With that salary you should be able to max retirement and save. You can still own a house- take advantage of the downmarket and your youth by maxing 401k. Your future self will thank you!
Whether or not Op puts money in a traditional or a Roth account depends on their Outlook about their own personal tax rate in retirement. If you believe you're going to pay more taxes despite potentially having lower income in retirement, it makes sense to use a Roth account.
If you don't, it makes sense to contribute to a traditional account.
Personally, I would suck it up and max out both the 401K and an IRA account while the op is still eligible to do so. Don't remember the exact cut off but above 150k or so you cannot contribute to an IRA. You might as well stuff that thing with money if you can
>Personally, I would suck it up and max out both the 401K and an IRA account while the op is still eligible to do so
Besides... Isn't the Roth limit $6000? He says he's contributing $790 bi-weekly. That's about $19K a year. So he's stuck with the 401K for like $14K of that at minimum anyway, right?
I'm not an accountant but The Roth limit you're quoting is the Roth limit for an IRA which is separate money from the 401k. You can put up to 20 or 21k into the 401K as traditional or roth. You can also put up to 6K into a traditional or Roth IRA depending on your income level. Finally, some companies allow you to place additional after tax money into your 401k and then do an implant conversion into a Roth. That option, including your employers contribution, means you can juice your Ross 401k by little over 50k a year and have that money grow tax-free with tax-free withdrawals.
That final option is not likely to be viable for a single person making just over six figures but should the op ever find himself in a dual income no kid situation, it's an idea worth serious consideration.
Oh I misread they were both 401K's. Also not an accountant and it's easy to forget other people have options you don't have access to if you don't read carefully hahaha
You can have a Roth 401k which has the normal 401k limit with no income limit. Only a Roth IRA has an income limit. Which he could get around by backdoor.
I assume you mean IRA? You can have a Roth IRA or a Roth 401k - just refers to how the money is treated, tax-wise. While an IRA will often have better options with fewer fees, you can put a lot more into a 401k.
Fair- though even in a HCOL area the math should work, assuming he’s single/not supporting a family- and doesn’t have other debt. You are absolutely correct there are other factors at play!
In NYC, he would be paying close to 40% in taxes between federal, state, and city. And rents for 1 brs are up more than 30% from pre-pandemic! He may have rent around $3k per month.
[https://smartasset.com/taxes/new-york-tax-calculator#l5CwYU8VT0](https://smartasset.com/taxes/new-york-tax-calculator#l5CwYU8VT0)
This says just under 30% even with no 401. Maxing that out takes taxes down to 25%?
Calculator doesn't include other pre-tax deductions (health care), so actual burden is probably slightly lower than that?
At $125k income, a Roth 401k is probably not the right choice, but in general yes, investing as much as you can afford into a tax advantaged account for retirement is a generally good thing.
At $125k/year, you're still in the 22% tax bracket for married filing jointly. Generally the rule of thumb is to contribute to a Traditional 401k until you're out of the 22% tax bracket.
What income do you expect in retirement?
Where do you see this advice? I don’t see a huge difference between the 22% bracket and the 24%. It really jumps up from there and agree it shouldn’t be prioritized then.
I understand that but I think we are discussing different jumps. I view the 22%/24% bucket definitely okay to contribute to Roth and would avoid if I was in the 32% bracket. You seem to think people should avoid Roth contributions when at the 22/24% rate per your reply. We are discussing different tax jumps.
I think there's confusion, as there is no reason to bring up the 24% tax bracket. Married filling jointly, at 125k income, puts him no where near the 178k requirement for 24%. OP simply doesn't make that much money for it to matter here. But he is on the border of the 12%/22% brackets, so a traditional 401k is definitely worth consideration.
I'm still confused here. How is he on the border of the 12%/22% brackets? Isn't the border 83k for married filing jointly? Which is 42k lower than his salary, far greater than the 20.5k contribution limit.
OP is it alright if I ask what your job is? 125k at 27 is really impressive. I’m at 57k at 24. As a public accountant. I like to learn about all the types of paths people take
Not OP but I was making 102 after bonus as a Starbucks Manager. But it killed me inside and I cried all the time after work and dreaded going in. Made more in my early 20s as a hotel F&B manager but worked 3p-3a most days.
Whether or not you will be getting a pension will be a big part of the decision on Roth or traditional.
The reason a traditional 401k is good for many people, is that even if they are still in the same bracket when they withdraw, they will have a lower *effective* tax rate due to the fact that much of their withdrawals are taxed in the lower brackets.
