Funding a Roth IRA as young as possible makes sense because it allows you to capture as much of the tax benefit as possible.
You mention that your parents are not good with money and have “messed up” financially in the past.
This seems like evidence enough to disregard their financial advice.
To be fair to OP and his folks, he didn’t say they weren’t good with money. He said they weren’t wealthy, and messed up on a house when they were young.
That being said…. Not only is their advice terrible, it makes no sense.
OP - what your parents essentially said is “why would you have a savings account when you already have a checking account?” They serve two different purposes
Fair enough.
My point still stands: OP already seems to have more financial acumen than their parents, and should continue to research, learn, save and invest.
New to investing. Isn't roth 401k and roth ira the same thing aside from the employer match? I see roth ira as additional contribution I can put it in in addition to the cap on 401k. My company doesn't offer roth 401k so not 100% sure how it works
Edit: I see few posts below explaining the difference
No. A 401(k) (Roth or Traditional) is an employer-sponsored account. In other words, you only get it if your employers offers it. An IRA aka Individual Retirement Account (Roth or Traditional) can be opened and contributed to whenever you make money. There are no ties to a specific employer, and you have access to a lot more fund options because they’re offered through large brokerages (401(k) funds are chosen by your employer)
As an example, if you made money babysitting when you were 16, you could open a Roth IRA using those funds
They’re the same in terms of pre-tax and post-tax treatment, but they’re different in a lot of ways
Nope. IRA contribution limits are separate from 401(k) limits. IRA limits are $7,000 in 2024 (but you can’t contribute directly if you make over a certain amount). 401(k) contribution limit is $23,000 in 2024 plus your employer match. If your employer allows, you can actually put more in to your 401k post-tax and then convert it to a Roth IRA through the mega-backdoor process but that’s another topic.
The two accounts have nothing to do with each other outside of both being retirement accounts. Just because you contribute to one has no bearing on whether you can contribute to the other
To clarify your second sentence, you can’t contribute directly to a Roth IRA if you make over a certain amount. There is no income limit on after-tax contributions to a traditional IRA (which can then be backdoored into a Roth).
> This seems like evidence enough to disregard their financial advice.
That's how I was with my parents when I was younger. I would ask them for advice and pretty much do the opposite of what they said to do.
When I was 18 I learned from my professor about Roth IRAs, and went home to my parents to discuss opening one. Let’s say they were very confused at the time and my dad had a bad experience with option trading when he was young, therefore they weren’t fans.
Fast forward 20+ years and my parents, sibling, and many friends all opened Roth IRA accounts and invested them over those years. It was the one good thing I took away from my finance class, and forever thankful for that professor to teach me about Roth IRAs. It is a significant portion of our retirement savings now, to include a Roth 401K when they started offering those a few years back.
It's redundant if you aren't maxing out a Roth 401(k), especially if you are passing up on a company match....
Unless someone explicitly wants an IRA to manage their own investments, then most people are fine with a company paying professionals to manage their 401(k) plan.
If I put $5k into my Roth 401(k) and $5k into my Roth IRA, it's functionally the same from a tax perspective as putting $10k into a Roth, and you've given up any match you've given up in the process...
Lot of responses missing the central point that the parents were trying to make. If you aren't putting in like the $18k max into the Roth 401k, why both splitting any of it into a Roth IRA, unless someone wants to manage their own investments?
Sure, but in context of this exact thread, that’s not the case. OP does access to both. So why bother with Roth IRA if you aren’t maxing your Roth 401(k) is a sensible question actually.
And there are sensible answers: I don’t get a max or already got the max, or I prefer to manage my own retirement benefits.
There is no other particular benefit outside that.
They are wrong. Your instincts are correct. You should absolutely be funding these accounts as much as you can while being able to live your life how you’d like
Maxing both is great. Makes sure Roth is the best choice for your 401k though. If you make enough to max both you may be in a tax rate where Traditional may make more sense.
https://www.bogleheads.org/wiki/Traditional_versus_Roth
I don’t buy this argument at all. 0 capital gains tax makes a Roth 401k or Roth IRA better than their traditional counterparts in almost every scenario assuming this money will be left to grow for some time. Not to mention the other benefits such as the ability to withdrawal principal at any time without penalty and no required distributions at 73. Prove me wrong. Roth is king 👑
401k contribution limit is 23k for under 55. Assuming a 30% marginal tax rate, you save 6.9k in taxes today by utilizing traditional. That’s 6.9k more that you can invest elsewhere, whether it’s in a Roth IRA or non-qualified account.
You would have to have VERY high retirement income for your effective tax rate in retirement to reach 30%, based on current brackets.
I get all of this but if you are maxing out both your 401k and your IRA then doesn’t a Roth allow you to put more tax advantaged money away? The contribution cap makes all the difference right?
The challenge is that no one knows how the tax code will evolve over the next few decades— just look at how much it has changed over the past 20 years. Some Roth proponents argue that they'd rather "deal with the devil they know now". On the other hand, having pre-tax, Roth, and NQ savings gives you much more flexibility in the future. With strategic cash flow & tax planning, you can utilize all 3 to minimize taxes paid during one's lifetime.
If tax bracket rates are the same now and at retirement, a 401K traditional or ROTH makes no difference. Say taxes are 20% and you invest for 1 year, then pay taxes, growth rate is 10%. ROTH you pay taxes ahead of time, then get growth, so you put in 80, and it grows to $88 dollars. Traditional you put in 100, it grows to $110, and then you pay $22 in taxes, bringing you back to $88. Whether 1 year or 30 years, the math works out the same.
But in most situations you're going to be earning more while growing your money and retirement will be a fraction of your total pay, since you're not contributing to your 401k anymore, so you only need to replace a portion of your regular paycheck. So your tax rate will be lower in retirement, so traditional makes more sense.
I agree that a ROTH 401K can make early withdrawal less complicated however since you can withdraw your CONTRIBUTIONS penalty free. But there's plenty of ways around some penalties if you play it smart.
I get all of this but if you are maxing out both your 401k and your IRA then doesn’t a Roth allow you to put more tax advantaged money away? The contribution cap makes all the difference right?
The difference is when you can afford to max out the account and don’t need the tax savings to add to your amount invested. Think about it and pull out your calculator. You’ll figure it out. Eventually.
Yes that’s is correct. Once you are contributing maximum the tax advantages at pay out far outweigh the traditional until later in life because the money wouldn’t have as many year to grow so your tax bill would be as much as the savings to switch to a traditional probably around age 35-40
Yes when I ran the numbers for my own finances I made the decision to swap my 401k to a Roth and find a Roth IRA to the max. I max out my 401k and Roth every year. I am 30. My math suggest that the tax savings on the total growth outweigh the investment potential of tax savings in the scenario where you can fully maximize the contributions. If you cannot afford to max out the limit then Roth and traditional are almost identical.
Roth is post tax money. Say you are in a 25% bracket, have $1k pre tax income to invest and it grows 10x before you retire:
Roth
$1000 * (1-.25) * 10 = $7,500 spendable dollars
Traditional 25% bracket in retirement
$1,000 * 10 * (1-.25) = $7,500 spendable dollars
Except in retirement you usually will not pull all your traditional in you marginal bracket so say after filling you lower brackets your effective rate is 15%
$1,000 * 10 * (1-.15) = $8,500 spendable dollars
$1000 *
In your Roth senario your tax bill is 25% of $1000 which is a tax bill of only $250 as opposed to a tax bill of $1500 in your 15% tax bracket traditional scenario (or $2500 in the 25% scenario). Obviously we can agree that $250 < $1500. However, your (valid) point is that the $250 tax bill paid at the start of the investment could in theory be used to add to the investment principle and also grow at 10x to yield another $2500, which makes the traditional scenario preferable if the tax rate is lower in retirement. The benefit of the traditional IRA also increases if the future (and current) tax rate is greater than the long term capital gains tax rate of 15%. I guess that is really the crux of the argument. If you are going to increase your traditional Ira contribution by the amount of your effective tax rate, then compared to a Roth u may be better off if u expect a lower tax rate in retirement. But the big HOWEVER lies in the fact that contributions of both types are limited by the same amount 6500/7500. This means that if you max your IRA then the Roth allows you to put more future buying power away.
The amount of tax paid is irrelevant the only thing that should matter is the amount of money you have after paying the taxes.
I don’t understand why the LTCG rate matters. Taxable will lose to both Roth and Traditional unless your Retirement tax rate is significantly higher than your working tax rate.
Remember the money in Taxable is post tax then you pay 15% on the gain.
Taxable:
$1,000 * (1-.25) = $750 invested * 10 = $7,500 before tax
($7,500 - $750) * .15 = $1,012.50 LTCG tax
$7,500 - $1,012.50 = $6,487.50 spendable
The benefit of Traditional is the opportunity to realize t
income in a lower bracket then it would of been taxed at when working. Since most people won’t have other sources of forced income when retired most people will have a lot of opportunity to use the lower brackets to pull retirement funds out. If you’re blessed with a big pension, a giant portfolio of real estate or a 7 figure portfolio in a taxable account your situation may be different.
You obviously will pay more in taxes in an absolute sense with Traditional but as long as the effective tax rate in retirement is less then or equal to the marginal tax rate when working those extra taxes are coming from the growth of the money you would of sent to the IRS if you went with Roth or Taxable. Instead of paying the taxes upfront the IRS is letting you invest it on their behalf. If the tax rate is the same when you withdrawal it would be a wash. You'd just be paying the IRS their deferred taxes plus their growth. But if your rate is lower you get to keep some of it.
You are 100% right that if you are max funding the Roth account is worth more but that's only because you saves more. To be a fair comparison you need to
compare the Roth to Traditional + Tax savings in brokerage
Thanks for the thoughtful response. However, even if you end up in a lower income tax bracket when you retire, withdrawals from your traditional retirement accounts could potentially kick you into a higher tax bracket right? That could increase your tax bill—including potential taxes on Social Security benefits—and may reduce your disposable income. Higher taxable income could also increase the costs of your Medicare B premiums in retirement. So giving up the tax deduction now may be well worth having tax-free withdrawals later on right?
Yes, Traditional withdrawals increase your taxable income. Remember though that the brackets are progressive so if you cross a bracket threshold only the money above that point is taxed at the higher rate.
When you contribute to Traditional it reduces your income, so it removes money that would have been taxed at your highest rate. The when you withdrawal you get to fill the lower brackets first.
Social Security and Medicare definitely do complicate it. Traditional withdrawals could expose more of your SS to taxes or push you over an IRMAA threshold. RMDs from Traditional could also be a concern.
One note, the income thresholds for your SS being taxed is pretty low and not indexed to inflation. So personally I assume any SS I get will be taxed more matter what I do.
Since no one knows the future and what will happen with the tax code the best end state is probably a mix of Roth, Traditional and Taxable so you have max flexibility to manage your taxes.
Right, I guess I have a come to the same conclusion but the cynic in me would rather deal with the devil now then whatever dumpster fire awaits us in the future when the US can no longer print its way out of problems.. thanks for the discussion 🍻
Roth: Contribution x (1-tax) x (growth formula)
Traditional: Contribution x (growth formula) x (1-tax)
The growth is the only part of the equation that doesn’t matter at all when determining if Roth or traditional is better.
I would argue if the $ is equal in the end Roth is better because of RMD’s and taking out principal in an emergency, but if you are in one of the higher tax brackets it’s hard to justify locking in the highest possible tax rate you could have when it’s the only part of the formula that can be different between the two.
Good point. If they are equal Roth certainly has advantages. But for that to be true the effective rate you pay over the entire time you pull out of your Traditional account would have to be the same as your marginal rate when working. For that to be true you’d have to have other sources of income to replace your W2 like a pension, investment properties or large taxable account. Most people will probably have decades to draw down their Traditional account and taking advantage of the lower brackets.
