Should You Invest in a 401 (K) or Roth 401 (K)?
Welcome to The Statement, Lifehacker’s new weekly personal finance newsletter. I’m Alicia Adamchik, author of the Lifehacker money article , and every Wednesday I cover the most pressing money issues of the week and answer readers’ questions about any aspect of your financial life.
This week I’m all about changing perspectives. I’ve written about building a bullying list , participating in a deep year, and the benefits of full-time workers when calculating hourly wages , all of which involve rethinking certain behaviors and habits.
At first glance, it might seem like a change in perspective has nothing to do with money, but I think it has important financial implications. The hourly wage calculation is the most obvious – it helps you think about time and energy when spending money, rather than whether you can “afford” something or not based on the money you currently have in your money. bank account.
The intimidation list and year of depth is a little more complicated, however. They require you to think about your life, what you want from it, and why you are not pursuing certain goals. Is there a job you are interested in but don’t feel right for? Do you have a hobby that you gave up? Why? And what does it take to change your mind?
My deep year includes reading a lot of books that I have put aside and working on the skills I already have, instead of worrying about everything I don’t have. And my bullying list, well, it includes a few steps I’m not sure I’m ready for, but I’ll try anyway.
Reader question: Should you invest in 401 (k) or Roth 401 (k)?
Ari asks:
If you have a choice in a 401 (k) or Roth 401 (k) job, how to choose? Is this based on your total salary? Household total income?
As with the Roth IRA , your income and age are the main factors when choosing a Roth 401 (k). Roths are more valuable to people on low incomes (probably early in your career) because you invest money after taxes, which then grows tax-free. With a traditional 401 (k), you deposit money before you pay taxes on it, so you have to pay when you receive your retirement benefits.
If you choose Roth, you are essentially “blocking” your current tax rate because you expect it to be lower than your retirement rate. This means that when you withdraw funds, you will not pay taxes on the money, whereas with a traditional 401 (k), you will pay.
Both tax schemes are beneficial in different ways. If you’re young, Roth is probably a better fit. “If you’re in the lowest income tax bracket, go for Roth,” says Howard Pressman, a certified Virginia-based financial planner. “The current tax deduction is not that important to you, so why not take advantage of the tax-free growth.”
And as we said earlier , tax rates are currently some of the lowest they’ve ever been (and likely will be), which means that it makes more sense to pay today’s tax rate than to play with a higher one. a bet, making Roth the best bet. … The trade-off is that now you will not receive the tax credit.
You need to diversify
However, another consideration is how much of your savings is currently in tax-deferred accounts such as traditional IRAs and 401 (k) s. If you’re over 50, you should diversify before retirement so you have the flexibility to withdraw funds from both taxable and tax-free savings pools.
Regardless of your choice, any employer contributions will be pre-tax, says Samuel Boyd , a certified financial planner based in Washington. “So, in the event that you cannot make an informed forecast of your tax implications now versus the future, contributing Roth 401 (k) and getting a traditional 401 (k) match will at least lead to tax diversification,” says Boyd.
This is one way to diversify. Another option is to direct your additional contributions (workers over 50 can deposit an additional $ 6,000 in Traditional or Roth 401 (k) this year) into after-tax accounts, suggests Margarita M. Cheng , CFP in Maryland. “Clients need tax diversification.”
Also keep in mind that too much tax-deferred retirement accounts result in high mandatory minimum payments when you turn 70.5, which in turn raises your tax bracket when you retire when you least can. allow it.
Roth assets, on the other hand, are not subject to RMD. “The nice thing about the Roth 401 (k) is that you can deposit almost three to four times what you can do in the Roth IRA, so it’s a great option for this type of savings and will reduce your compulsory income. at the age of 70 and a half, ”says Wes Brown , CFP based in Tennessee. While Roth IRAs have a $ 6,000 contribution limit this year, you can deposit up to $ 19,000 in Roth 401 (k) (and $ 7,000 and $ 25,000, respectively, if you’re over 50).
Both types of accounts take place in a secure retirement plan. If you are young or already have a lot of tax-deferred savings, then choose Roth.
This week’s review
Here are some more stories from the past week that you might like:
- The best piece of advice I’ve heard about asking your boss for more money is : Accept the awkwardness and it will pay off.
- Travel rewards are the best use for your credit card points : or at least the place where you get the most “value.”
- Check your credit report even if your credit is blocked : Scammers can still access open lines of credit when your reports are blocked.
- Can you over-diversify your assets : not really, but you need to consider if it’s worth it.
- How to get compensation for canceled flights to Europe : it’s simple!
- How to deal with stress at work : Just answer this damn letter.
- No statistic will help you outperform the market : relax.
- When “now” is not the best time to invest : when you haven’t taken care of the basics.
- Cover your PIN-keypad when using an ATM for an entrance : do not succumb to fraud!
That’s all for this week. If you have a question on a topic that you want me to touch on , please email me at [email protected] . And check out other articles on two cents .