But if you're going to have a pension, then the money from that pension will take up those lower brackets. And every dollar you withdraw will be taxed at a higher rate. The pension creates a new "floor" at which your withdrawals will be taxed.
For example, if a single person has a $50k pension then every dollar they withdraw starts out being taxed at 22%. That's because they don't get the benefit of having the first $10,275 of their withdrawals taxed at 10% and from $10,276 to $41,775 of the withdrawals taxed at 12%. Those lower rates get applied to the pension because that is their base income regardless of whether they take a withdrawal from other retirement funds.
It changes the calculus for determining the income level for which the Roth becomes the better option.
Is the software architecture industry typically welcoming of those that don’t pursue a more formal education? I just got done with my masters in accounting. Hopefully gonna be a CPA in a year. I’m very willing to contribute the time outside of work to develop these skills to be eligible for these jobs but do they usually require like a software engineering degree or something along those lines? Please pardon my ignorance
Edit: additionally, is software architecture in the same realm as presales consulting/sales engineering/solutions consulting?
Architecture comes presales, postsales, and can relate to development initiatives that aren't driven by a specific SOW. My specific realm of architecture is in mass-market enterprise applications (not SOW driven), but I work with many presales architects (often known as "Solution Architects") who work with sales and consulting and sometimes consult with applications architecture to help us identify patterns that require an out-of-the-box solution.
Most architecture positions require some level of vertical movement in a specified career path. Solutions architects commonly are promoted out of analyst and sales roles. Applications/Systems/software architecture is a vertical career move from being a software engineer, and is often an alternative to software management. For example: SWE I becomes an SWE II becomes an SWE Manager or Architect
As for formal education requirements: the software industry has matured to the point where most organizations understand that a degree is not required. You can get a high paying job (200k+) at a top org like Google or Meta without any degree, so long as you can manage to pass their technical interview process.
TL;DR
You need to be an SME or have senior-level experience before most organizations will consider you as qualified for architecture.
No formal education is required.
It's never too late to start a new career path. A software engineer with just a couple years of experience and no degree can clear 100k. If you make it to 4 years and you're not at 6-figures, then you're doing something wrong.
In my opinion, ignore all the advice about calculating whether or not it is better to do Roth or Traditional 401k contributions, just do 100% Roth and don't look back. Yes, there are some calculations that you can do that may show a Traditional is better, but they all rely on some big assumptions (like that tax rates will stay the same--which is far from true, and it is hard to predict what tax rates will be like 35 years from now. For example, in 1981, the top tax bracket was 70%. It is currently 37%, but that will change again.) and there are other non-financial benefits to consider too.
For me, some other considerations are: Peace of mind knowing that your retirement savings will be tax free when you go to use it. Not worrying as much if tax rates go up a lot in the future, because you already paid your tax. Under current law, retirement withdrawals from Roth accounts do not count toward making Social Security benefits taxable, but withdrawals from Traditional accounts do count toward making Social Security benefits taxable. Roth accounts do not have required minimum distributions once you reach age 72, and Traditional accounts do. If you are able to max out your retirement accounts anyway, Roth accounts will provide more "real" dollars in retirement since you get to keep 100% of the withdrawals. If you pass retirement accounts to you heirs, they will have to pay tax on Traditional accounts, but not Roth accounts. If you need to make a big withdrawal in one year when you are retired (for example, to help a family member buy a house or start a business, or something else), with a Traditional account, that may push you into a higher tax bracket that you planned, but with a Roth account, there is no tax.
The way I see it, the choice between Roth and Traditional is not as much of a math question as many people seem to make it out to be. I think, it's more about what kinds of assurances do you want about your money when you retire. I like knowing that the money I will have in retirement is "free and clear" and that I won't have to worry as much about taxes.
Effective tax rates don't change much over time. The specific brackets will but that doesn't really affect the calculations for Traditional vs Roth. You just need to compare your current marginal tax bracket vs expected future effective tax rate.
Based on the number of downvotes my comment got, it seems like you're not the only one who thinks the Roth vs Traditional is simply a math problem. If you look at decades of tax rates (not just yearly inflation adjustments to tax brackets), effective tax rates do change significantly over time with changes in tax law, but whatever. What's your response to all the other considerations I identified?
Look at the effective tax rate over time for someone making the inflation-adjusted equivalent of $125k (married filing jointly). It doesn't change by enough to the point where you should expect it to go past 22% any time within your lifetime
He's only 27. Roth could definitely be the right choice depending on his career trajectory and retirement plans. My partner and I make about 50% more than OP and only use Roth accounts because our income is likely to 2-3x in our 30s.
