HiI'm 27 years old and have been taking advantage of both Roth 401ks and Roth IRAs for the past 5 years. Roth is good for young people, right? Well, I recently got a promotion and with it a raise that will put me into the 28% tax bracket. I fully intend to keep funding the Roth IRA as much as possible until income limits stop me. But my question is do I stop contributing to my Roth 401k and instead start putting my money into a traditional 401k? If not now, then at what point?Thanks for weighing in!
Congratulations on your first board post! You were such a smart young person to begin investing at age 22. As your story demonstrates, you are just getting started with your earning power over the future decades. Your tax liability will most likely increase with your growing compensation and increasing tax rates. So the money that you invest in a Roth IRA and a Roth 401k now, when your tax liability is lower than it is expected to be in 30-40 years, will reduce your tax liability in retirement where distributions would be tax free. Plus, you can withdraw your original contributions from the IRA at any time tax and penalty free (though I recommend letting your investments continue to work for your retirement).FuskieWho sees the only benefit of a Traditional 401k to be the current year tax deduction which provides temporary tax relief at the expense of future liabilities, which could also be achieved through other itemized deductions...
I agree with Fuskie, but to elaborate a bit . . . Who knows what the tax code will look like say 30 years from now or what rates will be, but for now, 28% is a pretty low tax rate. 15% is possible, but that is unlikely for retirees like you who begin saving early in their careers. 25% is about the best you can hope for.I would continue the Roth contributions while you are in the 28% bracket. If your tax rate rises above 30% perhaps you will want to review your situation.And don't forget the impact of state and local income taxes.
2 things that seem like muddy this topic a little is that you have to be careful when weighing the options and making projections because contributing X amount pre-tax is not thr same amount post-tax (e.g you can't compare $500/month in a Roth vs $500/ month in traditional), but more importantly, what you save now in a traditional is the marginal tax rate, and when you withdraw, it is taxed at the effective tax rate - that will of course have some unpredictability and will be influenced by other variables, but i assume will be less.Paul
what you save now in a traditional is the marginal tax rate, and when you withdraw, it is taxed at the effective tax rate - that will of course have some unpredictability and will be influenced by other variables, but i assume will be less.That's a good point, Paul. But don't forget Social Security payments (if any) are likely to be taxable chewing up much of your lowest brackets. And required minimum distributions beginning at age 70-1/2 can be a burden often taxed at the highest rates.Roth is the best way to go for most people if they qualify. Others can do OK if they plan ahead and carefully ration funds to keep distributions in lower tax brackets. But that is harder than you think.And note that extra taxable income (MAGI) pushes you into higher Medicare premiums that can raise your costs by several thousand per year (under current law).
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