This Loophole Makes Traditional 401(K) Better Than Roth [2023 Update]

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Having an optimized investing strategy can mean extra tens of thousands of dollars per year in retirement-and I'm breaking down how you can get the most bang for your buck with the Traditional 401(k).
For the full deep-dive on the ultimate Traditional and Roth strategy, check out The Money with Katie Show podcast: podcasts.apple.com/us/podcast...
Here's the spreadsheet we created to show the Traditional vs. Roth timelines and outcomes: docs.google.com/spreadsheets/....
This show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin. Devin Emery is our Chief Content Officer. Our video editors are Christie Muldoon, Sebastian Vega, and Nichole Friedman. Additional fact-checking comes from Kate Brandt.
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00:00 Traditional or Roth 401(k)?
00:15 Why a Traditional 401(k) could be better
02:00 Katie’s experiment
05:27 Roth vs Traditional numbers
07:08 Katie’s ultimate strategy
07:59 M1 Finance’s high-yield savings account
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Опубликовано:

6 авг 2024

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Комментарии : 165

@TheManInBush Год назад

insane break down - changed the way i think about roth vs traditional and I really love all the number crunching showing why and how it is better. thank you!

@MoneywithKatie Год назад

So glad it helped!

@sparksmcgee6641 Год назад

Her numbers are wrong. She didn't take into account that social security is taxed in the traditional account pay out. This is clickbait and she skips a whole lot that makes things more complex. Completely inaccurate information

@edhurtado4784 5 месяцев назад

I like here, subscribed, and will listen more of her, but she did not consider IRMMA, and the taxability of SS with taxable IRA distributions.

@eile4219 7 дней назад

@sparksmcgee6641 you assume we still get social security 20 or 30 years later(they are running of of money). The math is fine.

@AlexMorgan-ti6nv 3 месяца назад

I never though of investing tax savings from a traditional 401k elsewhere, eye opening and incredibly smart

@RobertNoppers 3 месяца назад

Right? but no tweaks when you've ignored your 401k and IRA till 62 and you need to look at those balance sheets as retirement is becoming more real

@DavidParker-tl3re 3 месяца назад

As someone nearing retirement with minimal savings, debt, and health concerns, I started investing. Now, a year later, my savings have surpassed $800k, edging closer to my $2m goal by age 65

@MichaelJaw-hv9uu 3 месяца назад

retirement can be challenging and confusing without proper preparation. How do you tell if your success is based on your decisions or mere luck

@DavidParker-tl3re 3 месяца назад

that's a really good question. I'd credit research, which was the challenging part that led to Emily ava milligan, a top fund manager in turn made this success out of 300k, rather than luck

@MartinJackson-yq6bl 3 месяца назад

After I copied her name and pasted it into my browser, her website popped up. I needed an example like this to reference, thanks for the share

@stephtraveler7378 Год назад

I did what you just described over the last 25 years... and the numbers work out almost exactly as you described. I never rebalanced, but I also never sold. Just held and let it recover, but point is: Maxed traditional 401k and invested the remainder post tax in Roth, in the years I qualified and conversions in the years I didnt. Great analysis. Smart girl!

@drewjohnson9823 Год назад

I’ve heard arguments the other way, but enjoyed the perspective. I actually split mine down the middle.

@MoneywithKatie Год назад

Love the balance!

@keithmachado-pp6fv 3 месяца назад

I like this thought process and agree with most of the points. I do challenge the “top down” vs “bottom up” analysis. It makes the correct assumption that the Roth tax is paid at the highest tax bracket you are in at the time, which makes sense because at a minimum you have wages and perhaps other income. However on the withdrawals from the traditional, the example shows paying tax starting in the 10% bracket. That assumes no other income. At a minimum, during RMD time, you will have SS income and most people with large IRA balances likely have other income, such as a pension, annuity, dividends/interest income, so the tax on the withdrawals will go on top of this income just like the Roth does up front.

