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Financial Planning / Foolish 401(k)s


Subject:  Re: Roth or Traditional 401k Date:  12/25/2018  8:46 PM
Author:  aj485 Number:  26189 of 26270

Make about $170k per year and about 15 years aways from retirement with about $450k currently in it and can't contribute maximum.

Why aren't you able to contribute the maximum? Is it because you're a highly compensated employee? Or because you can't seem to carve out the $18,500 (2018) or $19,000 (2019) out of your paycheck? I would strongly suggest that with $170k in income, you should be putting a minimum of $25,500 away each year (15%) in either 401(k), IRA or taxable accounts for your retirement. And if you have a partner, they should also be doing the same.

$450k is only about 2.6 times your annual compensation, and by age 50 (15 years before retiring at 65), it's recommended that you have 10 times your annual income put away - so you are way behind on your retirement savings. That means that you might want to bump your retirement savings up to 20% - 25% instead of a minimum of 15% Again - it doesn't have to be an account labeled '401(k)' or 'IRA' to be savings for retirement - taxable accounts work, too. And it's often best to have some of each kind - tax-deferred (Traditional 401(k) or IRA); tax-free (Roth 401(k) or IRA) and taxable (regular brokerage) - that way, you will be able to manage your tax rate in retirement by adjusting which accounts you draw from.

Always contributed to the traditional but will wondering if I'm better off contributing to the Roth option.

It depends on what you think your tax rate will be in retirement vs. what it currently is. Considering that the current tax rates are scheduled to go back up in 2026, if you are planning on keeping the same standard of living, it's likely that your tax rates will be higher in retirement, so doing the Roth now would probably be a reasonable choice.

That said, with how much you currently have saved, it's unlikely that you will be able to keep the same standard of living. Even if you were to max out your 401(k) for 15 years, and have a 6% CAGR, you might have $1.5MM in your 401(k). At a 4% safe withdrawal rate (for 30 years) that would mean that you could only withdraw $60k/year - only about 35% of your current income. If you have a pension that you are willing to count on (and I would strongly suggest checking your pension's annual IRS form 5500 before you start counting on it - if it's less than 90% funded, I would question whether it will be able to provide you with your expected income), that would add some, and SS should also provide you with some, but you are still probably going to fall below your current $170k in income. If your income will be lower in retirement, then your tax rate will probably be lower, too. That would mean that making contributions to a Traditional account will probably be better for you in the long run.

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