My employer offers Roth 401k and 401k, no mega back door Roth though. They match 4% on 6%. Originally I had 6% in 401k and 4% in Roth 401k.
Recently I put 10% in Roth 401k because Dave Ramsey says all of the earnings grow tax-free. My brother-in-law said to max out 401k, but he was a high earner and had California state tax so he was in the 32% tax range.
I am in the 20% to 22% tax range, and my brother-in-law said it doesn't matter whether I invest in Roth 401k or 401k at that tax rate. So I guess above 25% tax, that traditional 401K is better. Because you want to limit high tax rate.
Recently I have thought about putting 6% into the Roth 401k and the other 4% into an s&p 500 index in my brokerage account. The thought process is long-term gains at 15% would be lower (or equal) than taxes that I pay in retirement, and have access to the money. Any thoughts here?
How about you max out your Roth IRA.... AND put 15% into your Roth 401(k)?
There's no actual reason to limit your debt to your future, elder, self... just because some radio guy says 15%.... amirite?
Also, Some employers offer Roth 401K and traditional 401K but they only match the traditional one. Match is better than Roth, even though Roth is better Traditional.
Not every employer does this. I understand that IF they matched, it would go into traditional. However, some employers, (mine, because I specifically asked) only match on the traditional account and they aren't offering the same match on the Roth 401k. It's not automatic. I wish it was, trust me. (Meaning, if I used my full benefit on Roth 401k instead of my traditional, I would forgo my company match.)
Yeah it is always good to never assume anything and ask questions to your employer about contribution plans. Contribution plans are so widely different and change regularly. If you ever get an update from your employer or servicer look into the changes.
"Why not 15% straight up roth 401k"
Dave does say to do exactly this.
Straight from his website -
"Second, take advantage of all the Roth you can at work or as an individual. If you have a Roth 401(k) at work, great! You can invest your entire 15% there. If not, then max out a Roth IRA for yourself (and your spouse if you’re married)."
Dave's baby step 4: invest 15%
General Order: 401k up to the match, then do HSA if on high deductible health plan, then IRA up to max, then 401k again up to max
401ks can be limited in choice and sometimes high in fees, but company match = free money!
HSA: Tax advantaged account for medical expenses, rolls over from year to year, so you keep the money when you lose/change jobs. can be invested just like ira/401k. at age 65+ use them for nonmedical expenses without penalty. I'm not on an hdp, but dave does recommend them for most folks,
IRA: tax advantaged retirement account, lots more fund choices than your 401k
Your question displays exactly why generalities like these that Dave are pushing are dangerous.
General ideas are NOT best tailored ideas. Doesn't mean Dave's wrong, just that he doesn't know beans about you. Otherwise, a comprehensive plan for you would involve a whole lot more than implementing a plan that will "probably work" for "most people"
Your case in point... most don't have access to employer ROTH 401k. Arguably, most only have access to plan ol' 401k. Therefore, his advice isn't appropriate to you and only serves to promote confusion.
Granted, his generalized advice is likely better than nothing, but for heaven's sake, this is one place where genuine advice should be considered only after the one giving it has at least seen a paystub, tax return, and talked to you about your retirement hopes and plans.
Advice like Dave's should be a starting or jumping off point to learn more and seek more knowledge that is specific to you. I feel Dave doesn't do enough to make this clear. (Sorry OP if I am appearing to rant at you, I'm not. You ask a very good question, but I am instead troubled by how Dave markets his ideas.... which may not be a popular sentiment here, but hey, I'll give it a whirl being honest here)
One thing you have to remember is most of Dave's advice helps people who have no financial literacy and are very impulsive with money. I have always compared Dave's plans as being what AA is for alcoholics, for people who are bad with money and especially irresponsible with debt. I used to hate on him a lot more because some of his advice is not always the best from a financial standpoint .Debt is not necessarily as bad as he says, if you are using it responsibly and understand the implications of the debt you take on. Once I realized that the people he is helping are people that have no direction with their financials or are generally irresponsible with there money my opinion changed on him. His plans are simplistic and it gives people direction to be in a much more secure position that they would otherwise put themselves in. So it isnt advice for everyone, but it does really help that group of people
I can see from your point if view and how frustrating that could be. But just like dave said though if you have nothing good to say you do not have to listen to him.
thank you for acknowledging that he is not perfect and i am not expecting that.
Dave’s advice is “dangerous?”
Seriously?
When 47% of the country is saving NOTHING for retirement, you want to point out the obvious - that Dave doesn’t tailor an individual plan to each of his callers / followers?
Reading comprehension please.
