$3000 each into VTSAX and VTIAX ($3000 minimum for each fund) The money was then placed in the Roth IRA and I paid taxes on the 18k. very few people consider that with ROTH 401k you can contribute more than with traditional 401K. This is because my tax rate is high now and I can convert the funds at a future date post retirement when my tax rate is lower. Roth IRA contributions are made with after-tax dollars, so there's no conflict between this type of plan and a 401(k), which is funded with pre-tax dollars. Current net worth minus house is ~230k. During that sign up process you’ll be presented with a choice. mpi vs roth ira reddit, So I started a Roth IRA when I was 18 or so and never put any more money into it after my initial $1,000 investment (I know, I should have). I seem to come up with making slightly less but I'm still just not sure. Big difference. Plus, I’m also 40. Switching to maxing out roth ira instead of roth 401k. You can convert pre-tax 401k to fill up the standard deduction and 10% tax brackets and pay way less tax on that income than if you put it in Roth 401k now. I’ll be signing up for the personal capital to give it a try. RMD's start to be come a large factor when you are in your 80's and 90's, because after 5 or 6 decades of appreciation, you may be bumped into a much higher tax bracket and have to pay more for Medicare. The 401k grows to $1,829,768 by the time we’re 60 years old. Yes, you may need to invest the pre-tax equivalent of $30K to max out the Roth, but you’re also getting a lot more value than if you invested $19,500 in a Traditional 401k. ... contributions, put those savings on automatic and consider a traditional IRA or Roth IRA account. Thanks for your comment. One cannot truly make a blanket statement regarding where and how much money … An IRA is an Individual Retirement Account. You aren’t contributing ~30k pretax because you are paying taxes. Assuming 2x growth when you withdraw, the pretax account would be worth $31,200 (19,500 * 2 * .8) and the post-tax would again be worth $31,200 ($15,600 * 2). I've read through all posts in r/financialindependence comparing the ROTH 401k and the traditional 401k for FIRE. Vs. Roth IRA: Can I Have Both? My employer contributes 6% of my pay no matter what and will match up to an additional 5%. Assuming a 20% tax rate, you could invest all $19,500 pre-tax or only $15,600 (19,500 * .8) post-tax. Can you believe that half of all US households have no retirement savings at all? In fact the further away from Roth being equal to traditional in what you are calling pretax dollars the more you should use traditional. The big differences between the … Max out your 401(k) and contribute to a Roth. It's a good idea to have both tax deferred and after tax retirement savings. The Breakdown. Good point, I guess I need to consider the tax law in the country I'll be retiring though. ($A + $b)×1.0810 = $A×1.0810 + $b×1.0810. Is that you? Reply Link. More posts from the personalfinance community. Even if your spend is below the 12% you are missing a chance to up your cost basis for free. Every projection shows us with higher income than when we were working, especially when social security is considered. If you have money in both a traditional 401(k) plan or IRA and a Roth version, there may be ways you can maximize the differences in taxation to reduce the amount you'd owe in taxes down the road. Reply. Am I thinking about this wrong? I have opened a roth ira. You cannot access gains in a Roth account early. Remove that constraint and run the scenario with both $19.5k trad vs roth. For that reason alone, the Roth 401K looks a lot more attractive long term. But don't forget that comes at the cost of eating up 0% cap gains. I am a bot, and this action was performed automatically. In October, I maxed out my 401k and Roth IRA contributions for the year. Six years ago, I distinctly remember a loan advisor telling all of us soon-to-be student debtors to start investing in a Roth IRA that day. Some previous contributions however were non roth. I don't plan to access Roth or gains early. Here’s what to know before deciding which account is right for you. Contribution limits for Roth IRAs. For most households, the Roth IRA contribution limits in 2020 and 2021 will be the smaller of $6,000 or your taxable income. Roth IRA; Traditional IRA; Roth 401(k) Traditional 401(k) I think the terms can confuse people so let’s break it down. I think Roth IRAs are a great deal, and I recommend opening a Roth IRA if you fall in the income limits. Maybe your advisor may be aware of what they are. Traditional, what do you mean exactly by "being able to contribute more"? It is something that we are dealing with now as my wife and I approach retirement age. It looks like the Amazon 401k plan at Fidelity limits the after-tax non-ROTH contribution to 10% of base salary. Look into HSAs and After-Tax (different than Roth) 401k for further savings. Though both the retirement instruments have similar … Say you put 18,500 into a traditional account, it grows to 100k, and you withdraw it at retirement. Right now I'm not doing conversions because I'm trying to get as much 0% cap gains as I can. Key Points. This