@4891Cody 11 месяцев назад

I’m going to give three reasons why I prefer Roth over traditional and won’t ever bother with traditional 401k 1. Estate planning. If you plan on using a traditional 401k do realize you are leaving a tax trap for your heirs to inherit. If you have 400k in pre tax 401k and you die and aren’t married the account is going to be converted into an inherited IRA given to your heirs if you are taking RMDs when you die your heirs will also have to take RMDs and pay taxes on those RMDs. Most likely your heirs are going to be younger and in their prime earning years so they are going to get taxed more due to higher income then a retiree. If you have a roth 401k and it gets turned into an inherited IRA guess what? Your heir/s don’t have to do RMDs and don’t get taxed on that money. That is huge bonus for Roth compared to Traditional in regards to passing on legacy wealth. 2. You don’t plan on liquidating your portfolio. Look if you have a really large 401k in the millions when you go to retire your RMDs are going to be heavily taxed. The tax you will have to pay because of RMDs. If your money is Roth and in the millions then you don’t have to liquidate your portfolio if you have for example 4 million in your Roth 401k and you roll that over to a Roth IRA and you get 4% dividends through ETFs and/or stocks that is 160k a year 100% tax free. 3. You already heavily contribute to a taxable account. I already dump almost 20% of my gross income into a taxable brokerage account on top of Roth IRA and 401k contributions. If your like me and already do heavy contributions to a taxable account the “investing the tax savings into a brokerage account to make more money then Roth” is redundant. We put money into Roth specifically to not pay taxes on that money in the future. I could list a few more reasons but those are the three main reasons I prefer Roth over traditional.

@Random-yq1wu 10 месяцев назад

1. If heirs has no job they could pay lower taxes than what you payed. 2. Median 401k balance is only under 250K not a problem for most people 3. Most people don't have time for brokerage accounts.

@4891Cody 10 месяцев назад

⁠@@Random-yq1wu 1. Most people aren’t bums so yes most people’s heirs will have jobs when they inherit money. 2. I’m not most people and I doubt most people watching these type of people will only have 250k balance in their retirement accounts when they retire or if they are already retired. 3. If you don’t have time for taxable brokerage account then you are really screwing yourself over. They allow you to stay liquid while investing and give you a ton of options in life. People who stay away from taxable brokerage accounts are very foolish.

@Jay230612 9 месяцев назад

If I can liquidate contributions from Roth IRA why would I have taxed brokerage account?

@kortyEdna825 Месяц назад

The 401k is good, because retirement choices determine a lot of things. My parents both spent same number of years in the civil service, but my mom was investing through a wealth manager, and my dad through the 401k. My mom retired with about 4.2 million, but my dad retired with roughly 1.8 million. So it really does.

@brucemichelle5689. Месяц назад

Effective management of personal finances is more important than the amount of money saved, regardless of whether one earns income through work or investment. To optimize financial outcomes, individuals can seek guidance from a qualified financial advisor who can provide tailored advice and strategies to minimize expenses and maximize income.

@allysonlleatherwood Год назад

Stings to learn this in my 30's but glad to know before it's too late.

@MoneywithKatie Год назад

Better late than never! The timeline we ran started at age 30 :)

@bernadofelix 11 месяцев назад

Great video. We are all seeking for financial independence and a better way of life. This is not difficult to achieve with savvy investing, a frugal lifestyle, and cautious budgeting. I'm glad I learned early on to work hard for financial independence. As Warren Buffet said, he has seen this happen many times in his life. Not an investor, My husband and i never earned more than a middle class salary. We plan to get retired at 58 with a stock portfolio worth $1.7M. We have never sold so much as one share of stock.

@nicolasbenson009 11 месяцев назад

I totally agree; I am 66 years old, recently retired, with approximately $1.2 million in external retirement funds. I am debt free and have very little money in retirement funds compared to the total value of my portfolio over the past three years. To be honest, I didn't do all this alone, but with the help of a financial advisor. Having one is currently the best way to trade in the stock market, especially for people nearing retirement.

@nicolasbenson009 11 месяцев назад

I started out with a Financial Adviser called "Margaret Johnson Arndt". Her honest approach gives me complete ownership and control of my position, and her rates are incredibly affordable given my ROI. However, do your due diligence before contacting a financial advisor.

@cesarcharolet Год назад

I would love to see you and The Money Guy Show have a sit down on a podcast since they follow the “all Roth all the Time” for 401k and to see you both bring the data on why 1 or the other is better.

@RupertMDoc 4 месяца назад

My read on the Money Guys is they advocate funding retirement accounts so lavishly that with compounding growth retirees will be able to have much more money to spend compared to while working, e.g. 25% investments. Not to knock that, but it gives Roth more of an argument. Also, Katie seemed to have skipped over social security, which for most will already fill the lowest tax brackets making it a bit more of a wash... unless you have no faith in social security or want to retire ahead of it.

