401k now or Roth 401k?

[LivingAlmostLarge]

As someone self employed i can contribute to a 401k either Roth or traditional. We're on the fence with our bracket. I want to put in the $22,500 but I keep feeling like I should wait till December 1st and see what happens to our income for the year. In case anything strange happens then maybe a traditional would be better. If it's where I think then maybe a Roth 401k would be better. What would you guys do?

[kork13]

When in doubt, I always err to Roth. (1) Roth is more "dense" than traditional (more dollars go into it, accounting for taxes); and (2) Tax free growth is always a winner in my book, so you've got to have a wildly high income for me to go any different direction.

[myrdale]

Roth is always the #1 choice. I have yet to see / understand a situation where it is not. Ignorance is my only excuse for why I was not doing the Roth 401k option years earlier at work. You will put the same amount of money in either way, but in the traditional you may end up paying $100k's of taxes on growth vs $0k of taxes for the Roth.

[Jluke]

Roth is always the #1 choice. I have yet to see / understand a situation where it is not. Ignorance is my only excuse for why I was not doing the Roth 401k option years earlier at work. You will put the same amount of money in either way, but in the traditional you may end up paying $100k's of taxes on growth vs $0k of taxes for the Roth.

You put the same amount in but in order to get that amount in the Roth account you have to pay taxes on the money first. So it might be 24000 in income to get 22500 for the Roth whereas it is 22500 of income to contribute that amount for the traditional 401k.

otherwise yes the Roth grows tax free.

high income earners (think top tax bracket, 35%??) may get more tax savings now by contributing to a traditional 401k instead of the Roth.

[jenn_jenn]

Following this thread closely!

I am not self employed but also have the option for traditional 401k or Roth 401k.

I never know what to do because I’ve read conflicting opinions so I split my contributions 50/50.

[Like2Plan]

Since you have the option to wait and see what your taxable income is going to be for the year (or at least have a really good idea) before you fund your contribution, I would do what you are doing and wait and see.

(It sounds like you have already calculated the decision point for either Roth or traditional in regards to your expected tax bracket).

[LivingAlmostLarge]

So I tell people if you are above 32% go to the traditional 401k. The chances of you being in a lower bracket when you retire is high. Why? Because look at the income

32% Single - making above $182k

32% MFJ - making above $364k

Most people I know MFJ fall into the 24% bracket up to $364k. Plus you add in $20.5k + $20.5k each and you are looking at $400k before you get there gross not counting other deductions.

$200k puts on you par with $180k single filer and $400k in retirement is looking at $10M in portfolio at 4%. I don't know many people having a $10M portfolio at reitrement or generating $30k/month from pensions and SS.

So in theory it always make sense to take advantage of the tax break depending on your bracket and where you think you'll fall in retirement. Most might live on $150k MFJ but then if you aren't then you are comfortably in 24% and that's not to say some isn't Roth funds.

So we aren't sure what bracket we are in this year 24% or 37%. I think i need to wait and see.

[jenn_jenn]

So I tell people if you are above 32% go to the traditional 401k. The chances of you being in a lower bracket when you retire is high. Why? Because look at the income

32% Single - making above $182k

32% MFJ - making above $364k

Most people I know MFJ fall into the 24% bracket up to $364k. Plus you add in $20.5k + $20.5k each and you are looking at $400k before you get there gross not counting other deductions.

$200k puts on you par with $180k single filer and $400k in retirement is looking at $10M in portfolio at 4%. I don't know many people having a $10M portfolio at reitrement or generating $30k/month from pensions and SS.

So in theory it always make sense to take advantage of the tax break depending on your bracket and where you think you'll fall in retirement. Most might live on $150k MFJ but then if you aren't then you are comfortably in 24% and that's not to say some isn't Roth funds.

So we aren't sure what bracket we are in this year 24% or 37%. I think i need to wait and see.

Good advice! I’ve read this elsewhere as well.

One thing that is a bit of a wildcard is where you think taxes will be in the future. We’re of the opinion that taxes will only keep going up in the future and could look very different 30 years from now. So even though today’s rules it mathematically makes sense to take advantage of the tax break, there’s a chance that the equation changes in the future. And this is primarily the reason I do the 50/50 (along with it being more “dense” as Kork put it).

I guess one thing that I should do is really do a true forecast and what we think the risk vs. reward is. I haven’t been calculated or detailed about it. And sorry this is me just thinking “out loud” here…

[LivingAlmostLarge]

Good advice! I’ve read this elsewhere as well.

One thing that is a bit of a wildcard is where you think taxes will be in the future. We’re of the opinion that taxes will only keep going up in the future and could look very different 30 years from now. So even though today’s rules it mathematically makes sense to take advantage of the tax break, there’s a chance that the equation changes in the future. And this is primarily the reason I do the 50/50 (along with it being more “dense” as Kork put it).

I guess one thing that I should do is really do a true forecast and what we think the risk vs. reward is. I haven’t been calculated or detailed about it. And sorry this is me just thinking “out loud” here…

Maybe but there will always be higher and lower brackets. I can't forsee a flat tax because it's too fair. And with brackets means you can control your income. I also don't see the lower brackets going away and inflation is just pushing the brackets higher.

Have you see the maximum income taxed for Social Security? $160k. So I am not sure 32% bracket will stay at $300k...Otherwise the median $74k income will be in trouble if you want to tax it 32%.

[AllyStreelman]

Personally, I'd choose Roth, because I'd rather count on the tax-free gains.

[Fishindude77]

Despite the arguments for or against one -vs- the other, they are both good options.
You really won't go wrong either route.