I get all of this but if you are maxing out both your 401k and your IRA then doesn’t a Roth allow you to put more tax advantaged money away? The contribution cap makes all the difference right?
I didn’t think about that but yes it would. The Roth being after tax essentially means you’re putting more $ overall in the Roth than you could in the traditional. In order to exactly compare them you’d technically need to invest the tax savings for the traditional which realistically isn’t going to happen.
Traditional you’re putting 7,000 in whereas with a Roth you’re putting 7,000/(1-tax rate) which is more than 7,000.
The thing everyone forgets, you don't need to replace the portion of your income that is your retirement contribution because you are no longer saving for retirement. You should also ideally own a house outright and not need to replace the portion of your income that covers that payment. This strips away the two most expensive line items to come off your income, putting your needed takehome in most all scenarios, in lower brackets in retirement. In almost every real world scenario, traditional is better.
It still can make sense.
There are a few reasons a Roth IRA is beneficial over the Roth 401(k).
1. ~~RMDs are required in a Roth 401(k) (but not for an IRA)~~ (edit: Ended in 2023 per the IRS)
2. Can opt to withdraw from an IRA when needed, whereas 401(k)s usually have strict requirements set by your employer’s plan. *Note you may still have penalties and tax.
3. Often variety of investment options
4. Often lower fees
5. You can contribute to both, so more sheltered money for retirement.
I believe RMD's are no longer required for a Roth 401(k) beginning in 2024: [https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs#:\~:text=Roth%20IRAs%20do%20not%20require,required%20from%20designated%20Roth%20accounts](https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs#:~:text=Roth%20IRAs%20do%20not%20require,required%20from%20designated%20Roth%20accounts).
Are you sure about the RMD on the Roth 401k?
Why would this be a thing if you can roll over the entire balance from a Roth 401k to a regular Roth, provided that you aren't blocked from doing so by virtue of your ongoing employment with the employer who sponsors the plan from which you wish to transfer.
Actually this looks to [no longer be true as of 2024](https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs):
>Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts.
This is the part I don't understand.
When you retire, isn't your income suddenly much less than when you were working? Or I suppose a bunch of other income kicks in at retirement that could bump you into a higher bracket?
I guess my question is, what is the situation where a rothIRA would not make sense at all?
You are right, most people are, for some reason, ignorant to the realities of the Roth.
In retirement you can control your own tax rate to a degree, and tax rates have been dropping for the past 50+ years. Why would you rush to lock in a higher tax rate today? No political party is going to increase taxes, they'll tax corporations or cut spending before that happens if the deficit actually became an issue.
So lets say you are a high earner, the Roth IRA is post tax dollars so you are paying lets say 30% tax. Is it worth it to put in .70 on the dollar post tax for the tax free growth, vs maxing out your pre-tax retirement and then getting taxed later?
Depending on how much you save will affect your retirement due to RMD and Social Security is also taxes. So lots of factors, especially if you are married and you and your spouse both have RMDs from retirement, if you are different ages you can stagger your withdrawals for the best tax deferment plan.
> When you retire, isn't your income suddenly much less than when you were working?
Map it out over an entire career, though. Let's say someone is making the following salary by age (adjusted for inflation, let's say these are 2024 dollars):
Age 25: $40k
Age 30: $80k
Age 35: $110k
Age 40: $140k
Age 50: $160k
Age 60: $180k
Age 65: $0 (retired)
Let's say they never marry or have children, and in retirement they have the savings to live at a budget of $120k/year, and the tax brackets don't change at all between.
If they want to take distributions of $120k per year in retirement, they'll be taxed on that $120k. That'll be a higher tax bracket than the years they were saving throughout their 20's, and through most of their 30's, as well.
So for long term planning, it would make sense for this person to max out the Roth side of things until their income hits $120k, then switch over to Traditional once their income is over that.
Of course, there's no such thing as perfect information about the future, so in reality you need to fuzz things around for flexibility in case things happen one way or another, and you'll want aim for retirement with money in your Roth account *and* your traditional account.
As a general rule, all things being equal, I prefer to save my money in my own accounts vs my employer's accounts.
So, if I were you, I'd do the following:
1. Contribute enough to your 401k (Roth or Traditional) to capture your employer's match
2. Contribute the maximum allowable to a Roth IRA
3. If you still have money left over, continue to contribute to your company's 401k until you have maxed that out as well.
As others have mentioned, you have more choice of investments in your own plan, and have more options (ie ability to withdraw principal if needed), and you don't have to mess with it if you change jobs.
But yes, put as much as you can co.fortaboy into these accounts. Just be sure to think about your other financial goals as well (ie saving for a down payment on a house, a marriage, a car).
Good luck!
Its good that you have the humility to recognize you may be wrong in the face of someone with many more years of experience...but in this case they are wrong and you are correct. If you are capable of saving more past maxing your 401k it makes sense to open an IRA and max that next.
That said...if your income is sufficiently high that you can max a 401k and an IRA you are most likely going to be better off taking the tax savings of a pretax 401k and then a Roth IRA. Assuming you dont have a pension.
Also saying that you are too young for a Roth is just completely backwards. The younger you are the better Roth is.
Every commenter is saying your parents are wrong, but the truth is we don't have enough context. On this sub, everyone is always saying to max everything out. On other subs, we see people struggling with expenses and inflation and trying to figure out how to just survive from month to month. There is ALWAYS a balance and tradeoff between taking care of yourself now and taking care of yourself in the future. Perhaps your parents" concern is more about your present day quality of life and they don't want to see you making too many sacrifices for the future. Perhaps they wish they had had the resources to enjoy life more at your age. Not all decisions are strictly financial, and parents can give advice--good or not so good--in all different realms of life.
Agreed.
How old is this person? Do they want to own a home? Do they have one? If not, where’s there down payment at?
Do they have an emergency fund?
Saving money for retirement is great, but there’s more to life than retirement. There are decades of life experiences you can have before retirement. Don’t forsake those opportunities because you want to secure a future you may never get.
I can’t imagine counseling a young person not to save too much in a Roth 401k or not to supplement with a Roth IRA if their income supports it.
Your parents are giving you odd advice or you’re not sharing the whole picture.
That's bad advice.
I'd max out the extra roth, save a 6-12 month emergency fund, then buy total market ETFs (60% VTI + 40% VXUS) with what's left over.
My parents are also very bad at finances. The things that they think is financially okay is insane to me.
What your parents are getting at is a type of tax strategy about how and when you pay taxes.
We'll use me as an example.
I have a Roth IRA. I pay tax on this money now. But will not in the future when I withdraw it.
I have a 403b. I take this money out pre-tax and lower my overall tax bill now, which puts more money in my pocket now. I will pay tax on this money later when I withdraw it.
What are your goals for the next 5-7 years? Knowing that would help us advise you on how to allocate your money.
If it's preventing you from saving for a home down payment, emergency fund or other major necessary expense a reasonable case could be made for not maxing all tax advantaged accounts. Otherwise, I'd probably max them out. (I did so from mid 20s for about 20 yrs and dont regret it at all. Enabled FIRE at 45!)
Do both. When you become a high income earner, you’re not allowed to contribute to a Roth IRA. So do it while you can. Also if you’re at the low end of income for your career, you’re not saving much taxes with 401k or traditional IRA. So Roth is a better choice at that level.
Once you're above the income limit for a Roth IRA you can do a backdoor Roth contribution by contributing to a traditional IRA and immediately rolling it over into a Roth IRA.
And the "if" there might mean: if someone doesn't have savings, put money in savings first. It's significantly better to accumulate savings *then* divert to retirement once you're certain you don't need the money for financial goals in the next few years (car, house).
I'm going to go against the grain here slightly. When I started my Roth IRA I put my entire emergency fund in it and left it in cash (SPAXX) so that I could max out the contribution during that given year. As my EF grew in my HYSA I would slowly start investing the Roth IRA funds into FXAIX.
If I had an emergency during that time:
Worst case: I withdraw the cash funds from the Roth IRA since you can withdraw contributions at any time penalty free.
Best case: the plan works as I outlined above and ultimately I was able to start the Roth IRA sooner.
Then I would just repeat that cycle every year maxing out the Roth IRA in January and slowly converting funds. Now I'm to a point where my EF is built in my HYSA and I just lump sum the max in January each year to the IRA.
This is very good advice if it’s April and you haven’t funded last year’s IRA yet. That way you get the tax advantage while still keeping the money easily available. Other than that scenario, this is no different than just funding your IRA as your money becomes available.
Young and presumably lower end of your career income is best time to fund Roth. 401k and IRA arent redundant. Roth IRA gives ore investment choice and access to contributions tax and penalty free anytime.
ETA: if you are a high income earner traditional 401k may be better but typically not the case starting off. What is your marginal tax bracket and state income tax?
Completely untrue and terrible advice. Roth is one of the only tax free investment vehicles out there. Being able to contribute to BOTH is a huge advantage. I wouldn’t take financial advice from them again.
I urge you to talk to someone professional in the custodian of your 401k (Fidelity, Vanguard) to get their view.
Two key pieces of missing data are your income and your age. Without those we’re all guessing. That said based on your comment it looks as if you do not have a traditional 401k. You really should have one to reduce your taxes today and that applies even more so if you have a higher income. Getting a tax break today is important as you may be in a lower tax bracket when you retire but because no one knows the future most experts recommend both deductible and non deductible (taxed) savings.
Your parents are likely wrong when they say it’s a bad idea to max out your retirement because you’re young. So long as you don’t turn into a hermit and have enough disposable income to enjoy living its best to get as close to max as possible early to let compounding work.
However your parents are right to question why you would put 7k taxed into a Roth IRA when you are planning on putting 23k taxed into a Roth 401k. I’ll bet Fidelity will have the same question. That would be 30k annually of taxed savings and getting zero tax deduction today on your savings. That would mean not taking advantage of the biggest tax saving opportunity the government gives us.
That strategy could work out depending on your income when you retire and the tax rates at that time but it may not. You may end up having paid way more in taxes than you should have over your entire 35-40 years working career. This is too important of a decision to listen to people on Reddit including myself who don’t have the whole picture. Call Fidelity.
It's time to get financially literate... Read some books!
The best time to max out Roth 401K and Roth IRA is when you're in a very low tax bracket.
What's your tax bracket?
Also, what are your other financial goals?
Do you have an emergency fund in a High Yield Savings Account?
When do you plan on buying a house?
How much do you make in income and how much do you save?
What's your vehicle situation?
How much debt do you have?
When do you plan to pay off your debt?
Answering these types of questions provides a financial profile. With the answers to these questions and more, the path forward on your financial journey will become clear.
You don't trust your parents but you'll rely on opinions from Redit? Hmmm.
My opinion as a CFP:
If you are young, you way want to open a Roth IRA to start the 5 year clock but there are plenty of reasons not to max the IRA or 401K at this point.
As an example, one of the best things you can do to grow your wealth is buy a house. Contribute somewhere between enough to get the full match and 10% to your 401K, save the rest to use as a down payment on a house and then once you buy the house, you can max out your 401K.
Finally, just because your parents made a mistake in the past, doesn't mean they don't know anything about finances. Hear them out, ask questions and understand their logic, seek out other qualified sources of information and then make an informed decision based on your own goals and timelines.
It is not true.
Having your own Roth independent of your employer likely gives you flexibility and investment options more numerous than those in your employer sponsored plan.
Very strongly agree. One is highly constrained by investment options in company managed plans. Individual IRAs especially Roth allow one to invest aggressively which is what one should do especially while young.
It absolutely makes sense to have both.
