Should I (22 y/o) be directing all my retirement contributions to a Roth 401(k)?

[whattimeisit]

Hi all, having some confusion over my retirement contributions and would love some advice. For context, currently making 110K base before EOY bonus and employee retirement contributions. Employer automatically contributes from a profit sharing retirement fund an amount equivalent to 5% of base salary. After that, I am currently contributing 16% of my salary to my vanguard fund, for a total of 21% of salary being contributed when adding on employer profit sharing fund. I am splitting my 16% evenly, with 8% going to 401(k) pre-tax and 8% going to 401(k) roth. I did this under the advice from some family members, but a recent conversation with a financial advisor directed me to consider contributing all 16% to the roth 401k. I was curious in hearing some opinions on this here, as this is my first job and never something I have had to consider before, so thank you all very much in advance. This subreddit has been integral in my financial journey thus far.

 

[stevenj]

@whattimeisit Roth or traditional: https://www.reddit.com/r/personalfinance/wiki/rothortraditional and https://www.madfientist.com/traditional-ira-vs-roth-ira/

 

[ichiyaza]

@whattimeisit

For context, currently making 110K base before EOY bonus and employee retirement contributions.

You're pretty solidly in the 24% federal tax bracket.

Do you live in a state with income taxes (likely you do -- only 7 states have no income taxes)?

The general rule of thumb is to lean toward traditional 401k when you have significant money in 22% or above tax bracket.

See this previous post w/comments that explain it pretty well:

https://www.reddit.com/r/personalfinance/comments/vyz3h0

 

[resjudicata]

@ichiyaza Agreed. I'd go 100% in traditional 401k. You're unlikely to need to withdraw at higher than 24% in the future, so I'd take the guaranteed 24% tax avoidance now.

 

[sweetplum]

@whattimeisit At your income level, Roth sucks by probably 10%. In addition to the other suggested reading, this one is also good: https://www.gocurrycracker.com/roth-sucks/

But that said, a good projection is that going full traditional will, probably, net you about 10% more after sitting there for 35 years. No matter what choice you make, understanding your investment options, making sure the funds you choose have low fees, and learning about balancing (and rebalancing!) your investments will make a bigger difference over 35 years that the balance between Roth and traditional.

TL;DR: traditional is better when you are in a 22% or higher bracket, but it's not the most important factor. Asking questions (as you have) is perhaps the most important step of all.

 

[chr1]

@whattimeisit I am doing the same as you, 8% to each (+ employer match) but have only recently started doing that as previously I was putting it all into Roth. I am about halfway toward the standard retirement age and my FA advised I start splitting my contributions because of not knowing precisely what my tax liability will be in retirement. They suggested I have 2 “buckets” with which to draw from - untaxed and taxed.

“The reason I’m telling you this is because I’m playing both sides so that I always come out on top” - Mac

 

[resjudicata]

@chr1 You'll probably be better off with 100% going to traditional unless you're in the 12% or below tax bracket. Your tax bracket is unlikely to be over 22%, so it's pretty much a guaranteed win.

 

[raihan12]

@whattimeisit I also contribute 50/50 split for my Roth IRA and Traditional 401k. I do this because the traditional contribution pushes me into a lower tax bracket that makes it worthwhile to contribute to my Roth IRA. However I believe a mix of Roth/Trad makes sense as you hedge your bets against future tax rates while locking in some low rates now.