It seems the general consensus is to contribute as much as is necessary to get your employer's 401k match, then max out your Roth accounts for the year, then max out 401k's if you can (we can't). Unfortunately we've just been contributing 20% each into our 401k's for years, and now that we're a bit older, I'm wondering if it would still be worth it to change our contributions to include roth accounts. From what I've gathered Roth accounts are great if you start young, less so if you start in your mid 40's. Should I just keep doing what I've been doing?
Mid 40's, wife and I have contributed 20% to 401k's for years. Is it too late to start contributing to a Roth IRA?
byu/Knellblast inpersonalfinance
Posted by Knellblast
13 Comments
Roth vs traditional (if you have space left in either) comes down to your income now vs expected income in retirement. What’s your current household income?
Why would it be too late to contribute to the Roth? Sure – 20 years early would have been even better — but now is the 2nd best time to start!
You can let that money compound tax free for the next few decades!
It doesn’t really matter honestly. In the long run, ultimately evens out.
It’s all up to how comfortable you are to paying taxes and RMD’s when you’re older. You didn’t miss anything and you can absolutely start now with a Roth. You have 15-20 years at least left. Just do what you’re comfortable with. There’s no right or wrong as long as you’re contributing.
Roth contributions in your 401k plan are not the same thing as a Roth IRA. A Roth 401k account is administered by the plan sponsor, while a Roth IRA is under your own control.
Most people will live on a lot less money in retirement than they make when they are working. Think about how much you are saving now, when your career tops out you’ll be saving even more. So, for the majority of folks end up at a lower tax bracket in retirement than when they are working – which means keep maxing your traditional. But it’s never too late to open a ROTH IRA – I don’t fully fund mine every year but will add bonus money, extra savings, etc throughout the year. My 2% cashback from my credit card gets auto deposited there as well.
If neither of you are hitting the minimum pretax amount in your 401K, I wouldn’t change anything but focus on getting up to that amount if you can. I know the wiki recommends the roth ira in the middle of that but it doesn’t make sense to me unless your 401k plan is truly crappy (which I know it is for a lot of people).
Definitely not too old, but don’t contribute to a Roth inside your 401k. Get it at a bank or brokerage account.
I started my Roth IRA at age 40. The utility of Roth accounts don’t have anything to do with age. Saving for retirement at a younger age is more advantageous in both tradtional and Roth accounts, but Roth accounts are not specifically better for younger people. The reason younger people might prefer Roth over traditional comes down to being earlier in their careers and likely earning lower income and potentially paying lower taxes than they would pay during retirement, which could make Roth contributions more optimal (pay 12% tax now to avoid 22% tax later).
What you are considering now is diverting some of the funds that you normally contribute to a traditional 401k to instead contribute to a Roth IRA. You should read the wiki section on[ Roth vs Traditional](https://www.reddit.com/r/personalfinance/wiki/rothortraditional) and use a couple online calculators to project what your retirement income will be and what your marginal tax rate will be. There are additional considerations like RMDs and how your taxable income during retirement (which includes withdrawals from traditional accounts but not from Roth accounts) will impact your medicare costs.
As long as you’re not dead, it’s never too late for anything.
That said, Roth vs Traditional has nothing to do with age, just tax bracket. If your tax bracket now is higher than you expect it to be in retirement (because you’re working now and won’t be in retirement), the “now” deduction is better. The idea is to pay taxes when your bracket is the lowest.
So…..if contributing to a Roth IRA means contributing the same amount less to your 401K, I’d probably just keep doing what you’re doing.
But if you’re in a position to continue to contribute 20% to your 401Ks AND start contributing to a Roth IRA…..obviously do that.
The far most reliable indicator of how much you’ll have in retirement isn’t what type of accounts you choose, it’s how much.
Unless you plan to be making dramatically more money in retirement than you are now, it really doesnt matter. If you maintain an equivalent lifestyle then it basically is the same. A lot of people pull back a little in retirement, which could mean it makes sense to defer paying taxes.
Max roth all the way. We found out, the hard way, that Required Minimum Distributions from traditional IRAs puts us over the threshold where they dramatically reduce our Social Security benefits and increase our Medicare premiums
The more you save is better, always.
But realistically you have to fund them when there is excess otherwise, and that is not always possible in earlier years.
Just do your best.
Im not an expert or anything so don’t take this as financial advice but I wouldnt do it. You missed a majority of your tax free growth. I mean I suppose you could start it and just make sure the Roth IRA is the last thing you touch maximizing your tax free growth, but i would just try to max out the 401k maybe an HSA and do a personal brokerage account. I guess it really depends on your incomes and your retirment budget aswell. You could always pull out your contributions from a Roth ira because its already taxed money so it wouldnt hurt I supposed to start one. Some places even give a match on them. I guess its up to you really.