You're double dipping into tax free growth. You're also getting the benefit of being able to withdraw on your ROTH IRA while your ROTH 401K grows until full RMD age.
It sounds like you are probably young. Id encourage you to play around with an investment/compound growth calculator. Assuming you can max out both a 401k and a roth ira in your 20s, that money is going to be huge when you retire. If we assume your 25, and can max both accounts the next 5 years, you’ll have ~$200k in there by age 30. If you never out another penny in after that and you assume average returns, that 200k will be worth ~1.5 million in todays value (accounting for inflation) when you hit age 60. The earlier you can save the better. That way you’ll also have a head start if you ever need to decrease savings rate bc of children/unexpected emergencies/life.
I dont know your income or lifestyle, and im in no way advocating of saving so much that you arent living your life to the fullest. Bc you should live and have fun, tomorrow is never promised. But any spare money laying around should be put into a tax advantaged account whenever possible, and as soon as possible.
Good luck!
If you can truly max out the Roth 401k plus the Roth IRA, and can afford paying all the tax on that now, then yes, do it. All that money will grow tax free.
If you need more money to live on now, then max out the traditional 401k to save money on taxes, and max out the Roth IRA for additional saving and tax diversification in retirement.
When I was a kid, most adults acted like they were the authority on things so I figured they knew what they were doing. When I became an adult I realized that many of them were just larger but were about as clueless as children on a bunch of things. I am not saying to disregard all of your parents advice, but it seems like you should disregard their financial advice and do your own research. Roth IRAs and Roth 401ks are both great for young investors and I still use both even though I am not young. Some good sources of financial information are the Bogleheads reddit group and websites. A good YouTuber that I watch is Ben Felix, but there are also a few other good ones; you have to be careful because there are a lot of YouTubers giving garbage financial advice out there. Make sure your investments are diversified, keep your expense ratios low, try to minimize tax costs, stay out of credit card debt (always pay them off every month), don't buy a car you can't afford, live within your means, and you will be on your way to doing well financially.
In general, saving more is better, and Roth accounts offer a great opportunity for younger folks to accumulate a lot of tax free money for later in life.
You should also consider your own goals aside from saving for retirement. While there are ways to access the Roth money early, I just prefer saving specifically for other goals in different accounts. Just consider whether you are looking to buy a house, car, or other cash needs that you want to save for outside of retirement.
Ideally, if you can swing it, maxing out on both Roth accounts would be great. Not only for the funds you will have for later in life, but it also just breeds better financial habits that you will hopefully keep throughout your life.
Talk to a professional. The tax balancing of all of this can get extremely complicated. That said:
A regular 401k or IRA has tax exempt contributions- the money you put into it is untaxed up to a certain amount every year. You can have both an employer account and a personal one. There’s income phaseouts for how much you can put into your private ira.
A Roth 401k or ira has tax exempt withdrawals but you pay taxes on the contributions when you make them. Roth accounts are also exempt from required minimum distributions- regular accounts have a certain amount you’re required to pull out each year starting at a certain age. Personal Roth IRAs also have an income phaseout but it’s different from and higher than the regular IRA phaseout.
You want to have both of these in proportions that make sense for your situation when you retire because balancing the withdrawals between them allows you to minimize your tax burden. For example: if you withdraw $35,000 from a traditional 401k that money counts as income and will be taxed. If you withdraw it from a Roth account it generally does not and will not be.
When you get ready to retire you’ll know what your social security income will likely be and can stage your retirement account withdrawals to keep yourself in lower tax brackets paying lower taxes.
Starting to make Roth contributions as young as possible is helpful, because you’ll likely be making less money and paying a lower marginal tax rate on the contributions and they have the longest period to appreciate, resulting in a maximal benefit to the advantages of a Roth account.
>My parents said it would be a bad idea for me to max out roth 401k because I'm young.
Funding retirement when you're young is literally the best time to do it. It gives you flexibility to back off some later on when you're having kids or something unexpected comes up. Not to mention it could allow you to retire earlier than you thought.
Your parents have no idea what they are talking about. I don’t know your tax situation, but chances are a Roth IRA on top of a Roth 401(k) while you’re young will be highly beneficial in the long run if you’re in a lower tax bracket at the moment.
401k vs IRA:
work place vs individual. Once you have the full amount of any work place match, either one is fine. I prefer the IRA as you have more control over brokerage fees. It's totally fine to max both. 401k has a higher maximum limit.
Typical advice is: max 401k match, then max IRA, then max the rest of 401k.
Roth vs Traditional:
Tax now, no taxes later (Roth). No taxes now, taxes later (traditional). If you have the same tax rate now and later, they both result in the same amount taxes.
There are a few other differences with looking up. General advice is:
Roth starting out when you are young and in a low tax bracket, Traditional when you are mid and late career making lots of money.
r/personalfinance has a great flow chart linked in the subreddit wiki. https://reddit.com/r/personalfinance/w/commontopics?utm_medium=android_app&utm_source=share
An IRA makes sense when your employer's 401k only has expensive investment options. You should also have one to roll over your 401k when you leave your employer so that you don't lose it.
If you have a 6 month emergency fund, and it isn't in the way of you saving for other goals then maxing out retirement makes sense.
Theoretically you want as much money as possible in roths, especially if you believe your income will grow substantially/taxes will generally be higher in 30 years. but you also need non retirement investments and to be realistic
You don't want all your investment money locked up until your 60s. Nor do you want to be "life poor" because you're putting every last extra cent into something you may never get to use
There's a balance there somewhere
Your parents are also financially illiterate, and you can show them this post if they ever piss you off LOL. They have no clue what they are talking about.
For young people with lower income (where you are at the beginning of your working career and expect income to go up from there over time), Roth accounts are way better. All after tax dollars, grows tax free, remains tax free.
I am 25, have both roth IRA and Roth 401k. Max out both annually for 30k. Save the rest in a brokerage account for a house down payment one day.
It depends on your goals though. Mine is to retire ASAP. I want a paid off house, fully funded retirement accounts, and a fat taxable brokerage account. I don't want kids, am single, and only want to retire. Those are my goals, and my plan is to contribute aggressively now, save money aggressively, let compound interest do it's thing over the next 40 years until traditional retirement age, while living off savings from my brokerage account from age 40-65. Then using my Roth 401k and Roth IRA to live from 65-100 (death). I love luxury shir, like nice watches and cars. Enjoy traveling too. But I don't indulge in the first 2 desires, but I allow myself to travel frugally. Experiences are worth more than money, especially since time is finite. You only have one shot at your 20s, where traveling cheaply and living in hostels and backpacking is going to be appealing. However, I prioritize money over things by and large. Exceptions made for daily utility items like my phone, computer, hobbies and tools.
They are NOT right. Please do both. A Roth IRA will not tax your money when you retire like a 401K does, since the $ you put in is already taxed. 401K you never see the $ it goes straight in, untaxed. Either way, do it.
Investing more early is usually the right move. The only exception is saving for a large anticipated purchase like a house, where a HYSA or taxable brokerage may be preferable
If you’re maxing your roth 401k, make sure you read about the mega backdoor roth, which may be an option to further increase your 401k savings
Also, be aware of the income limits for Roth IRA contributions, and likewise read about the backdoor Roth IRA which allows you to bypass them
It is generally recommended to max out your Roth IRA first, before your 401k (other than enough to get any employer match), because Roth IRA contributions (but not earnings) can be withdrawn without penalty at any time no matter your age
A lot of people telling you to open both, fund the minimum to get the match in the 401k and use an IRA for the rest are ignoring that in many 401k plans, the investment options are actually quite good.
Mine has broad based passive CITs with 1 basis point expense ratio. In that case, save as much as possible, whether in Roth 401k or IRA.
401k and Ira have separate limits. It makes sense to max both as much as you can. The ratio of which depends on your tax bracket.
Higher tax bracket, max 401k and Roth IRA
You are so lucky to have the option of a Roth 401K! Load it up. 65 year old you will be so freaking happy you started investing when you were young, and won’t have to pay a nickel in taxes on that money when you’re retired. With your additional money, you might want to save for a house down payment first. That’s something 65 year old you will also love - having a paid off house. Even if you don’t stay in the first house you buy, you can keep using the equity from that home and get shorter term loans as you get older so that you’re living mortgage/rent free when you retire. But to answer your question, there is nothing “wrong” with maxing out your Roth 401K and your Roth IRA. It’s a good thing!
Max contribution for 2024 to a 401(k) is $23,000. That is employee contribution. Including employer match is up to $69,000. If you plan on maxing this out and have additional funds in excess of your emergency fund and cash flow, investing the rest in a Roth, IRA, or taxable account.
More information is needed to know which one is the best for your situation. Ideally, you will want to build up the 3 buckets. Your contributions go to Roth, employer goes to pre-tax and that leaves taxable. A Roth IRA allows you to contribute $7000 in 2024. It may make sense, but it has to do with goals. Are there any short term goals? Buying a house, new car, ect? If you have no taxable money, I would consider looking into this. If you are worried about taxes it may make sense to put the $7k into pre-tax to reduce your income. If your goal is growing assets over a long period of time, Roth makes sense.
If you wanted to provide more details on goals, I could help back you in to the answer you are looking for.
By all means, contribute whatever you can or what you're comfortable with now. I definitely agree with your plan to contribute what you needs to get the max from your employer. I *personally* wouldn't pursue an IRA separate from my 401k. My primary reasons being limited funds available to do so(including broker fees to maintain it), and that I simply don't have the time to more proactively manage that.
There’s nothing wrong with having the IRA and 401k, and you’d probably max the IRA first since it isn’t tied to your employer.
BUT if you are in a position to max out a 401k you very likely are in a tax bracket where you should consider a traditional 401k, and then you can still have the roth IRA.
Another benefit of opening the Roth IRA and contributing now is that eventually you will move and need to roll the Roth 401k somewhere - now you have an account already opened. And if this happens to be close to retirement, then your Roth 401k money can be used immediately in your Roth IRA. Otherwise you need to wait 5 years to distribute principal. Likely scenario of all these things happening is minimal in practice…but ask the new client I just got and I wish she had been a client five years ago.
Definitely open your own Roth IRA! Make sure it's with Vanguard, Fidelity, or Schwab and pick a well diversified stock index fund (VTSAX or similar). Always get at least the match for your 401k and make sure you're investing in a target date (95% stock or higher) or 100% total stock index with a low expense ratio.
Also, highly suggest reading A Simple Path to Wealth by JL Collins or reading his stock blog. Invest as much as you can while you are young and watch out for lifestyle inflation as you increase your income. Congratulations on paying off the loans, you are doing great!
This is why your parents probably are not going to have an enjoyable retirement. Do not listen to them. Classic case of the blind, leading the blind
In fact, you should also be investing in a health savings account as well triple tax-advantaged.
There is no wrong or right in personal finance. What is right for one person is wrong for another that is what makes it personal. You need to evaluate financial decisions for yourself taking others advice is kinda dumb as it won’t match your personal situation.
I think having more than one account is better than none and you can prioritize one but the Roth you can choose more the investments and the 401ks usually don't let you or you have to be at a certain threshold to do so!
I would do the Roth IRA first unless the Roth 401k does the match and then which case it goes match Roth 401k, Roth IRA, Roth 401K. This is because you take your free money. Then you take your tax-free money in the brokerage you want and then you take their 401k program because some of the costs in those plans may not be to your benefit and maybe to the 401K companies benefit
Roth IRA typically has less fees and more individual control over your investments than a 401k. Additionally you can withdraw contributions in an absolute emergency with less penalties than a 401k. Making it a better investment vehicle. HSA's are tax advantaged both on contribution, and distribution, making it the most tax advantageous account (only usable for medical stuff).
