ROTH for young workers

[Jerry1]

I do the taxes for a friend who has three kids. I do the kids returns. He has a business so his accountant does his taxes. I was looking at two of the older kids W-2 and they made 401K contributions. My first thought was “good, he’s teaching the kids to save for retirement”. Then I wondered and thought I’d ask the group their opinion, what about a ROTH? They’re not making much money yet so they’d only pay 10 to 12 percent on the amount they don’t put into a 401K. It seems that they’d be way better off to load up as much as possible into a ROTH while they’re paying the least amount of tax instead of loading up a 401K.

Is my thinking right? Are there any restrictions that would keep them from contributing to a ROTH?

 

[Spock]

I do the taxes for a friend who has three kids. I do the kids returns. He has a business so his accountant does his taxes. I was looking at two of the older kids W-2 and they made 401K contributions. My first thought was “good, he’s teaching the kids to save for retirement”. Then I wondered and thought I’d ask the group their opinion, what about a ROTH? They’re not making much money yet so they’d only pay 10 to 12 percent on the amount they don’t put into a 401K. It seems that they’d be way better off to load up as much as possible into a ROTH while they’re paying the least amount of tax instead of loading up a 401K.

Is my thinking right? Are there any restrictions that would keep them from contributing to a ROTH?

Company matching $.

 

[Jerry1]

Company matching $.

Good point. I’ll look into that. I’m not sure if he matches (they work at his business).

 

[qwerty3656]

I vote for Roth until they start making big money.

 

[pb4uski]

+1 Roth at 10% or 12% tax bracket IMO.

BTW, do any of the kids qualify for the Retirement Savers Tax Credit? Free money from Uncle Sam for retirement contributions, including Roth contributions.

 

[SevenUp]

They’re not making much money yet so they’d only pay 10 to 12 percent on the amount they don’t put into a 401K. It seems that they’d be way better off to load up as much as possible into a ROTH while they’re paying the least amount of tax instead of loading up a 401K.

Is my thinking right? Are there any restrictions that would keep them from contributing to a ROTH?

If they are in the 10% bracket, their marginal tax rate, due to credits such as the saver's credit pb4uski mentioned, and perhaps the earned income credit, might be much higher than the bracket rate and thus make traditional contributions more appealing. Otherwise, depending on the likely career paths of the kids, it could be a reasonable bet that they would more into higher brackets soon enough, and work long enough, that paying 10% or 12% now will eventually look good.

Minor point: Roth is a name not an acronym.

See Traditional versus Roth - Bogleheads for more discussion.

 

[EastWest Gal]

Does the business offer a Roth 401K? My son works tow part time jobs. Both offer 401Ks, but one offers a Roth 401K. He’s not bothering with the regular 401k for now.

 

[disneysteve]

I've advised my 27-yo daughter to continue funding her Roth even though she now works somewhere that offers a 401k but there is no company match. If there was a match, I'd change my advice because it's tough to beat a guaranteed 50% return. Since there is no match, I think it's far better to be in control of your own investing rather than being tied in to just the options that the company offers.

 

[Jerry1]

+1 Roth at 10% or 12% tax bracket IMO.

BTW, do any of the kids qualify for the Retirement Savers Tax Credit? Free money from Uncle Sam for retirement contributions, including Roth contributions.

I’ll look into it. Thanks.

Does the business offer a Roth 401K? My son works tow part time jobs. Both offer 401Ks, but one offers a Roth 401K. He’s not bothering with the regular 401k for now.

I’ll talk to my friend, the dad. He owns the business so something he could consider offering if he doesn’t already.

 

[Sunset]

They can also contribute to an outside Roth, as well as the company 401K, which may have a Roth side.

 

[copyright1997reloaded]

+1 Roth at 10% or 12% tax bracket IMO.

BTW, do any of the kids qualify for the Retirement Savers Tax Credit? Free money from Uncle Sam for retirement contributions, including Roth contributions.

This is why my child maxed out the 2022 Roth IRA contribution (helped by me).

p.s. Another thing to look at: if not a dependent, have the child sell stock with LTGC as their LTCG rate is zero/low. (For example, transfer appreciated stock that you don't think you will hold until your death to the child as a gift who then sells it at their zero/low long term capital gain rate.)

 

[Big Gun]

Roth All Day

Roth's as soon as youngsters have earned income.

IMHO, the company match aspect (for a family-owned business) is overrated, since its still going to be taxed when withdrawn. Avoids FICA, but probably no marginal tax rate arbitrage benefit.

I fully understand the Roth versus Traditional logic for full-time earners, but money is fungible and the opportunities to contribute to Roth's are limited. I have funded Roth's for my kids whenever they have earned income, and will continue to do so no matter what their (or my) marginal tax rates are at the time.

The ultimate irony is that youngsters who start saving for retirement early will likely amass a large tax deferred account, and then have to worry about Roth Conversions or losing the marginal tax rate arbitrage game.

'I have too much money in my Roth'. Said no-one. Ever.

 

[SunGuy]

The standard Rule of Thumb is to do:

1. 401k up to company match

2. Invest into Roth IRA, one you can max that you do further steps

3. HSA account, you should open and contribute to this while young it is a triple tax advantaged way to invest, no taxes in, on growth or distributions if used for medical costs, with no expiration date, and once you are 65 you can take the money out and just pay income tax on it, and use it for anything.

Once you can then max the HSA move onto

4a. Taxable brokerage account for things like MLPs etc that produce K-1's, just be aware of UBTI .

4b. This is also where you can save with Money Market style fund for house down payment too, and if this is a goal when you are working on the other steps, you should be adding to this too along the way.

There's tons of stuff that will make everyone different, but stay out of debt, pay yourself first, reduce your daily "latte factor" number as well.
Read up on the pioneer in this field, David Bach for more if you struggle with being on the conspicuous consumer spending treadmill of hedonistic consumption.

If you make enough to max out the main accounts (congratulations on being rich) then if you don't want to save for real estate and other investments like art/crypto. There are some amazing life insurance products that if you know what to buy are going to pay out $40kish a year tax free in retirement.

You could potentially get:
1. $30k+ from taxable brokerage account (amount equal to standard deduction)

2. $XXk Social Security payments

3. $XXk withdrawal from your Roth IRA, remember Roth has no RMD (required minimum distribution)

4. $XXk from LIRP (life insurance retirement plan)
Not everyone wants or needs this, only super wealthy people with dependents do, so I would never buy this as I am single and no kids. I instead will just funnel more money into real estate.

With all that being said, all these distributions still leave you in the ZERO 0% TAX BRACKET!

 

[ncbill]

Right now my kids put ~30% into Roth TSP, get a 5% match in traditional TSP, & also fund an external Roth up to the maximum annual contribution.

I'm sure that will change in the future, but not a bad way to start.

Wish I had done the above, or as much as I could at the time.

 

[RobertTN]

Right now my kids put ~30% into Roth TSP, get a 5% match in traditional TSP, & also fund an external Roth up to the maximum annual contribution.

I'm sure that will change in the future, but not a bad way to start.

Wish I had done the above, or as much as I could at the time.

I was going to say something along these lines. Max out the Roth if the employer offers that (you still get the match but it goes into the regular 401K) and do a Roth IRA up to the limit if possible. The big unknown of course are where taxes will be in the future, and I certainly use the Roth as a tax risk mitigation.

 

[tulak]

Bogleheads has unsurprisingly covered this topic: https://www.bogleheads.org/wiki/Prioritizing_investments

I’ve looked this over in the past and agree with their recommendations.