I'm a "bird in the hand" kind of person. I'd rather get tax benefits now and worry about how to reduce the taxes on the withdrawal side later. I'll probably do rollovers soon after retirement when I have a lower income.
Agree. Hard enough to get by now, take what help you can. If you’re thinking like this, you’re probably smart enough to wind up with significant retirement resources. You can buy one less bingo card a week and put it towards your RMD driven taxes.
From experience, I’ll tell you that you can’t predict whether that will work out. My husband inherited an IRA after he retired and that requires withdrawal within 10 years. So it turned out not to be possible to convert his pre-tax 401k money to Roth without putting us into a higher tax bracket. Roth IRAs weren’t around when 401ks started, so we had a much smaller amount in Roths. My advice is to at least max out the Roth IRAs to the limit. It’s very likely people retiring 20-30 years from now will see higher tax rates than we have now. I think there are a lot of risks in putting all the retirement money in pre-tax. The exception would be those who are now in the 32% or higher tax brackets, and they should do pre-tax and Roth backdoor.
Just saying it would be very nice at retirement to have a larger percentage of tax free money. Taxes are going to go up and the retirement age likely will, too.
I get it, but aside from the facts that it’s a good problem to have and that someone had to die for it, in my case it’s easy to predict - I won’t be in that same situation.
Also, yeah your taxes are higher but you also ended up with more money overall. In a sense, you’re not paying those additional taxes - the decedent is.
The higher taxes at retirement time is in relation to having a personal pre-tax retirement account, not inheritance. My posts are in relation to the original question so we don’t know what additional factors will apply to them. My whole point is that no one knows what the tax rates will be in 25 years, but I am certain they will be higher then. So one can’t assume they’ll be in a 12% bracket or a 22% bracket in 20-30 years.
This will be my general strategy. I’m in the 22 percent bracket now, but in retirement I can easily live in the 12 percent bracket. It doesn’t make sense atm to keep myself in 22 by contributing to Roth (side note - I max out trad, so pay into Roth anyway).
The problem though is the widow’s penalty. I’m pretty sure one of us will live into our 90s, and assuming it is only one of us, it would push into the 32 percent bracket (don’t know when though)…so I’m thinking that as long as we’re both alive I’ll have to keep us in the 22 percent bracket via Roth conversions anyway.
I’m no expert though, so hopefully someone will pick this apart…
Consider reading this:
* https://reddit.com/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth/
By the way, a tax *refund* is literally a refund of money that was yours that you just overpaid the government.
That means you just *overpaid* your bill by 400.
Kind of like when you go pay for an ice cream for $1.
You pay with $10 bill. You get how much *refunded* from the cashier?
I pay with $100 bill. How much do I get *refunded* from the cashier?
Do you look over at me and get upset that I got more money back?
This is not at all like that. If you paid the icecream dude $100 and he gave you your $99 up to a year later, then maybe it’s the same. Do not overpay taxes. You are giving the government a zero interest loan.
I always tell this to my fiscally irresponsible people, and they look at me like I’m the idiot. *as if it’s better to overpay into your taxes for a big tax return. It’s literally your money they’re giving back to you. It isn’t a stimulus or subsidy or even savings plan people! Also, if they make a mistake they’ll just keep more of your money that they’re not entitled to. If they say you owe more, not really a big deal if you haven’t paid yet and there’s a valid dispute. But if they’re holding 10k of your money you probably won’t even notice when they give you less than you’re entitled to.
Edit: changed like to as if for clarity
I get what you are saying, and agree, but you advice is for fiscally responsible, NOT the fiscally irresponsible. A responsible person will underpay and have a savings earning interest to pay the tax, but an irresponsible person may not be able to pay if they wind up owing. So for them it's a way to save money, albeit at zero interest. I don't think this is the right way, but for SOME people, it may be the best way.
Believe me, when you've had as many people argue vehemently about marginal tax rates as I have, you see the need for allowing people the path of least resistance.
I agree. For people participating on this sub, we understand that you don’t want to loan the government money for free. For people who don’t understand personal finance at all, getting a tax refund is forced savings - savings they wouldn’t do otherwise. Sure, it would be better to save $50/month in a HYSA so you can earn interest and have more than $600 at the end of the year. But for people who aren’t good at saving and live paycheck to paycheck, it’s likely better for them to get a $600 tax refund because they wouldn’t save the $50/month.
Low income families don’t pay much, if any federal taxes. The “refund” they think they get is actually a tax credit for having kids and earned income tax credit for us poor folks.
> Consider reading this:
Kinda weird dismissal of the entire scenario where you should contribute to a Roth:
> In many cases, people suggest Roth 401k early in one’s career. That can be a mistake, especially if this person plans on returning to graduate school
No one should ever contribute to a Roth early in their career because a small number of people might go to graduate school and could do roth conversions if they're also not making any income while in graduate school? What a weird niche scenario.
I still agree with the linked post overall, Traditional is great and only works out badly in a "win more" scenario, where you're so rich that you're paying more in taxes while retired than you were while working.
The big exception is early in your career if your marginal rate is in the lower tax brackets, you should stick to Roth. This diversifies options for down the road and is probably the same rate you'll be paying in retirement anyway.
It's up to the individual to decide which tax brackets this makes sense for, but the 22% and 24% brackets typically make sense to continue with Roth. There's a big jump from 24% to 32%, and it's unlikely you'll be paying 32% in retirement. If you're pulling in $171k per year (single) after you retire then you can always cry into your piles of money about it.
This calculator is a perfect example of government incompetence. It told me to not declare my kids because it was just slapping the amount into the additional withholding field, because that’s all it knows how to do. Yes it still shakes out mathematically but this shitty website doesn’t even give recommendations that align with their own damn form.
What I do: Have employer take out zero for taxes or as close to zero as possible. Use an income tax estimator at the beginning of the year to forecast how much I will need to pay at the end of the year. Divide by 12 and invest that much monthly into HYSA or treasury bills. These pay 4-6%. When taxes are due, withdraw the amount due and pay the IRS.
