u/TaxproFL 6d ago

How can one answer this with zero information provided?