Is a Roth 401K Account a Good Idea for Me?

[nico08]

My goal, like others on this site, is to retire early. I am 39 and would like to be able to retire as early as 45. My employer offers a 401k plan. I invest the maximum tax-deferred amount per year ($16,500) and receive a 4% company match. The 401k can be invested as a Roth 401k. I would like to know if it is better for me to invest money in the 401k as a tax-deferred (traditional) contribution or as a after-tax (roth) contribution. I do not own real estate, I take the standard deduction/exemption for tax purposes. The nice thing about the traditional 401k contribution for me is that it brings my current taxable income down. Currently, about 52% of my net worth is in taxable accounts, 32% is in employer-sponsored retirement plan accounts (401k, 403b) and 15% is in Roth-IRA accounts. I have read that as a general rule, just like it is a good idea to diversify your investment accounts, it is also a good idea, if possible, to diversify your investment accounts based on tax status (after tax, tax deferred, and Roth-type accounts). Thank you for your insight!

 

[LOL!]

Current marginal income tax bracket?

If your marginal income tax bracket in retirement will be less, then the Roth 401(k) is a BAD idea for you. In general, early retired folks without pensions have a much lower tax bracket in retirement than when they were working.

If you stay with the traditional 401(k), you will be able to roll it over to an IRA and then to convert it to a Roth IRA while at a lower tax rate than now when you are working. Why would you want to pay more taxes than you need to? Stick with the traditional 401(k).

 

[JustCurious]

I agree with LOL. You should contribute to the traditional 401k before the Roth.

The only point I would disagree with is that you should compare your current marginal tax rate with your expected average (not marginal) tax rate in retirement applicable to the 401k withdrawals. The former is very likely to be higher than the latter, so the traditional 401k is the way to go.

Bogleheads :: View topic - Roth 401k v. traditional 401k