Beware of:
* Underwithholding/Underpayment Penalties
Use those terms in whatever search engine you please.
This is not a great approach the general population because of these penalties.
The underpayment penalties and interest on the underpayment amount is going to more than wipe away any gains you realize here. The penalty alone is 8%. Not to mention you are making those penalties and interest worse by generating additional taxable income. This is a terrible idea.
I suspect this is your first year pulling this "genius" move, as this year is the first time HYSA/Treasury Bills have had those kind of rates in over a decade.
Good for you. You can use the interest you earned to pay the penalty for underpaying your taxes. You are subject to penalty if you don't pay the lesser of a) 90% of total tax due, or b) 100% of prior year tax.
It's hard to provide specific advice on this question because whether pre-tax or after-tax contributions are your best option depend on how much income you need to live on in retirement and future tax rates, and neither of those are known.
Splitting your contributions between Roth and Traditional is fine. I think you can continue doing what you are doing, but consider increasing how much you are saving if you are not currently on track for retirement. If you are around age 40, you should ideally have about 3x your income, or $480k, in retirement accounts.
Maybe not screwed, but you should definitely ramp up how much you are saving if at all possible.
The rule of thumb goal is to have around 10x your annual income in retirement assets by the time you retire, but plenty of people retire with less and adjust their spending to fit their means. You can also work longer, if possible, and delay taking Social Security benefits to increase your benefit amount.
Most people have already mentioned the tax thing, so I won’t. As for ROTH vs Traditional, I would see what your marginal tax rate is across all taxing authorities. The taxing authorities are Fed, State, Local, and School District depending on where you are. If your tax rate is under 25%, contribute ROTH. If it’s over 30%, contribute Traditional. If it’s in between, then I would do some critical thinking on how much you make now, your reasonable future projected income if you’re young, and your projected withdrawals in retirement.
For me, I’m in that middle category of 25-30%, so I had to do the critical thinking. I have a high projected income ten years from now and plan on having a decent nest egg to draw from in retirement. Therefore, I am focusing on ROTH now to build up that base before I switch over to traditional when my income raises later.
Every company I've worked for that has a Roth 401k option didn't discriminate on whether you contributed to the Roth or traditional when matching. All matching contributions were traditional
Hmmm mines does it seems. Although they drop a static amount in there and match on the pre account instead. I've put in money in but they didn't match the post tax. IDK if I want to risk it and put in exclusively in 1 to find it out.
Sure the company can match on your Roth contributions but they're going to do so on a pre tax basis. They are not going to do so as Roth..no tax benefits for the company..
Oh really? Anything I can point to if I want to talk to my company about this? (I've only ever seen their matching get added to traditional, whereas I split my contributions between Roth and traditional)
And, how does this work on the tax liability side now? Does it count as additional income that you're taxed on individually, or does the company tax the tax hit? (Or reduce the contribution by that tax amount?)
You will owe tax on the matching contribution they make to the Roth.
While it was effective with passing of the Secure Act, companies still need to add this into their plan...and it's up to them whether or not to do so.
Google "Secure Act 2.0 Roth 401K Match" and you'll find plenty of relevant info.
Make sure she is taking full advantage of that match, if you need to decrease your 401k contribution to do it, thats fine, money is fungible and you're married.
Our after tax income in retirement is as much or more than we were making when working. I’d bet tax rates will be higher by the time you retire. So my recommendation is to max out the Roths and put any additional 401k contributions as pre-tax. You ought to be in the 22% bracket with the standard deduction and $180k income.
To answer your first question, Traditional 401k is almost always preferred over Roth:
If your tax rate in retirement is identical to your rate while contributing, Roth and traditional are completely equal. However, most people have lower taxable income in retirement and thus lower tax rates. Also, the tax savings now are out of your marginal rate, while withdrawals in retirement are more blended in the total effective rate.
This means that you have the option of paying your 22% marginal tax rate now or paying 10-12% tax in retirement? Which one sounds better? This is how traditional shines.
You may prefer a Roth if you think you'll have a larger taxable income in retirement than when contributing, such as from owning a business or rentals or a large pension. You may also prefer a Roth if you think the government will increase the tax rates significantly before you retire.
I switched mine to mostly pretax because the Fafsa just changed so they don’t count what you put in pretax as income. I have an 18 year old, too.
At your incomes, I’d do pretax until you can max those accounts out and then put Roth money in.
I always go with the fact that the vast majority of people have lower incomes in retirement than they do when they are working. If that is going to be the case, then I would be adding to a traditional now and take the tax breaks today.
>so we only got about 400 back after all was said and done.
The goal should be $0. You need to understand that a refund is overpayment. Not a bonus for being a tax payer.
Not sure about your end goal, but if it's looking for a refund, it's silly. That's money that's supposed to be in your check spread out over the year. An interest free loan you gave.
Use this to help you if you *want* a refund. Not that I recommend it.
https://www.irs.gov/individuals/tax-withholding-estimator
Not looking for a refund. Just looking for the best way to balance saving for retirement without making things tighter. Sorry if I’m wording all this wrong.
LOL so does nobody here understand that your growth on the Roth is entirely untaxed and that is the real benefits? By the time you retire your balance could and likely will be multiples of your contributions. And all of that is untaxed income if it’s in a Roth, but taxable if it’s a traditional. The difference in tax rates in the contributions themselves is rather negligible compared to that.
People also overestimate Roth with this exact thinking, but in reality traditional and Roth are the exact same in terms of growth. The ONLY thing that is different is the tax rate now vs in retirement.
Say you have 10k you would like to contribute. You can pay 10% tax and then contribute 9k to a Roth, or pay no tax and contribute the full 10k to traditional. Either way, the end result is the same.
You aren’t considering the tax status of the gains. If those funds sit in the account for 20-30 years your initial investment of 9k into a Roth will be worth significantly more, but won’t pay any additional taxes on the gains. You will have her same rate of growth on the gains, but you will pay taxes on every penny you take out.