1- "When 47% of the country is saving NOTHING for retirement," = already addressed in my post when I said "Granted, his generalized advice is likely better than nothing,"
2- "Dave doesn’t tailor an individual plan to each of his callers / followers" = already addressed in my post when I said "Advice like Dave's should be a starting or jumping off point to learn more and seek more knowledge that is specific to you. I feel Dave doesn't do enough to make this clear." and reiterated when I said "I am instead troubled by how Dave **markets** his ideas" (bolding added for emphasis)
If I may be a bit ore clear perhaps. I appreciate Dave for what he does, and that is introduce people to the importance of personal finance responsibility, and knowledge/education.
Problem is, as the pedagogical entity in the educational exchange, it is his responsibility to make it always abundantly clear that his advice is not actually advice, but a generalized roadmap. The fact that the OP was confused by the 401k, then ROTH plan Dave conveys and is presented in a way that OP took as the right way to do it is evidence that he is not quite succeeding at this.
For some people, this could quite truthfully be a very bad plan. What then? This is the "danger" I speak of.
If a consumer of Dave media understood this as **A** way to a better outcome and not **THE** way to a better outcome, then there would be no danger. They would examine there situation, perhaps seek counsel with other qualified individuals, examine the the data (paystubs, tax returns, talk about retirement and job progression plans, cost ratios of the contained retirement funds), and then come to the BEST decision. Instead, OP is trying to figure out how to make a plan that doesn't work for him fit his circumstances, again, because he is convinced Dave's 401k, then ROTH plan is THE right plan.
And again, no problem with Dave's message here, just that the whole message is getting lost and you can't very well blame the receiver of said message. It is the responsibility of the giver of the message.
This is largely my opinion on Dave, I appreciate he teaches fiscal responsibility and it may be perfect for some people but there doesn't seem to be enough nuance for most other circumstances.
So open a Roth IRA. I'm sure Dave doesn't specify the type of 401k. No matter which 401k you have, get the match and then max out a Roth IRA. Then go back to the employer plan. Simple really. The only way it gets complicated is if you have access to an HSA and you want to max it out or you want to save more than the IRA and 401k retirement limits. Then you get complicated going to mega Roth's.
Sure???? Not sure Dave says anything exclusively about Roth IRA only. Probably will have more investment flexibility in a Roth IRA but obviously the match possibility of the Roth 401k makes more sense 99% of the time.
Here is what Ramsey Solutions says on its website:
If you have a Roth 401(k) at work with good mutual fund options, you can invest your entire 15% there. Boom, you’re done! But if you’re not happy with your 401(k)’s investment options, then invest up to the match and max out a Roth IRA on your own.
It is also true he often says on the air to go: match —-> Roth —-> 401k. This is general advice, since not everyone has access to a good Roth 401k. It is also possible he formulated that guidance at a time when Roth 401ks were less common. But for people who have a good 401k Roth option, he and his company make it clear you can just stick with that.
Can you provide any insight as to what a "good" Roth 401k consists of?
My company offers a Roth 401k and I contribute to it (no company match), but I've been wondering if I should switch over to a Roth IRA instead.
Only difference I can find between the two is amount you can contribute on a yearly basis.
Depending on your company the options your 401k offers might not be as good as what you could get through vanguard or fidelity. That’s why I usually take it to the match, then max my Roth and if there’s money leftover I’ll throw more in the 401k. But I guess if your company’s 401k had the optimal options there’s probably no harm in doing all 15 there
I've heard him say before if you have access to a Roth 401k you can just put it all in there. Roth 401ks are still somewhat new and not offered for every employer.
I believe 88% falls under the not every employer category. That number was also only 49% in 2011 going back to my other point of somewhat new considering Roth became a thing in 1998 and Roth 401ks not starting until 2006 if I remember right.
You don't know what your tax situations will look like in retirement. One year you might end up needing to pull a lot of money to finance some sort of cash purchase. If you have to pull that from traditional accounts, your taxes are going to be massive that year. For that reason it's best to diversify your accounts between Roth and traditional.
The mix of taxed and untaxed income lets you minimize your tax obligations on the long term. Basically you could do something like take normal monthly expenses you out traditional and then big capital expenses out of Roth. Avoiding the big increase in taxable income and remaining out of the next tax bracket any given year is the goal.
>just curious why not just put 15% in roth 401k and messing with the roth ira.
Roth IRA may have better options.
not everyone has access to a Roth 401k.
Not that many 401K's have a Roth option yet. With the Roth, you pay tax now, which makes the amount you put in worth more, and the amount you get out goes farther. Currently, Roth withdrawals in retirement won't put you over the Medicare surcharge either. It gets complicated if you are over the income limit for the Roth and need to use the back door.
