401k or Roth/401k ?

[Time2]

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.

 

[sengsational]

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-credit/investing-retirement/roth-vs-traditional-401k/

 

[jazz4cash]

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.

 

[Montecfo]

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.

 

[aaronc879]

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%.

 

[Time2]

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.

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-credit/investing-retirement/roth-vs-traditional-401k/

I'll take a look, thanks

 

[pb4uski]

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.

 

[Time2]

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!

 

[sengsational]

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.