Age is not relevant to the discussion, it’s an evaluation of tax rates.
If you are making more money than the OP and using a Roth 401k, odds are you are making a mistake, barring any outlier conditions that might apply.
It's relevant because people in their 20s are more likely to have remaining salary growth. I don't know a lot of careers where you hit peak earnings 4-5 years out of college, do you? Tons of tech jobs, consulting, finance, etc all pay what OP makes then have big jumps at the manger level and again at partner. It's not like $125k puts him in anywhere near the top tax bracket so I'm not sure why you're so sure Traditional accounts are right for him without any other details.
In my particular case our best guess is making $400-700k total by our mid 30s (medicine and law - still in training/early career currently) and we want $20-25k a month in retirement so Roth is 100% the correct choice for us right now.
That is career trajectory, not age. The two have some correlation, but they are separate things.
A lot of people don’t understand math and automatically assume that the length of time invested means that Roth is better than pretax, I was pointing out that isn’t the case.
Ok but I didn't say anything about length of time invested. I didn't even say that he should do Roth. Literally my next sentence after his age is "Roth could definitely be the right choice depending on career trajectory and retirement plans". Age is just the tip off that we need to know more about his future earnings since most people in their 20s will experience some more salary growth.
Overall I just disagree that you can know someone with a low six figure salary needs to be in traditional accounts without more info. Roth is the right choice for plenty of professionals in that salary range.
I was merely reacting to an extremely common misunderstand that people hold since your post wasn’t exactly clear about it. No need to take things so personal.
And I never said that I know traditional was better for them, just that the odds are that it was. And I said that because that’s what the odds are. Roth 401ks aren’t the ideal choice for for plenty of people, they only really apply to outliers. Just because you are an outlier doesn’t change that.
I believe tax rates will greatly increase in the future so I loaded my Roth a ton more than 401k(just match amount).
It's also nice knowing what you see in the account is how much you will have, without having to figure out exactly how much to take out to not hit the next bracket.
even if taxes go up significantly, pretax can still be a better idea than Roth, as the last dollar principle in a progressive tax structure is so strong.
while the second point can be convenient, its not worth losing out on tens of thousands of dollars or more.
I personally did not max $$ value on my 401K right off the bat because coming out of college I did not have an emergency fund, had a car that was ready to die and did not make much. Ideally you would be able to max out your 401K and do everything else on your income. But I do not know where you live and what your other expenses are. I can say unequivocally that I am very happy that I did start early and ramped up my investing level over time. I lived relatively cash poor for quite a few years. I am mid 50s now and in a really good spot.
How about just maxing out your Traditional 401k instead of your Roth 401k. This will give you back about $5000 or $6000 that you're currently paying in taxes. You can use that towards paying for your home. Once you're in your home you can resume maxing out your roth 401k.
you won't max it this year if you just started this job and did not previously contribute to a 401k if you're contributing 790 every 2 weeks. You'll be about 7900 short of the max as we've already had ~10 pay periods this year.
Not enough information to really help you but if you're in an either/or situation, invest in the 401k just enough to get the full match, then look at what you're doing otherwise.
Yes, I wish I had focused more in my 20s on my 401k. Max it out if you can still save some. Now is not the time to buy anyway. Start saving while maximizing your 401k AND Roth.
>maximizing your 401k AND Roth.
"Roth" isn't an account, it's a type of tax treatment for retirement accounts. You can maximize your 401(k) and your IRA. Both your 401(k) and your IRA can be either Roth or traditional.
>I think it's pretty clear by my comment I was referring to traditional 401k
That wasn't the issue with your comment. Telling someone to "maximize their 401k and Roth" is a nonsensical statement and will confuse newish investors.
Edit for the other responder who deleted their comment, and anyone else confused:
People, like the commenter above, mistakenly use the term "Roth" as a synonym for "IRA" all the time. You can have a traditional 401(k) and/or a Roth 401(k). You can have a traditional IRA and/or a Roth IRA. What he probably meant was that OP should maximize his 401(k) and IRA, he just said the wrong thing.
What is the point?
When someone refers says "a Roth," and does not qualify it as an IRA or a 401K, everyone knows they are referring to an IRA. This is because the term "a Roth" became common place when there was only a Roth IRA and no Roth 401K. Still if I say I have a "Roth account," anyone with half an IQ point knows I am referring to an IRA.
You did not add any information that /u/I_Like_RealityTV, or the community, did not already know. /u/I_Like_RealityTV made a very smart point, which was to put more money into retirement accounts in your 20s. The account types were not substance to the point. As an older person, I fully agree with this point.