is an okay plan for a person who needs to be tricked into saving. While you’ll be grateful for what you save now once the time comes to retire, it’s important to think of the big picture: What other goals do you have between now and then? Please contact the moderators of this subreddit if you have any questions or concerns. No rule states you can’t open a Roth 401(k) along with a Roth IRA. California is terrible for higher income earners. If one of you dies before the other, the survivor will almost certainly be forced into a higher bracket. I'm in my early 30's, my 401k balance is approximately $275,000 and I max out my 401k contributions. mpi vs roth ira reddit, So I started a Roth IRA when I was 18 or so and never put any more money into it after my initial $1,000 investment (I know, I should have). Both IRAs have a contribution limit of $6,000 in 2020. In 2020 and 2021, the maximum contribution to a Roth IRA is $6,000 (people 50 and older get an extra $1,000). I have opened a roth ira. Rollover IRA/401K Rollover Options ... Is Maxing Out Your 401(k) Enough? Investment Account 5% They are less early retiree - you cannot have a Roth conversion ladder or a useful 72(t). That’s because you don’t have to pay tax initially and can invest more. You might not be … … So let's say you contribute $18k and your company contributes $9k, that will … IRA. Press question mark to learn the rest of the keyboard shortcuts. High rollers may want to open both to take advantage of both contribution maximums. If you can’t save that much, then do this. I might not fully grasp what you’re saying. between roth ira or roth 401k unless you have bad funds in your 401k. Retirement. Personally, I max my traditional 401k and I invest my “tax savings” my maxing a Roth IRA. Udayan Chattopadhyay says: May 20, 2011 at 3:34 am. As long as you aren’t withdrawing any earnings? In other words, there is no such thing as a Roth employer contribution--employer contributions are always traditional even if they get put in a Roth 401K. Some previous contributions however were non roth. Even worse idea, Spain does not recognize Roth money. Take some time to read about and understand the differences between 401k plans and IRAs. Spain is going to tax that money. If I start contributing to an ira and put less in the 401k would I be losing out on more compounding in the 401k, Its functionally the same. That’s a lot of money. Now, my paychecks are larger because those automatic deductions are no longer happening. However, if you are maxing out your ROTH 401K you are contributing $19,500 after-tax money, which depending on your tax bracket can be ~$30,000 pre-tax money. to Spain). would I be losing out on more compounding in the 401k. That’s only the people with retirement accounts. I assume you are contributing the max to a non-Roth 401k and contributing additional money to taxable accounts. However, very few people consider that with ROTH 401k you can contribute more than with traditional 401K. Roth IRA vs. Roth 401(k): Which Is Best for You? Roth IRA; Traditional IRA; Roth 401(k) Traditional 401(k) I think the terms can confuse people so let’s break it down. I'm not currently maxing the Roth IRA but I’m thinking I should max it first before investing in the Roth 401k for early withdrawal advantages. Now, my paychecks are larger because those automatic deductions are no longer happening. Use your IRA accounts for retirement savings; the Roth is a good way to go if you qualify for one. If you max out your Roth IRA contributions, there are other ways to … An IRA is an Individual Retirement Account. I also invested in my brokerage account. People with no retirement accounts have much l… This person is not limited to only $15.6k post tax. Employees can choose to … 401k vs Roth IRA Infographics. Investing in both a 401(k) plan and a Roth IRA offers the perfect combination of tax savings—some now and some in the future. For 2019 contributions and earlier, you could not make contributions to a traditional IRA … In 2021 a married couple can contribute $6,000 ($7,000 if over 50) each to a Roth IRA each year, usually via the back door for most high-income professionals since they make too much to contribute directly. I had no idea which type of retirement to go into. Roth IRA 5%. Maxing out your 401k is not so good. If I start contributing to an ira and put less in the 401k would I be losing out on more compounding in the 401k. >. Assume that taxes are the same now and in your retiement years. The difference is just the tax status of the contributions. Personally I do traditional 401k since I plan on retiring early and max out mega back door Roth and back door Roth IRA. You're in CA and plan to leave. You have effectively saved more by using a roth approach. In October, I maxed out my 401k and Roth IRA contributions for the year. If your 401k plan allows, you can contribute after-tax money to a non-Roth 401k, then convert the after-tax to a Roth 401k or IRA. Most comments focus on the income and the tax brackets. Talk about an awesome first world problem to have! https://thunfinancial.com/home/american-expat-financial-advice-research-articles/expat-roth-conversions-qna/. One last point: