My company offers both a traditional and roth 401k contributions. Currently i do 3% traditional and 7% into the roth. Is this a smart strategy?

[joeysjelly]

I want a majority of my 401k to be in the roth, due to the tax advantages when i’m older. however, i like to sprinkle some into a traditional 401k because my paycheck won’t be reduced as much and for the same contribution amount per paycheck. is this an ok strategy or should all 10% be in the roth ?

 

[vanessajones23]

@joeysjelly Do you have a company match? What is your marginal tax bracket? Does 10% max it out?

 

[craigl]

@vanessajones23 Also worth noting that most (all?) company matches are traditional even if you elect Roth for your own contribution.

 

[vanessajones23]

@craigl That's why i brought up the match. It's very rare, but I've seen insanely good company matches. Things like doble contributions. In those cases you might end up with so much in your traditional accounts that the RMDs in retirement can end up pushing you into such a high tax bracket that your effective retirement tax rate is actually high than your working marginal. Its pretty rare though.

Also if you aren't maxing out then there's usually 0 reason to do a roth, unless you are in a very low tax bracket.

 

[davyjoneshere]

@joeysjelly Why you should (almost) never contribute to a Roth 401(k)

 

[parkergolden]

@joeysjelly The general idea is when you're young and your salary is low, you want to put it into Roth, as you're not losing much tax advantage and your taxes at retirement will probably be higher as tax rates grow, and your retirement income will probably be higher.

As your salary goes up, you would offset more of your current tax burden by putting more into traditional 401K until you max out the contribution limit. This basically means you're making more now than you expect once you retire.

After 401K is maxed, you can put a little more into Roth IRA either directly (if you're under the income cap) or backdoor it through a traditional IRA. This is optional, I just like having my "extra money" that's not my savings or emergency fund to grow tax free as long as I leave it alone. I'm also probably a lot closer to retirement than you are, so to me there's no downside of hiding away the 6.5K a year into tax free growth.

 

[into_the_wilderness]

@joeysjelly What is your income and tax rate (including state)?

 

[brittany18]

@joeysjelly Do you expect your marginal tax rate now to be higher than your effective tax rate in retirement? If so, then you should go all traditional.

 

[breve]

@brittany18 Would you say it’s worth considering that tax rates may be higher during retirement as they’re historically relatively low at the moment? Or is this overthinking?

 

[morgan93]

@breve Yes, the tax brackets are historically lower than they were not many decades ago, but who do you think is going to cosign jacking them up now? They woud run anyone out of office that tries.

 

[briantheguydude]

@joeysjelly https://www.reddit.com/r/personalfinance/s/U0dvAKPwBb

The answer is more nuanced than you might think but it comes down to your current vs projected income/tax bracket in retirement.

Basically, I like all Roth below 24% tax bracket. Above that I’d go all Traditional.

 

[nessa1234]

@joeysjelly Your strategy is not unreasonable. Is it optimal? That can not be determined with certainty. But at least you are making the correct first move - saving. That's a win.

 

[jackdcat]

@joeysjelly You need more than 10%

 

[matthewsjc1]

@joeysjelly Depends on your future tax brackets, future tax laws, when you retire, and other factors. I would probably do a Roth IRA for my Roth account, and Traditional 401K for my pre-tax account.

 

[blueberry25]

@joeysjelly I mean either traditional or Roth is better for you depending on your situation. Splitting between them just strikes me as being indecisive and punting the work to come to a decision on which is better.