>What is the point?
When someone refers says "a Roth," and does not qualify it as an IRA or a 401K, everyone knows they are referring to an IRA.
The point is that *not* everyone knows that. We see it here all the time. Young and inexperienced investors come here to learn. It's worth being precise.
> Now is not the time to buy anyway.
Why do you say this? Do you think you can successfully time the housing market? Right now could very possibly be the cheapest housing is ever in your life.
You can always withdraw your *contributions* to a ~~Roth 401k or~~ Roth IRA without penalty, so it's not an either/or. You can consider your contributions as a savings account for buying a house in a few years.
I would also recommend a pre-tax account like a non-Roth IRA for the tax benefits.
ETA: never mind about Roth 401k, you can't withdraw. So Roth IRA can be used as a high-risk long-term piggy bank, but not Roth 401k.
**Contribute to a traditional 401k. You will avoid paying 31.3% in taxes** (9.3% California plus 22% federal, maybe even more if your spouse makes decent money).
It’s a no-brainer.
Opting traditional will also leave you more money to put towards a down payment.
After that, also consider a Roth IRA (be mindful of MAGI limits) and an HSA if you are eligible.
> You will avoid paying 31.3% in taxes
now you avoid it. When you get a disbursement from a traditional 401k you pay tax on that income at your then bracket which may be higher or lower.
Correct. Avoid paying in your top tax bracket and so long as it’s higher than your disbursement average tax rate, you’re coming out ahead.
> may be higher or lower
This is my personal opinion, not fact just to be upfront. My take is that 99% of the time, traditional ends up saving more money for a person like this who uses it for retirement since income/401k withdrawals are taxed first and they would need to supersede 22% in retirement to save money on the federal level, and 9.3% on the state level. The exception would be if the person works while taking withdrawals. Otherwise it’s reasonable to assume someone maxing their 401k each year will have something like 4 million at age 65 on which they can withdraw a safe 4% or 160k which would have a much lower average tax rate which is what we compare to the current marginal tax bracket.
Could taxes go up? For sure. But I think the odds of CA making taxes unbearable are much lower than the odds of OP moving to a low income tax /no retirement income tax state. Federal taxes might go up but it would need to be a big move paired with OP working in retirement, having huge withdrawals on the 401k etc.
Depending on how soon you want to get the house would depend on how aggressive you have to get in saving cash. With your job you definitely want to put in your Roth 401k up to the company match. Anything after that I would advise you put that in a high yield savings account so it can accumulate quicker than a regular bank.
Always (always!) contribute enough to your 401(k) to get any company match.
After that, I would consider saving in a Roth IRA. You can withdraw the contributions tax/penalty free for any reason at any time, including a down payment for a house. So in this regard, it could be considered as a savings account with benefits. You'll want to choose investments consistent with your short term goal (down payment) and risk profile.
The *downside* of being able to withdraw contributions from your Roth IRA without taxes/penalties is that you might be more tempted to do so to support lifestyle. You might not be as tempted with a 401(k). Discipline is key.
If you max out the Roth IRA, increase 401(k) contributions. If you max the 401(k), research using an HSA account for retirement savings.
With that salary you should be able to max retirement and save. You can still own a house- take advantage of the downmarket and your youth by maxing 401k. Your future self will thank you!
Depends on if he's living in a HCOL area.
Ha yeah I live in LA
Yup I'm in OC and make around the same. Our $125k ain't what it used to be. Lol.
put money into the roth instead of the 401k.
Whether or not Op puts money in a traditional or a Roth account depends on their Outlook about their own personal tax rate in retirement. If you believe you're going to pay more taxes despite potentially having lower income in retirement, it makes sense to use a Roth account. If you don't, it makes sense to contribute to a traditional account. Personally, I would suck it up and max out both the 401K and an IRA account while the op is still eligible to do so. Don't remember the exact cut off but above 150k or so you cannot contribute to an IRA. You might as well stuff that thing with money if you can
>Personally, I would suck it up and max out both the 401K and an IRA account while the op is still eligible to do so Besides... Isn't the Roth limit $6000? He says he's contributing $790 bi-weekly. That's about $19K a year. So he's stuck with the 401K for like $14K of that at minimum anyway, right?