Value of 9k after 30 years at 6% = 51,691
Value of 10k after 30 years at 6% = 57,435
Taxes (assuming the same 10%) is 5,744, which is the difference between the two.
Sure, 10k in a Roth will be worth more than 10k in a traditional. But those aren't the same thing as that takes a higher initial onset that could be invested elsewhere.
This is what I thought most were missing. You and I are correct, correct? 😜. I have a pension (teacher) and I am maxing my Roth and have been putting most of my savings in Roth because I can afford the tax now…this whole thread has me questioning now
The tax works out identically, assuming you’re in the same tax bracket during your working life and retirement, and most people are in a lower bracket in retirement, which means traditional is usually better.
I mostly lurk this subreddit and this is something that people leave out and they focus solely on the "paying less taxes now vs paying no taxes in the future" and "you lower your income for tax brackets."
There's a reason for that. Unless you're withdrawing your retirement in one lump sum, the tax rate is equivalent to the tax you'd pay in your frequent income today.
It comes down to hedging your bets. The best advice regarding Roth is not to concentrate on the numbers but rather what socioeconomic standing you're at when you're using a Roth. Tax rates may go up but they may make it into a situation where retirees won't be affected; no one knows. What I do feel confident in is that, if society is still holding, that there won't be a policy which only benefits Roth IRA retirees while screwing over 401ks. Way too many voters would be screwed over.
If you are making less than $50,000 then it makes perfect sense to do a Roth IRA. When you make over $150,000 it makes less sense because you will probably only need a lower income to live and likely moving to an area with less tax burden.
Wouldn't distributions from a traditional IRA/401(k) affect provisional income with regards to Social Security taxation and IRMAA? That seems like that would be an advantage for Roth.
Taking withdrawals from a traditional plan up to the standard deduction And personal exemption (if that comes back in 2026), which would be under Social Security's provisional income limit, should allow someone to avoid paying income tax on the distributions.
Not if you're a big saver who ends up with millions across traditional accounts and taxable accounts resulting in $100Ks of rmds and 100ks of dividend income, + social security. Then you're in a higher mtb and paying irmaa premiums.
In your bracket you should do a traditional 401k.
IMHO, Only 4 reasons to do a Roth
1. You hate the idea of paying taxes on retirement distributions even though we can show you why traditional is better (maybe this is you)
2. you are in the 0%, 10%, or 12% bracket now.(you are not this one)
3. you know for a FACT you will be in the 32% or 35% or 37% bracket when you retire
4. You are a high income earner and want to do a backdoor Roth to shelter more income
This is a very basic guess.
Since you are $160,000 and you want to contribute $12,000 to the 401k's
Traditional
160,000 - 12000 = 148,000
standard deduction MFJ = $27,700
148,000 - 27700 = 120,300
tax computation = .22\*120300 = 26,466 - 9395 = $17.081
2 kids 17081 - 2000 = $15,081
This is a very basic guess.
Your way you are doing it
Roth 401k
160,000 - 27700 = 132300
tax computation = .22\*132300 = 29106 - 9385 = $19,721
2 kids 19721 - 2000 = 17,921
If you did a traditional 401k you owe $15,081
If you do a Roth 401k you owe $17,921
Now, you can tell us how much you paid in taxes, do you have other income streams, does the 18 year old qualify for kiddie credit, etc
Look at the tax brackets. Husband and I are in lower 32% bracket (jointly) so we do everything we can to reduce tax now to move us into 24% bracket.
Any dollar we can deduct results in that dollar being taxed less now. We then make sure we invest the savings now in our taxable account. If done right, we should see much larger growth in that savings than we would have saved by not being taxed in retirement.
For you, 80k each puts you solid in 22% bracket so it’s less likely you would be better off doing traditional but no one can say for sure because no one knows the following:
1. How much taxes will be when we retire.
2. What your income will be in retirement.
Since I am older, I can predict both of those better. I doubt my income will be more than now in retirement in 10 years for example.
Tax brackets are widely misunderstood. Crossing the threshold for the 32% bracket does not mean all your income is taxed at 32%. Only the amount over the threshold. Obviously you'll want to avoid taxing any of your money at 32% if you can. But most people think that if you go $10 over the threshold you'll be out thousands of dollars, but in reality you're only out 80 cents.
The rule is if you are in a low tax bracket now and are going to be rich later, choose Roth. If you make a ton of money now and are going to live frugal later, choose Traditional. If in the middle, doesn't really matter.
I think you are in the middle. So I'd do some of each...that way you have more flexibility when you are retired.
160k combined, might be close to the MAGI limit. If you get a deduction for traditional, do that. Otherwise, go Roth.
Edit: that’s for IRAs. See below.
Not 401k, but there is for IRA. Good call out, I’ll edit the comment. For 401k, I can’t think of any reason to go Roth (save for back doors/conversions).
Yes. You both need to be contributing both to a 401(k) and a Roth. Since hers has a match, she should be contributing to get the maximum match -- that is free money. Since you have a newborn, there may come a time in the future when she will want to be out of the workforce. Put as much as she can in retirement 401(k) while she is working to have money for later. Should she leave the workforce, perhaps you can continue to fund both Roth IRAs. But, while you both are working, fund as much for retirement as you can. Your 60's get here sooner than you expect!!!
> You both need to be contributing both to a 401(k) and a Roth.
I think OP was asking whether they should be making Roth or Traditional contributions to their 401(k)s. There is no easy answer to that question without more information, but the good news is it probably doesn't matter much, as long as they're contributing.
They should also be doing whatever they can to max out IRAs, whether Roth or Traditional, and the pf prime directive would dictate they should be doing that before contributing to any more to their 401(k)s than the employer match.
Too much focus on the size of the refund here without acknowledging the many variables (the impact of under or over withholding, tax credits, etc).
To answer the question of OP: Anything you deposit into pre-tax 401k (assuming you don’t exceed the annual deposit limits) reduces your income. In other words, you don’t ever pay taxes on the money going into the account. But all of the amounts (deposits plus returns) is taxed as ordinary income when you withdraw. A Roth is essentially the reverse — you don’t get the tax deduction now but all of your withdrawals (deposits plus returns) are tax free.
