So I figured late that withdrawal from Roth plan is tax free even for the gain. If that’s the case why should I invest in regular 401k? Simply because I will have tax free growth in regular 401k? Am I missing something?
I am on the 24% tax bracket right now but will be on 12% tax bracket upon retirement I suppose. Is mixing Roth and regular 401k good idea?
Thanks in advance.
Posted by GuyNext
7 Comments
[deleted]
>Is mixing Roth and regular 401k good idea?
Yes.
Traditional 401k isn’t tax free growth. The real benefit is avoiding 24% tax today and paying a lower rate later if you retire in the 12% bracket. That difference is a big win, and you can invest the tax savings now and compound it.
Mixing is still smart for flexibility and tax diversification, but with your brackets it makes sense to lean Traditional heavy. Something like 70 to 85% Traditional and 15 to 30% Roth is reasonable.
Mathematically the best advantage is not overpay your taxes today. I love Roth, but the math is the math. Chat gpt does a good job explaining this if you ask it.
But basically if you have the ability to lower your taxable income today, and choose not to (Roth), then you’re basically choosing to overpay your taxes.
Depending on your age, you have no idea what your taxes will be in retirement. I’ve had clients that said the same thing as you start a business and make way more in retirement than they ever did as an employee. Happy problems. Best of luck.
You are forgetting that Roth contributions are made with money that’s been taxed so you have less. Imagine having $1 million that has not been taxed versus $760k that you don’t have to pay tax on. If you pay 12% tax on that $1 million, you end up with $880k, more than $760k.
Ironically, in my experience, people who mix contribution has never been because they understand the taxes & math and have their own strategy, rather because they *don’t* understand.
Roth withdrawals or distributions on gains are tax free after 59.5 years of age.
You can also withdraw “contributions” from roth tax free and penelty free any time, but you must do it in the correct way through your broker to aviod it being counted as a “distribution” and file the correct tax form to avoid penalties and taxes.
This is why you should max your Roth if you can afford it.
Your 401k investment reduces the tax on your gross at year end or when taxes are due, that’s the advantage for today. I want to lend money to the government the least amount.