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Roth or regular 401k for young kids in 22%-24% brakets
Old 10-28-2021, 07:40 AM   #1
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Roth or regular 401k for young kids in 22%-24% brakets

If a young kid is in the 12% bracket, I think the Roth is a slam dunk, but where is the cut off (to switch to regular 401k)?

My kids have pretty good jobs out of college (and not married) and my default answer was start a Roth, but I'm starting to second guess that advice.
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Old 10-28-2021, 08:00 AM   #2
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I think it depends on the kid and what you think their marginal tax brackets are expected to look like over their lifetime.

If the kid is going to remain single and have lower compensation and maybe not accumulate much wealth, then switching from Roth to traditional if they start to exceed the 12% bracket probably makes sense.

If the kid is going to marry another professional and they'll both be in high five-figure, low-six figure jobs, then I'd think about sticking with the Roth even in the 22% bracket.

A few other things to consider:

1. What do you think is going to happen with tax rates, either in 2026 or later. That would impact the recommendation.

2. If the kid is going to retire early, or have some low income years for any other reason (going back to graduate school, perhaps), then maybe do traditional now and convert during those low income years.

3. If you're going to leave them an estate of any size, that might cause them high brackets in their 40s/50s. Hard to figure out how to plan for it, but something to maybe think about.

My kids have all been all Roth all the time so far.

My oldest may start making some more money (good degree, good company, good career prospects, but one never knows). But he also plans on never retiring because he wants to earn a lot to give a lot away.

So for him it probably makes sense to stay with Roth at least into the 22% bracket and maybe even 24% if he makes it there before 2026. I think I told him the other day that he could just qualitatively switch to traditional whenever he felt like he was paying "a painful amount" in taxes. Probably not the most laser-like advice, but there it is.
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Old 10-28-2021, 08:11 AM   #3
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Pre-tax 401k as much as they can after Roth IRA.

Roth IRA to $6,000.

HSA if they have a HDHP.

Saving more early is the key. Even 12% + 6% state tax avoided is nearly 20% more they could save. Dodge the tax for 40 years but use Roth as well.
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Old 10-28-2021, 08:59 AM   #4
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1. Get any/all available matching funds in the 401k
2. Roth
3. Then 401k or Deductible IRA depending on the 401k investment options

The cutoff is after maxing out #1 & #2.

As their income increases, they should be saving across all types of accounts. We don't know the future tax rates, so prepare for all possibilities.
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Old 10-28-2021, 12:53 PM   #5
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Definitely pick up any company match. Roth vs. 401k may be a wash at higher tax rates, but should favor the Roth at low tax rates as mentioned. I kind of like Roth contributions up to the limit and then back to the 401k for anything more. If a Roth 401k is available then maybe a 50/50 split of Roth and traditional. Income limits may throw a wrench into that plan in future years, so I'd overweight the Roth early on if that is possible.
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Old 10-28-2021, 12:59 PM   #6
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Quote:
Originally Posted by SnowballCamper View Post
1. Get any/all available matching funds in the 401k
2. Roth
3. Then 401k or Deductible IRA depending on the 401k investment options

The cutoff is after maxing out #1 & #2.

As their income increases, they should be saving across all types of accounts. We don't know the future tax rates, so prepare for all possibilities.

X2 on get the free company match money first. That is most likely in pretax 401k. Then depending on tax bracket, either 401k or Roth. In retrospect I should have done more Roth, been doing some pretty large conversions last couple years and continuing in near future. Of course future tax rates are unknown, but my gut feel is they certainly aren't going to go down. Add in my RMD tax issues, and you can see why the Roth conversions now. It would have been better to have more Roth when working.
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Old 10-29-2021, 10:17 AM   #7
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I personally went 100% to Roth 401k in a similar tax bracket as soon as my company offered it. In addition I did the Roth IRA until I wasn't eligible anymore. I didn't look at the immediate tax savings vs future rates.

Match will go in a regular 401k to make tax simple.

I considered flexibility in the future and how much tax you will pay overall at retirement age. I put about 200k in my Roth 401k and have had 400k in gains on that account for a total of 600k. In the end it really lowers overall tax you pay. In addition I don't think there are RMDs on a Roth 401k money. Imagine the growth they will have over their careers.

Yes, its not fun to pay that much in taxes every year.
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Old 10-29-2021, 11:01 AM   #8
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In the end it really lowers overall tax you pay.
That could be true, and, at the same time, it could be true that it decreases the amount of money you have to spend (compared to using traditional).

Quote:
In addition I don't think there are RMDs on a Roth 401k money.
There are, actually; however, it is of little consequence because you could roll it over to a Roth IRA. (See, for example, this explanation. )
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Old 10-29-2021, 12:49 PM   #9
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So for free advice, I would first consider how much you can contribute. If you can max it out and pay taxes then I would suggest a Roth. However there are probably many that can say put $10K into 401K but not afford 22% tax on top of that. So then I would suggest the traditional as you will get more into the account.
If the budget can afford to max out 401K and pay the tax I would suggest Roth unless there is a reason with some confidence that tax rate will be lower later. I would always take a slight hit in taxes to remove unknowns like future tax rates.
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