Is It Better To Do A Pre-tax or Roth 401K?
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- Опубликовано: 5 авг 2024
- Your 401(k) at work is one of the best ways-if not THE SINGLE best way-to save for retirement! The 401(k) makes it easy, quick, relatively painless, and forces you to “dollar cost average” into your investments over time. Your 401(k) may also provide employer matching contributions and lower costs than you’d be able to get on your own due to economies of scale!
But, for all of their glory, the 401(k) can be difficult to navigate. There are rules and potential penalties. There are limits and restrictions on investments. Most importantly, most 401(k) plans today have the Roth or pre-tax option, making things even MORE confusing!
This short video explains the differences between the Roth 401(k) and the pre-tax 401(k) and will guide you towards which one is best for you and your retirement planning needs.
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The most helpful video about retirement savings I’ve ever seen.
Great video, I have veen on the look out for one that covers this topic and you confirmed everythingnI've been piecing together snd concluding on my own. Thank you!
Thanks you. Appreciate the concise clear information and examples.
Awesome!!! Glad you enjoyed it and found it helpful.
Wow, that was an excellent video!
This is a great video, the one that I was looking for.
I'm working at the moment as an asssociate for Amazon and I have my pre-tax 401 K since 2020.
In june I'm going to work for one of the Big 4 as an associate in the Tax department, and I'm thinking go through the Roth 401 K one, because I was thinking the exact thing, I'm going to make more money, especially when I start moving up to better positions in the firm.
And I don't have 50 yet so... I think is a good time to roll over into the Roth.
Thank you very much for ypur presentation.
Outstanding!!!
Good one! thanks
Great video
great video
A few things to note: Pre-tax 401K is a joint account with Uncle Sam. So do you want to pay taxes on the seed or taxes on the harvest? Trump Tax cuts will expire in 2025 so most brackets will go back to their 2017 levels so 3% higher in retirement.
Also, there is a fallacy with this because some will invest the same amount as they would pre-tax. There is also the effect on how much social security is taxable which is less with a Roth (provisional income brackets haven't been adjusted for inflation since the 90s). Only 15% of social security isn't taxable the rest is subject to taxation. Because the brackets haven't been inflation adjusted you could have up to 85% included as taxable income and more seniors are becoming subjected to this due to inflation.
IRMAA (Medicare) premiums do two year look back on taxes and if you go over the bracket by 1 dollar you pay a higher premium for the same services.
If you manage to keep your living expenses low and your pretax portfolio grows eventually you'll be forced to take out RMDs, i.e., forced income which could put you into higher brackets (which is why people pay advisors to help them with Roth conversions strategies to fill up lower tax brackets before RMD. This usually results in them paying more taxes than they had saved suring their working years. This also affects IRMAA as mentioned before.
Also if you're married and you or your spouse passes the survivor is now filing single for their remaining years which has a smaller standard deduction, smaller brackets and one exemption instead if two (Trump Tax cuts expire so we're back to exemptions and the 2017 standard deduction with inflation adjustments which was about half of the Trump tax cuts standard deduction the first year. The money in a Roth or Roth 401k is tax free.
When both the spouse and the survivor pass then the remaining balance going to the beneficiaries no longer has stretch IRA with RMDs over their lifetime. Instead the SECURE act(s) changed it to a 10 year withdrawal unless they're under 18. So their beneficiaries may be at their prime earning age and subjected to forced income so if that would result in them paying more in taxes.
For us at at the 22% bracket and we have most of our money in Roth and Roth workplace investments. We don't pay state income tax and child tax credits have kept our effective tax rate initially at 7% and now about 13-15% now. I would only consider a small percentage of pre-tax retirement contribution now because I'm in my 50s so the pre-tax won't compound as fast as the Roth amounts so we could draw down the amount first before RMDS. Also I'd put more of pre-tax in more of a 60/40 or similar portfolio with conservative lower volatility. My wife is 8 years younger and I don't want to leave her and my children with possible tax management issues when I pass. Just my two cents and based on what the current tax laws are today.
Kindly advise the formula used to arrive at approx. slightly above $225k at age 62 under Traditional Pre-Tax 401k and approx. $188k under ROTH 401k at age 62.
My employer of almost 20 years just started offering a Roth 401k vs the traditional 401k. I decided to go with the Roth because historically lower tax rates and like you said to diversify my taxes when I retire. The good thing about the Roth is there are no rmd’s.
One item I notice on some videos doing the comparison of Roth and traditional is ignoring the time value of money as well as the fact that with a Roth, you pay all the tax at once vs spreading it out over many years. It also ignores state tax, as some retirees move to Florida or other tax free states. Here is an example. You are 60 years old and convert $100k to a Roth today in the 22% federal and 5% state tax rate and pay $27k from your bank account. If you invest the remaining $73k and it doubles to $146k after tax by the time you are 75 and the $100k Roth also doubles to $200k, you have $346k after tax. If you don’t convert and your $100k in bank doubles to $200k and you are now in 28% federal bracket for your IRA withdrawal but zero state, you have $144k after tax in your IRA ($200k minus $56k) for a total of $344k, virtually the same as converting. Except the $56k of tax is not paid out all at once, it is paid out gradually with FUTURE value dollars as you slowly take out RMDs. You are likely never to fully drain the account in your lifetime. Yes your heirs will pay tax but they can pay it from the higher balance in the cash account.