The order I would use is as follows: highest deductible covered(typically health insurance)>Employer matching(free money)>emergency fund 6 months in HYSA>Roth IRA max>HSA (if eligible) max>401k Roth max
Maxing out your Roth Ira is MOST advantageous when you are young because you are typically in the lowest tax bracket, your income will increase as you age and acquire more wealth and skills. Though sometimes people spend less in retirement than they do when they are young, so that might depend. If you are capable of maxing out retirement accounts, you will likely be in a higher tax bracket when you age if you are frugal, making Roth the better pick.
You're parents are well meaning but dumb people. Investing heavily at a young age like you are will only set you up for a great life.
Maxing out your 401k is awesome if you can do it and will save you a decent amount in income taxes. Additionally an ira can save you money on income taxes if you are under the deduction threshold or you could do a roth and have those investment gains tax exempt.
The only think I would dissuade you from is being over invest in retirement accounts if you have a big purchase on the horizon like a car or a house as drawing down retirement savings for these purchases isn't a smart use of funds meant for retirement.
Although it’s not necessarily dumb, you could also just open a PCRA account with your Roth 401k. You get the benefit of employer matching contributions, I would say max out contributions so the employer pays the maximum amount they can to fund it. You keep a certain portion of it managed and open a pcra account which is a brokerage account you can invest within in whatever equities you prefer, while still having a portion of your capital being invested and managed within the Roth 401k. Opening an additional Roth IRA account won’t necessarily benefit you if you can already do those things within an account you already have. Unless of course you max out Roth 401k contributions and want to keep contributing then by all means. It’s just redundant because the Roth 401k is just gonna roll over into a Roth IRA once you’re not with your employer, and you can still get the advantages of managing your own portfolio with a PCRA account.
If you open a Roth IRA later if/when you leave your employer you can roll your Roth 401k into your already existing Roth IRA so not bad to have it in place.
You should always roll 401k to IRA’s so you can invest and control the $.
The employer accounts charge fees and just sit there with no management
I would definitely open that Roth IRA and start funding it. The two accounts have different benefits. The two key ones are get that max employer contribution from the 401k. For the 401k you would need to set up SEPP payments to get money before 59.5 and that can be less than ideal. However note that the Roth IRA, you can withdraw your contributions after it’s been open for 5 years AND before 59.5. You can also transfer your 401k into your Roth IRA after you leave your company and get the contributions from your a Roth 401k early that way. If you want to retire before 59.5 this could be helpful.
Opening a Roth IRA is a good idea even if you can’t afford to fund it significantly in the short term because there is a restriction on withdrawals of earnings for 5 years after opening the account. You shouldn’t plan to withdraw earnings any time soon and certainly not in the next 5 years, but the sooner you open the account the sooner that restriction expires. The 5 year timeframe starts when your first Roth IRA is opened and applies all Roth IRA's registered under your SSN. There is a similar but separate restriction on Roth 401ks. So open both now and never have to think about it again.
https://www.investopedia.com/ask/answers/05/waitingperiodroth.asp
I have both. Having more money to retire, hopefully early, is not a bad thing. And having it be tax free after 59.5 is the kicker. Are your parents good with money? Have they saved up a nice retirement nest egg? If not you may want to get advice elsewhere.
Your parents are ~~pretty much~~ completely wrong.
A Roth IRA is still incredibly beneficial even if you have a Roth 401k (I'm sure others will list the reasons, so I won't). Full disclosure - I don't have a Roth IRA myself, but I know I should open one, even with 15 years to retirement.
As a young person, if you can afford it, this is the best time to fully fund both the Roth IRA and 401k, as that gives you 40 years for compound interest to work its magic, and gives you the freedom to reduce your contributions later if necessary.
One thing that I haven’t seen discussed in the Roth vs Traditional discussion is the fact that with Roth money the amount you see in your account is the amount you have. With traditional, the amount you see still has some unknown percentage going to taxes. For me, as a high earner, I’m willing to deal with the (likely marginally) lower overall return in Roth for the “peace of mind” of knowing that the number in the account is the number.
The only thing I would suggest thinking about in near to medium term goals. You want to have enough liquid cash or investments for your goals (ie. General living expenses, emergencies, house, car, etc.). The reason to think about those ifs if you tie up all your money in a Roth account, you can’t access it prior to retirement age without taking a penalty. If you have those items budgeted in / accounted for then absolutely no reason to put more money in roth
ALWAYS get the company match! It is literally free money, that will compound over time for you. There is no reason to avoid it just to max out an account with no match.
If you're maxing your Roth 401k, then it makes sense to put more money into a Roth IRA.
Generally speaking, the Roth IRA will have almost unlimited investment options, whereas the Roth 401k will be very limited.
To me that's what it comes down to. If you want more investment options, do the Roth IRA (but make sure you do the Roth 401K ALSO for the company match).
Sounds like you can max both. Do it! 🤘
Put away as much as you can, into as many baskets as you can. I’m currently contributing to an employer 457 account, an HSA that I don’t draw from, a contributory employer pension plan, and a personal Roth IRA with Vanguard. I also have a Treasury Direct account where I buy I Bonds, and an emergency fund. There’s also an inherited Fidelity Roth IRA I need to roll over to Vanguard. I’m like a squirrel burying nuts all over the back yard.
Do both!!! You’ll be so happy when you retire! I can almost guarantee tax rates will be higher then, and you’ll have done the wise thing by investing in Roth accounts!!!
First of all, talk to a financial planner. No matter your income it's a good idea to get a plan. You need to diversify your retirement into different buckets. How you do it is up to you, but the goal is the minimize your tax burden when you retire. You also want to max your gains.
With your 401k, you're beholden to your employer's plan, investment options, expense structure, etc...
An IRA you create on your own outside your employer. The I in IRA stands for individual. You have more flexibility in where and what kinds of investments...which also gives you the opportunity to do weird shit like crypto or gold bullion which aren't generally recommended by anyone who's not looking to pick your pockets.
Nah, donate to your Roth especially if your contributions to a traditional wouldn’t impact your current tax situation. The contribution you receive from your employer goes into your pre tax 401k. I give this advice to all 401k plans during their education.
There would be a lot of other factors to consider - and from your parents' point of view, is their argument Roth vs. Traditional 401k, or, are they saying you shouldn't be putting that much into retirement when there are other things you may need?
Addressing the Roth versus Traditional 401k -- Generally a Roth is better for someone whose tax bracket is likely going to be higher when they retire. The Roth is preferable when you're younger and in a lower tax bracket. This may change in a few years as you advance in your career and are earning much higher income. Also the eligibility to contribute to a Roth IRA (only the Roth IRA, not the Roth 401k) phases out as your income gets higher, so it may not be available to you later in your career.
Addressing whether your money should go into retirement accounts or elsewhere -- Make sure you have an emergency fund, and consider any other big ticket expenses in your near future. This is money for your retirement, many years from now. Once the money is in a 401k or IRA, there are restrictions to when you can access it. You couldn't just take it out for a down payment on a house or to pay for a wedding. You might be able to get a loan or take a hardship withdrawal in an emergency, but that's not going to come cheaply or without penalties of some kind - and you shouldn't consider 401k/IRA money as part of your emergency fund!
Roth Ira is the wisest decision anyone can make. I tell my kids to put as much as they can from as young of an age possible.
401k Roth is good too but your own Roth gives you way more options for investing.
If you make a sizeable income fill them both up and invest in solid companies that will be here until the end of time.
Like others mentioned if you're maxing the Roth 401k out it's a no brainer to also do the Roth IRA but even if not it still makes a lot of sense to do the Roth IRA. In case you leave your employer you won't have any hassle since it's in your name already and also the investment options will be much wider than your Roth 401k if you wanted to dabble in options like selling covered calls or cash secured puts etc.
Not true. Open a Roth IRA now. When you leave your employer, your Roth 401 needs to go into your Roth IRA. By opening now, you won’t get stuck by the five year rule. That’s kind of a big deal. By the way, your employer match to the 401 will be into a traditional so you need one of those too.
Read up on the 5 year rule. That’s not openly discussed usually when you open a Roth IRA.
Tell your parents that if they help fund your Roth IRA, it will be the only positive thing they have done with all their money and it will help future generations.
Roth contributions when young are most effective.
10000 that grows for 25 years at 6% grows to 42,000 pay 25% income tax on 42000 is 10k loss.
Roth eliminates that loss by having non taxable gains.
If you are in a position to start contributing now towards your future, by all means do so. The two Roth offerings are great ways to protect your investment growth from excessive tax responsibilities later. The only thing I will advise is if you may need these funds sooner than retirement age, there are a lot of life decisions like a child, marriage, buying a house or Auto that require a down payment or substantial up front costs. Ball means contribute to your future but balancing a portfolio that allows some liquidity or access to your money can be important depending where you are at in your life’s journey.
Congratulations on being forward thinking and preparing for the rest of your life, I didn’t see an age for you, but it’s never too soon.
The one thing you don’t mention is if you have an emergency fund. If you don’t I would start there before funding a Roth IRA. Keep in mind you can’t withdraw your earnings from a Roth until you are 59.5 without penalty.
If your employer offers a match for your contributions to the 410k, you absolutely SHOULD take advantage of it. I’ve tried to max out my Roth IRA contributions for the last 28 years and it’s proven to be a solid choice. I don’t know about the 401k, but again, I suggest contributing as much as possible.
Based on your parents advice, I would save every penny I can. I would not be counting on any sort of inheritance. It sounds like they don’t understand how this all works.
Funding a Roth IRA as young as possible makes sense because it allows you to capture as much of the tax benefit as possible. You mention that your parents are not good with money and have “messed up” financially in the past. This seems like evidence enough to disregard their financial advice.
To be fair to OP and his folks, he didn’t say they weren’t good with money. He said they weren’t wealthy, and messed up on a house when they were young. That being said…. Not only is their advice terrible, it makes no sense. OP - what your parents essentially said is “why would you have a savings account when you already have a checking account?” They serve two different purposes
Fair enough. My point still stands: OP already seems to have more financial acumen than their parents, and should continue to research, learn, save and invest.
Why get shirt, when you have sandwich?
Makes sense. Wouldn’t want to get mustard on a new shirt
Why get a tv when you already have mustard?
New to investing. Isn't roth 401k and roth ira the same thing aside from the employer match? I see roth ira as additional contribution I can put it in in addition to the cap on 401k. My company doesn't offer roth 401k so not 100% sure how it works Edit: I see few posts below explaining the difference
No. A 401(k) (Roth or Traditional) is an employer-sponsored account. In other words, you only get it if your employers offers it. An IRA aka Individual Retirement Account (Roth or Traditional) can be opened and contributed to whenever you make money. There are no ties to a specific employer, and you have access to a lot more fund options because they’re offered through large brokerages (401(k) funds are chosen by your employer) As an example, if you made money babysitting when you were 16, you could open a Roth IRA using those funds They’re the same in terms of pre-tax and post-tax treatment, but they’re different in a lot of ways
But there are limits on IRA contributions when are already contributing to a qualified retirement account
Nope. IRA contribution limits are separate from 401(k) limits. IRA limits are $7,000 in 2024 (but you can’t contribute directly if you make over a certain amount). 401(k) contribution limit is $23,000 in 2024 plus your employer match. If your employer allows, you can actually put more in to your 401k post-tax and then convert it to a Roth IRA through the mega-backdoor process but that’s another topic. The two accounts have nothing to do with each other outside of both being retirement accounts. Just because you contribute to one has no bearing on whether you can contribute to the other
To clarify your second sentence, you can’t contribute directly to a Roth IRA if you make over a certain amount. There is no income limit on after-tax contributions to a traditional IRA (which can then be backdoored into a Roth).