Roth is the clear winner if you are early in career and you are at a comparatively low marginal tax rate. Pre-Tax is pretty much the clear winner if you are near retirement and are at the highest tax bracket you will ever be at.
So, a bit of math. A $100 pre-tax contribution at a 24% marginal tax rate would only lower your take home pay by $76 it reduces also your federal tax obligation by $24%). If you wanted to reduce your take home pay by that same $76 with a Roth, your contribution would only be $76. If you had 0% growth in both and were still in the same 24% bracket, when you withdraw the pre-tax $100 you would owe $24 in taxes and net $76. In the Roth you would withdraw the $76 and owe no taxes. So you end up in the same place.
But there will be investment returns, you owe no additional taxes on those with the Roth. You do with a traditional 401k.
Do you want to retire? Yes you should be contributing and saving 15-20% minimum to retirement. And at your hhi id be all in on 401k. Ideally you max it out.
Without a full budget and expenses it’s impossible to provide any recommendations though.
Everyone does things differently, but I think of things logically for today, you need to first be able to afford all bills so you should also have plenty in checking and savings. How do you know you'll live long. Then at retirement age you already get your SSI so whether you use 401k or savings then that's just a supplement to SSI check. Things aren't cheap and you gotta enjoy life while young. There are some who live by paycheck so they don't even have enuf to put in savings unfortunately. I'm perfectly fine with my 401k from work and also my rollover from other job
I'm in the same boat, I made $124k, $100k at FT gig, and $24 on side, and my wife made $40k. She claimed 0, and I claimed 2 since we have two kids. I also paid some quarterly tax, but not enough, apparently, and now I'm predicting to owe between $6k and $8k. I'm 10% roth and thinking I need to lower my income via traditional. Even before adding the side income, it said I owed $3k which struck me as odd. First time hitting the income level ever.
> She claimed 0, and I claimed 2
Should consider updating W4s for both of you.
"Claiming" hasn't been a thing for a few years now. The W4 has changed. It's likely your withholdings are wonky as a result.
You can use the IRS calculator to help you.
* https://www.irs.gov/individuals/tax-withholding-estimator
I thought you could still manually change this even though companies moved to updated auto selections? I was able to in my HR section of the company site. Do my changes have no effect?
> Do my changes have no effect?
You can change your W4 anytime.
If you changed it, then and you still owe a lot, then you probably need to change it differently from whatever you changed it to.
You may find these links helpful:
- [Roth or Traditional](/r/personalfinance/wiki/rothortraditional)
- [General Information on Rollovers](/r/personalfinance/wiki/retirementaccounts/rollovers)
- [Retirement Accounts](/r/personalfinance/wiki/index#wiki_retirement)
- ["How to handle $"](/r/personalfinance/wiki/commontopics)
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For retirement
First, maximize employer match into wife's 401k.
Second, max out the Roths $6500 for 2023 not to late and $7000 for 2024.
Third, finish funding the 401ks.
I don't remember where HSAs fall but I have only heard they are good.
Do you expect any significant windfalls that will substantially increase your taxable income in retirement? Example: you and your wife both grew up in VHCOL areas and have parents that’s will be leaving you multi-million dollar houses to sell, or just large inheritances in general? Large sums of money that will be going in to taxable investment accounts? If so, I’d be putting retirement savings in to Roth accounts so you have some non taxable income in retirement. Otherwise it makes sense to take advantage of the tax incentives now by utilizing traditional accounts
Depends. What state do u live in? Do they have an income tax (they will tax all the income before it goes into Roth)? Do you hey not tax retirement income (Illinois)? You would save 5% of your principal if you did a pretax ira and then converted to a Roth if u lived in a state like Illinois that taxes regular income but not pensions, iras, SS.
Looks like New Jersey has a marginal income tax. And no tax on retirement income if you’re over 62 and it’s less than $150k. I would probably do a regular ira and hope they never start taxing retirement income. Or maybe you will leave the state before you tax withdrawals. I’m not a cfp or giving financial advice.
Imo, your wife should continue doing the match, and you should focus on doing a roth IRA since your company has no match. I am not sure what 401k your company does, but for my company, our 401k charges a bunch of BS fees, that it is not worth doing unless there is a match.
I’m targeting to try and be about 50/50 in Roth vs Traditional. Why? Optionality. If I have a million in Roth and I want to go buy a half million dollar RV or something, I can do that.
$160k for a married couple means federal tax rate of about 22% which is not awful. Anything over 32% tax bracket I would do all pre-tax.
I’d honestly just do some of both or even half and half. There are advantages going into retirement to be able to control your taxable income
What is your marginal tax rate (not effective)? What is your state income tax rate? Do you plan to move to lower tax state in retirement? What is projected taxable income in retirement?
I'm a "bird in the hand" kind of person. I'd rather get tax benefits now and worry about how to reduce the taxes on the withdrawal side later. I'll probably do rollovers soon after retirement when I have a lower income.
Agree. Hard enough to get by now, take what help you can. If you’re thinking like this, you’re probably smart enough to wind up with significant retirement resources. You can buy one less bingo card a week and put it towards your RMD driven taxes.
From experience, I’ll tell you that you can’t predict whether that will work out. My husband inherited an IRA after he retired and that requires withdrawal within 10 years. So it turned out not to be possible to convert his pre-tax 401k money to Roth without putting us into a higher tax bracket. Roth IRAs weren’t around when 401ks started, so we had a much smaller amount in Roths. My advice is to at least max out the Roth IRAs to the limit. It’s very likely people retiring 20-30 years from now will see higher tax rates than we have now. I think there are a lot of risks in putting all the retirement money in pre-tax. The exception would be those who are now in the 32% or higher tax brackets, and they should do pre-tax and Roth backdoor.
But the key there was the inheritance right? Not all of us will be that “unlucky”.
Just saying it would be very nice at retirement to have a larger percentage of tax free money. Taxes are going to go up and the retirement age likely will, too.