Super presentation. Great visual aids. Answered all my questions. Thank you. When calculating your income in retirement to determine how much you can withdraw to stay within a specific tax bracket are your social security benefits counted toward those various income levels?
Yes but only up to 85% is actually taxable.
ROTH 401k. Tax free distribution and not have to worry about hiring a wealth manager to do ROTH conversions in the future.
One problem I see is that with a traditional you will have to pay tax on the growth as well which I didnt hear you mention. With that being said it makes more sense to utilize a Roth 401k over a traditional 401k
You're 100% correct! Keep your LOWER growth less tax-efficient (bonds, REITS, commodities for example) investments in your pre-tax and fill your ROTH with high growth investments, backfilling anything else into taxable accounts. I agree at the very least you should have half Roth 401k. For retirement planning, it's much better to be able to manipulate the tax burden each year by strategically drawing from both pre-tax and tax-free assets like the Roth component of your 401k.
@@RetireWire what a fascinating piece of information. Thanks. This is what I'm going to do
Traditional 401k's don't get taxed on gains, but the tax is deferred and taxed as regular income in retirement. That's why in the video, the red line (Traditional) decreases quicker than the pink line (Roth). More is being withdrawn because it's taxed as it's taken out. For most people, Traditional or a mix of both works out better.
Yes I have a IRA for 2 years now. And a 401k IRA from work.
HI Greg.
I have both a Roth 401k and Pretax 457. when i retire i want to roll over my Roth 401k and pretax 457. into IRA's. Do need to open up two IRA's to start that five year clock? Both a Traditional ira for the Pretax and Also a Roth IRA for the Roth 401k?
No matter how you look at it, at one time or another you will pay taxes. That not my concern, no bank or retirement system is save from a crash or bail in. Is a Roth account safe from a crash or bail in?? Can I take one of my 401 k out, one of the two plans if I am still working at the same place?? and invest it else where, I am 65. I am more worried to do with a big crash, and bail in in 2023. The way things are looking now a days, your better to be your own bank.
Great discussion!
One of the best and most balanced I have seen.
Will check out some of your other posts.
You sort of touched on it by saying have both, but another advantage of Roth if all other math is equal, are the secondary effects on Social Security taxation and Medicare and ACA rates.
We were always in high 20-30% brackets while contributing. Don’t expect to get out of teens in retirement(now).
It would be nice to have a little more Roth for tax management. We did not have a lot of access to Roth accounts . On the positive we have a bunch of HSA money, and should be able to convert a little more to Roth.
Roth 401k: you get the same amount in your retirement account as traditional but your paycheck is less the taxes you pay on your contribution. I contributed 27,000 this year into my Roth 401k, however my paycheck was approximately 200 less. Last year I was in traditional 401k. If you’re okay with less paycheck then Roth is the best because tax free growth.
No you didn't because the max contribution into a Roth 401K is 6500 unless you're over 50 then it's 7500. The max for a traditional 401K is 22500 or 30000 if you're over 50.
@@CasiodorusRex um you need to do some more research before replying. Roth 401k is not the same as a Roth IRA. I am over 50. My employer has a 401k plan with Options for Pre-Tax, After Tax Roth and After Tax. Don't tell me what I have done or haven't done. The above should have mentioned 2022 Tax Year. This tax 2023 year I will be contributing 30,000 into my Roth 401k and 7,500 into my Roth IRA. Also my employer contributed to my pre-tax bucket in my 401k.
@@scottdaytonhunn You are correct. I was not. There is forced wihdraws at 72 with a Roth 401k unlike a Roth IRA. So you'll need to roll that money over. I'm not sure if there is a fee involved for doing so.
@@CasiodorusRex Secure 2.0 Section 325 eliminates Roth 401(k) RMD end of 2023.
Has congress ever made changes to 401k/IRA (roth or not) that were retroactive? Concerned something like that happens with a roth 401k where they try to tax it again anyways later.
Hi Ultra - not to my knowledge no they have not. Only one time to my knowledge they passed a tax increase mid year and made it retroactive to the 1st of the year, but I've never heard of them doing anything with retirement accounts like a 401k or Roth IRA or Roth 401k etc. For retirement planning, I think it's best to assume any changes would NOT be retroactive. That being said, I do know the current administration has considered eliminating Roth conversions, they've also wiped out our multi-roth-conversion bucket strategy a few years back (that was Trump I believe). So while they'll make changes, I highly doubt they'll be retroactive. I'd also say take advantage of Roth conversions if you can.
@@RetireWire roth conversions is when people roll traditional into roths?
@@Ultrajamz Correct, paying the taxes NOW versus LATER. Some 401k plans allow in-service pre-tax to roth conversions as well but you'd have to check with your employer. Finally, if you have extra money to save ask your employer if they allow after-tax voluntary contributions. Most companies don't, but some do, and that's about the same as an additional Roth 401k contriobuton.