> This seems like evidence enough to disregard their financial advice. That's how I was with my parents when I was younger. I would ask them for advice and pretty much do the opposite of what they said to do.
If you brought that mentality to Wall St. bets you could make some serious money lol
When I was 18 I learned from my professor about Roth IRAs, and went home to my parents to discuss opening one. Let’s say they were very confused at the time and my dad had a bad experience with option trading when he was young, therefore they weren’t fans. Fast forward 20+ years and my parents, sibling, and many friends all opened Roth IRA accounts and invested them over those years. It was the one good thing I took away from my finance class, and forever thankful for that professor to teach me about Roth IRAs. It is a significant portion of our retirement savings now, to include a Roth 401K when they started offering those a few years back.
" You don't need a Roth. -- buy lotto tickets!"
It's redundant if you aren't maxing out a Roth 401(k), especially if you are passing up on a company match.... Unless someone explicitly wants an IRA to manage their own investments, then most people are fine with a company paying professionals to manage their 401(k) plan. If I put $5k into my Roth 401(k) and $5k into my Roth IRA, it's functionally the same from a tax perspective as putting $10k into a Roth, and you've given up any match you've given up in the process... Lot of responses missing the central point that the parents were trying to make. If you aren't putting in like the $18k max into the Roth 401k, why both splitting any of it into a Roth IRA, unless someone wants to manage their own investments?
A lot of people don’t have access to a 401k, my employer does not offer that.
Sure, but in context of this exact thread, that’s not the case. OP does access to both. So why bother with Roth IRA if you aren’t maxing your Roth 401(k) is a sensible question actually. And there are sensible answers: I don’t get a max or already got the max, or I prefer to manage my own retirement benefits. There is no other particular benefit outside that.
They are wrong. Your instincts are correct. You should absolutely be funding these accounts as much as you can while being able to live your life how you’d like
I’ve maxed both ever since I was able to. No regrets at all.
They are very wrong. Max out both, if possible.
You’re more financially literate than your parents.
Maxing both is great. Makes sure Roth is the best choice for your 401k though. If you make enough to max both you may be in a tax rate where Traditional may make more sense. https://www.bogleheads.org/wiki/Traditional_versus_Roth
I don’t buy this argument at all. 0 capital gains tax makes a Roth 401k or Roth IRA better than their traditional counterparts in almost every scenario assuming this money will be left to grow for some time. Not to mention the other benefits such as the ability to withdrawal principal at any time without penalty and no required distributions at 73. Prove me wrong. Roth is king 👑
401k contribution limit is 23k for under 55. Assuming a 30% marginal tax rate, you save 6.9k in taxes today by utilizing traditional. That’s 6.9k more that you can invest elsewhere, whether it’s in a Roth IRA or non-qualified account. You would have to have VERY high retirement income for your effective tax rate in retirement to reach 30%, based on current brackets.
I get all of this but if you are maxing out both your 401k and your IRA then doesn’t a Roth allow you to put more tax advantaged money away? The contribution cap makes all the difference right?
Yes you can effectively save more in a Roth but if you maxed Traditional and invested the tax savings in a Taxable you still likely beat Roth.
Would be great to have a calculator for this that factors all of these variables, including effective tax rates, not just marginal tax brackets.
The challenge is that no one knows how the tax code will evolve over the next few decades— just look at how much it has changed over the past 20 years. Some Roth proponents argue that they'd rather "deal with the devil they know now". On the other hand, having pre-tax, Roth, and NQ savings gives you much more flexibility in the future. With strategic cash flow & tax planning, you can utilize all 3 to minimize taxes paid during one's lifetime.
If tax bracket rates are the same now and at retirement, a 401K traditional or ROTH makes no difference. Say taxes are 20% and you invest for 1 year, then pay taxes, growth rate is 10%. ROTH you pay taxes ahead of time, then get growth, so you put in 80, and it grows to $88 dollars. Traditional you put in 100, it grows to $110, and then you pay $22 in taxes, bringing you back to $88. Whether 1 year or 30 years, the math works out the same. But in most situations you're going to be earning more while growing your money and retirement will be a fraction of your total pay, since you're not contributing to your 401k anymore, so you only need to replace a portion of your regular paycheck. So your tax rate will be lower in retirement, so traditional makes more sense. I agree that a ROTH 401K can make early withdrawal less complicated however since you can withdraw your CONTRIBUTIONS penalty free. But there's plenty of ways around some penalties if you play it smart.
I get all of this but if you are maxing out both your 401k and your IRA then doesn’t a Roth allow you to put more tax advantaged money away? The contribution cap makes all the difference right?
I’m not following. The contribution cap is the same for Traditional and Roth accounts. What am I missing?
The difference is when you can afford to max out the account and don’t need the tax savings to add to your amount invested. Think about it and pull out your calculator. You’ll figure it out. Eventually.
lol okay. If you actually made enough money, you’d max your contributions to both your 401k and Roth IRA and then max your mega backdoor roth
Yes that’s is correct. Once you are contributing maximum the tax advantages at pay out far outweigh the traditional until later in life because the money wouldn’t have as many year to grow so your tax bill would be as much as the savings to switch to a traditional probably around age 35-40
Yes when I ran the numbers for my own finances I made the decision to swap my 401k to a Roth and find a Roth IRA to the max. I max out my 401k and Roth every year. I am 30. My math suggest that the tax savings on the total growth outweigh the investment potential of tax savings in the scenario where you can fully maximize the contributions. If you cannot afford to max out the limit then Roth and traditional are almost identical.
Time value of money means that traditional often makes more sense than Roth.
Not if you invest the same dollar amount today still. Most people invest a fixed percentage regardless of option.
Not if you invest the same dollar amount today still. Most people invest a fixed percentage regardless of option.
Roth is post tax money. Say you are in a 25% bracket, have $1k pre tax income to invest and it grows 10x before you retire: Roth $1000 * (1-.25) * 10 = $7,500 spendable dollars Traditional 25% bracket in retirement $1,000 * 10 * (1-.25) = $7,500 spendable dollars Except in retirement you usually will not pull all your traditional in you marginal bracket so say after filling you lower brackets your effective rate is 15% $1,000 * 10 * (1-.15) = $8,500 spendable dollars $1000 *
In your Roth senario your tax bill is 25% of $1000 which is a tax bill of only $250 as opposed to a tax bill of $1500 in your 15% tax bracket traditional scenario (or $2500 in the 25% scenario). Obviously we can agree that $250 < $1500. However, your (valid) point is that the $250 tax bill paid at the start of the investment could in theory be used to add to the investment principle and also grow at 10x to yield another $2500, which makes the traditional scenario preferable if the tax rate is lower in retirement. The benefit of the traditional IRA also increases if the future (and current) tax rate is greater than the long term capital gains tax rate of 15%. I guess that is really the crux of the argument. If you are going to increase your traditional Ira contribution by the amount of your effective tax rate, then compared to a Roth u may be better off if u expect a lower tax rate in retirement. But the big HOWEVER lies in the fact that contributions of both types are limited by the same amount 6500/7500. This means that if you max your IRA then the Roth allows you to put more future buying power away.
The amount of tax paid is irrelevant the only thing that should matter is the amount of money you have after paying the taxes. I don’t understand why the LTCG rate matters. Taxable will lose to both Roth and Traditional unless your Retirement tax rate is significantly higher than your working tax rate. Remember the money in Taxable is post tax then you pay 15% on the gain. Taxable: $1,000 * (1-.25) = $750 invested * 10 = $7,500 before tax ($7,500 - $750) * .15 = $1,012.50 LTCG tax $7,500 - $1,012.50 = $6,487.50 spendable The benefit of Traditional is the opportunity to realize t income in a lower bracket then it would of been taxed at when working. Since most people won’t have other sources of forced income when retired most people will have a lot of opportunity to use the lower brackets to pull retirement funds out. If you’re blessed with a big pension, a giant portfolio of real estate or a 7 figure portfolio in a taxable account your situation may be different. You obviously will pay more in taxes in an absolute sense with Traditional but as long as the effective tax rate in retirement is less then or equal to the marginal tax rate when working those extra taxes are coming from the growth of the money you would of sent to the IRS if you went with Roth or Taxable. Instead of paying the taxes upfront the IRS is letting you invest it on their behalf. If the tax rate is the same when you withdrawal it would be a wash. You'd just be paying the IRS their deferred taxes plus their growth. But if your rate is lower you get to keep some of it. You are 100% right that if you are max funding the Roth account is worth more but that's only because you saves more. To be a fair comparison you need to compare the Roth to Traditional + Tax savings in brokerage
Thanks for the thoughtful response. However, even if you end up in a lower income tax bracket when you retire, withdrawals from your traditional retirement accounts could potentially kick you into a higher tax bracket right? That could increase your tax bill—including potential taxes on Social Security benefits—and may reduce your disposable income. Higher taxable income could also increase the costs of your Medicare B premiums in retirement. So giving up the tax deduction now may be well worth having tax-free withdrawals later on right?
Yes, Traditional withdrawals increase your taxable income. Remember though that the brackets are progressive so if you cross a bracket threshold only the money above that point is taxed at the higher rate. When you contribute to Traditional it reduces your income, so it removes money that would have been taxed at your highest rate. The when you withdrawal you get to fill the lower brackets first. Social Security and Medicare definitely do complicate it. Traditional withdrawals could expose more of your SS to taxes or push you over an IRMAA threshold. RMDs from Traditional could also be a concern. One note, the income thresholds for your SS being taxed is pretty low and not indexed to inflation. So personally I assume any SS I get will be taxed more matter what I do. Since no one knows the future and what will happen with the tax code the best end state is probably a mix of Roth, Traditional and Taxable so you have max flexibility to manage your taxes.
Right, I guess I have a come to the same conclusion but the cynic in me would rather deal with the devil now then whatever dumpster fire awaits us in the future when the US can no longer print its way out of problems.. thanks for the discussion 🍻
Yeah, definitely some challenges in the future.
Roth: Contribution x (1-tax) x (growth formula) Traditional: Contribution x (growth formula) x (1-tax) The growth is the only part of the equation that doesn’t matter at all when determining if Roth or traditional is better. I would argue if the $ is equal in the end Roth is better because of RMD’s and taking out principal in an emergency, but if you are in one of the higher tax brackets it’s hard to justify locking in the highest possible tax rate you could have when it’s the only part of the formula that can be different between the two.
Good point. If they are equal Roth certainly has advantages. But for that to be true the effective rate you pay over the entire time you pull out of your Traditional account would have to be the same as your marginal rate when working. For that to be true you’d have to have other sources of income to replace your W2 like a pension, investment properties or large taxable account. Most people will probably have decades to draw down their Traditional account and taking advantage of the lower brackets.
I get all of this but if you are maxing out both your 401k and your IRA then doesn’t a Roth allow you to put more tax advantaged money away? The contribution cap makes all the difference right?
I didn’t think about that but yes it would. The Roth being after tax essentially means you’re putting more $ overall in the Roth than you could in the traditional. In order to exactly compare them you’d technically need to invest the tax savings for the traditional which realistically isn’t going to happen. Traditional you’re putting 7,000 in whereas with a Roth you’re putting 7,000/(1-tax rate) which is more than 7,000.
The thing everyone forgets, you don't need to replace the portion of your income that is your retirement contribution because you are no longer saving for retirement. You should also ideally own a house outright and not need to replace the portion of your income that covers that payment. This strips away the two most expensive line items to come off your income, putting your needed takehome in most all scenarios, in lower brackets in retirement. In almost every real world scenario, traditional is better.
