The reason why is simple: taxes are low right now, infrastructure is crumbling, healthcare costs are going up, and the country is $21 trillion in debt. With a trad, you’re going to be taxed on the money as it’s taken out, but often times when you are retirement age, your earned income may be less so that you’re taxed at a lower rate than you would be if you were taxed on the money today. You seem to be mixing up effective tax rates with marginal tax rates (a.k.a. Up until earlier this week I was going 10% traditional and I read several places that in my income bracket that it's hard to predict, so splitting it is a good option. Those rates are never the same. Assuming worst case scenario & you finding yourself in a tough spot, it's better to have more money in a Traditional 401k, as opposed to less money in a Roth 401k. The fact that your contributions are taxed at the beginning in one case, and at the end in the other case, is much more important than you realize. Personally I do not want to retire if it means I'm taking a hit in lifestyle (and taxes scale substantially with income). My employer does not match and instead offers a Profit Sharing based on our earnings (this was 4.5k last year.) It's very likely that your tax bracket upon retirement will be lower than 25%, so at high incomes traditional is typically a better option. I’ve since switched to 100% Roth starting in 2018. My earning situation has changed drastically over the last two years and I'm currently looking at earning ~115k this year (before taxes.) Most people plan to contribute to the 401k to get all the employer matching and then contribute to Roth IRA. You are missing the fact that with a traditional 401k you are taxed on the contributions + earnings at the end, and with a Roth you are taxed at the beginning. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. First contributed directly to the Roth IRA. This is a larger contribution amount but I will be taxed on it later. See here: http://www.reddit.com/r/personalfinance/wiki/investing#wiki_roth_or_traditional.3F. Or if you can get some of your capital gains covered under the 0% rate by optimizing drawdown order, that would also benefit you. If you work in a state with income tax and retire in a state without income tax, traditional gets an advantage. So with Traditional, you'll be paying less in taxes. The Roth IRA and the traditional IRA have a few things in common. Cookies help us deliver our Services. (Just learned last year how the tax brackets work so I understand it's income OVER 75k that I'm taxed at 25% on.). This means your 141k in your traditional account would give you about 114.5k after tax. besides when you pay your taxes, the total gains on Roth vs Traditional are the same. Scenario #1 - I contribute 10% of my pre-tax income into a traditional 401k. Contribution limits. It's certainly one question I've struggled with myself and one that I've seen the gamut of responses citing pros/cons for either side. If you anticipate a lower rate in the future, then Traditional 401k is better. Any guidance is appreciated! Roth 401(k) Traditional IRA Roth IRA; Conversions and Rollovers Upon termination of employment (or in some plans, even while in service), can be rolled to IRA or Roth IRA. Note that by law any employer matching contributions must be made into a traditional Roth account. 401(k) funds are not the only company retirement plan assets eligible for rollover. Your bullet points are correct but you conclusion is wrong. If a higher rate, then Roth 401k. There is no such thing as an "effective marginal tax bracket". The reason to do that is to save the tax payment until you are in retirement when you have little or no income, so those withdrawals will be taxed at your EFFECTIVE rate in retirement. The question really boils down to whether the tax savings at the 25% tax bracket today is worth taxing the contribution and all growth at 15% later. Press question mark to learn the rest of the keyboard shortcuts. Cookies help us deliver our Services. You could always split it up between the 2. This is a nice graphic to help provide visual context. People choose Roth because they think they will be at a higher marginal tax rate in the future (either from higher earnings or from an increase in taxes). With a traditional IRA, investments inside the account grow tax-deferred. Contributions to Traditional IRAs and Roth IRAs Are Aggregated Contributions to IRAs and Roth IRAs are aggregated. In 2019, IRA contribution limits are $6,000, or $7,000 for those aged 50 or older. Or more money + tax liability? Roth IRA Traditional IRA; Key tax benefits: Contributions are made with after-tax money and any potential earnings grow tax-free. Roth IRA – Contributions are made with after-tax dollars, meaning that you pay taxes on the money before it ever gets put into the account. If you're under age 59½ and you have one Roth IRA that holds proceeds from multiple conversions, you're required to keep track of the 5-year holding period for each conversion separately. You have to try to gauge your tax responsibilities now vs later, and in many ways it is a guessing game. Your goal should be to save enough money for retirement, assuming worst case emergencies & stock market crashes. My employer does not match and instead makes a contribution based on our total income into our traditional 401k account. I am a bot, and this action was performed automatically. If you are paying a lot of taxes now and anticipate paying less at retirement, the traditional approach is better. With traditional, you pay a lot less in taxes now, put more into 401k, but you later have to pay taxes during retirement. After that, they will maximize 401k contribution. A solo 401(k) functions much like its corporate counterpart. Is it better to have less money + no tax liability? The allowable contributions made to a traditional IRA are considerably less than to a 401(k). Balancing between both accounts is usually the best strategy because it gives you a lot of flexibility while saving you some taxes now. Otherwise, I agree with what you're saying. A total of 22.9k invested retirement is preferable a lot of taxes now be $ 172,206 under both.! Retirement, the most recommended path to take that extra $ 6k and $... Ira to a 401k which option is best for you, and t = tax rate it no. 2019, IRA contribution limits are $ 6,000, or $ 7,000 for those aged 50 or older does! Of income in retirement is preferable start to make more sense ve since switched to 100 % Roth in! My withdrawal tax rate for your traditional account would give you about after... 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