@@RetireWire yeah I just started a job that I have to contribute to a 401k pre-tax for the match, but I was unemployed half the year so my bracket will be unusually low… if I can roll that amount into the roth-401k by years end that would be nice.
Also I’m somewhat biased towards roth since I imagine, aside from career development, inflation will make wages go up into higher brackets (since they never adjust the brackets enough IMO) so those future dollars will be taxed more.
You're in Roth Vegas?
It's really a wash if the tax rate stay the same?... I appreciate the apples to apples comparison.
My parents strategy was to blow through all their retirement savings. Accumulate some credit card debts, avoid paying or filing taxes for 4 years before they died. Leave behind zero cash,assets, or property in the estate and basically told the IRS to kick rocks. Im obviously watching these videos to not follow in those footsteps
Lol! Wow.
I ran a calculator for my own personal instance and it was better for me to do traditional 401k because my tax rate in retirement will be lower than it is now.
That’s entirely possible! And kudos to you for taking the time to learn and make the best decision for your situation.
I’m 37 and have 30’years until I retire. Everything I have is in Roth. It always bugs me when I’m asked do I think I will be in a higher or lower tax bracket when I retire and I’m like I don’t know. I feel like it is a stupid question with so many years anything. Why would I want to deal with the government after retirement. With so many variables I sticking with what I can control and I think that is overlooked. I’m staying with Roth. Pay Uncle Sam now and leave me alone.
@@youngjedi5599 Keep in mind that if you calculate and plan well, some of a tax-deferred money can end up being tax free in the end if you draw out just under the amount that kicks in the taxable income for any retirement year. So, be sure you are not overlooking that free money.
Correct! If you are 100% Roth you have the privilege of losing on the front end and the back end.
Consider having even 10% in pretax.
For instance under current rules you can not get free “ObamaCare” with no income.
Also Standard Deductions are taxed at 0%.
Also pretty dangerous assuming the Gov will leave you alone
How do you know what your tax rate will be in retirement??..do you have a crystal ball?
Wouldn't the taxes you save on tradition be at your top rate? Then in retirement you would be taxed at your average rate?
So what are you doing with your tax savings? Because if you aren't putting it aside or using it to pay off you mortgage or high interest debt then you're not getting the benefit of it. If you put in 10K and your tax rate is 22% your current tax savings is 2.2K. if that money grows to 100K and your tax rate is 10% you have up to 10K in taxes when you withdraw and your heirs may have higher rates. And that taxable income affects how much of your social security is taxed and your Medicare premiums are means tested based on your taxable income which includes your taxable income. So you at minimum will pay 10K plus tax on social security and irmaa in the future to save 2K today. And don't forget required minimum distribution withdrawals
So you might want to include your pre-tax savings invested in either a Roth or your 401K to pay for future taxes unless you think. This advisor has it correct in that if you do pre-tax you need to do both. I know my income will be at or greater than what I make now and I'd prefer not to to do large Roth conversions and try to deal with future tax brackets since Trump tax brackets will expire in few years and Fedzilla has a 31 trillion dollar debt.
@@charlesbyrneShowComments4all "So what are you doing with your tax savings?" The "tax savings" by contributing to traditional 401(k) is inside and part of that t-401(k) thus cannot be used to "pay off mortgage or high interest debt" or invest in Roth IRA.
I don’t understand the need to convert roth 401k to roth IRA? Why should you even do that?
You would roll-or convert-your Roth 401k to a Roth IRA when you retire, generally speaking. That gives you more control over the funds, etf's, and other investments you can buy. It MAY lower your fees as well. Some 401k plans will allow you to leave the funds in the 401k plan indefinitely - you should explore that option as well if the 401k plan has great low cost options, but remember you're paying fees within the 401k plan (somehow, usually they're hidden fees) and those fees go to support the plan - so if you retire or leave employment your fees are being paid to cover plan expenses.
Question ,,, I have my money in Pre-tax 40 1k, 62 now if i withdraw now of course i will pay taxes but if i wait until 70 1/2 won't i pay less tax
The amount of tax you'll pay on any pre-tax 401k or IRA withdrawal will be dependent on other factors such as income and capital gains etc. It's not dependent on your age whatsoever. So the short answer is no - you won't pay less in taxes at 70 1/2 unless you're income is lower overall. At age 62 it's a great time to look into Roth conversions to reduce your required minimum distributions at age 72.
@@RetireWire thanks
If you can’t really afford it …. Do traditional.
The tax saving is back words in the board
The "Take home pay" as well. You take home more in the traditional situation and less in Roth since you are paying for the taxes in advance. Correct?
Your wrong its the opposite isn't it.
8:05 I have a bit of an issue with this. If your contribution rate is 10%, you're going to add $200 either way. It's just that your net check is going to be $30 less. If you don't live paycheck to paycheck, it shouldn't be that big of a deal.
We single people LOVE paying more for the married folks…. Total bull…
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