@Amelia-Elizabeth 8 месяцев назад

Amazing video, A friend of mine referred me to a financial adviser sometime ago and we got talking about investment and money. I started investing with $120k and in the first 2 months , my portfolio was reading $274,800. Crazy right!, I decided to reinvest my profit and gets more interesting. For over a year we have been working together making consistent profit just bought my second home 2 weeks ago and care for my family.

@Amelia-Elizabeth 8 месяцев назад

@rachealhubert74 Quitting may not be the best approach if you ask me. This is where an AI comes into the picture. I barely have time to trade myself as my job swallows up most of my time. Alice Marie Coraggio, a licensed fiduciary whom has made me over 5 figures in profit in less than seven months, handles my investments. I could leave you a lead if you need help.

@Amelia-Elizabeth 8 месяцев назад

@rachealhubert74 Alice Marie Coraggio

@Amelia-Elizabeth 8 месяцев назад

Lookup with her name on the webpage

@Patricia-Margaret 8 месяцев назад

@rachealhubert74 Alice Marie Coraggio her trading strategies is working for me for more than a year now and I’m making good profit from the stock market and she's 100% honest, reputable and trustworthy

@jakejake7289 6 месяцев назад

Thanks but I already have a Nigerian prince managing my money.

@CBW0314 Год назад

This is what I’ve been waiting for!!! Thanks so much Katie

@MoneywithKatie Год назад

Thank you so much!

@wlaw422 Год назад

This was a great episode. Appreciate the deep dive!

@MoneywithKatie Год назад

Thanks, Will! The full episode is on the podcast if you want to hear 60 minutes of me running all different scenarios, hahaha

@stephenwright133 Год назад

Spot on! I've been doing this strategy for some time now and it works well for me.

@SSJBartSimp 6 месяцев назад

Wait I already get traditional 401k employer match, max out HSA, and max out Roth IRA. Why wouldn't I put the rest into Roth 401k?

@brandonscott9 Год назад

Most people who have enough money to max their 401ks will also have additional streams of income like real estate. With factoring that in, I believe the tax free returns would prbobably be better over a longer time horizon. Plus, behaviorally most people won't invest the difference and then roth is a huge winner. I spilt 50/50 roth / pre and max roth ira on top of it. Should allow me to have flexibility in where I am pulling from depending on other taxable streams of income. It is nice to hear someone firmly on the side of pretax, as most other financial youtubers are roth lovers

@MoneywithKatie Год назад

That's fair! Maybe my bias is showing because I am *not* a real estate investor and plan to live solely on my qualified and taxable accounts.

@ELI5ance 10 месяцев назад

Yup I agree on the behavior side. We are making a huge assumption thar your average person would invest the different. They probably don't even know the different. Most people use traditional 401k because they want the tax break now to fund their life not necessarily invest.

@brianrothenberg9823 Год назад

Katie, thanks for creating this video. I like your approach. However, I think for the tax rates in retirement, you should factor in social security payments. I'm not sure how that would affect the outcome, but I think it would make the comparison more realistic.

@RBzee112 5 месяцев назад

I think this works if you retire at 60-62, but delay collecting Social Security until 65-67. I plan on retiring at 55 and start SS at 65-67. I have about 1.5m in my 401k.

@markstone6263 5 месяцев назад

yes very important, up to 85% of SS could be tax at that higher tax bracket.

@edhurtado4784 5 месяцев назад

Also how IRMMA will affect your Medicare premiums.

@marisahernandez4257 Год назад

My biggest concern as someone who plans to retire at 65 is if I’m investing in pre-tax for my 401K, starting at 59 1/2, I can do Roth conversions, but those conversions can change the tax bracket I’m in for those years, which can cause me to pay IRMAA premiums since IRMAA makes its calculations based on a 2 year look back. Granted, that gets calculated annually, but with the amount of money I plan to have in my 401k by then, I’ll be doing the Roth conversions for a WHILE if it’s all in pre-tax. Maybe doing a split between traditional and Roth would be worth it. At least HSA lowers taxable income, so it balances out some.

@MoneywithKatie Год назад

I like your perspective! Tax diversification always makes sense, IMO, so if you're worried about this later, I think that balance makes sense.