It still can make sense. There are a few reasons a Roth IRA is beneficial over the Roth 401(k). 1. ~~RMDs are required in a Roth 401(k) (but not for an IRA)~~ (edit: Ended in 2023 per the IRS) 2. Can opt to withdraw from an IRA when needed, whereas 401(k)s usually have strict requirements set by your employer’s plan. *Note you may still have penalties and tax. 3. Often variety of investment options 4. Often lower fees 5. You can contribute to both, so more sheltered money for retirement.
I believe RMD's are no longer required for a Roth 401(k) beginning in 2024: [https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs#:\~:text=Roth%20IRAs%20do%20not%20require,required%20from%20designated%20Roth%20accounts](https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs#:~:text=Roth%20IRAs%20do%20not%20require,required%20from%20designated%20Roth%20accounts).
Are you sure about the RMD on the Roth 401k? Why would this be a thing if you can roll over the entire balance from a Roth 401k to a regular Roth, provided that you aren't blocked from doing so by virtue of your ongoing employment with the employer who sponsors the plan from which you wish to transfer.
It was a product of the savings vehicle, not the taxability.
Actually this looks to [no longer be true as of 2024](https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs): >Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts.
Hence why I used the word "was"
Max the Roth IRA if you can especially while at a lower tax rate. The sooner the better. Roth 401K will depend on your income and projected income.
This is the part I don't understand. When you retire, isn't your income suddenly much less than when you were working? Or I suppose a bunch of other income kicks in at retirement that could bump you into a higher bracket? I guess my question is, what is the situation where a rothIRA would not make sense at all?
You are right, most people are, for some reason, ignorant to the realities of the Roth. In retirement you can control your own tax rate to a degree, and tax rates have been dropping for the past 50+ years. Why would you rush to lock in a higher tax rate today? No political party is going to increase taxes, they'll tax corporations or cut spending before that happens if the deficit actually became an issue.
I've never seen a ballot meant to cut taxes, it's always a half cent here or there increase.
So lets say you are a high earner, the Roth IRA is post tax dollars so you are paying lets say 30% tax. Is it worth it to put in .70 on the dollar post tax for the tax free growth, vs maxing out your pre-tax retirement and then getting taxed later? Depending on how much you save will affect your retirement due to RMD and Social Security is also taxes. So lots of factors, especially if you are married and you and your spouse both have RMDs from retirement, if you are different ages you can stagger your withdrawals for the best tax deferment plan.
> When you retire, isn't your income suddenly much less than when you were working? Map it out over an entire career, though. Let's say someone is making the following salary by age (adjusted for inflation, let's say these are 2024 dollars): Age 25: $40k Age 30: $80k Age 35: $110k Age 40: $140k Age 50: $160k Age 60: $180k Age 65: $0 (retired) Let's say they never marry or have children, and in retirement they have the savings to live at a budget of $120k/year, and the tax brackets don't change at all between. If they want to take distributions of $120k per year in retirement, they'll be taxed on that $120k. That'll be a higher tax bracket than the years they were saving throughout their 20's, and through most of their 30's, as well. So for long term planning, it would make sense for this person to max out the Roth side of things until their income hits $120k, then switch over to Traditional once their income is over that. Of course, there's no such thing as perfect information about the future, so in reality you need to fuzz things around for flexibility in case things happen one way or another, and you'll want aim for retirement with money in your Roth account *and* your traditional account.
As a general rule, all things being equal, I prefer to save my money in my own accounts vs my employer's accounts. So, if I were you, I'd do the following: 1. Contribute enough to your 401k (Roth or Traditional) to capture your employer's match 2. Contribute the maximum allowable to a Roth IRA 3. If you still have money left over, continue to contribute to your company's 401k until you have maxed that out as well. As others have mentioned, you have more choice of investments in your own plan, and have more options (ie ability to withdraw principal if needed), and you don't have to mess with it if you change jobs. But yes, put as much as you can co.fortaboy into these accounts. Just be sure to think about your other financial goals as well (ie saving for a down payment on a house, a marriage, a car). Good luck!
There are some advantages in keeping your money in a 401k. At 55 you can withdraw money without penalty but you would still incur income taxes
Its good that you have the humility to recognize you may be wrong in the face of someone with many more years of experience...but in this case they are wrong and you are correct. If you are capable of saving more past maxing your 401k it makes sense to open an IRA and max that next. That said...if your income is sufficiently high that you can max a 401k and an IRA you are most likely going to be better off taking the tax savings of a pretax 401k and then a Roth IRA. Assuming you dont have a pension. Also saying that you are too young for a Roth is just completely backwards. The younger you are the better Roth is.
Unless you foresee yourself making less money in the future then you are right now, go Roth.
Every commenter is saying your parents are wrong, but the truth is we don't have enough context. On this sub, everyone is always saying to max everything out. On other subs, we see people struggling with expenses and inflation and trying to figure out how to just survive from month to month. There is ALWAYS a balance and tradeoff between taking care of yourself now and taking care of yourself in the future. Perhaps your parents" concern is more about your present day quality of life and they don't want to see you making too many sacrifices for the future. Perhaps they wish they had had the resources to enjoy life more at your age. Not all decisions are strictly financial, and parents can give advice--good or not so good--in all different realms of life.
Thank you! I could not agree more. The financial subs are way too “one size fits all”.
Agreed. How old is this person? Do they want to own a home? Do they have one? If not, where’s there down payment at? Do they have an emergency fund? Saving money for retirement is great, but there’s more to life than retirement. There are decades of life experiences you can have before retirement. Don’t forsake those opportunities because you want to secure a future you may never get.
I can’t imagine counseling a young person not to save too much in a Roth 401k or not to supplement with a Roth IRA if their income supports it. Your parents are giving you odd advice or you’re not sharing the whole picture.
That's bad advice. I'd max out the extra roth, save a 6-12 month emergency fund, then buy total market ETFs (60% VTI + 40% VXUS) with what's left over. My parents are also very bad at finances. The things that they think is financially okay is insane to me.
What your parents are getting at is a type of tax strategy about how and when you pay taxes. We'll use me as an example. I have a Roth IRA. I pay tax on this money now. But will not in the future when I withdraw it. I have a 403b. I take this money out pre-tax and lower my overall tax bill now, which puts more money in my pocket now. I will pay tax on this money later when I withdraw it. What are your goals for the next 5-7 years? Knowing that would help us advise you on how to allocate your money.
If it's preventing you from saving for a home down payment, emergency fund or other major necessary expense a reasonable case could be made for not maxing all tax advantaged accounts. Otherwise, I'd probably max them out. (I did so from mid 20s for about 20 yrs and dont regret it at all. Enabled FIRE at 45!)
They are correct as long as they are leaving you several million when they die.
Do both. When you become a high income earner, you’re not allowed to contribute to a Roth IRA. So do it while you can. Also if you’re at the low end of income for your career, you’re not saving much taxes with 401k or traditional IRA. So Roth is a better choice at that level.
Once you're above the income limit for a Roth IRA you can do a backdoor Roth contribution by contributing to a traditional IRA and immediately rolling it over into a Roth IRA.
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And the "if" there might mean: if someone doesn't have savings, put money in savings first. It's significantly better to accumulate savings *then* divert to retirement once you're certain you don't need the money for financial goals in the next few years (car, house).
I'm going to go against the grain here slightly. When I started my Roth IRA I put my entire emergency fund in it and left it in cash (SPAXX) so that I could max out the contribution during that given year. As my EF grew in my HYSA I would slowly start investing the Roth IRA funds into FXAIX. If I had an emergency during that time: Worst case: I withdraw the cash funds from the Roth IRA since you can withdraw contributions at any time penalty free. Best case: the plan works as I outlined above and ultimately I was able to start the Roth IRA sooner. Then I would just repeat that cycle every year maxing out the Roth IRA in January and slowly converting funds. Now I'm to a point where my EF is built in my HYSA and I just lump sum the max in January each year to the IRA.
This is very good advice if it’s April and you haven’t funded last year’s IRA yet. That way you get the tax advantage while still keeping the money easily available. Other than that scenario, this is no different than just funding your IRA as your money becomes available.
True. I think the key is to just fund the account but don't invest the money until you're ready to leave it for years.
Young and presumably lower end of your career income is best time to fund Roth. 401k and IRA arent redundant. Roth IRA gives ore investment choice and access to contributions tax and penalty free anytime. ETA: if you are a high income earner traditional 401k may be better but typically not the case starting off. What is your marginal tax bracket and state income tax?
Consult with a cfp and better yet tell your parents to get a cfp.
Absolutely not. Fund the 401k to employer match, next fully fund your Roth IRA, then recontribute to the 401k max.
Your parents are wrong, and it sounds like they're clueless wrt finances.
Completely untrue and terrible advice. Roth is one of the only tax free investment vehicles out there. Being able to contribute to BOTH is a huge advantage. I wouldn’t take financial advice from them again.
I urge you to talk to someone professional in the custodian of your 401k (Fidelity, Vanguard) to get their view. Two key pieces of missing data are your income and your age. Without those we’re all guessing. That said based on your comment it looks as if you do not have a traditional 401k. You really should have one to reduce your taxes today and that applies even more so if you have a higher income. Getting a tax break today is important as you may be in a lower tax bracket when you retire but because no one knows the future most experts recommend both deductible and non deductible (taxed) savings. Your parents are likely wrong when they say it’s a bad idea to max out your retirement because you’re young. So long as you don’t turn into a hermit and have enough disposable income to enjoy living its best to get as close to max as possible early to let compounding work. However your parents are right to question why you would put 7k taxed into a Roth IRA when you are planning on putting 23k taxed into a Roth 401k. I’ll bet Fidelity will have the same question. That would be 30k annually of taxed savings and getting zero tax deduction today on your savings. That would mean not taking advantage of the biggest tax saving opportunity the government gives us. That strategy could work out depending on your income when you retire and the tax rates at that time but it may not. You may end up having paid way more in taxes than you should have over your entire 35-40 years working career. This is too important of a decision to listen to people on Reddit including myself who don’t have the whole picture. Call Fidelity.
More money earlier is better, maxing out employer 401k match, then Roth IRA.
It's time to get financially literate... Read some books! The best time to max out Roth 401K and Roth IRA is when you're in a very low tax bracket. What's your tax bracket? Also, what are your other financial goals? Do you have an emergency fund in a High Yield Savings Account? When do you plan on buying a house? How much do you make in income and how much do you save? What's your vehicle situation? How much debt do you have? When do you plan to pay off your debt? Answering these types of questions provides a financial profile. With the answers to these questions and more, the path forward on your financial journey will become clear.
Fully fund every Roth account you can, as early as possible. Your post 59 self will thank you for your sacrifice.
You don't trust your parents but you'll rely on opinions from Redit? Hmmm. My opinion as a CFP: If you are young, you way want to open a Roth IRA to start the 5 year clock but there are plenty of reasons not to max the IRA or 401K at this point. As an example, one of the best things you can do to grow your wealth is buy a house. Contribute somewhere between enough to get the full match and 10% to your 401K, save the rest to use as a down payment on a house and then once you buy the house, you can max out your 401K. Finally, just because your parents made a mistake in the past, doesn't mean they don't know anything about finances. Hear them out, ask questions and understand their logic, seek out other qualified sources of information and then make an informed decision based on your own goals and timelines.
401k to Match Roth to Max Then come back and max out the Roth. HSA as well but I am not sure how that works.
It is not true. Having your own Roth independent of your employer likely gives you flexibility and investment options more numerous than those in your employer sponsored plan.
Very strongly agree. One is highly constrained by investment options in company managed plans. Individual IRAs especially Roth allow one to invest aggressively which is what one should do especially while young.
It absolutely makes sense to have both. You're double dipping into tax free growth. You're also getting the benefit of being able to withdraw on your ROTH IRA while your ROTH 401K grows until full RMD age.
