In most cases, your tax situation should dictate which type of 401(k) to choose. If you're in a low tax bracket now and anticipate being in a higher one after you retire, a Roth 401(k) makes the most sense. If you're in a high tax bracket now, the traditional 401(k) might be the better option.
I split my 401(k) contributions 50/50 between a standard and a Roth. The thought process is that it allows me to take money out tax-free during big spending years in retirement and the opposite during normal years.
It removes a certain amount of risk. In this case, if you split your retirement funds between a traditional 401(k) and a Roth 401(k), you would pay half the taxes now, at what should be the lower tax rate, and half when you retire, when rates could be either higher or lower.
If you expect to be in a lower tax bracket in retirement, a traditional 401(k) may make more sense than a Roth account. But if you're in a low tax bracket now and believe you'll be in a higher tax bracket when you retire, a Roth 401(k) could be a better option.
The biggest benefit of the Roth 401(k) is this: Because you already paid taxes on your contributions, the withdrawals you make in retirement are tax-free. ... By contrast, if you have a traditional 401(k), you'll have to pay taxes on the amount you withdraw based on your current tax rate at retirement.
“The main thing you'll want to consider when choosing between Roth and Traditional accounts is whether your marginal tax rate will be higher or lower during retirement than it is now,” says Young. ... If your tax rate is likely to be lower in retirement, you can use Traditional contributions to defer taxes instead.
Having access to both, Traditional and Roth assets in retirement give you much greater control over your taxable income each year in retirement since you can choose which account to use to meet your spending needs in those years.
The good news is that it is often possible to contribute to both a traditional and a Roth 401(k). Since no one knows what tax rates will be in the future, diversifying with contributions to both a traditional 401(k) and Roth might be a way to hedge your tax bets with your retirement savings.
If your employer offers a 401(k) plan, there may still be room in your retirement savings for a Roth IRA. Yes, you can contribute to both a 401(k) and a Roth IRA, but there are certain limitations you'll have to consider.
Pretax contributions may be right for you if:
You'd rather save for retirement with a smaller hit to your take-home pay. You pay less in taxes now when you make pretax contributions, while Roth contributions lower your paycheck even more after taxes are paid.
A Roth IRA or 401(k) makes the most sense if you're confident of having a higher income in retirement than you do now. If you expect your income (and tax rate) to be lower in retirement than at present, a traditional IRA or 401(k) is likely the better bet.
The benefits of having both a 401(k) and Roth IRA. ... The investment growth for both 401(k)s and Roth IRAs is tax-deferred until retirement. This is a good thing for most participants since people tend to enter into a lower tax bracket once they retire, which can lead to substantial tax savings.
Holding both a Traditional IRA and a Roth IRA could enable you to enjoy a tax deduction this year by contributing to the former and collect tax-free gains down the road with the latter.
The first five-year rule sounds simple enough: In order to avoid taxes on distributions from your Roth IRA, you must not take money out until five years after your first contribution.
IRA Contribution Limits
This contribution limit applies to all your IRAs combined, so if you have both a traditional IRA and a Roth IRA, your total contributions for all accounts combined can't total more than $6,000 (or $7,000 for those age 50 and up).
For example, if your 401(k) offers 10 choices, put 10% of your money in each. Or, pick one fund from each category, such as one fund from the large-cap category, one from the small-cap category, one from international stock, one from bonds, and one that is a money market or stable value fund.
If you're in a higher tax bracket now than you expect to be in retirement, then it generally doesn't make sense to make Roth 401(k) contributions over pre-tax additions. For example, if your household taxable income is $500,000, you're in the 35% marginal tax bracket.
The IRS allows penalty-free withdrawals from retirement accounts after age 59 ½ and requires withdrawals after age 72 (these are called Required Minimum Distributions, or RMDs).
One key disadvantage: Roth IRA contributions are made with after-tax money, meaning there's no tax deduction in the year of the contribution. Another drawback is that withdrawals of account earnings must not be made before at least five years have passed since the first contribution.
Starting in 2022, the bill had proposed to end so-called non-deductible backdoor and mega backdoor Roth conversions. Regardless of income level, you'd no longer be able to convert after-tax contributions made to a 401(k) or a traditional IRA to a Roth IRA.
You can have multiple traditional and Roth IRAs, but your total cash contributions can't exceed the annual maximum, and your investment options may be limited by the IRS.
Yes, if you meet the eligibility requirements for each type.
The biggest difference between a Roth IRA and a traditional IRA is how and when you get a tax break. Contributions to traditional IRAs are tax-deductible, but withdrawals in retirement are taxable. ... No immediate tax benefit for contributing. Contributions can be withdrawn at any time without taxes or penalties.
The limits for 401(k) plan contributions and IRA contributions do not overlap. As a result, you can fully contribute to both types of plans in the same year as long as you meet the different eligibility requirements.