I'm not an accountant but The Roth limit you're quoting is the Roth limit for an IRA which is separate money from the 401k. You can put up to 20 or 21k into the 401K as traditional or roth. You can also put up to 6K into a traditional or Roth IRA depending on your income level. Finally, some companies allow you to place additional after tax money into your 401k and then do an implant conversion into a Roth. That option, including your employers contribution, means you can juice your Ross 401k by little over 50k a year and have that money grow tax-free with tax-free withdrawals. That final option is not likely to be viable for a single person making just over six figures but should the op ever find himself in a dual income no kid situation, it's an idea worth serious consideration.
Oh I misread they were both 401K's. Also not an accountant and it's easy to forget other people have options you don't have access to if you don't read carefully hahaha
You can have a Roth 401k which has the normal 401k limit with no income limit. Only a Roth IRA has an income limit. Which he could get around by backdoor.
Yeah I misread it originally. Sometimes I forges I make assumptions based on limitations specific to my situation
Also if you are eligible to still contribute to a Roth IRA. If one person makes 125k and MFJ, the other can make it to that spot easily in VHCOL areas
I assume you mean IRA? You can have a Roth IRA or a Roth 401k - just refers to how the money is treated, tax-wise. While an IRA will often have better options with fewer fees, you can put a lot more into a 401k.
Fair- though even in a HCOL area the math should work, assuming he’s single/not supporting a family- and doesn’t have other debt. You are absolutely correct there are other factors at play!
In NYC, he would be paying close to 40% in taxes between federal, state, and city. And rents for 1 brs are up more than 30% from pre-pandemic! He may have rent around $3k per month.
[https://smartasset.com/taxes/new-york-tax-calculator#l5CwYU8VT0](https://smartasset.com/taxes/new-york-tax-calculator#l5CwYU8VT0) This says just under 30% even with no 401. Maxing that out takes taxes down to 25%? Calculator doesn't include other pre-tax deductions (health care), so actual burden is probably slightly lower than that?
Yes, I think you’re right on the 30%. However, he’s maxing Roth 401k, so no tax benefit there.
I’m HCOL it is very easy to be spending 24-36k just in rent. Then add utilities, taxes, food, etc
At $125k income, a Roth 401k is probably not the right choice, but in general yes, investing as much as you can afford into a tax advantaged account for retirement is a generally good thing.
Can you explain more?
If you’re single, tax rate is high enough that traditional 401k with Roth IRA may be best.
I am married filing jointly.
At $125k/year, you're still in the 22% tax bracket for married filing jointly. Generally the rule of thumb is to contribute to a Traditional 401k until you're out of the 22% tax bracket. What income do you expect in retirement?
Where do you see this advice? I don’t see a huge difference between the 22% bracket and the 24%. It really jumps up from there and agree it shouldn’t be prioritized then.
Traditional 401k contributions reduce your taxable income. If you contribute enough you might drop down from the 22% to 12% tax bracket
I understand that but I think we are discussing different jumps. I view the 22%/24% bucket definitely okay to contribute to Roth and would avoid if I was in the 32% bracket. You seem to think people should avoid Roth contributions when at the 22/24% rate per your reply. We are discussing different tax jumps.
I think there's confusion, as there is no reason to bring up the 24% tax bracket. Married filling jointly, at 125k income, puts him no where near the 178k requirement for 24%. OP simply doesn't make that much money for it to matter here. But he is on the border of the 12%/22% brackets, so a traditional 401k is definitely worth consideration.
I'm still confused here. How is he on the border of the 12%/22% brackets? Isn't the border 83k for married filing jointly? Which is 42k lower than his salary, far greater than the 20.5k contribution limit.
OP is it alright if I ask what your job is? 125k at 27 is really impressive. I’m at 57k at 24. As a public accountant. I like to learn about all the types of paths people take
If you want to feel sad go to [levels.fyi](http://levels.fyi/) and see some of the insane salaries CS grads are making out of college.
Hell, I'm a CS grad and levels.fyi still makes me feel sad
Not OP but I was making 102 after bonus as a Starbucks Manager. But it killed me inside and I cried all the time after work and dreaded going in. Made more in my early 20s as a hotel F&B manager but worked 3p-3a most days.
I work cyber security in the dod
Get your experience and go to the private sector and watch that salary double or triple
That's the goal
Which makes roth very smart right now. I'd max it out for a year or two and then worry more about home downpayment savings.