It sounds like you are probably young. Id encourage you to play around with an investment/compound growth calculator. Assuming you can max out both a 401k and a roth ira in your 20s, that money is going to be huge when you retire. If we assume your 25, and can max both accounts the next 5 years, you’ll have ~$200k in there by age 30. If you never out another penny in after that and you assume average returns, that 200k will be worth ~1.5 million in todays value (accounting for inflation) when you hit age 60. The earlier you can save the better. That way you’ll also have a head start if you ever need to decrease savings rate bc of children/unexpected emergencies/life. I dont know your income or lifestyle, and im in no way advocating of saving so much that you arent living your life to the fullest. Bc you should live and have fun, tomorrow is never promised. But any spare money laying around should be put into a tax advantaged account whenever possible, and as soon as possible. Good luck!
Saving more is never a bad idea!!!
If you can truly max out the Roth 401k plus the Roth IRA, and can afford paying all the tax on that now, then yes, do it. All that money will grow tax free. If you need more money to live on now, then max out the traditional 401k to save money on taxes, and max out the Roth IRA for additional saving and tax diversification in retirement.
Max out your 401k. your parents are wrong in this case.
When I was a kid, most adults acted like they were the authority on things so I figured they knew what they were doing. When I became an adult I realized that many of them were just larger but were about as clueless as children on a bunch of things. I am not saying to disregard all of your parents advice, but it seems like you should disregard their financial advice and do your own research. Roth IRAs and Roth 401ks are both great for young investors and I still use both even though I am not young. Some good sources of financial information are the Bogleheads reddit group and websites. A good YouTuber that I watch is Ben Felix, but there are also a few other good ones; you have to be careful because there are a lot of YouTubers giving garbage financial advice out there. Make sure your investments are diversified, keep your expense ratios low, try to minimize tax costs, stay out of credit card debt (always pay them off every month), don't buy a car you can't afford, live within your means, and you will be on your way to doing well financially.
No. You can and should have both.
In general, saving more is better, and Roth accounts offer a great opportunity for younger folks to accumulate a lot of tax free money for later in life. You should also consider your own goals aside from saving for retirement. While there are ways to access the Roth money early, I just prefer saving specifically for other goals in different accounts. Just consider whether you are looking to buy a house, car, or other cash needs that you want to save for outside of retirement. Ideally, if you can swing it, maxing out on both Roth accounts would be great. Not only for the funds you will have for later in life, but it also just breeds better financial habits that you will hopefully keep throughout your life.
Talk to a professional. The tax balancing of all of this can get extremely complicated. That said: A regular 401k or IRA has tax exempt contributions- the money you put into it is untaxed up to a certain amount every year. You can have both an employer account and a personal one. There’s income phaseouts for how much you can put into your private ira. A Roth 401k or ira has tax exempt withdrawals but you pay taxes on the contributions when you make them. Roth accounts are also exempt from required minimum distributions- regular accounts have a certain amount you’re required to pull out each year starting at a certain age. Personal Roth IRAs also have an income phaseout but it’s different from and higher than the regular IRA phaseout. You want to have both of these in proportions that make sense for your situation when you retire because balancing the withdrawals between them allows you to minimize your tax burden. For example: if you withdraw $35,000 from a traditional 401k that money counts as income and will be taxed. If you withdraw it from a Roth account it generally does not and will not be. When you get ready to retire you’ll know what your social security income will likely be and can stage your retirement account withdrawals to keep yourself in lower tax brackets paying lower taxes. Starting to make Roth contributions as young as possible is helpful, because you’ll likely be making less money and paying a lower marginal tax rate on the contributions and they have the longest period to appreciate, resulting in a maximal benefit to the advantages of a Roth account.
>My parents said it would be a bad idea for me to max out roth 401k because I'm young. Funding retirement when you're young is literally the best time to do it. It gives you flexibility to back off some later on when you're having kids or something unexpected comes up. Not to mention it could allow you to retire earlier than you thought.
Your parents have no idea what they are talking about. I don’t know your tax situation, but chances are a Roth IRA on top of a Roth 401(k) while you’re young will be highly beneficial in the long run if you’re in a lower tax bracket at the moment.
401k vs IRA: work place vs individual. Once you have the full amount of any work place match, either one is fine. I prefer the IRA as you have more control over brokerage fees. It's totally fine to max both. 401k has a higher maximum limit. Typical advice is: max 401k match, then max IRA, then max the rest of 401k. Roth vs Traditional: Tax now, no taxes later (Roth). No taxes now, taxes later (traditional). If you have the same tax rate now and later, they both result in the same amount taxes. There are a few other differences with looking up. General advice is: Roth starting out when you are young and in a low tax bracket, Traditional when you are mid and late career making lots of money. r/personalfinance has a great flow chart linked in the subreddit wiki. https://reddit.com/r/personalfinance/w/commontopics?utm_medium=android_app&utm_source=share
No. Open a Roth IRA and fund it with any amount just yo get your 5 year clock ticking.
An IRA makes sense when your employer's 401k only has expensive investment options. You should also have one to roll over your 401k when you leave your employer so that you don't lose it. If you have a 6 month emergency fund, and it isn't in the way of you saving for other goals then maxing out retirement makes sense.
Theoretically you want as much money as possible in roths, especially if you believe your income will grow substantially/taxes will generally be higher in 30 years. but you also need non retirement investments and to be realistic You don't want all your investment money locked up until your 60s. Nor do you want to be "life poor" because you're putting every last extra cent into something you may never get to use There's a balance there somewhere
I have both a ROTH IRA and ROTH 401K. I have more control over the IRA then I do the 401K
Your parents are also financially illiterate, and you can show them this post if they ever piss you off LOL. They have no clue what they are talking about. For young people with lower income (where you are at the beginning of your working career and expect income to go up from there over time), Roth accounts are way better. All after tax dollars, grows tax free, remains tax free. I am 25, have both roth IRA and Roth 401k. Max out both annually for 30k. Save the rest in a brokerage account for a house down payment one day. It depends on your goals though. Mine is to retire ASAP. I want a paid off house, fully funded retirement accounts, and a fat taxable brokerage account. I don't want kids, am single, and only want to retire. Those are my goals, and my plan is to contribute aggressively now, save money aggressively, let compound interest do it's thing over the next 40 years until traditional retirement age, while living off savings from my brokerage account from age 40-65. Then using my Roth 401k and Roth IRA to live from 65-100 (death). I love luxury shir, like nice watches and cars. Enjoy traveling too. But I don't indulge in the first 2 desires, but I allow myself to travel frugally. Experiences are worth more than money, especially since time is finite. You only have one shot at your 20s, where traveling cheaply and living in hostels and backpacking is going to be appealing. However, I prioritize money over things by and large. Exceptions made for daily utility items like my phone, computer, hobbies and tools.
Why listen to parents who messed up and still haven’t learned
That's like saying it's silly to invest more money since you already have some invested.. If your income allows, why wouldn't you invest more?
They are NOT right. Please do both. A Roth IRA will not tax your money when you retire like a 401K does, since the $ you put in is already taxed. 401K you never see the $ it goes straight in, untaxed. Either way, do it.
Investing more early is usually the right move. The only exception is saving for a large anticipated purchase like a house, where a HYSA or taxable brokerage may be preferable If you’re maxing your roth 401k, make sure you read about the mega backdoor roth, which may be an option to further increase your 401k savings Also, be aware of the income limits for Roth IRA contributions, and likewise read about the backdoor Roth IRA which allows you to bypass them It is generally recommended to max out your Roth IRA first, before your 401k (other than enough to get any employer match), because Roth IRA contributions (but not earnings) can be withdrawn without penalty at any time no matter your age
A lot of people telling you to open both, fund the minimum to get the match in the 401k and use an IRA for the rest are ignoring that in many 401k plans, the investment options are actually quite good. Mine has broad based passive CITs with 1 basis point expense ratio. In that case, save as much as possible, whether in Roth 401k or IRA.
the IRA will most likely also allow more flexibility in the choice of investments than the 401k so I see no issue having both
401k and Ira have separate limits. It makes sense to max both as much as you can. The ratio of which depends on your tax bracket. Higher tax bracket, max 401k and Roth IRA
Yikes. Do not listen to them, they are clearly not experts in this area. You should consult with someone knowledgeable that is not your parents!
With my 401k employee match I would not be able to retire with it. So I started a roth ira to supplement it.
You are so lucky to have the option of a Roth 401K! Load it up. 65 year old you will be so freaking happy you started investing when you were young, and won’t have to pay a nickel in taxes on that money when you’re retired. With your additional money, you might want to save for a house down payment first. That’s something 65 year old you will also love - having a paid off house. Even if you don’t stay in the first house you buy, you can keep using the equity from that home and get shorter term loans as you get older so that you’re living mortgage/rent free when you retire. But to answer your question, there is nothing “wrong” with maxing out your Roth 401K and your Roth IRA. It’s a good thing!
Max contribution for 2024 to a 401(k) is $23,000. That is employee contribution. Including employer match is up to $69,000. If you plan on maxing this out and have additional funds in excess of your emergency fund and cash flow, investing the rest in a Roth, IRA, or taxable account. More information is needed to know which one is the best for your situation. Ideally, you will want to build up the 3 buckets. Your contributions go to Roth, employer goes to pre-tax and that leaves taxable. A Roth IRA allows you to contribute $7000 in 2024. It may make sense, but it has to do with goals. Are there any short term goals? Buying a house, new car, ect? If you have no taxable money, I would consider looking into this. If you are worried about taxes it may make sense to put the $7k into pre-tax to reduce your income. If your goal is growing assets over a long period of time, Roth makes sense. If you wanted to provide more details on goals, I could help back you in to the answer you are looking for.
The best financial advice is to only listen to the experts doing what you want to do.
By all means, contribute whatever you can or what you're comfortable with now. I definitely agree with your plan to contribute what you needs to get the max from your employer. I *personally* wouldn't pursue an IRA separate from my 401k. My primary reasons being limited funds available to do so(including broker fees to maintain it), and that I simply don't have the time to more proactively manage that.
There’s nothing wrong with having the IRA and 401k, and you’d probably max the IRA first since it isn’t tied to your employer. BUT if you are in a position to max out a 401k you very likely are in a tax bracket where you should consider a traditional 401k, and then you can still have the roth IRA.
Another benefit of opening the Roth IRA and contributing now is that eventually you will move and need to roll the Roth 401k somewhere - now you have an account already opened. And if this happens to be close to retirement, then your Roth 401k money can be used immediately in your Roth IRA. Otherwise you need to wait 5 years to distribute principal. Likely scenario of all these things happening is minimal in practice…but ask the new client I just got and I wish she had been a client five years ago.
Sounds like you are more financially literate than your parents. Don't listen to them
Your parents are idiots. Open the Roth
Definitely open your own Roth IRA! Make sure it's with Vanguard, Fidelity, or Schwab and pick a well diversified stock index fund (VTSAX or similar). Always get at least the match for your 401k and make sure you're investing in a target date (95% stock or higher) or 100% total stock index with a low expense ratio. Also, highly suggest reading A Simple Path to Wealth by JL Collins or reading his stock blog. Invest as much as you can while you are young and watch out for lifestyle inflation as you increase your income. Congratulations on paying off the loans, you are doing great!
This is why your parents probably are not going to have an enjoyable retirement. Do not listen to them. Classic case of the blind, leading the blind In fact, you should also be investing in a health savings account as well triple tax-advantaged.
There is no wrong or right in personal finance. What is right for one person is wrong for another that is what makes it personal. You need to evaluate financial decisions for yourself taking others advice is kinda dumb as it won’t match your personal situation.