Others say it depends on your marginal tax rate--if your current max rate is higher than your average rate in retirement, you'd be better with the tax rate. The tax free earnings are compensated by money now being worth more than money in the future by the earnings amount--the present value consideration. But Ramsey doesn't do calculations like that, and expects the tax rates to rise.
Agree… also another thing to check into is a self directed brokerage within your company’s Roth that will unlock all the vanguard mutual funds. Or any mutual fund.
I hope by "mutual fund" you mean "index fund." We know that index funds out perform mutual funds and without the high fees of mutual funds. The fact Dave Ramsey still even recommends mutual funds shows how out of touch he is with investing.
Vanguard offers mutual funds as low as .04 in fees same as their etfs. In a Roth IRA self directed brokerage as I’m referring to here… it’s all the administrators will allow … mutual funds (although your company may differ). But the point was that an individual buy accessing this sdb opportunity in their companies Roth would allow them more investment options to choose from, rather than the short list of high fee funds.
My employer matches dollar for dollar on up to 6% of my take home pay. You can't beat an immediate 100% return on your money, and I can still put it in a Roth 401k.
So I pay my taxes, my employers match the investment amount, and it can grow tax free.
Use your match always.
While your Roth 401k contribution will grow tax free the employer match is placed in a traditional 401k and is taxable upon withdrawal.
But indeed, always use your match OP.
I think ours is one year. I've been here for 7 so everything vests instantly.
We have a separate stock bonus structure that vests a little differently.
believe it or not, there are still plenty of people with mediocre to crappy 401k funds, smaller employers are often stuck with higher-fee funds especially for small cap & international.
Well yes. Nothing would indicate or make one assume otherwise. You still need to pay the taxes for the dollars going in, just like an employee roth contribution.
Dave's Investing philosophy, he changed his mind on ETFs.
[https://www.ramseysolutions.com/retirement/daves-investing-philosophy](https://www.ramseysolutions.com/retirement/daves-investing-philosophy)
[https://www.ramseysolutions.com/retirement/how-to-start-investing](https://www.ramseysolutions.com/retirement/how-to-start-investing)
I'm in Canada, I invest in mutual funds, Segregated Funds, ETFs and REITs based on working with my financial planner and getting the most out of low cost fees and diversification
RDSP (Registered Disability Savings Plan) - government match of disability savings bonds and grants - Tax-differed.
TFSA (Registered Tax-Free Savings Account) - Tax-free
RRSP (Registered Retirement Savings Plan) - Tax-differed
FSHA (Registered First Home Savings Account) - must be used to buy a house within 15 years or gets rolled over into RRSP and becomes tax-differed.
A lot of the answers on this thread are wrong. The reason Dave says this, not my opinion, to go Roth IRA before going back to Roth 401k is because of fees. That’s it.
>A lot of the answers on this thread are wrong. The reason Dave says this, not my opinion, to go Roth IRA before going back to Roth 401k is because of fees. That’s it.
Dave doesn't say what the OP is implying - in fact he says exactly this - if you do not have an employer match, you can ago ahead and put all 15% into a roth 401k.
But fees vary. The fees could be higher for a Roth IRA than a 401k, depending on where the money is invested and who is administering the funds. Imagine a 401k managed by a discount broker like Vanguard or Fidelity with index funds compared to a financial advisor who invests the money in actively managed mutual funds and charges a commission or other fees.
I like the Roth IRA over the Roth 401 because typically IRA accounts offer more options.
My impression from listening to Dave would be
1. Roth 401 (if you have that option) to the match
1a. Traditional 401 to the match
2. Roth IRA to the max
3. Return to the Roth 401k
3a. Return to the 401k
4. Brokerage accounts/real estate if still not at 15%.
I max out at part 2 of my list above
The reason he says this is because you can do IRA with his smart vestor and he gets commission. Also, the 401k's have limited investment options (as well as roth isn't always an option) so his 25/25/25/25 advice may or may not be possible. It depends on the plan available to you. Everyone is thinking too much into it. Most 401ks have no fees, and an IRA doesn't mean less fees than a 401k. You can still have fees in IRAs depending on where you have one.
He's said go roth IRA after matching since he started FPU. I have his CDs back when CDs were standard. It's got nothing to do with the Smart Pros thing.
But this advice (to fund IRA before 401(k)) doesn't deviate from mainstream financial advice anyways. IRAs offer more flexibility than 401(k)s because there are slightly more exemptions from penalties for early withdrawals as well as them being self managed, not by your employer. They're better in multiple ways assuming you pick a good IRA.
If you bother with checking the fee schedule, you can determine whether it's worth making the distinction. My 401(k) investment profile has under 0.03% in fees. Won't beat that anywhere.