@brandonswan9247 5 месяцев назад

Finally. Someone who understands this question properly. Im sad that i can only give one thumbs up.

@MoneywithKatie 5 месяцев назад

Ha, thank you so much!

@TheahLil 7 месяцев назад

THANK YOU SO MUCH for also including the 12% rate bracket!!! I've been doing Roth and FEEL like it's the right thing since I'm already in the 12%, but hearing you analyze it show that yes this is likely same/better choice for me than traditional . I have pension which those contributions are taken as traditional so that's also a factor. Gotta love all the complexity each person has!

@TravelingTheWorld1993 11 месяцев назад

Katie , great informative video! right now I am going 100% Roth. Because I am paying 19% in taxes. That is for state and federal combined. Sometimes it jumps to 22% when I work a lot of overtime.

@sarbadavarun6102 Год назад

I reached same conclusion as you did especially that I live in Oregon, a high tax state. Standard deductions and bucketed tax will reduce tax burden when we pull out money from traditional 401k later.

@keithmachado-pp6fv Месяц назад

I stand corrected on my earlier comment challenging the top down vs bottom up comment. Upon further investigation, I have 12 years before RMDs to figure out how to get all my income other than SS to zero. This will be accomplished by investing in municipal bonds, cash value life insurance, MLPs, and stocks. Then I will be able to withdraw my RMDs taking advantage of the standard deduction and lower tax brackets (both which are increased annually for inflation).

@josephjones836 Год назад

2:47 The most valuable part of the video for me was setting a realistic expectation of 25 year retirement. It's almost comical when I hear some financial planner expect the average person to invest from 40 - 50 years consistently. From what I have seen, most people don't start thinking about retirement 30; even if you do contribute regularly, life gets in the way.

@ImaAHol 6 месяцев назад

Thanks for doing such a great job with this, the article, and the podcast episodes on Roth vs Traditional as well as withdrawing for 0% tax rates! My company just added the Roth option and I was going back and forth on it. I'm a few years out still from retirement but do you think about converting up through the 12% bracket early in retirement due to the math showing it's kind of a tossup?

@brenthumason9347 2 месяца назад

The effective tax rate benefits of Traditional 401ks is what I have been saying for years. But no one else does. I thought I was crazy.

@glockman99 Год назад

Great video

@mucusofwanderhome6945 Год назад

Isn’t it easier to just say…. Split your contributions between the traditional and Roth?

@lionman13 6 месяцев назад

I’ve always done 50% traditional, and 50% Roth in my work 401(k). Today, I changed it to 100% traditional based on this video. Thanks so much, hope I’m doing the right thing-thank you.

@tgc789 Год назад

Other reasons for Roth - lowest tax rates in history now - avoiding SS tax - avoiding medical premiums - avoiding RMDs - no tax for heirs - widow tax torpedo

@MoneywithKatie Год назад

I cover this in the full episode! Even if tax rates double I still don't advocate for Roth when I run the scenarios and we talk about avoiding RMDs as much as possible by doing a tax conversion before RMDs kick in! Would love to hear your thoughts.

@tgc789 Год назад

@@MoneywithKatie it's weird to be on the opposite side of the spectrum. I don't really see a point to do traditional below the 24% tax bracket. In the 22-24 I can see an argument for a split being a decent strategy if you are above 35 years old but it's a far cry from traditional always being the best option

@MoneywithKatie Год назад

@@tgc789 I think that's fair. In our full episode, we basically say the same thing you are right now - that at 12%, it's kind of a crapshoot, so if you want to get those cheap Roth contributions now, it probably makes sense.

@caliwish7585 Год назад

If you are a high income earner that is a litigation target such a doctor , a 401k is protected from creditors. By investing in Roth 401k you end up saving 30%+ more in a protected investment.

@JJ-xv3gs 4 месяца назад

Conversion before RMD only works if you have a small amount in the traditional account. What happens if you have a large amount like over 3 million? You can only convert so much before RMD kicks in. So I think it all depends on how much money you have by the time you have to take RMD@@MoneywithKatie

@shanenolan085 5 месяцев назад

THANK YOU for this video!!!! Ive seen sooooooo many videos of people bashing the traditional 401k plans and im like theyre not bad at all imo 💯💯😂😆🙌🏿🙌🏿 plus, my house will be paid off by the time i retire and i will be in a lower tax bracket anyway... i respect all three plans but the hate was getting crazy 💯

@saplouie Год назад

A couple things not taken into consideration. When drawing Social Security, 401k withdrawals count as income, which will make Social Security 85% taxable. Secondly, the 401k has Required Minimum Distributions starting at age 72. By age 80, you will be forced to withdraw 5% per year.