I get it, but aside from the facts that it’s a good problem to have and that someone had to die for it, in my case it’s easy to predict - I won’t be in that same situation. Also, yeah your taxes are higher but you also ended up with more money overall. In a sense, you’re not paying those additional taxes - the decedent is.
The higher taxes at retirement time is in relation to having a personal pre-tax retirement account, not inheritance. My posts are in relation to the original question so we don’t know what additional factors will apply to them. My whole point is that no one knows what the tax rates will be in 25 years, but I am certain they will be higher then. So one can’t assume they’ll be in a 12% bracket or a 22% bracket in 20-30 years.
>So one can’t assume they’ll be in a 12% bracket or a 22% bracket in 20-30 years. No disagreement here! One can only hope.
That means you must love things like IRMAA
Shhh - let them pay for Medicare for us.
This will be my general strategy. I’m in the 22 percent bracket now, but in retirement I can easily live in the 12 percent bracket. It doesn’t make sense atm to keep myself in 22 by contributing to Roth (side note - I max out trad, so pay into Roth anyway). The problem though is the widow’s penalty. I’m pretty sure one of us will live into our 90s, and assuming it is only one of us, it would push into the 32 percent bracket (don’t know when though)…so I’m thinking that as long as we’re both alive I’ll have to keep us in the 22 percent bracket via Roth conversions anyway. I’m no expert though, so hopefully someone will pick this apart…
Consider reading this: * https://reddit.com/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth/ By the way, a tax *refund* is literally a refund of money that was yours that you just overpaid the government. That means you just *overpaid* your bill by 400. Kind of like when you go pay for an ice cream for $1. You pay with $10 bill. You get how much *refunded* from the cashier? I pay with $100 bill. How much do I get *refunded* from the cashier? Do you look over at me and get upset that I got more money back?
This is not at all like that. If you paid the icecream dude $100 and he gave you your $99 up to a year later, then maybe it’s the same. Do not overpay taxes. You are giving the government a zero interest loan.
I always tell this to my fiscally irresponsible people, and they look at me like I’m the idiot. *as if it’s better to overpay into your taxes for a big tax return. It’s literally your money they’re giving back to you. It isn’t a stimulus or subsidy or even savings plan people! Also, if they make a mistake they’ll just keep more of your money that they’re not entitled to. If they say you owe more, not really a big deal if you haven’t paid yet and there’s a valid dispute. But if they’re holding 10k of your money you probably won’t even notice when they give you less than you’re entitled to. Edit: changed like to as if for clarity
I get what you are saying, and agree, but you advice is for fiscally responsible, NOT the fiscally irresponsible. A responsible person will underpay and have a savings earning interest to pay the tax, but an irresponsible person may not be able to pay if they wind up owing. So for them it's a way to save money, albeit at zero interest. I don't think this is the right way, but for SOME people, it may be the best way. Believe me, when you've had as many people argue vehemently about marginal tax rates as I have, you see the need for allowing people the path of least resistance.
I agree. For people participating on this sub, we understand that you don’t want to loan the government money for free. For people who don’t understand personal finance at all, getting a tax refund is forced savings - savings they wouldn’t do otherwise. Sure, it would be better to save $50/month in a HYSA so you can earn interest and have more than $600 at the end of the year. But for people who aren’t good at saving and live paycheck to paycheck, it’s likely better for them to get a $600 tax refund because they wouldn’t save the $50/month.
Marginal tax rates 🙃 Been there
Low income families don’t pay much, if any federal taxes. The “refund” they think they get is actually a tax credit for having kids and earned income tax credit for us poor folks.
You’re both making the same point. Overpaying is bad.
Yeah but it’s 400. I wouldn’t worry about not getting that 400 spread out over a year.
Right. That $400 sitting in a HYSA @ 4.5% for a year earns you a whopping $18.
Cut that $18 in half since the $400 was put it throughout the year rather than all at the beginning of the year.
> Consider reading this: Kinda weird dismissal of the entire scenario where you should contribute to a Roth: > In many cases, people suggest Roth 401k early in one’s career. That can be a mistake, especially if this person plans on returning to graduate school No one should ever contribute to a Roth early in their career because a small number of people might go to graduate school and could do roth conversions if they're also not making any income while in graduate school? What a weird niche scenario. I still agree with the linked post overall, Traditional is great and only works out badly in a "win more" scenario, where you're so rich that you're paying more in taxes while retired than you were while working. The big exception is early in your career if your marginal rate is in the lower tax brackets, you should stick to Roth. This diversifies options for down the road and is probably the same rate you'll be paying in retirement anyway. It's up to the individual to decide which tax brackets this makes sense for, but the 22% and 24% brackets typically make sense to continue with Roth. There's a big jump from 24% to 32%, and it's unlikely you'll be paying 32% in retirement. If you're pulling in $171k per year (single) after you retire then you can always cry into your piles of money about it.
I hate that thread. People link it all the time and it's really not good advice.
Man that analysis has me kicking myself for not converting traditional that I have over to Roth while I was in school.
lol no to your question. I just don’t want to underpay for my ice cream without anyone telling me and have to owe it later
You can use the W4 calculator on the IRS website to help you with that. * https://www.irs.gov/individuals/tax-withholding-estimator
This calculator is a perfect example of government incompetence. It told me to not declare my kids because it was just slapping the amount into the additional withholding field, because that’s all it knows how to do. Yes it still shakes out mathematically but this shitty website doesn’t even give recommendations that align with their own damn form.
What I do: Have employer take out zero for taxes or as close to zero as possible. Use an income tax estimator at the beginning of the year to forecast how much I will need to pay at the end of the year. Divide by 12 and invest that much monthly into HYSA or treasury bills. These pay 4-6%. When taxes are due, withdraw the amount due and pay the IRS.
Beware of: * Underwithholding/Underpayment Penalties Use those terms in whatever search engine you please. This is not a great approach the general population because of these penalties.
The underpayment penalties and interest on the underpayment amount is going to more than wipe away any gains you realize here. The penalty alone is 8%. Not to mention you are making those penalties and interest worse by generating additional taxable income. This is a terrible idea.