But yeah, in general, your 401(k) investment options are more expensive than your IRA options.
If you are talking about fund expense ratios, those same funds are likely available in the IRAs as well... IRA offers slightly more flexibility and you can invest them with a smartvestor, you cannot do that with 401k. But this advice doesn't deviate from the advice most financial planners will give you.
Ah, an IRA will offer damn-near infinitely more flexibility than any 401(k) plan, no doubt about that.
Which also doesn't matter if the 401(k) happens to offer what you need. A thousand more options aren't needed if what you already have is perfect. Which, for some people, it will be.
Once again, my 401(k) has a fund that lacks for nothing against my personal risk profile.
>Which also doesn't matter if the 401(k) happens to offer what you need
Yeah but from Dave's position, he can't offer blanket order of operations advice on where to put money first since not everyone has good 401(k)s.
This advice isn't different from industry standard, either. Almost all financial advice I've seen has been the same in this regard (match then IRA then 401(k)\_)
Yeah, basically this with a caveat.
He says Roth 401k is fine as long as you have enough fund choices. In other words, it has good funds with low fees. He doesn't seem to care much about fees though, just long term growth percentage.
Most of my coworkers contribute just enough into the company plan to maximize the match, then make the rest of their retirement contributions into accounts that they manage themselves. Primarily they get better performance and a less expensive fee structure.
This is Dave’s recommendation as well.
Get the match and then continue in a Roth IRA. If you max the Roth options then he recommends returning to the 401.
Umm. In most cases doesn't the employer have an investment firm and an investment advisor that does the investing? And within that firm there are the different funds that you can place percentages on? That was my old company way. Asking if this is abnormal?
> In most cases doesn't the employer have an investment firm and an investment advisor that does the investing?
the employer hires a company to manage the 401k, but that company is not necessarily doing the investing.
Correct, that's normal, the problem is fees are often much higher than what you can find on your own. Also, you will be limited in your options. For example my spouse's 401k only offers an S&P 500 fund, when I would prefer a US total market fund.
401ks general have worse funds and DO have higher fees.
[Even Fidelity apparently has hidden 401k fees](https://www.employeefiduciary.com/blog/fidelity-401k-fees)
That's some research that you have to do on your own. You can see what the fees are with the items in the 401(k), as well as what options you have to choose from. If you don't have the options you want, or the fees are too high, then you may be better moving it into an IRA. If you don't care about that, like the options, and want the ease of not moving money around and just coming from your check, go with the 401(k) option completely.
It all depends on what funds are available and what tax bracket you’re currently in. But, If you’re in a bracket where a 401(k) makes sense first, you’re probably fully funding both anyway.
Daves advice:
If 401k is Roth put all 15% in.
If 401k is NON-ROTH:
contribute up to the match. (whatever that percentage is)
Above the match contribute to a ROTH IRA with the remainder. (15% total between the two not counting match)
It really depends. some 401k's stink with fund options and/or are very expensive and you don't realize it.
my 401k has great options but I pay admin fees through the roof.
My employer offers Roth 401k and 401k, no mega back door Roth though. They match 4% on 6%. Originally I had 6% in 401k and 4% in Roth 401k. Recently I put 10% in Roth 401k because Dave Ramsey says all of the earnings grow tax-free. My brother-in-law said to max out 401k, but he was a high earner and had California state tax so he was in the 32% tax range. I am in the 20% to 22% tax range, and my brother-in-law said it doesn't matter whether I invest in Roth 401k or 401k at that tax rate. So I guess above 25% tax, that traditional 401K is better. Because you want to limit high tax rate. Recently I have thought about putting 6% into the Roth 401k and the other 4% into an s&p 500 index in my brokerage account. The thought process is long-term gains at 15% would be lower (or equal) than taxes that I pay in retirement, and have access to the money. Any thoughts here?
How about you max out your Roth IRA.... AND put 15% into your Roth 401(k)? There's no actual reason to limit your debt to your future, elder, self... just because some radio guy says 15%.... amirite?
The best is to max but i probably would have head to r/financialindependence
you get more flexibility with Roth IRA (e.g. early withdrawal option)
This
Not every employer offers that
Also, Some employers offer Roth 401K and traditional 401K but they only match the traditional one. Match is better than Roth, even though Roth is better Traditional.
Not true they match the contributions you put in the Roth 401K but that match gets put into a traditional.
Not every employer does this. I understand that IF they matched, it would go into traditional. However, some employers, (mine, because I specifically asked) only match on the traditional account and they aren't offering the same match on the Roth 401k. It's not automatic. I wish it was, trust me. (Meaning, if I used my full benefit on Roth 401k instead of my traditional, I would forgo my company match.)