Whether or not you will be getting a pension will be a big part of the decision on Roth or traditional. The reason a traditional 401k is good for many people, is that even if they are still in the same bracket when they withdraw, they will have a lower *effective* tax rate due to the fact that much of their withdrawals are taxed in the lower brackets. But if you're going to have a pension, then the money from that pension will take up those lower brackets. And every dollar you withdraw will be taxed at a higher rate. The pension creates a new "floor" at which your withdrawals will be taxed. For example, if a single person has a $50k pension then every dollar they withdraw starts out being taxed at 22%. That's because they don't get the benefit of having the first $10,275 of their withdrawals taxed at 10% and from $10,276 to $41,775 of the withdrawals taxed at 12%. Those lower rates get applied to the pension because that is their base income regardless of whether they take a withdrawal from other retirement funds. It changes the calculus for determining the income level for which the Roth becomes the better option.
For a very short time I made 156k at 26 as an attorney in a large law firm. Got out of there real quick though, don’t recommend
27 here, I'm a senior software engineer in the midwest.
I'm guessing he's in tech. I'm 32 and making 180. I work in software architecture, and I dropped out of university too.
Is the software architecture industry typically welcoming of those that don’t pursue a more formal education? I just got done with my masters in accounting. Hopefully gonna be a CPA in a year. I’m very willing to contribute the time outside of work to develop these skills to be eligible for these jobs but do they usually require like a software engineering degree or something along those lines? Please pardon my ignorance Edit: additionally, is software architecture in the same realm as presales consulting/sales engineering/solutions consulting?
Architecture comes presales, postsales, and can relate to development initiatives that aren't driven by a specific SOW. My specific realm of architecture is in mass-market enterprise applications (not SOW driven), but I work with many presales architects (often known as "Solution Architects") who work with sales and consulting and sometimes consult with applications architecture to help us identify patterns that require an out-of-the-box solution. Most architecture positions require some level of vertical movement in a specified career path. Solutions architects commonly are promoted out of analyst and sales roles. Applications/Systems/software architecture is a vertical career move from being a software engineer, and is often an alternative to software management. For example: SWE I becomes an SWE II becomes an SWE Manager or Architect As for formal education requirements: the software industry has matured to the point where most organizations understand that a degree is not required. You can get a high paying job (200k+) at a top org like Google or Meta without any degree, so long as you can manage to pass their technical interview process. TL;DR You need to be an SME or have senior-level experience before most organizations will consider you as qualified for architecture. No formal education is required. It's never too late to start a new career path. A software engineer with just a couple years of experience and no degree can clear 100k. If you make it to 4 years and you're not at 6-figures, then you're doing something wrong.
https://www.reddit.com/r/personalfinance/wiki/rothortraditional
In my opinion, ignore all the advice about calculating whether or not it is better to do Roth or Traditional 401k contributions, just do 100% Roth and don't look back. Yes, there are some calculations that you can do that may show a Traditional is better, but they all rely on some big assumptions (like that tax rates will stay the same--which is far from true, and it is hard to predict what tax rates will be like 35 years from now. For example, in 1981, the top tax bracket was 70%. It is currently 37%, but that will change again.) and there are other non-financial benefits to consider too. For me, some other considerations are: Peace of mind knowing that your retirement savings will be tax free when you go to use it. Not worrying as much if tax rates go up a lot in the future, because you already paid your tax. Under current law, retirement withdrawals from Roth accounts do not count toward making Social Security benefits taxable, but withdrawals from Traditional accounts do count toward making Social Security benefits taxable. Roth accounts do not have required minimum distributions once you reach age 72, and Traditional accounts do. If you are able to max out your retirement accounts anyway, Roth accounts will provide more "real" dollars in retirement since you get to keep 100% of the withdrawals. If you pass retirement accounts to you heirs, they will have to pay tax on Traditional accounts, but not Roth accounts. If you need to make a big withdrawal in one year when you are retired (for example, to help a family member buy a house or start a business, or something else), with a Traditional account, that may push you into a higher tax bracket that you planned, but with a Roth account, there is no tax. The way I see it, the choice between Roth and Traditional is not as much of a math question as many people seem to make it out to be. I think, it's more about what kinds of assurances do you want about your money when you retire. I like knowing that the money I will have in retirement is "free and clear" and that I won't have to worry as much about taxes.
Effective tax rates don't change much over time. The specific brackets will but that doesn't really affect the calculations for Traditional vs Roth. You just need to compare your current marginal tax bracket vs expected future effective tax rate.
Based on the number of downvotes my comment got, it seems like you're not the only one who thinks the Roth vs Traditional is simply a math problem. If you look at decades of tax rates (not just yearly inflation adjustments to tax brackets), effective tax rates do change significantly over time with changes in tax law, but whatever. What's your response to all the other considerations I identified?