The money going in is not tax free, it is tax deferred. It's important to consider how much you'll want to spend in retirement, when you … While contributing the yearly maximum to your 401(k) may seem like a lot, you need to crunch the numbers to see if it's enough for a secure retirement. My employer contributes 6% of my pay no matter what and will match up to an additional 5%. Effective for 2020 contributions, anyone with earned income can open and contribute to a traditional or Roth IRA. to Spain). Why Bother With A Roth vs. A Traditional IRA vs. A 401k. It gives you substantially more flexibility. It really wasn't until like 2005 that we were able to pull ourselves out of debt and start saving seriously (aside from the 401Ks at work). Talk about an awesome first world problem to have! And for you super savers, here are other ways to save for retirement. Would it make sense for me to choose ROTH 401K over traditional 401K for the purpose of being able to contribute more even if my tax brackets may be lower during retirement? I'm 28 now and want to start investing in it again. Reddit . Other accounts, such as 529 plans , help with saving for education. Both IRAs have a contribution limit of $6,000 in 2020. (goal of financial freedom at 50) Any insight? You know you can take that money that you didn't contribute to the 401k and put it in a normal brokerage, right? For an early retiree, I think the first option is clearly better. My main question is how would switching contributions to a different account effect compounding? The difference between 401k matching vs maxing. There are other options that trump the 401k and even the Roth. The site may not work properly if you don't, If you do not update your browser, we suggest you visit, Press J to jump to the feed. The trad account you withdraw taxed 20k, more like $16k. Roth IRA vs. Roth 401(k): How they compare However, the Roth 401(k) has a number of key differences from the Roth IRA. Say you put 15k in each a trad and roth. If your employer happens to offer a good 401k plan (Fidelity is considered a good option for most people) and you are confident you don't want to make early withdrawals, then it's really not that huge of a difference between putting the money into the Roth 401k vs the Roth IRA. Roth 401k 5%. Thomas asked, “I agree with the at least maximize your employer match but have been confused as to why people don’t max out 401k first before adding to ROTH?” So the analysis gets more complex and really depends on how much money is in each bucket and do you have enough time to draw it all out before a pension or SS kicks in (or the 0% tax bracket goes away). Other people have been spot on about maxing out both a Roth and your 401k, and certainly not withdrawing funds from your 401k to fund the Roth. Currently all of my contributions go to the roth 401k portion. There’s effectively no difference between contributing more pre-tax and contributing less post-tax which is why discussions about Traditional vs Roth end up being focused on tax rates. Yes. Do these three things after maxing out your 401k and Roth IRA. Both 401k and Roth IRA aim at enabling the investor to amass a corpus sufficient enough to meet the long-term financial commitments, which become difficult because as people grow old, their capacity to earn comes to a standstill and many aspects like health come into play. Rollover IRA/401K Rollover Options Combining 401Ks ... Is Maxing Out Your 401(k) Enough? Currently all of my contributions go to the roth 401k portion. It does make sense. In most cases you would have more money by using traditional. It's a fallacy that you "can contribute more", what you are actually doing is probably paying more in taxes than you need to. Only 8 countries recognize the tax status of Roth money. Just wanted you to be aware of that since your employer is matching and you are using their Roth option. Now, It feels like free money that ill be able to withdraw during FIRE years and pay minimal tax on it. Maxing out Roth 401(k) contributions reduces your take home pay more compared to pre-tax deferrals. Roth funds are nice in that the limit is effectively higher. The 401k actually has a $54k annual cap via the after-tax option, and that includes the $18k and company match. According to the latest (2016) Survey of Consumer Finance, the median value of retirement accounts for families near retirement age is around $120,000. level 1 Vampiric2010 If I had paid the tax for a ROTH during my high earning years, I am looking at what, 25 to 38%? Without dragging on a long conversation here, we have an amazing article on when to contribute to a Roth IRA vs. a Traditional IRA. Of course, there are other factors like the state you live in. $19500 in Traditional + $6500 in taxable brokerage (assuming you've maxed out all other options). At its core, FI/RE is about maximizing your savings rate (through less spending and/or higher income) to achieve FI and have the freedom to RE as fast as possible. I live in California, I'm 24, and I plan to retire early and move out of California / USA (e.g. If they are high, use traditional. You're most likely better still contributing to Traditional then doing a Roth