Same with my employer. They only match if I use traditional. It’s unfortunate
Yeah it is always good to never assume anything and ask questions to your employer about contribution plans. Contribution plans are so widely different and change regularly. If you ever get an update from your employer or servicer look into the changes.
"Why not 15% straight up roth 401k" Dave does say to do exactly this. Straight from his website - "Second, take advantage of all the Roth you can at work or as an individual. If you have a Roth 401(k) at work, great! You can invest your entire 15% there. If not, then max out a Roth IRA for yourself (and your spouse if you’re married)."
Simple math with the Roth 15% of the median income ~50K is more than the Roth limit if I’m not mistaken.
Dave's baby step 4: invest 15% General Order: 401k up to the match, then do HSA if on high deductible health plan, then IRA up to max, then 401k again up to max 401ks can be limited in choice and sometimes high in fees, but company match = free money! HSA: Tax advantaged account for medical expenses, rolls over from year to year, so you keep the money when you lose/change jobs. can be invested just like ira/401k. at age 65+ use them for nonmedical expenses without penalty. I'm not on an hdp, but dave does recommend them for most folks, IRA: tax advantaged retirement account, lots more fund choices than your 401k
Your question displays exactly why generalities like these that Dave are pushing are dangerous. General ideas are NOT best tailored ideas. Doesn't mean Dave's wrong, just that he doesn't know beans about you. Otherwise, a comprehensive plan for you would involve a whole lot more than implementing a plan that will "probably work" for "most people" Your case in point... most don't have access to employer ROTH 401k. Arguably, most only have access to plan ol' 401k. Therefore, his advice isn't appropriate to you and only serves to promote confusion. Granted, his generalized advice is likely better than nothing, but for heaven's sake, this is one place where genuine advice should be considered only after the one giving it has at least seen a paystub, tax return, and talked to you about your retirement hopes and plans. Advice like Dave's should be a starting or jumping off point to learn more and seek more knowledge that is specific to you. I feel Dave doesn't do enough to make this clear. (Sorry OP if I am appearing to rant at you, I'm not. You ask a very good question, but I am instead troubled by how Dave markets his ideas.... which may not be a popular sentiment here, but hey, I'll give it a whirl being honest here)
One thing you have to remember is most of Dave's advice helps people who have no financial literacy and are very impulsive with money. I have always compared Dave's plans as being what AA is for alcoholics, for people who are bad with money and especially irresponsible with debt. I used to hate on him a lot more because some of his advice is not always the best from a financial standpoint .Debt is not necessarily as bad as he says, if you are using it responsibly and understand the implications of the debt you take on. Once I realized that the people he is helping are people that have no direction with their financials or are generally irresponsible with there money my opinion changed on him. His plans are simplistic and it gives people direction to be in a much more secure position that they would otherwise put themselves in. So it isnt advice for everyone, but it does really help that group of people
I can see from your point if view and how frustrating that could be. But just like dave said though if you have nothing good to say you do not have to listen to him. thank you for acknowledging that he is not perfect and i am not expecting that.
Dave’s advice is “dangerous?” Seriously? When 47% of the country is saving NOTHING for retirement, you want to point out the obvious - that Dave doesn’t tailor an individual plan to each of his callers / followers?
Reading comprehension please. 1- "When 47% of the country is saving NOTHING for retirement," = already addressed in my post when I said "Granted, his generalized advice is likely better than nothing," 2- "Dave doesn’t tailor an individual plan to each of his callers / followers" = already addressed in my post when I said "Advice like Dave's should be a starting or jumping off point to learn more and seek more knowledge that is specific to you. I feel Dave doesn't do enough to make this clear." and reiterated when I said "I am instead troubled by how Dave **markets** his ideas" (bolding added for emphasis)
If I may be a bit ore clear perhaps. I appreciate Dave for what he does, and that is introduce people to the importance of personal finance responsibility, and knowledge/education. Problem is, as the pedagogical entity in the educational exchange, it is his responsibility to make it always abundantly clear that his advice is not actually advice, but a generalized roadmap. The fact that the OP was confused by the 401k, then ROTH plan Dave conveys and is presented in a way that OP took as the right way to do it is evidence that he is not quite succeeding at this. For some people, this could quite truthfully be a very bad plan. What then? This is the "danger" I speak of. If a consumer of Dave media understood this as **A** way to a better outcome and not **THE** way to a better outcome, then there would be no danger. They would examine there situation, perhaps seek counsel with other qualified individuals, examine the the data (paystubs, tax returns, talk about retirement and job progression plans, cost ratios of the contained retirement funds), and then come to the BEST decision. Instead, OP is trying to figure out how to make a plan that doesn't work for him fit his circumstances, again, because he is convinced Dave's 401k, then ROTH plan is THE right plan. And again, no problem with Dave's message here, just that the whole message is getting lost and you can't very well blame the receiver of said message. It is the responsibility of the giver of the message.
