Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
401k or Roth/401k ?
Old 06-10-2021, 06:48 AM   #1
Thinks s/he gets paid by the post
 
Join Date: Oct 2019
Posts: 1,577
401k or Roth/401k ?

My son just got a job with benefits. He has a choice of 401k or Roth/401k.
He's in the $40k to $50k income range filing single.

I have suggested the Roth/401k, mostly because he is young and at some point will probably buy a house. He could withdraw his contributions for a down payment. On the other hand, next year we will start gifting him money just to give it away early, rather than when he's in his 50s when he might inherit it.
Question: 401k or Roth/401k.
Time2 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 06-10-2021, 07:15 AM   #2
Moderator
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 8,244
I've advised my kids to go with the Roth 401k because they're really not in that high of a tax bracket that they need relief. But left it up them, after explaining the pros and cons. But only up to the match (after that, fund individual Roth).


ETA: Based on your question, I went out to the go-to for answers to questions like this: Clark Howard. He's saying Roth 401k is a slam-dunk, but posits with unusual alacrity that tax rates have to be headed up: https://clark.com/personal-finance-c...ditional-401k/
sengsational is offline   Reply With Quote
Old 06-10-2021, 07:39 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Aug 2004
Location: Laurel, MD
Posts: 5,903
I am surprised if this is an either/or choice. Id go with the Roth assuming the tax deferral is not critical. Also, if there is a match It is usually designated to the non-Roth option so employee ends up with both which is good, actually. I wish the Roth option was available earlier in my career.
__________________
...with no reasonable expectation for ER, I'm just here auditing the AP class.Retired 8/1/15.
jazz4cash is offline   Reply With Quote
Old 06-10-2021, 07:45 AM   #4
Thinks s/he gets paid by the post
 
Join Date: Aug 2016
Location: Northern Virginia
Posts: 3,143
There is no pat answer. It is tax-rate dependent.

The best candidates for early career Roths in my view are married couples with moderate incomes or with one moderate income.

But establishing a Roth at a modest level( to get the meter running) makes sense for most folks I think.
Montecfo is offline   Reply With Quote
Old 06-10-2021, 07:52 AM   #5
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 4,083
At that income level I would go with the ROTH. However, when he gets to the point of going past the 12% bracket then contribute enough to the regular 401K to stay below the top of the 12%.
aaronc879 is offline   Reply With Quote
Old 06-10-2021, 08:54 AM   #6
Thinks s/he gets paid by the post
 
Join Date: Oct 2019
Posts: 1,577
Quote:
Originally Posted by sengsational View Post
I've advised my kids to go with the Roth 401k because they're really not in that high of a tax bracket that they need relief. But left it up them, after explaining the pros and cons. But only up to the match (after that, fund individual Roth).

The match is different, they automatically contribute 5%, then match 1%. But as far as the individual Roth, that has a lower limit $6k vs the 401k/Roth limit of $19.5k.

What is the reasoning about using the individual Roth?

He could max the individual Roth and then use what's left in the 401k/Roth.


Quote:
ETA: Based on your question, I went out to the go-to for answers to questions like this: Clark Howard. He's saying Roth 401k is a slam-dunk, but posits with unusual alacrity that tax rates have to be headed up: https://clark.com/personal-finance-c...ditional-401k/
I'll take a look, thanks
Time2 is offline   Reply With Quote
Old 06-10-2021, 08:58 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 29,450
Quote:
Originally Posted by Time2 View Post
My son just got a job with benefits. He has a choice of 401k or Roth/401k.
He's in the $40k to $50k income range filing single.

I have suggested the Roth/401k, mostly because he is young and at some point will probably buy a house. He could withdraw his contributions for a down payment. On the other hand, next year we will start gifting him money just to give it away early, rather than when he's in his 50s when he might inherit it.
Question: 401k or Roth/401k.
Roth 401k... with $50k of income as a single he'll be in the 12% tax bracket so there isn't much tax rate arbiitrage to capture in a traditional 401k... its less likely that he'll be in a lower tax bracket when he need that money.... so pay the tax, go with the Roth 401k and let it grow tax free.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 06-10-2021, 09:07 AM   #8
Thinks s/he gets paid by the post
 
Join Date: Oct 2019
Posts: 1,577
Quote:
Originally Posted by jazz4cash View Post
I am surprised if this is an either/or choice. I’d go with the Roth assuming the tax deferral is not critical. Also, if there is a match It is usually designated to the non-Roth option so employee ends up with both which is good, actually. I wish the Roth option was available earlier in my career.

Yes, money put in by the employer is not in the Roth account.

I didn't have a good understanding until 6 or 7 years ago, I should have put money in a Roths instead of tIRAs. My tax bracket was low. I did get about 12% of my liquid accounts into Roths, whereas I have about 58% in Tax deferred accounts. So, I kinda missed that boat. Now doing Roth conversions.
Yes, I think it is wise to have a split of all three types of accounts, Roth tIRA and taxable accounts. I have no idea what the proper split is and I think it would require predicting the future to get it right.

EDIT to add, luckily my son's company has a wide variety of Vanguard funds to pick from!
Time2 is offline   Reply With Quote
Old 06-10-2021, 03:14 PM   #9
Moderator
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 8,244
Quote:
Originally Posted by Time2 View Post
The match is different, they automatically contribute 5%, then match 1%. But as far as the individual Roth, that has a lower limit $6k vs the 401k/Roth limit of $19.5k.
The idea is to make sure all of the "free money" is accessed, so priority #1 is saving through the company (401k)*. If all of the match is captured and there's still more room for saving, the an individual Roth is priority #2. The reason for the individual Roth is that you have full flexibility with investment options and you have the choice of the very lowest expense ratios in an personal Roth. But since it's pretty easy to max-out an individual Roth, so if there's STILL more room for saving, then priority #3 is back in the 401k.

* For mega corps, they usually have a lot of choice and low fees, but smaller corps sometimes have really horrific fees and little choice. It could be so bad that a the company 401k is not recommended at all! So check the expense ratios.
sengsational is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Roth 401k and non-Roth 401k CSdot FIRE and Money 12 11-27-2020 11:04 AM
Confused choosing between: 401K, Roth 401K, Roth IRA or Traditional IRA? krldrummerboy FIRE and Money 22 05-26-2016 11:46 AM
401K, Roth IRA, Roth 401K - Need advice please tsturbo FIRE and Money 15 05-10-2009 02:08 PM
roth 401k and roth dont seem good deal mathjak107 FIRE and Money 29 05-29-2006 05:43 AM

» Quick Links

 
All times are GMT -6. The time now is 11:54 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2021, vBulletin Solutions, Inc.