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Old 04-12-2019, 09:44 AM   #1 (permalink)
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401(k) vs Roth 401(k)?

I just found out the new investment options where I work include a Roth 401(k).

I make decent money but have lots of deductions (saved by itemizing last year), am probably on a trajectory to make more later in life, but am not currently maxing a Roth IRA for my wife.

Is there any cut and dry metric for when the Roth 401k is better than the standard?
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Old 04-12-2019, 11:02 AM   #2 (permalink)
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I'm sure you're aware 401Ks contributions are made with pre-tax income and are taxed at the time of their distribution (retirement), so you end up paying taxes on their appreciation. Roth IRA contributions are not tax deductible, so they will not reduce your current tax liability, but are tax free at the time of their distribution (only applies to contributions up to annual federal limits), so all appreciation becomes tax free.

I think the biggest factor as to which is wisest is your current age and planned retirement age. If that money is going to sit there and grow for another 20+ years, it's typically better in a Roth. The advise I normally give (keep in mind my office and circle of friends are mostly 25-35 years old) is to first make sure your taking advantage of any matching 401k incentives, then max out Roth IRAs, and finally go back to contributing to your 401ks if there's any additional savings capacity.
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Old 04-12-2019, 11:25 AM   #3 (permalink)
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Yeah - to clarify, I'm 30, get matching up to 5% whether it's Roth or standard 401k. So at least 5% is going in one of the two.

Tough when congress gets to decide whether my tax rate will be the same in 30 years...
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Old 04-12-2019, 11:38 AM   #4 (permalink)
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Quote:
Originally Posted by flyweightnate View Post
Tough when congress gets to decide whether my tax rate will be the same in 30 years...
That's why there really is no clear right answer. If you were to pay an effective 25% rate today, and that same effective rate of 25% in 30 years, you'd have the exact same amount of money after taxes. The taxes paid today with a Roth IRA is the same as the net present value of those paid in 30 years with a 401k. The more important thing to focus on is that you're putting as much in as you comfortably can, investing it in something with an acceptable amount of risk (changes as you age), and that doesn't kill you with fees.
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Old 04-12-2019, 11:45 AM   #5 (permalink)
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I also share skinnyfatguy’s strategy of prioritizing company match, then maxing Roth IRA, then additional 401k contributions if desired.

I don’t think a Roth 401k is going to be more advantageous than a traditional 401k unless you are using it as a primary account and can make contributions above what you are allowed in a Roth IRA ($6k annually).

Also, with employer matching, their portion is still taxable, even if your contributions are post-tax. I’m not sure exactly how that affects fund composition or reinvestment. If it means your funds are split and not compounding together, then I think you’d be shooting yourself in the foot.
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