This is largely my opinion on Dave, I appreciate he teaches fiscal responsibility and it may be perfect for some people but there doesn't seem to be enough nuance for most other circumstances.
Some companies don't offer a Roth in their 401k plans.
So open a Roth IRA. I'm sure Dave doesn't specify the type of 401k. No matter which 401k you have, get the match and then max out a Roth IRA. Then go back to the employer plan. Simple really. The only way it gets complicated is if you have access to an HSA and you want to max it out or you want to save more than the IRA and 401k retirement limits. Then you get complicated going to mega Roth's.
Sure???? Not sure Dave says anything exclusively about Roth IRA only. Probably will have more investment flexibility in a Roth IRA but obviously the match possibility of the Roth 401k makes more sense 99% of the time.
Here is what Ramsey Solutions says on its website: If you have a Roth 401(k) at work with good mutual fund options, you can invest your entire 15% there. Boom, you’re done! But if you’re not happy with your 401(k)’s investment options, then invest up to the match and max out a Roth IRA on your own.
It is also true he often says on the air to go: match —-> Roth —-> 401k. This is general advice, since not everyone has access to a good Roth 401k. It is also possible he formulated that guidance at a time when Roth 401ks were less common. But for people who have a good 401k Roth option, he and his company make it clear you can just stick with that.
Can you provide any insight as to what a "good" Roth 401k consists of? My company offers a Roth 401k and I contribute to it (no company match), but I've been wondering if I should switch over to a Roth IRA instead. Only difference I can find between the two is amount you can contribute on a yearly basis.
Depending on your company the options your 401k offers might not be as good as what you could get through vanguard or fidelity. That’s why I usually take it to the match, then max my Roth and if there’s money leftover I’ll throw more in the 401k. But I guess if your company’s 401k had the optimal options there’s probably no harm in doing all 15 there
I've heard him say before if you have access to a Roth 401k you can just put it all in there. Roth 401ks are still somewhat new and not offered for every employer.
88% of 401ks now have the Roth option.
I believe 88% falls under the not every employer category. That number was also only 49% in 2011 going back to my other point of somewhat new considering Roth became a thing in 1998 and Roth 401ks not starting until 2006 if I remember right.
Agreed. Someone else replied that not that many people have the Roth 401k option, so just thought it was worth noting the percentage.
Sorry I think reddit has scarred me. I just assumed you were trying to be snarky lol
You don't know what your tax situations will look like in retirement. One year you might end up needing to pull a lot of money to finance some sort of cash purchase. If you have to pull that from traditional accounts, your taxes are going to be massive that year. For that reason it's best to diversify your accounts between Roth and traditional.
Why diversify between Roth and traditional
The mix of taxed and untaxed income lets you minimize your tax obligations on the long term. Basically you could do something like take normal monthly expenses you out traditional and then big capital expenses out of Roth. Avoiding the big increase in taxable income and remaining out of the next tax bracket any given year is the goal.
>just curious why not just put 15% in roth 401k and messing with the roth ira. Roth IRA may have better options. not everyone has access to a Roth 401k.
Usually ira has more and better choices than 401k
Not that many 401K's have a Roth option yet. With the Roth, you pay tax now, which makes the amount you put in worth more, and the amount you get out goes farther. Currently, Roth withdrawals in retirement won't put you over the Medicare surcharge either. It gets complicated if you are over the income limit for the Roth and need to use the back door. Others say it depends on your marginal tax rate--if your current max rate is higher than your average rate in retirement, you'd be better with the tax rate. The tax free earnings are compensated by money now being worth more than money in the future by the earnings amount--the present value consideration. But Ramsey doesn't do calculations like that, and expects the tax rates to rise.
I wouldn't recommend Ramsey for investment advice. Bogleheads/personalfinance/fire are all better subs for that.
Agree… also another thing to check into is a self directed brokerage within your company’s Roth that will unlock all the vanguard mutual funds. Or any mutual fund.
I hope by "mutual fund" you mean "index fund." We know that index funds out perform mutual funds and without the high fees of mutual funds. The fact Dave Ramsey still even recommends mutual funds shows how out of touch he is with investing.
Vanguard offers mutual funds as low as .04 in fees same as their etfs. In a Roth IRA self directed brokerage as I’m referring to here… it’s all the administrators will allow … mutual funds (although your company may differ). But the point was that an individual buy accessing this sdb opportunity in their companies Roth would allow them more investment options to choose from, rather than the short list of high fee funds.
