I just started a job I am 22 years old
making 88k a year currently. Should i choose the 401k traditional or the roth 401k? i expect to be making more the longer i work at this job
Traditional 401k or Roth 401k?
byu/BranchSorry678 inpersonalfinance
Posted by BranchSorry678
7 Comments
I personally would go Roth if you have the option. I think taxes in 30 years will only be higher. No chance it’s the same or lower IMHO
You ask one of the most debated questions. Personally, especially with not such a super high income, I’d prioritize the Roth. With a Roth 401k (or Roth IRA) what you see is what you get to keep. With traditional (pre-tax) accounts what you have is a growing tax bill and no idea what the taxes owed will even be in 30+ years. Almost certainly tax rates will be at best about the same as today, and quite likely much higher to account for large deficits the government runs. There are many other benefits with having Roth money – in particular Roth IRAs – which can provide more flexibility and optionality in the future.
In short, forgo the tax benefit today in favor of tax free money forever.
If you really can’t decide then there is nothing wrong with doing a little of both. You could do 50/50 Roth and traditional money to sort of “hedge”. You don’t have to be all or nothing.
I’d recommend 100% roth. If you’re unsure, you could also do could do a 70/30 split to roth and trad.
Spend the next few years maxing your personal Roth IRA, and using the Roth 401K as much as you can afford. To retire at 65, save at least 15% of your income every year. To retire at 55 or earlier, saving 25-40% will likely get you there.
The Roth vs Traditional thing can be confusing.
Review how tax brackets actually work. This video explains the *progressive* nature of tax brackets.
* https://www.youtube.com/watch?v=VJhsjUPDulw
Then, once you have a handle on the progressive tax system, read this below to help connect the dots on why optimizing tax deferred assets may lead to the most tax efficiency over one’s lifetime.
* https://reddit.com/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth
You are currently in the middle of the 22% bracket. I’d lean toward the standard plan in our wiki: Trad 401k up to the match, then max Roth IRA, then back to max Trad 401k.
Unless the job has a pension; then I’d go all Roth.
I wish I had continued contributing to my Roth 401k for at least a few more years personally. I did Roth for the first 6 years. My logic was that money would have the longest to grow tax free and I would hopefully only make more going forward in my career. Plus any employer contributions (match, profit sharing, etc) goes into pretax so even if you’re contributing 100% to Roth, you’ll get some spread between both in that way.
Eventually I hit a couple years where I owed a bit on taxes and instead of just adjusting my withholding, I switched to pretax to lower my taxable income. At that point I started a Roth IRA at least, but even then, now that I’m 40, only 28% of my savings are Roth since my pretax years were when I was able to start maxing out my 401k, that bucket overtook the Roth pretty quickly. So in hindsight I wish I had continued in Roth for at least a couple more years, until my salary started putting me in the federal 24% bracket.