Traditional or Roth 401k for my daughter

[disneysteve]

My daughter becomes eligible for her company's 401k next month. She got the enrollment stuff this week. How does she decide on traditional vs Roth options? She does max her Roth IRA each year and will likely continue to do so even after she starts putting 5% into her 401k (to get the full match). She's 27, single, and earns about 42K currently.

[Jluke]

If she can qualify for the savers credit using the traditional then take that into consideration. Assuming that still exists.

Roth is probably nice to not have to worry about taxes in the future. But rules can change.

[Petunia 100]

IMO, she should do the Roth now while her income is low. Down the road when she is earning more money, she should re-evaluate.

[kork13]

IMO, she should do the Roth now while her income is low. Down the road when she is earning more money, she should re-evaluate.

Agreed with Petunia. When her income is low (12-15% bracket or lower), Roth is by far the best option. And a lifetime of tax-free growth from her 20s on? Please & thank you!

For the record, I'd for the tax-free growth & RMD avoidance, I'd still advocate for Roth everything in the 25% bracket, and maybe even higher.

[Like2Plan]

I agree with what has been said.
Here is a link to IRS regarding the savers credit. It's free money, but she would have to contribute quite a bit more (pretax) than what she is planning to do to get it down to where she would qualify: https://www.irs.gov/retirement-plans...-savers-credit

The Roth option would probably be best. Another thought is way down the road, she may have a substantial inheritance (assuming some of that would be already be pretax).

[moneybags]

I agree that Roth is a better option, unless she has a company match. If she does, she should contribute to the 401K up to the match amount and put the rest in a Roth.

[kork13]

I agree that Roth is a better option, unless she has a company match. If she does, she should contribute to the 401K up to the match amount and put the rest in a Roth.

Many/most companies that have a Roth option and also offer matching funds will provide the match regardless of if you contribute to Roth or traditional. The only consideration is that (by law) their matching funds can only be given as pre-tax/traditional contributions. So even if you contribute 100% Roth, you'd end up with a traditional portion for the company match.

[srblanco7]

Agreed with Petunia. When her income is low (12-15% bracket or lower), Roth is by far the best option. And a lifetime of tax-free growth from her 20s on? Please & thank you!

For the record, I'd for the tax-free growth & RMD avoidance, I'd still advocate for Roth everything in the 25% bracket, and maybe even higher.

Agree with this wholeheartedly. Focus on Roth early in your earning years to take advantage of compounding.

[LivingAlmostLarge]

Roth 401k as well!

[myrdale]

She is doing EXTREMELY WELL to be maxing the Roth IRA while earning $42k. I am a pretty dedicated saver, but that ratio is amazing to me.

I think the Roth option is always the correct option. I only switched (due to my own ignorance) to the Roth 401(k) option last year.

Ultimately Roth or Standard isn't going to affect how much she contributes. In 30 years, either way she will have put $200,000 into it. What it will affect is if she will have to pay interest on the $2M of growth. That could be a difference of $200,000 or more.*

*I threw those numbers out by the seat of my pants. I'll have to double check later.

[disneysteve]

She is doing EXTREMELY WELL to be maxing the Roth IRA while earning $42k. I am a pretty dedicated saver, but that ratio is amazing to me.

There’s more to that story. She also receives annuity payments from a legal settlement years ago. That brings her total income up to 50K.

That said, she has low expenses. She lives with us and does pay monthly “rent” but a lot less than she’d pay on her own. We buy food and most necessities. She covers most everything else but she’s pretty low maintenance. Other than her car payment she has no debt. So she’s able to save 30% or more of her income at this point.

She’s 27 and has about 72K saved so far.

[srblanco7]

There’s more to that story. She also receives annuity payments from a legal settlement years ago. That brings her total income up to 50K.

That said, she has low expenses. She lives with us and does pay monthly “rent” but a lot less than she’d pay on her own. We buy food and most necessities. She covers most everything else but she’s pretty low maintenance. Other than her car payment she has no debt. So she’s able to save 30% or more of her income at this point.

She’s 27 and has about 72K saved so far.

That's impressive. Rough numbers - assuming 30 more years, 9% rate of return, at $10k/year - that'll turn into $2.3M.

[disneysteve]

That's impressive. Rough numbers - assuming 30 more years, 9% rate of return, at $10k/year - that'll turn into $2.3M.

And she’ll probably get a couple million more when we check out. I think she’ll be okay.

[AllyStreelman]

I went with the Roth 401k option when I started my career (and since) because I figured I'd be in a much lower tax bracket at that time then when I plan to take withdrawls. If this is the case with your daughter, I'd suggest that as well.

[terri77]

Definitely Roth for the early years.