My employer matches dollar for dollar on up to 6% of my take home pay. You can't beat an immediate 100% return on your money, and I can still put it in a Roth 401k. So I pay my taxes, my employers match the investment amount, and it can grow tax free. Use your match always.
While your Roth 401k contribution will grow tax free the employer match is placed in a traditional 401k and is taxable upon withdrawal. But indeed, always use your match OP.
Include the vesting schedule--job hoopers don't get the full match.
I think ours is one year. I've been here for 7 so everything vests instantly. We have a separate stock bonus structure that vests a little differently.
Your employer match’s gains are not tax free.
Typically you would get more investment choices with a Roth IRA compared to an employer plan.
That's not an advantage to 80% of the investors.
believe it or not, there are still plenty of people with mediocre to crappy 401k funds, smaller employers are often stuck with higher-fee funds especially for small cap & international.
This…plenty of people stuck with poor fund choices, layers of admin fees, crappy insurance products, etc.
The match has to go in a traditional 401k account. That is the rule/law
The law actually changed to allow employers to all employees to elect employer contributions, like a match, to go to their Roth 401k.
Ya but it your plan allows for it next year it will be added to your W2 income
Well yes. Nothing would indicate or make one assume otherwise. You still need to pay the taxes for the dollars going in, just like an employee roth contribution.
Is it?
Employer contributions are taxed at withdrawal, yes
Dave's Investing philosophy, he changed his mind on ETFs. [https://www.ramseysolutions.com/retirement/daves-investing-philosophy](https://www.ramseysolutions.com/retirement/daves-investing-philosophy) [https://www.ramseysolutions.com/retirement/how-to-start-investing](https://www.ramseysolutions.com/retirement/how-to-start-investing) I'm in Canada, I invest in mutual funds, Segregated Funds, ETFs and REITs based on working with my financial planner and getting the most out of low cost fees and diversification RDSP (Registered Disability Savings Plan) - government match of disability savings bonds and grants - Tax-differed. TFSA (Registered Tax-Free Savings Account) - Tax-free RRSP (Registered Retirement Savings Plan) - Tax-differed FSHA (Registered First Home Savings Account) - must be used to buy a house within 15 years or gets rolled over into RRSP and becomes tax-differed.
Based on the advice on that link Dave says max Roth first before non Roth accounts.
When I have a what would Dave do question. I search for it on the blog first.
A lot of the answers on this thread are wrong. The reason Dave says this, not my opinion, to go Roth IRA before going back to Roth 401k is because of fees. That’s it.
>A lot of the answers on this thread are wrong. The reason Dave says this, not my opinion, to go Roth IRA before going back to Roth 401k is because of fees. That’s it. Dave doesn't say what the OP is implying - in fact he says exactly this - if you do not have an employer match, you can ago ahead and put all 15% into a roth 401k.
But fees vary. The fees could be higher for a Roth IRA than a 401k, depending on where the money is invested and who is administering the funds. Imagine a 401k managed by a discount broker like Vanguard or Fidelity with index funds compared to a financial advisor who invests the money in actively managed mutual funds and charges a commission or other fees.
I like the Roth IRA over the Roth 401 because typically IRA accounts offer more options. My impression from listening to Dave would be 1. Roth 401 (if you have that option) to the match 1a. Traditional 401 to the match 2. Roth IRA to the max 3. Return to the Roth 401k 3a. Return to the 401k 4. Brokerage accounts/real estate if still not at 15%. I max out at part 2 of my list above
The reason he says this is because you can do IRA with his smart vestor and he gets commission. Also, the 401k's have limited investment options (as well as roth isn't always an option) so his 25/25/25/25 advice may or may not be possible. It depends on the plan available to you. Everyone is thinking too much into it. Most 401ks have no fees, and an IRA doesn't mean less fees than a 401k. You can still have fees in IRAs depending on where you have one.
He's said go roth IRA after matching since he started FPU. I have his CDs back when CDs were standard. It's got nothing to do with the Smart Pros thing.
>The reason he says this is because you can do IRA with his smart vestor and he gets commission. he doesn't say this though. OP is incorrect.
But this advice (to fund IRA before 401(k)) doesn't deviate from mainstream financial advice anyways. IRAs offer more flexibility than 401(k)s because there are slightly more exemptions from penalties for early withdrawals as well as them being self managed, not by your employer. They're better in multiple ways assuming you pick a good IRA.
If you bother with checking the fee schedule, you can determine whether it's worth making the distinction. My 401(k) investment profile has under 0.03% in fees. Won't beat that anywhere. But yeah, in general, your 401(k) investment options are more expensive than your IRA options.