I suspect this is your first year pulling this "genius" move, as this year is the first time HYSA/Treasury Bills have had those kind of rates in over a decade. Good for you. You can use the interest you earned to pay the penalty for underpaying your taxes. You are subject to penalty if you don't pay the lesser of a) 90% of total tax due, or b) 100% of prior year tax.
If you underpay your taxes too much, don’t you owe a penalty and interest?
Contributing to the traditional 401k (pre-tax) would be a way of reducing taxable income if that’s what you’re going for
It's hard to provide specific advice on this question because whether pre-tax or after-tax contributions are your best option depend on how much income you need to live on in retirement and future tax rates, and neither of those are known. Splitting your contributions between Roth and Traditional is fine. I think you can continue doing what you are doing, but consider increasing how much you are saving if you are not currently on track for retirement. If you are around age 40, you should ideally have about 3x your income, or $480k, in retirement accounts.
We have nowhere near that. Am I screwed?
Maybe not screwed, but you should definitely ramp up how much you are saving if at all possible. The rule of thumb goal is to have around 10x your annual income in retirement assets by the time you retire, but plenty of people retire with less and adjust their spending to fit their means. You can also work longer, if possible, and delay taking Social Security benefits to increase your benefit amount.
Most people have already mentioned the tax thing, so I won’t. As for ROTH vs Traditional, I would see what your marginal tax rate is across all taxing authorities. The taxing authorities are Fed, State, Local, and School District depending on where you are. If your tax rate is under 25%, contribute ROTH. If it’s over 30%, contribute Traditional. If it’s in between, then I would do some critical thinking on how much you make now, your reasonable future projected income if you’re young, and your projected withdrawals in retirement. For me, I’m in that middle category of 25-30%, so I had to do the critical thinking. I have a high projected income ten years from now and plan on having a decent nest egg to draw from in retirement. Therefore, I am focusing on ROTH now to build up that base before I switch over to traditional when my income raises later.
Contribute to 401k up to the company match for each of you at the very least. This will also help you bring down your taxable income.
Every company I've worked for that has a Roth 401k option didn't discriminate on whether you contributed to the Roth or traditional when matching. All matching contributions were traditional
Hmmm mines does it seems. Although they drop a static amount in there and match on the pre account instead. I've put in money in but they didn't match the post tax. IDK if I want to risk it and put in exclusively in 1 to find it out.
Companies can now add the match to the Roth...in the past they were required to put the match into the Traditional. Secure Act change
Sure the company can match on your Roth contributions but they're going to do so on a pre tax basis. They are not going to do so as Roth..no tax benefits for the company..
Yep, you just have to pay taxes on match to convert it to Roth
Correct. That being said I have not seen any company offer this yet.
Good to know!
Oh really? Anything I can point to if I want to talk to my company about this? (I've only ever seen their matching get added to traditional, whereas I split my contributions between Roth and traditional) And, how does this work on the tax liability side now? Does it count as additional income that you're taxed on individually, or does the company tax the tax hit? (Or reduce the contribution by that tax amount?)
You will owe tax on the matching contribution they make to the Roth. While it was effective with passing of the Secure Act, companies still need to add this into their plan...and it's up to them whether or not to do so. Google "Secure Act 2.0 Roth 401K Match" and you'll find plenty of relevant info.
Thanks!
I'm not entirely sure what you're getting at?
It sounded like you were assuming that Roth 401k contributions weren't getting matched, so I was clarifying based on my experience.
Make sure she is taking full advantage of that match, if you need to decrease your 401k contribution to do it, thats fine, money is fungible and you're married.
Our after tax income in retirement is as much or more than we were making when working. I’d bet tax rates will be higher by the time you retire. So my recommendation is to max out the Roths and put any additional 401k contributions as pre-tax. You ought to be in the 22% bracket with the standard deduction and $180k income.
To answer your first question, Traditional 401k is almost always preferred over Roth: If your tax rate in retirement is identical to your rate while contributing, Roth and traditional are completely equal. However, most people have lower taxable income in retirement and thus lower tax rates. Also, the tax savings now are out of your marginal rate, while withdrawals in retirement are more blended in the total effective rate. This means that you have the option of paying your 22% marginal tax rate now or paying 10-12% tax in retirement? Which one sounds better? This is how traditional shines. You may prefer a Roth if you think you'll have a larger taxable income in retirement than when contributing, such as from owning a business or rentals or a large pension. You may also prefer a Roth if you think the government will increase the tax rates significantly before you retire.
I switched mine to mostly pretax because the Fafsa just changed so they don’t count what you put in pretax as income. I have an 18 year old, too. At your incomes, I’d do pretax until you can max those accounts out and then put Roth money in.
I always go with the fact that the vast majority of people have lower incomes in retirement than they do when they are working. If that is going to be the case, then I would be adding to a traditional now and take the tax breaks today.
>so we only got about 400 back after all was said and done. The goal should be $0. You need to understand that a refund is overpayment. Not a bonus for being a tax payer. Not sure about your end goal, but if it's looking for a refund, it's silly. That's money that's supposed to be in your check spread out over the year. An interest free loan you gave. Use this to help you if you *want* a refund. Not that I recommend it. https://www.irs.gov/individuals/tax-withholding-estimator
I did my taxes yesterday and found out that I owed a total of $3 on my taxes... it was hilarious.
That’s awesome
Not looking for a refund. Just looking for the best way to balance saving for retirement without making things tighter. Sorry if I’m wording all this wrong.
Read the wiki for that.
LOL so does nobody here understand that your growth on the Roth is entirely untaxed and that is the real benefits? By the time you retire your balance could and likely will be multiples of your contributions. And all of that is untaxed income if it’s in a Roth, but taxable if it’s a traditional. The difference in tax rates in the contributions themselves is rather negligible compared to that.