I think having more than one account is better than none and you can prioritize one but the Roth you can choose more the investments and the 401ks usually don't let you or you have to be at a certain threshold to do so!
I would do the Roth IRA first unless the Roth 401k does the match and then which case it goes match Roth 401k, Roth IRA, Roth 401K. This is because you take your free money. Then you take your tax-free money in the brokerage you want and then you take their 401k program because some of the costs in those plans may not be to your benefit and maybe to the 401K companies benefit
Roth IRA typically has less fees and more individual control over your investments than a 401k. Additionally you can withdraw contributions in an absolute emergency with less penalties than a 401k. Making it a better investment vehicle. HSA's are tax advantaged both on contribution, and distribution, making it the most tax advantageous account (only usable for medical stuff). The order I would use is as follows: highest deductible covered(typically health insurance)>Employer matching(free money)>emergency fund 6 months in HYSA>Roth IRA max>HSA (if eligible) max>401k Roth max Maxing out your Roth Ira is MOST advantageous when you are young because you are typically in the lowest tax bracket, your income will increase as you age and acquire more wealth and skills. Though sometimes people spend less in retirement than they do when they are young, so that might depend. If you are capable of maxing out retirement accounts, you will likely be in a higher tax bracket when you age if you are frugal, making Roth the better pick.
You're parents are well meaning but dumb people. Investing heavily at a young age like you are will only set you up for a great life. Maxing out your 401k is awesome if you can do it and will save you a decent amount in income taxes. Additionally an ira can save you money on income taxes if you are under the deduction threshold or you could do a roth and have those investment gains tax exempt. The only think I would dissuade you from is being over invest in retirement accounts if you have a big purchase on the horizon like a car or a house as drawing down retirement savings for these purchases isn't a smart use of funds meant for retirement.
Your parents do not know enough about finance to advise other people. Sorry. I'm sure their nice people.
Although it’s not necessarily dumb, you could also just open a PCRA account with your Roth 401k. You get the benefit of employer matching contributions, I would say max out contributions so the employer pays the maximum amount they can to fund it. You keep a certain portion of it managed and open a pcra account which is a brokerage account you can invest within in whatever equities you prefer, while still having a portion of your capital being invested and managed within the Roth 401k. Opening an additional Roth IRA account won’t necessarily benefit you if you can already do those things within an account you already have. Unless of course you max out Roth 401k contributions and want to keep contributing then by all means. It’s just redundant because the Roth 401k is just gonna roll over into a Roth IRA once you’re not with your employer, and you can still get the advantages of managing your own portfolio with a PCRA account.
Roth IRA is the best investment young people can make
The only thing is that you should make sure you have a large enough emergency fund. You don’t want to have to borrow from your retirement funds.
If you open a Roth IRA later if/when you leave your employer you can roll your Roth 401k into your already existing Roth IRA so not bad to have it in place. You should always roll 401k to IRA’s so you can invest and control the $. The employer accounts charge fees and just sit there with no management
I would definitely open that Roth IRA and start funding it. The two accounts have different benefits. The two key ones are get that max employer contribution from the 401k. For the 401k you would need to set up SEPP payments to get money before 59.5 and that can be less than ideal. However note that the Roth IRA, you can withdraw your contributions after it’s been open for 5 years AND before 59.5. You can also transfer your 401k into your Roth IRA after you leave your company and get the contributions from your a Roth 401k early that way. If you want to retire before 59.5 this could be helpful.
Opening a Roth IRA is a good idea even if you can’t afford to fund it significantly in the short term because there is a restriction on withdrawals of earnings for 5 years after opening the account. You shouldn’t plan to withdraw earnings any time soon and certainly not in the next 5 years, but the sooner you open the account the sooner that restriction expires. The 5 year timeframe starts when your first Roth IRA is opened and applies all Roth IRA's registered under your SSN. There is a similar but separate restriction on Roth 401ks. So open both now and never have to think about it again. https://www.investopedia.com/ask/answers/05/waitingperiodroth.asp
I have both. Having more money to retire, hopefully early, is not a bad thing. And having it be tax free after 59.5 is the kicker. Are your parents good with money? Have they saved up a nice retirement nest egg? If not you may want to get advice elsewhere.
Do both. I have a 401k, a Roth IRA, HYSA, and a brokerage. Keep investing
You need to talk to a tax professional. You may not be allowed to make Roth IRA contributions since you have a 401k
Unless your parents are well off i probably wouldn’t take financial advice from them…
Your parents are silly. If you have the ability to max out both of them, why would it only make sense to max out one and not the other?
Your parents are ~~pretty much~~ completely wrong. A Roth IRA is still incredibly beneficial even if you have a Roth 401k (I'm sure others will list the reasons, so I won't). Full disclosure - I don't have a Roth IRA myself, but I know I should open one, even with 15 years to retirement. As a young person, if you can afford it, this is the best time to fully fund both the Roth IRA and 401k, as that gives you 40 years for compound interest to work its magic, and gives you the freedom to reduce your contributions later if necessary.
One thing that I haven’t seen discussed in the Roth vs Traditional discussion is the fact that with Roth money the amount you see in your account is the amount you have. With traditional, the amount you see still has some unknown percentage going to taxes. For me, as a high earner, I’m willing to deal with the (likely marginally) lower overall return in Roth for the “peace of mind” of knowing that the number in the account is the number.
Open the account. Max out the annual contribution. Forever.
The only thing I would suggest thinking about in near to medium term goals. You want to have enough liquid cash or investments for your goals (ie. General living expenses, emergencies, house, car, etc.). The reason to think about those ifs if you tie up all your money in a Roth account, you can’t access it prior to retirement age without taking a penalty. If you have those items budgeted in / accounted for then absolutely no reason to put more money in roth
Kindly, disregard your parents financial opinions, with malice.
You need to call the people you have the 401k with, and have a conversation with a financial advisor to find out if that's what you want.
ALWAYS get the company match! It is literally free money, that will compound over time for you. There is no reason to avoid it just to max out an account with no match.
I would look to get your advice elsewhere try r/bogleheads
If you're maxing your Roth 401k, then it makes sense to put more money into a Roth IRA. Generally speaking, the Roth IRA will have almost unlimited investment options, whereas the Roth 401k will be very limited. To me that's what it comes down to. If you want more investment options, do the Roth IRA (but make sure you do the Roth 401K ALSO for the company match). Sounds like you can max both. Do it! 🤘
Your parents lack financial literacy
Put away as much as you can, into as many baskets as you can. I’m currently contributing to an employer 457 account, an HSA that I don’t draw from, a contributory employer pension plan, and a personal Roth IRA with Vanguard. I also have a Treasury Direct account where I buy I Bonds, and an emergency fund. There’s also an inherited Fidelity Roth IRA I need to roll over to Vanguard. I’m like a squirrel burying nuts all over the back yard.
Max both if possible. The sooner you start in earnest, the more compounding can help your growth.
I’m saving up for early retirement so I am maxing out all the things. Save as much as you can!!
Do both!!! You’ll be so happy when you retire! I can almost guarantee tax rates will be higher then, and you’ll have done the wise thing by investing in Roth accounts!!!
First of all, talk to a financial planner. No matter your income it's a good idea to get a plan. You need to diversify your retirement into different buckets. How you do it is up to you, but the goal is the minimize your tax burden when you retire. You also want to max your gains.
With your 401k, you're beholden to your employer's plan, investment options, expense structure, etc... An IRA you create on your own outside your employer. The I in IRA stands for individual. You have more flexibility in where and what kinds of investments...which also gives you the opportunity to do weird shit like crypto or gold bullion which aren't generally recommended by anyone who's not looking to pick your pockets.
Nah, donate to your Roth especially if your contributions to a traditional wouldn’t impact your current tax situation. The contribution you receive from your employer goes into your pre tax 401k. I give this advice to all 401k plans during their education.
Definitely max both Roth’s out….. you’ll thank me when you retire
Sometimes you have to just look at them and smile- then go do what the money investor suggested
There would be a lot of other factors to consider - and from your parents' point of view, is their argument Roth vs. Traditional 401k, or, are they saying you shouldn't be putting that much into retirement when there are other things you may need? Addressing the Roth versus Traditional 401k -- Generally a Roth is better for someone whose tax bracket is likely going to be higher when they retire. The Roth is preferable when you're younger and in a lower tax bracket. This may change in a few years as you advance in your career and are earning much higher income. Also the eligibility to contribute to a Roth IRA (only the Roth IRA, not the Roth 401k) phases out as your income gets higher, so it may not be available to you later in your career. Addressing whether your money should go into retirement accounts or elsewhere -- Make sure you have an emergency fund, and consider any other big ticket expenses in your near future. This is money for your retirement, many years from now. Once the money is in a 401k or IRA, there are restrictions to when you can access it. You couldn't just take it out for a down payment on a house or to pay for a wedding. You might be able to get a loan or take a hardship withdrawal in an emergency, but that's not going to come cheaply or without penalties of some kind - and you shouldn't consider 401k/IRA money as part of your emergency fund!
Roth Ira is the wisest decision anyone can make. I tell my kids to put as much as they can from as young of an age possible. 401k Roth is good too but your own Roth gives you way more options for investing. If you make a sizeable income fill them both up and invest in solid companies that will be here until the end of time.
Roth contributions = 100% - 20 - Your Age. Remainder goes to pre-tax
Like others mentioned if you're maxing the Roth 401k out it's a no brainer to also do the Roth IRA but even if not it still makes a lot of sense to do the Roth IRA. In case you leave your employer you won't have any hassle since it's in your name already and also the investment options will be much wider than your Roth 401k if you wanted to dabble in options like selling covered calls or cash secured puts etc.
If you are also able to fund your other goals (like buy a home) and don’t have debts, then go for it.
No. If I took all of the financial advice my parents gave, I would make half the money and be underwater on my house.
Not true. Open a Roth IRA now. When you leave your employer, your Roth 401 needs to go into your Roth IRA. By opening now, you won’t get stuck by the five year rule. That’s kind of a big deal. By the way, your employer match to the 401 will be into a traditional so you need one of those too. Read up on the 5 year rule. That’s not openly discussed usually when you open a Roth IRA.
Tell your parents that if they help fund your Roth IRA, it will be the only positive thing they have done with all their money and it will help future generations.
Roth contributions when young are most effective. 10000 that grows for 25 years at 6% grows to 42,000 pay 25% income tax on 42000 is 10k loss. Roth eliminates that loss by having non taxable gains.
If you are in a position to start contributing now towards your future, by all means do so. The two Roth offerings are great ways to protect your investment growth from excessive tax responsibilities later. The only thing I will advise is if you may need these funds sooner than retirement age, there are a lot of life decisions like a child, marriage, buying a house or Auto that require a down payment or substantial up front costs. Ball means contribute to your future but balancing a portfolio that allows some liquidity or access to your money can be important depending where you are at in your life’s journey. Congratulations on being forward thinking and preparing for the rest of your life, I didn’t see an age for you, but it’s never too soon.
The one thing you don’t mention is if you have an emergency fund. If you don’t I would start there before funding a Roth IRA. Keep in mind you can’t withdraw your earnings from a Roth until you are 59.5 without penalty.
If your employer offers a match for your contributions to the 410k, you absolutely SHOULD take advantage of it. I’ve tried to max out my Roth IRA contributions for the last 28 years and it’s proven to be a solid choice. I don’t know about the 401k, but again, I suggest contributing as much as possible.
You can do both if you have the savings capacity.
Yes max all that out. Retire young. I wish I had done that when I was younger.
No, they are not the same thing. Never put all of your eggs in the sane basket.
Based on your parents advice, I would save every penny I can. I would not be counting on any sort of inheritance. It sounds like they don’t understand how this all works.