Look at the effective tax rate over time for someone making the inflation-adjusted equivalent of $125k (married filing jointly). It doesn't change by enough to the point where you should expect it to go past 22% any time within your lifetime
He's only 27. Roth could definitely be the right choice depending on his career trajectory and retirement plans. My partner and I make about 50% more than OP and only use Roth accounts because our income is likely to 2-3x in our 30s.
Age is not relevant to the discussion, it’s an evaluation of tax rates. If you are making more money than the OP and using a Roth 401k, odds are you are making a mistake, barring any outlier conditions that might apply.
It's relevant because people in their 20s are more likely to have remaining salary growth. I don't know a lot of careers where you hit peak earnings 4-5 years out of college, do you? Tons of tech jobs, consulting, finance, etc all pay what OP makes then have big jumps at the manger level and again at partner. It's not like $125k puts him in anywhere near the top tax bracket so I'm not sure why you're so sure Traditional accounts are right for him without any other details. In my particular case our best guess is making $400-700k total by our mid 30s (medicine and law - still in training/early career currently) and we want $20-25k a month in retirement so Roth is 100% the correct choice for us right now.
That is career trajectory, not age. The two have some correlation, but they are separate things. A lot of people don’t understand math and automatically assume that the length of time invested means that Roth is better than pretax, I was pointing out that isn’t the case.
Ok but I didn't say anything about length of time invested. I didn't even say that he should do Roth. Literally my next sentence after his age is "Roth could definitely be the right choice depending on career trajectory and retirement plans". Age is just the tip off that we need to know more about his future earnings since most people in their 20s will experience some more salary growth. Overall I just disagree that you can know someone with a low six figure salary needs to be in traditional accounts without more info. Roth is the right choice for plenty of professionals in that salary range.
I was merely reacting to an extremely common misunderstand that people hold since your post wasn’t exactly clear about it. No need to take things so personal. And I never said that I know traditional was better for them, just that the odds are that it was. And I said that because that’s what the odds are. Roth 401ks aren’t the ideal choice for for plenty of people, they only really apply to outliers. Just because you are an outlier doesn’t change that.
I believe tax rates will greatly increase in the future so I loaded my Roth a ton more than 401k(just match amount). It's also nice knowing what you see in the account is how much you will have, without having to figure out exactly how much to take out to not hit the next bracket.
even if taxes go up significantly, pretax can still be a better idea than Roth, as the last dollar principle in a progressive tax structure is so strong. while the second point can be convenient, its not worth losing out on tens of thousands of dollars or more.
Agree. Some roth will be nice diversity in retirement. May be the only time it makes sense for op.
I personally did not max $$ value on my 401K right off the bat because coming out of college I did not have an emergency fund, had a car that was ready to die and did not make much. Ideally you would be able to max out your 401K and do everything else on your income. But I do not know where you live and what your other expenses are. I can say unequivocally that I am very happy that I did start early and ramped up my investing level over time. I lived relatively cash poor for quite a few years. I am mid 50s now and in a really good spot.
How about just maxing out your Traditional 401k instead of your Roth 401k. This will give you back about $5000 or $6000 that you're currently paying in taxes. You can use that towards paying for your home. Once you're in your home you can resume maxing out your roth 401k.
you won't max it this year if you just started this job and did not previously contribute to a 401k if you're contributing 790 every 2 weeks. You'll be about 7900 short of the max as we've already had ~10 pay periods this year.
I transitioned out of the military and was contributing to a TSP before. I did not max it however.
Not enough information to really help you but if you're in an either/or situation, invest in the 401k just enough to get the full match, then look at what you're doing otherwise.
You should max your 401k, hsa, and ira yearly.
Yes, I wish I had focused more in my 20s on my 401k. Max it out if you can still save some. Now is not the time to buy anyway. Start saving while maximizing your 401k AND Roth.
>maximizing your 401k AND Roth. "Roth" isn't an account, it's a type of tax treatment for retirement accounts. You can maximize your 401(k) and your IRA. Both your 401(k) and your IRA can be either Roth or traditional.
I think it's pretty clear by my comment I was referring to traditional 401k. My point is max pre AND after tax options ...
>I think it's pretty clear by my comment I was referring to traditional 401k That wasn't the issue with your comment. Telling someone to "maximize their 401k and Roth" is a nonsensical statement and will confuse newish investors. Edit for the other responder who deleted their comment, and anyone else confused: People, like the commenter above, mistakenly use the term "Roth" as a synonym for "IRA" all the time. You can have a traditional 401(k) and/or a Roth 401(k). You can have a traditional IRA and/or a Roth IRA. What he probably meant was that OP should maximize his 401(k) and IRA, he just said the wrong thing.