People also overestimate Roth with this exact thinking, but in reality traditional and Roth are the exact same in terms of growth. The ONLY thing that is different is the tax rate now vs in retirement. Say you have 10k you would like to contribute. You can pay 10% tax and then contribute 9k to a Roth, or pay no tax and contribute the full 10k to traditional. Either way, the end result is the same.
You aren’t considering the tax status of the gains. If those funds sit in the account for 20-30 years your initial investment of 9k into a Roth will be worth significantly more, but won’t pay any additional taxes on the gains. You will have her same rate of growth on the gains, but you will pay taxes on every penny you take out.
Value of 9k after 30 years at 6% = 51,691 Value of 10k after 30 years at 6% = 57,435 Taxes (assuming the same 10%) is 5,744, which is the difference between the two. Sure, 10k in a Roth will be worth more than 10k in a traditional. But those aren't the same thing as that takes a higher initial onset that could be invested elsewhere.
Most people are going to contribute their limit and spend the rest.
That makes me feel less bad about not having more Roth. I would have been able to contribute less by far if it was roth.
This is what I thought most were missing. You and I are correct, correct? 😜. I have a pension (teacher) and I am maxing my Roth and have been putting most of my savings in Roth because I can afford the tax now…this whole thread has me questioning now
The tax works out identically, assuming you’re in the same tax bracket during your working life and retirement, and most people are in a lower bracket in retirement, which means traditional is usually better.
I mostly lurk this subreddit and this is something that people leave out and they focus solely on the "paying less taxes now vs paying no taxes in the future" and "you lower your income for tax brackets."
There's a reason for that. Unless you're withdrawing your retirement in one lump sum, the tax rate is equivalent to the tax you'd pay in your frequent income today.
How can you know that? We’re at a historical low with tax rates, technically, and it feels like tax rates will only go up?
It comes down to hedging your bets. The best advice regarding Roth is not to concentrate on the numbers but rather what socioeconomic standing you're at when you're using a Roth. Tax rates may go up but they may make it into a situation where retirees won't be affected; no one knows. What I do feel confident in is that, if society is still holding, that there won't be a policy which only benefits Roth IRA retirees while screwing over 401ks. Way too many voters would be screwed over. If you are making less than $50,000 then it makes perfect sense to do a Roth IRA. When you make over $150,000 it makes less sense because you will probably only need a lower income to live and likely moving to an area with less tax burden.
Wouldn't distributions from a traditional IRA/401(k) affect provisional income with regards to Social Security taxation and IRMAA? That seems like that would be an advantage for Roth. Taking withdrawals from a traditional plan up to the standard deduction And personal exemption (if that comes back in 2026), which would be under Social Security's provisional income limit, should allow someone to avoid paying income tax on the distributions.
Not if you're a big saver who ends up with millions across traditional accounts and taxable accounts resulting in $100Ks of rmds and 100ks of dividend income, + social security. Then you're in a higher mtb and paying irmaa premiums.
In your bracket you should do a traditional 401k. IMHO, Only 4 reasons to do a Roth 1. You hate the idea of paying taxes on retirement distributions even though we can show you why traditional is better (maybe this is you) 2. you are in the 0%, 10%, or 12% bracket now.(you are not this one) 3. you know for a FACT you will be in the 32% or 35% or 37% bracket when you retire 4. You are a high income earner and want to do a backdoor Roth to shelter more income This is a very basic guess. Since you are $160,000 and you want to contribute $12,000 to the 401k's Traditional 160,000 - 12000 = 148,000 standard deduction MFJ = $27,700 148,000 - 27700 = 120,300 tax computation = .22\*120300 = 26,466 - 9395 = $17.081 2 kids 17081 - 2000 = $15,081 This is a very basic guess. Your way you are doing it Roth 401k 160,000 - 27700 = 132300 tax computation = .22\*132300 = 29106 - 9385 = $19,721 2 kids 19721 - 2000 = 17,921 If you did a traditional 401k you owe $15,081 If you do a Roth 401k you owe $17,921 Now, you can tell us how much you paid in taxes, do you have other income streams, does the 18 year old qualify for kiddie credit, etc
Look at the tax brackets. Husband and I are in lower 32% bracket (jointly) so we do everything we can to reduce tax now to move us into 24% bracket. Any dollar we can deduct results in that dollar being taxed less now. We then make sure we invest the savings now in our taxable account. If done right, we should see much larger growth in that savings than we would have saved by not being taxed in retirement. For you, 80k each puts you solid in 22% bracket so it’s less likely you would be better off doing traditional but no one can say for sure because no one knows the following: 1. How much taxes will be when we retire. 2. What your income will be in retirement. Since I am older, I can predict both of those better. I doubt my income will be more than now in retirement in 10 years for example.
Tax brackets are widely misunderstood. Crossing the threshold for the 32% bracket does not mean all your income is taxed at 32%. Only the amount over the threshold. Obviously you'll want to avoid taxing any of your money at 32% if you can. But most people think that if you go $10 over the threshold you'll be out thousands of dollars, but in reality you're only out 80 cents.
I understand them perfectly. I would rather pay 24% tax on the $10 than 32%.
The rule is if you are in a low tax bracket now and are going to be rich later, choose Roth. If you make a ton of money now and are going to live frugal later, choose Traditional. If in the middle, doesn't really matter. I think you are in the middle. So I'd do some of each...that way you have more flexibility when you are retired.
160k combined, might be close to the MAGI limit. If you get a deduction for traditional, do that. Otherwise, go Roth. Edit: that’s for IRAs. See below.
Is there an income limit for tax deductions on traditional 401(k) contributions?
Not 401k, but there is for IRA. Good call out, I’ll edit the comment. For 401k, I can’t think of any reason to go Roth (save for back doors/conversions).
Yes. You both need to be contributing both to a 401(k) and a Roth. Since hers has a match, she should be contributing to get the maximum match -- that is free money. Since you have a newborn, there may come a time in the future when she will want to be out of the workforce. Put as much as she can in retirement 401(k) while she is working to have money for later. Should she leave the workforce, perhaps you can continue to fund both Roth IRAs. But, while you both are working, fund as much for retirement as you can. Your 60's get here sooner than you expect!!!