@bruceinraleigh9999 Год назад

Yes, there are RMDs for the 401k / traditional IRA. But so what? Most people will need that money! Social Security plus pension was barely enough to live on at retirement age. Now, 3 years later, it's not enough. By the time I'm 80 I'll need to take A LOT from my retirement accounts. Conclusion: The RMD is no hardship. It's a necessity.

@dho5411 Год назад

social security is running out day by day. I don't want to rely on SS, when i retire. It'll be a nice cherry on top if there is still any money to give, but thats about all im expecting from social security.

@scnager1 Год назад

This all depends on your tax situation. For the standard W-2 job person, yes. But there are other legal more effective ways to offset your taxable income like rental real estate

@bruceinraleigh9999 Год назад

Also give some consideration for where you will live in retirement. I now live in in Pennsylvania. No state tax on my pension. No state tax on my Social Security. No state tax on my IRA withdrawals. I only pay state tax on the capital gains thrown off from my regular/taxable investment account ... and any withdrawals I might make in the future. . So I pay zero state income tax. And only small federal tax (because I have pension income). . Conclusion: There are many considerations to which we must pay heed when planning retirement.

@rajvo7406 10 месяцев назад

Hi Katie, What adter you mqxed out 401k in pretax money, what would you rather do - roth IRA or a pretax non- qualified 457b

@jiangpkpful 6 месяцев назад

Katie, we're doing Roth 401k because we think the company matched portion is traditional, and that will help 'diversify' our tax strategy in retirement. We're no longer eligible to do Roth IRA, and we're investing in an after tax brokerage account after maxing out the 401k's. Curious to know your thoughts (particularly around the match). Thanks!

@chavezpoder Год назад

Great video! I watch a ton of financial planning videos and this is the first I've heard of this strategy. I realize I'm suffering from some confirmation bias, but I've actually been using this strategy, but with realizing it's full benefit.

@MoneywithKatie Год назад

I'm so happy you enjoyed!

@oscaragordillo8166 Год назад

Hey Katie, thanks for this awesome videos! I have a question about Roth IRAs - I have been considering opening one. However, I’m not an US citizen which means that I don’t know if I can stay here in the long run. Understanding the benefit of these account come after you turn 65, what can I do if I open one but suddenly I have to leave the country? I’m assuming it will be heavily taxed if I withdraw the money, but do I also pay taxes in my own country? Should I avoid opening a Roth IRA? Any advice?

@MoneywithKatie Год назад

Hi, Oscar! Great question. Unfortunately I'm not sure the details of how a situation like this would be treated; I'm so sorry! You may want to consult a CPA for an hour to run through your options.

@karasweeney2166 Год назад

One of my favorite episodes so far and I've listened to them all. I am really struggling to figure out how to take advantage of a ROTH conversion if we will be receiving a military pension in the next few years. Is it even possible to take advantage of the ROTH conversion ladder if you will always be receiving income (military pension in our situation)? We won't ever not have income (tiny violin) so it feels risky or impossible. Am I on track or am I missing something? Thanks for the great content, Katie!

@MoneywithKatie Год назад

Thank you, Kara! Grateful for your loyalty. I think the key is that - while you may not have tax-free Roth conversions - I assume your pension payments will be less than your current full-time income(s), based on what I know about how pensions usually work. But depending on how early you are in your careers, it's possible your pension income will eclipse your current income. The goal is to make Roth conversions when your income is lowest, which - for most people - is early in their careers, and in retirement.

@charlottemcghee6225 11 месяцев назад

@@MoneywithKatie this was my question too! So if we are getting a pension we should still start the Roth conversions once we hit early retirement in order to take advantage of tax-free RMDs once they hit?

@charlottemcghee6225 11 месяцев назад

This was my question too- thanks for asking!

@ron9665 7 месяцев назад

1:03 This sounds good except the idea comes from the assumption that if I saved 12% from my payroll check then I have 12% to put elsewhere. It seems for my family that the only way we hit the figures we do for our 457b (pre-tax) is that the margin gets us to where we are and whatever is not invested is already spoken for be mundane items like food and electricity. I don't see a 12% pile of cash laying around waiting for a separate ROTH designation. Have I missed the point, or am I just not making enough at $58k for this to be feasible? I think what you're saying is probably in line with what I've always suspected in spite of what many sites say.