Conversion Ladder, which after 5 years you can withdraw the conversion amount on a tax free and penalty free basis. Roth IRAs can be great, but there are some restrictions to be aware of when investing in these accounts. I'm 28 now and want to start investing in it again. In a 401k vs Roth scenario, I think the 401k wins every time. I got a job that makes $53,000 annually. I didn't even realize I could possibly Fire 5 to 20 years before retirement. As we expected, the 401 (k) portfolio grows much more than the Roth IRA. I think you may be confusing yourself by treating $19,500 pretax as being equal to $19,500 post-tax which as you know is not true. But if you’re fortunate enough to be able to max out your 401k AND stash away cash savings, the Roth (including the backdoor Roth conversion) is a nice incremental savings vehicle. Over the years you earn say 33% in each and end up with 20k. We’re fairly confident we’ll be in a higher tax bracket come retirement, but we’re hedging our bets by maxing out our employer match 401k/403b contributions. Also putting about 10%+ of … Key Differences. Roth IRAs do not provide a current-year tax deduction on contributions, but the account grows tax-free and withdrawals are tax-free in retirement. I don’t even think I have 100k combined, so I’m way behind. 401k 5% with Co match. Essentially, if your taxes are very low, use Roth. I believe they would perform the same but I just want to be sure that I'm not making a mistake by switching contributions to a different account. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. Currently all of my contributions go to the roth 401k portion. Assume you pay a 20% total income tax rate. Looks like you're using new Reddit on an old browser. You can still do a 72-t on a Roth IRA or Roth 401k. You cannot contribute to a Roth 401k since you are at the 401k (across Roth and non-Roth) limit. Financial Independence is closely related to the concept of Early Retirement/Retiring Early (RE) - quitting your job/career and pursuing other activities with your time. You can max 401k and max a traditional OR roth IRA. Since the contribution s Roth IRAs aren’t deductible, most individuals might want to take it easy on their contributions. More posts from the financialindependence community, Continue browsing in r/financialindependence. Roth 401(k) vs. traditional 401(k): Which is better? One missing piece is Roth IRA and Roth 401K accounts are not subject to RMD's and they are passed on tax free to your heirs, with a potential of 10 more years of tax free appreciation after your death. It’s important to understand their advantages. I don't want to be forced to withdraw more than I actually need. The recession almost cut that $1,000 in half at its lowest and is now hovering around $750. I highly recommend you leverage that article as a basis for this. Not at all. 401ks are workplace-sponsored. In a Roth 401(k) vs. Roth IRA comparison, both offer tax-free growth & tax-free retirement income. A Roth IRAis a US retirement plan that is generally not taxed, as long as certain conditions are met. … Am I missing any other more important factors? In the 24% bracket, there is $4,680 saved in taxes. Im so glad I read this advice like 8 years ago. This makes literally zero sense. I'm in my early 30's, my 401k balance is approximately $275,000 and I max out my 401k contributions. Would it make sense for me to choose ROTH 401K over traditional 401K for the purpose of being able to contribute more even if my tax brackets may be lower during retirement? This got me thinking about how much a person needs to retire, and if they only put money into their Roth IRA… Do these three things after maxing out your 401k and Roth IRA. That $275,000 gains just as much as it would, and the contribution you make would gain just as much as it would. Whether you contribute to a Roth IRA or a traditional IRA, your money will grow tax-free until you retire just as it does in your 401k. Unfortunately, I only recently started maxing out my Roth 401k and Roth IRA. In 2020 I maxed out my traditional 401K, my ROTH IRA (backdoor), and my HSA. Even households that saved for retirement haven’t saved enough. For many investors, this is important because, after five years, the Roth IRA can also potentially serve as an emergency fund. *Edited to add that I have tried using 401k calculators to figure it out. Hello everyone, first a little bit of background. Roth gains would be the last money I access in my withdrawal strategy but I understand points 2-4. I have no expenses while living at home. I'm not sure if capital gains are considered earned or unearned income. You can also consider a mix of Roth and standard accounts, or just do conversions when markets dip or your income is low. However, if you are maxing out your ROTH 401K you are contributing $19,500 after-tax money, which depending on your tax bracket can be ~$30,000 pre-tax money. If you get a job that offers a 401k (or 403b, 457, or TSP) you’ll have an opportunity to sign. Think of all those years between FIRE and traditional retirement when you're living off your brokerage account and have no earned income. 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