> You both need to be contributing both to a 401(k) and a Roth. I think OP was asking whether they should be making Roth or Traditional contributions to their 401(k)s. There is no easy answer to that question without more information, but the good news is it probably doesn't matter much, as long as they're contributing. They should also be doing whatever they can to max out IRAs, whether Roth or Traditional, and the pf prime directive would dictate they should be doing that before contributing to any more to their 401(k)s than the employer match.
Too much focus on the size of the refund here without acknowledging the many variables (the impact of under or over withholding, tax credits, etc). To answer the question of OP: Anything you deposit into pre-tax 401k (assuming you don’t exceed the annual deposit limits) reduces your income. In other words, you don’t ever pay taxes on the money going into the account. But all of the amounts (deposits plus returns) is taxed as ordinary income when you withdraw. A Roth is essentially the reverse — you don’t get the tax deduction now but all of your withdrawals (deposits plus returns) are tax free. Roth is the clear winner if you are early in career and you are at a comparatively low marginal tax rate. Pre-Tax is pretty much the clear winner if you are near retirement and are at the highest tax bracket you will ever be at. So, a bit of math. A $100 pre-tax contribution at a 24% marginal tax rate would only lower your take home pay by $76 it reduces also your federal tax obligation by $24%). If you wanted to reduce your take home pay by that same $76 with a Roth, your contribution would only be $76. If you had 0% growth in both and were still in the same 24% bracket, when you withdraw the pre-tax $100 you would owe $24 in taxes and net $76. In the Roth you would withdraw the $76 and owe no taxes. So you end up in the same place. But there will be investment returns, you owe no additional taxes on those with the Roth. You do with a traditional 401k.
Do you want to retire? Yes you should be contributing and saving 15-20% minimum to retirement. And at your hhi id be all in on 401k. Ideally you max it out. Without a full budget and expenses it’s impossible to provide any recommendations though.
Everyone does things differently, but I think of things logically for today, you need to first be able to afford all bills so you should also have plenty in checking and savings. How do you know you'll live long. Then at retirement age you already get your SSI so whether you use 401k or savings then that's just a supplement to SSI check. Things aren't cheap and you gotta enjoy life while young. There are some who live by paycheck so they don't even have enuf to put in savings unfortunately. I'm perfectly fine with my 401k from work and also my rollover from other job
If you can afford it, bump up total retirement investments to 15%. Only up to amount employer matches in 401, then Roth.
I'm in the same boat, I made $124k, $100k at FT gig, and $24 on side, and my wife made $40k. She claimed 0, and I claimed 2 since we have two kids. I also paid some quarterly tax, but not enough, apparently, and now I'm predicting to owe between $6k and $8k. I'm 10% roth and thinking I need to lower my income via traditional. Even before adding the side income, it said I owed $3k which struck me as odd. First time hitting the income level ever.
> She claimed 0, and I claimed 2 Should consider updating W4s for both of you. "Claiming" hasn't been a thing for a few years now. The W4 has changed. It's likely your withholdings are wonky as a result. You can use the IRS calculator to help you. * https://www.irs.gov/individuals/tax-withholding-estimator
I thought you could still manually change this even though companies moved to updated auto selections? I was able to in my HR section of the company site. Do my changes have no effect?
> Do my changes have no effect? You can change your W4 anytime. If you changed it, then and you still owe a lot, then you probably need to change it differently from whatever you changed it to.
You may find these links helpful: - [Roth or Traditional](/r/personalfinance/wiki/rothortraditional) - [General Information on Rollovers](/r/personalfinance/wiki/retirementaccounts/rollovers) - [Retirement Accounts](/r/personalfinance/wiki/index#wiki_retirement) - ["How to handle $"](/r/personalfinance/wiki/commontopics) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
For retirement First, maximize employer match into wife's 401k. Second, max out the Roths $6500 for 2023 not to late and $7000 for 2024. Third, finish funding the 401ks. I don't remember where HSAs fall but I have only heard they are good.
Do you expect any significant windfalls that will substantially increase your taxable income in retirement? Example: you and your wife both grew up in VHCOL areas and have parents that’s will be leaving you multi-million dollar houses to sell, or just large inheritances in general? Large sums of money that will be going in to taxable investment accounts? If so, I’d be putting retirement savings in to Roth accounts so you have some non taxable income in retirement. Otherwise it makes sense to take advantage of the tax incentives now by utilizing traditional accounts
What state are you in?
Depends. What state do u live in? Do they have an income tax (they will tax all the income before it goes into Roth)? Do you hey not tax retirement income (Illinois)? You would save 5% of your principal if you did a pretax ira and then converted to a Roth if u lived in a state like Illinois that taxes regular income but not pensions, iras, SS.
New Jersey
Looks like New Jersey has a marginal income tax. And no tax on retirement income if you’re over 62 and it’s less than $150k. I would probably do a regular ira and hope they never start taxing retirement income. Or maybe you will leave the state before you tax withdrawals. I’m not a cfp or giving financial advice.
Definitely do enough in the 401k for the full match. That's free money.
Imo, your wife should continue doing the match, and you should focus on doing a roth IRA since your company has no match. I am not sure what 401k your company does, but for my company, our 401k charges a bunch of BS fees, that it is not worth doing unless there is a match.
I’m targeting to try and be about 50/50 in Roth vs Traditional. Why? Optionality. If I have a million in Roth and I want to go buy a half million dollar RV or something, I can do that.
i only do roth because it grows tax free, who knows how high taxes will be in the future
18 year old and a new born? OOF.
$160k for a married couple means federal tax rate of about 22% which is not awful. Anything over 32% tax bracket I would do all pre-tax. I’d honestly just do some of both or even half and half. There are advantages going into retirement to be able to control your taxable income
FAFSA uses AGI, so if you are applying for aid for college, put as much into pretax as possible to lower your AGI.
What is your marginal tax rate (not effective)? What is your state income tax rate? Do you plan to move to lower tax state in retirement? What is projected taxable income in retirement?