@mikethomas8179 Год назад

Literally switched my contributions from roth to entirely traditional today because of this episode. Thank you for breaking this down so well along with so many other topics!

@MoneywithKatie Год назад

This is so kind, thank you Thomas! Feel free to listen to the entire 1-hour deep dive on the podcast if that's even more helpful! :)

@kona6451 Год назад

Smart move is to have assets in both areas. Perhaps max out a ROTH IRA on top of the trad. 401k

@mikethomas8179 Год назад

@@kona6451 great point but unfortunately I can’t. I exceed the income limit for being able to contribute to a ROTH IRA

@mikethomas8179 Год назад

@@MoneywithKatie oh trust me, I already did! I believe I’ve listened to every one of your episodes start to finish :)

@MoneywithKatie Год назад

@@mikethomas8179 Mike!! This is so nice :')

@ld5714 11 месяцев назад

That is a good approach if people are disciplined enough to do it. However, it is a mistake not to have taxplanning in your retirement plan and people should be encouraged to do so, and review it periodically. RMDs on that amount will be very large and to the extent SS or it's viable replacement is available, that could increase MAGI into IRMMA penalty when they are on SS and they are substantial. People will need to keep their eye on the ball and not go blissfully into the future with large taxdeferred accounts to avoid unfortunate surprises. Just my 2¢

@sparksmcgee6641 Год назад

OK, right out of the bank, she skips that Social Security is income and taxed. That's to difficult to put in a clickbait video. She also skips the forced withdrawals in a trad. With current trends, a majority will still be working when forced to take their first withdrawal.

@missgui4400 Год назад

Millenials might not have SS by the time they retire.

@ron9665 7 месяцев назад

4:32 This 4% is pertaining to a living amount and NOT about RMDs, right??? The RMDs would not allow you to count what you pull from a ROTH if I understand this correctly....

@missgui4400 Год назад

I make sure to max out ROTH, HSA, and 401k. Soon to be maximizing traditional IRA 🙏

@conniechapin9278 4 дня назад

If your not itemizing your taxes (just taking standard deduction) any tax savings is for 401/ira is wasted.

@bruceinraleigh9999 Год назад

Yes, the traditional IRA is good. But she's wrong about one thing: Withdrawals from the 401k (presumably after retirement) are taxed the same as any other income. Not bottom-up. (There's no such thing as bottom-up.)

@johndoedoe4840 2 месяца назад

She's young but she knows what she's talking about. Very impressive. IMO, the best retirement vehicle is the Roth IRA bcz if you hold it long enough you will never have to pay tax on either the contributions or the earnings. The problem, though, is you can't get much into it like you can a 401k. I think she's right that traditional 401k is better than Roth 401k. I would hold stocks in taxable account as well, especially if your ordinary income is low enough to get 15% tax rate on LTCGs and qualified dividends.

@Matty-Freitag Год назад

Love the video- thanks Katie! I feel a little foolish but when you keep saying 'invest the tax savings' what precisely do you mean by that? I assume the money you get back at tax time? Sorry if I am misunderstanding..

@timm1583 Год назад

She means that you have more income to save because you paid that much less on taxes throughout the year. If you invest it instead of spending it

@MoneywithKatie Год назад

Yes, what Tim said! The money you save each year via the lower taxes per paycheck should be invested. :) Thanks for watching, Matt!

@Matty-Freitag Год назад

@@MoneywithKatie Thanks so much! Thanks @timm1583 as well!

@timm1583 Год назад

@@MoneywithKatie do you see this outweighing the tax flexibility or asset allocation options for people with higher savings rates. Do you predict RMDs following the same rules in the future for your model?

@jjnace4046 Год назад

AGI limits for Roth IRA contributions, any issues with switching this up? Roth 401k contributions around 5% to get employer match and then also max out Traditional IRA?

@MoneywithKatie Год назад

Smart workaround! You could also do a Backdoor Roth IRA: moneywithkatie.com/blog/how-to-contribute-to-a-roth-ira-if-youre-over-the-income-limit

@keithmachado-pp6fv 3 месяца назад

I actually agree with your premise, however one point is not entirely correct. The discussion of effective tax rate vs marginal. For example, if you have a pension and SS and investment income in addition to a $1m traditional IRA, the RMD impact on “additional” taxes will be at your highest marginal tax bracket.

