Submitted by Icy-Faithlessness466 t3_yhza9b in personalfinance

Research tells me That both accounts used after tax dollars you can so that you can pull money out tax free. The only difference I can see is that Roth IRA allows you to pull money whenever you want and may have better investment options/lower fees. Among other differences: Roth 401k loans, contribution limits (probably missing a few)

My question is does it matter which you invest in? If you’re a fan of tax free growth — why don’t most people do the 401k match, Roth IRA, and then Roth 401k? If you have a Roth 401k, is that better than a Roth IRA?

I’m 24 and In the 24% tax bracket, don’t really have a set age I want to retire yet. So it seems like I should take the 401k match and then focus on Roth 401k? Would that be a good plan?

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Werewolfdad t1_iughjd6 wrote

> My question is does it matter which you invest in?

Not usually. Roth 401k is often tax inefficient since income can force you into Roth IRA.

> If you’re a fan of tax free growth — why don’t most people do the 401k match, Roth IRA, and then Roth 401k? If you have a Roth 401k, is that better than a Roth IRA?

Exclusively Roth is highly tax inefficient

> I’m 24 and In the 24% tax bracket, don’t really have a set age I want to retire yet. So it seems like I should take the 401k match and then focus on Roth 401k? Would that be a good plan

Doubtful

Https://www.reddit.com/r/personalfinance/wiki/rothortraditional

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DeluxeXL t1_iughc7f wrote

> I’m 24 and In the 24% tax bracket, don’t really have a set age I want to retire yet. So it seems like I should take the 401k match and then focus on Roth 401k? Would that be a good plan?

No, you are unlikely to ever get to 24% effective tax rate during retirement. The usual advice (pretax to match --> Roth IRA --> max out pretax 401k) still applies to you.

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rnelsonee t1_iugi2i1 wrote

>If you’re a fan of tax free growth — why don’t most people do the 401k match, Roth IRA, and then Roth 401k? I

It's very common here to suggest 401k to the match, then IRA, then back to 401k. Note there's no capital gains taxes on pretax 401k's or IRA's, either (what I would call growth taxes).

>Would that be a good plan?

At your tax bracket, no - I'd do pretax. Remember that while you pay taxes on earnings with pretax, that's offset by the fact that you can afford to save more pretax dollars. Say you pay 24% on every dollar of pretax 401k in retirement. If you earn $1,000 now, it grows say 10× (8% for 30 years, e.g.) to $10,000 and you're left with $7,600 after taxes. It's the same amount you'd have if you earned $1,000, paid $240 in taxes, and put the $760 into a Roth. While the $2,400 in taxes with pretax is higher than $240 with Roth, that $240 you would have forfeited up front (with Roth) grew into that $2,400. So if your marginal tax rate now is the same as the rate you get taxed on these dollars, there's no advantage to Roth (or Trad).

But the key here is paying 24% on every one of those dollars in retirement. In order to do that, you'd need $109,000 (single) or $218,000 (joint) of other taxable income in retirement… where is that money coming from? Outside a huge pension or several million dollars saved up in other accounts, you won't get taxed 24% on all your 401k withdrawals. So do pretax when you're in those higher brackets now.

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CCM278 t1_iuiyjhc wrote

>...don’t really have a set age I want to retire yet.

You might want to put a little thought into your plan. Just so you can at least look back and say you made the best decision you could at the time with the information you had. I think you have a good plan and I'll explain why below:

​

You have a rare window of opportunity....time. The savings decisions you make now are about 10x more impactful than the ones you'll make in 20 years.

Conservatively, money in the stock market doubles every 10 years. So the sooner your nest egg starts compounding the better. If you hit 1M by 40 (16 years), then at 50 you'll have 2M and at 60 you'll have 4M. The compound growth is phenomenal. Compare that to me, I started saving at 32, hit 1M at 50 so by 60 I'll have 2M...give or take. You'll have 2x more money than me, even though you only started saving a few years earlier.

Asking about Roth vs Traditional savings is something of a lightning rod. You'll get a lot of advice about tax arbitrage and it is mathematically correct but you aren't going to pick your tax rates, those will be what they will be, as a function of dozens of decisions you'll make over your lifetime. The biggest ones are:

  • how much are you going to save?
  • how long does it have to grow?

The conventional advice is pre-tax 401k for someone in the 24% bracket (especially if you have state taxes) and Roth IRA. This creates a small tax hedge. It works like this because most people simply won't be able to save enough to blow past the income from their working years and frankly don't need to. The general goal is between social security and investments you'll need about 80% of your working income, so all other things being equal will be in a lower tax bracket.

However, the impact of compounding overturns the conventional advice for someone who starts in their 20's vs 30's or later especially if you can be aggressive (e.g. 25% of your salary). That extra decade of compounding is profound. So for that reason I recommend anyone under 30 going all in on Roth, and saving until it hurts.

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grokfinance t1_iughr69 wrote

Yes, I like your plan. Forgo the tax savings today and use the Roth accounts so you know in the future what you see in the account is what you get to keep no matter what happens in your financial situation, to the economy overall, to tax rates, etc.

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Environmental_Put_33 t1_iugi8rm wrote

Few schools of thought on this but I prefer the devil I know. Meaning, tax me now and leave it alone. 20+years in, the taxes may be a whole new level of crazy with the way society is going. So, I would do whatever offers me a match and then roth max after that.

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RK3D t1_iugj9fe wrote

Who knows if they'll just tax it anyway come time for retirement.

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shadow_chance t1_iugt9k5 wrote

> taxes may be a whole new level of crazy with the way society is going.

They've been going down for at least 20 years.

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