Traditional IRA with pre-tax money and Roth conversions. Individual retirement accounts (IRAs) are a key part of most retirement savings plans. Similarities. By reading or listening to some of the more popular finance gurus, it’s easy to come to the conclusion that only a fool would choose to invest in a Traditional IRA. It’s worth recognizing that many participants are hearing from the likes of Ramsey and Orman that the Roth 401k is the one they recommend, as have many top 401k advisors in the proper circumstances. Consistently making Mega Backdoor Roth contributions would have an enormous impact on a young person pursing FIRE! But before you open an account, you need to understand the differences between a Roth IRA and a traditional … Right or wrong, most doctors have a lot of money in traditional IRAs and 401K. A Roth IRA is an individual retirement account that can provide you with tax-free income in retirement. You’re asking people for reasons why they don’t, because they might not want to work for 30yr. Roth IRA vs. Paying off debt would be a great way to use the extra money you save from investing in a pre-tax retirement account, especially if the interest rate on the loan is high. Unsure of what state I would FIRE. Below is my background info: Single, 25, no dependents, living in TX. In my 401K I can actually divide up between Roth vs traditional contributions, so this question was an even bigger deal for me. The traditional, pre-tax, convention allows you to save a portion of your compensation tax-deferred, meaning you don’t have to pay current taxes on the amounts deferred into your retirement plan. An 8% match is great. But the “Traditional 401k vs. Roth 401k” question is a legitimate one, and one advisors are increasingly likely to deal with in those meetings. Reply. Personally hedging Roth in the meantime based on my circumstances (e.g. The $16k of income from your traditional retirement accounts would cover the standard deduction and personal exemption for a … « Reply #3 on: December 18, 2014, 11:30:49 AM » I did account for my standard deduction, personal exemption and my health insurance and FSA contributions, student loan interest, and CA state income tax and SDI/SUI in that overall tax figure. By contributing to a Traditional 401(k)/IRA and then doing either a Roth Conversion Ladder or SEPP 72(t) distributions, she could have almost 15 extra years of elevated income (when compared to simply investing in a taxable account)! A Roth IRA vs 401k Strategy – Start by Getting the Maximum Employer Contribution: ... IRS Limits, real estate, retirement income, Roth IRA vs 401k, Traditional IRA. Roth 401(k) vs. regular 401(k): as a rule of thumb, the lower your current marginal tax relative to in retirement, the more attractive the Roth becomes. What if you started contributing much more to traditional retirement accounts, and this changed your ratio at retirement to 40% traditional, 20% Roth, 40% taxable? When early retirement folks talk about Roths and Roth conversions, much of that conversation tends to focus around the idea of the Roth ladder — building a chain of Roth conversions each year so that you can eventually use Roth dollars to supplement your other sources of cash flow, turning traditional retirement dollars into early retirement dollars. I am deciding between traditional and Roth 401k contributions. That aside, I think the traditional 401k typically wins out if you decide to retire earlier and live on less in retirement than you did during life. Doctors’ eyes glaze over when talking about this but the distinction is critical. You may be able to have both, and decide year-by-year where you want to make your contributions. By putting those after tax 401k funds in a Money Market, to minimize taxable earnings, the caller could then have after tax 401k contributions distributed to her Roth IRA, while the taxable interest is directed to her Traditional IRA. If your tax bracket is the same now as it will be in retirement Roth vs traditional doesn’t matter – you end up with the same amount of money in either. There are a few surprising conclusions here. I would disagree with the assertion that the Roth v. traditional is the same in the end. Below are examples using a compounding interest formula, the way your money grows in a stock market. Roth and Traditional 401(k)s are quite similar in many ways. This calculator compares employee contributions to a Roth 401(k) and a traditional 401(k). However, as we will see in the following questions, the contribution limit to the after-tax 401(k) is much higher than that of the Roth 401(k)/IRA. There are 2 different types of 401k account: Roth and Traditional 401k – each gives you different benefits. Re: Roth 401k and IRA vs Traditional? With a Roth IRA, you save after-tax dollars and your money grows tax-free. July 29, 2013 at 10:43 pm. This means FREE MONEY! If your plan allows this, then you are able to contribute money to the after-tax 401(k) and then immediately convert it to Roth 401(k) or a Roth IRA. But remember: In most cases, you won’t be able to withdraw money from your 401(k) or IRA without facing an early withdrawal penalty until you hit age 59 1/2. There are generally two primary sources to save money within a company-sponsored retirement plan—401(k) or 403(b). This means that the after-tax 401(k) essentially becomes equal to the Roth 401(k)/IRA. 2. The reason backdoor Roth has not been a hot topic in FIRE ... backdoor Roth explained in just a few steps. January 29, 2017 at 1:13 pm . Generally when you convert a traditional IRA to a Roth IRA you pay income taxes on the amount converted, because most people send pre-tax money to a traditional IRA. New Gfph77 Regardless of what party wins future elections we're getting more liberal as a country. ROTH IRA VS 401K // Pros & cons of each, and how to choose one over the other. getty Which is better, a Roth or traditional 401(k)? Robo-Advisors vs. Discount Brokers; Retirement. The Beginner’s Guide To Saving For Retirement; How Much Do You Need To Have Saved For Retirement; How Much Should You Contribute To Your 401(K) How To Optimize Your 401(K) How To Roll Over Your 401(K) Roth IRA Or Traditional IRA; IRA vs. 401(K) Reviews. 401k is a retirement investment account which you and your company can contribute to. 4. You might even want to have BOTH! Second, there are tax benefits. Not a good plan! You’re very welcome. Our plan is when we retire to do the roth ira laddering. I’m always amazed at how people leave free money on the table. I know the consensus is traditional 401k contributions while in max earning/top marginal rate years. tax bracket, estimated working years until retirement, account balances in traditional vs Roth and taxable, conversion scenarios, and RMD projections). For most, especially those seeking FIRE, a Traditional 401k makes more sense than a Roth 401k. Comments. However, my question is about which actually lets you protect more money from taxation. Just a few variables with relatively high uncertainty to consider given my time horizon (and probably others I'm missing since I don't know how best to model this). Continue put as much as possible in 401k up to limit. 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