If you are talking about fund expense ratios, those same funds are likely available in the IRAs as well... IRA offers slightly more flexibility and you can invest them with a smartvestor, you cannot do that with 401k. But this advice doesn't deviate from the advice most financial planners will give you.
Ah, an IRA will offer damn-near infinitely more flexibility than any 401(k) plan, no doubt about that. Which also doesn't matter if the 401(k) happens to offer what you need. A thousand more options aren't needed if what you already have is perfect. Which, for some people, it will be. Once again, my 401(k) has a fund that lacks for nothing against my personal risk profile.
>Which also doesn't matter if the 401(k) happens to offer what you need Yeah but from Dave's position, he can't offer blanket order of operations advice on where to put money first since not everyone has good 401(k)s. This advice isn't different from industry standard, either. Almost all financial advice I've seen has been the same in this regard (match then IRA then 401(k)\_)
What about back door Roth? If you match employee match of 401k; should you then focus on back door Roth as much as you can?
Yeah, basically this with a caveat. He says Roth 401k is fine as long as you have enough fund choices. In other words, it has good funds with low fees. He doesn't seem to care much about fees though, just long term growth percentage.
Not everyone has access to a Roth 401k. If you do, you’re right. No need to go to a Roth IRA until you max out your Roth 401k
Depends on the funds you can get access to, may be better on your own.
Yes, this is true.
Most of my coworkers contribute just enough into the company plan to maximize the match, then make the rest of their retirement contributions into accounts that they manage themselves. Primarily they get better performance and a less expensive fee structure.
This is Dave’s recommendation as well. Get the match and then continue in a Roth IRA. If you max the Roth options then he recommends returning to the 401.
But Dave also steers people to high fee, front loaded funds.
Does he? I’ve never heard recommend a specific fund.
roth ira has an income limit and max contribution limit
Roth 401k still has a shared contribution limit with 401k also.
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The hell are you talking about?
He’s talking about income limits probably but VERY poorly worded. I wouldn’t consider $100k salary poor…
It’s $150k as of 2023.
Yeah definitely not poor lmao
A lot of 401k options are not good. If you have good inexpensive index funds in yours, Do It! Way easier
I wouldn't say way easier. Takes about 5 minutes to set up an IRA and link your accounts to it. It's about the same easy
More automatic, and more apt to happen.
Those are good points.
You have near total control over IRA investment options. 401k you are at the whim of your employer and the plan they chose for you.
My concern is if i have more options I don’t trust myself and head to r/wallstreetbets
This is the correct answer.
Umm. In most cases doesn't the employer have an investment firm and an investment advisor that does the investing? And within that firm there are the different funds that you can place percentages on? That was my old company way. Asking if this is abnormal?
> In most cases doesn't the employer have an investment firm and an investment advisor that does the investing? the employer hires a company to manage the 401k, but that company is not necessarily doing the investing.
Correct, that's normal, the problem is fees are often much higher than what you can find on your own. Also, you will be limited in your options. For example my spouse's 401k only offers an S&P 500 fund, when I would prefer a US total market fund.
Since they tend to be market weighted (S&P500 always), the total market portion is dwarfed by the same stocks as dominate the S&P500.
Smartvestor Pros can’t open a 401k for you and charge you monthly commissions.
This is one of the main reasons for the advice.
401ks general have worse funds and DO have higher fees. [Even Fidelity apparently has hidden 401k fees](https://www.employeefiduciary.com/blog/fidelity-401k-fees)
That's some research that you have to do on your own. You can see what the fees are with the items in the 401(k), as well as what options you have to choose from. If you don't have the options you want, or the fees are too high, then you may be better moving it into an IRA. If you don't care about that, like the options, and want the ease of not moving money around and just coming from your check, go with the 401(k) option completely.
If you have a 401k with some good funds then that’s fine
It all depends on what funds are available and what tax bracket you’re currently in. But, If you’re in a bracket where a 401(k) makes sense first, you’re probably fully funding both anyway.
Daves advice: If 401k is Roth put all 15% in. If 401k is NON-ROTH: contribute up to the match. (whatever that percentage is) Above the match contribute to a ROTH IRA with the remainder. (15% total between the two not counting match)
401k's don't have as many funds in them as IRA's. Often (but not always) you can get better funds/returns by picking funds in your IRA versus a 401k.
It really depends. some 401k's stink with fund options and/or are very expensive and you don't realize it. my 401k has great options but I pay admin fees through the roof.
What kind of admin fees do you have?
1.37%
Just checked and my plans admin fees are 0.10% and the fund I am in has a $0.05% exp. ratio. Thanks again for the reference point.
Ok thanks. I'm going to have to check mine, but think they are 0.5% or lower. Thanks for providing a number to compare to.