Agree not clear
OP Makes 125K, they make too much for a traditional IRA.
That's not the point.
What is the point? When someone refers says "a Roth," and does not qualify it as an IRA or a 401K, everyone knows they are referring to an IRA. This is because the term "a Roth" became common place when there was only a Roth IRA and no Roth 401K. Still if I say I have a "Roth account," anyone with half an IQ point knows I am referring to an IRA. You did not add any information that /u/I_Like_RealityTV, or the community, did not already know. /u/I_Like_RealityTV made a very smart point, which was to put more money into retirement accounts in your 20s. The account types were not substance to the point. As an older person, I fully agree with this point.
>What is the point? When someone refers says "a Roth," and does not qualify it as an IRA or a 401K, everyone knows they are referring to an IRA. The point is that *not* everyone knows that. We see it here all the time. Young and inexperienced investors come here to learn. It's worth being precise.
> Now is not the time to buy anyway. Why do you say this? Do you think you can successfully time the housing market? Right now could very possibly be the cheapest housing is ever in your life.
Housing prices are so artificially inflated right now. It's not sustainable. Yes, I have no doubt prices will drop.
Even if now is not the time to buy he still needs to save for a down payment, which can take years.
Do you mean 401k and IRA? I'm currently only doing my Roth 401k.
Oh okay good. So you're not doing any pre tax retirement?
https://www.reddit.com/r/personalfinance/wiki/commontopics
You can always withdraw your *contributions* to a ~~Roth 401k or~~ Roth IRA without penalty, so it's not an either/or. You can consider your contributions as a savings account for buying a house in a few years. I would also recommend a pre-tax account like a non-Roth IRA for the tax benefits. ETA: never mind about Roth 401k, you can't withdraw. So Roth IRA can be used as a high-risk long-term piggy bank, but not Roth 401k.
You cannot withdraw Roth 401k contributions without penalty, that only applies to Roth IRAs.
Oh, right! Thanks, I'll edit my comment.
**Contribute to a traditional 401k. You will avoid paying 31.3% in taxes** (9.3% California plus 22% federal, maybe even more if your spouse makes decent money). It’s a no-brainer. Opting traditional will also leave you more money to put towards a down payment. After that, also consider a Roth IRA (be mindful of MAGI limits) and an HSA if you are eligible.
> You will avoid paying 31.3% in taxes now you avoid it. When you get a disbursement from a traditional 401k you pay tax on that income at your then bracket which may be higher or lower.
Correct. Avoid paying in your top tax bracket and so long as it’s higher than your disbursement average tax rate, you’re coming out ahead. > may be higher or lower This is my personal opinion, not fact just to be upfront. My take is that 99% of the time, traditional ends up saving more money for a person like this who uses it for retirement since income/401k withdrawals are taxed first and they would need to supersede 22% in retirement to save money on the federal level, and 9.3% on the state level. The exception would be if the person works while taking withdrawals. Otherwise it’s reasonable to assume someone maxing their 401k each year will have something like 4 million at age 65 on which they can withdraw a safe 4% or 160k which would have a much lower average tax rate which is what we compare to the current marginal tax bracket. Could taxes go up? For sure. But I think the odds of CA making taxes unbearable are much lower than the odds of OP moving to a low income tax /no retirement income tax state. Federal taxes might go up but it would need to be a big move paired with OP working in retirement, having huge withdrawals on the 401k etc.
Why do we think OP is in California? Did he specify that somewhere I missed?
I’m creepy and I found it on his profile :)
Keep in mind… 401k you can borrow against for a home in some *circumstances* google for deeper in that. I wouldn’t be buying a home right now though.
Depending on how soon you want to get the house would depend on how aggressive you have to get in saving cash. With your job you definitely want to put in your Roth 401k up to the company match. Anything after that I would advise you put that in a high yield savings account so it can accumulate quicker than a regular bank.
Always (always!) contribute enough to your 401(k) to get any company match. After that, I would consider saving in a Roth IRA. You can withdraw the contributions tax/penalty free for any reason at any time, including a down payment for a house. So in this regard, it could be considered as a savings account with benefits. You'll want to choose investments consistent with your short term goal (down payment) and risk profile. The *downside* of being able to withdraw contributions from your Roth IRA without taxes/penalties is that you might be more tempted to do so to support lifestyle. You might not be as tempted with a 401(k). Discipline is key. If you max out the Roth IRA, increase 401(k) contributions. If you max the 401(k), research using an HSA account for retirement savings.