@danajohnson1900 Год назад

Can you explain how you calculated the difference of $5,400? New to money here. Thanks!

@saplouie Год назад

401k contributions are pretax, so your taxable income goes down by $22,500. At a 24% marginal tax rate, your tax bill will be reduced by 22500 x .24 = $5423.76.

@keithmachado-pp6fv 11 дней назад

I agree with you. If I convert $100k to a Roth I will send $25k to the IRS. If not my $25k will double to $50k when I start RMDs in 14 years. The interest on my $50k at a conservative 5% is $2500, more than double the year 1 RMD on that $100k in the 28% bracket. It will take a long time to close the $51k+ gap.

@eile4219 7 дней назад

If you convert 100k, it can be more than 25k.it depends on your income bracket. If you already making 200k a year, then you need to pay 35k tax on that 100k convertion.if you have no job, then you pay less than 25k tax

@keithmachado-pp6fv 7 дней назад

Yes the 25% was specific to my situation. I am at the top of the 12% bracket so I will pay 22% tax plus my long term cap gains now become taxable at 15% thus a total of $25k.

@halbouma6720 Год назад

Okay I ended up spending way too much time on this looking at your spreadsheet and listening to your other podcast and videos to try and figure out how you worked around a couple problems, one of which is is the tax on SS benefits. If you're maxing your 401K/IRA with your 24% of taxable income, that means your salary is well above $123K and you're building up big SS benefits which would cause them to be taxed by the IRA/401K income. You said in the podcast that you can just reduce your IRA withdraw by the SS amount which could work. Because the SS benefits only get treated at most as 85% income you'll still reduce your tax burden. You then get to continue growing your IRA with these savings.

@halbouma6720 Год назад

You also used working from 30 to 55 and then retiring as your example in the podcast, which got me confused. You might want to either adjust it to 35 to 60, or make it clear that you need to be in a 401K at the time you quit that allows rule of 55 distributions. And you can only withdraw from that 401(k) If it doesn't allow early withdraws or you have other IRA/401ks that you need to pay for retirement, it will have to start at 59 1/2.

@halbouma6720 Год назад

Anyway, you did a great job showing how its better to use your pre tax dollars as it helps you save more especially if you're in the 22% or above tax rate. Its what I've been doing for over 20 years for this reason even though I'm single. But I feel you should better represent your tax rate isn't going to be the 8.3% (single) or 4.7% (married) because its not going to be feeding the bottom up, SS will be unless you want to defer them as long as possible . But then it just makes it worse when it does start. This causes the gap between the two to narrow. Like in your example, if you're able to contribute the max amount at 24% tax rate for 25 years, you're making over $250K/year in the final year before retiring. You'll likely be getting around $69,500 in SS benefits at that point - much more if you're married. It will be hard to just downshift to $101,500 a year after that - even if you're reducing your taxes/expenses by a large amount. I can see the person wishing to not only withdraw the full $121,621 from the IRA but also take their $69,500 of SS benefits starting in 7 years. At that point, they'll have $24,000 in federal taxes and be in the 22% tax bracket. That's much higher than the 11K tax liability listed on the spreadsheet. With the Roth IRA, while they'll just collect $98,082 instead with the $69,500 they still end up with a little more money for the year because there's no tax hit. The Roth IRA despite being smaller can still work well because of SS if you're single. If you're married, the regular IRA will win out even with the having two people pulling SS income.

@danielcotter9202 Год назад

Would your opinion change for high earners whose employer contributions are 16% a year? Let the traditional bucket accumulate from employer contributions alone then choose roth 401k to max out $22,500 a year and still do Roth IRA max $6,500. Seems like best of both worlds and yes I understand very uncommon situation.

@MoneywithKatie Год назад

I like this question! Personally, my take is that - while you'll definitely get some amazing pre-tax contributions from the employer - the primary benefit of making pre-tax contributions yourself is the tax break you'll generate (especially as a high earner!). You aren't getting a tax break for _their_ contributions.

@stong4320 Год назад

I'm confused by what you when you mentioned path #2, traditional 401k + investing tax savings? Where are you getting the tax savings from? For example, if the limit for a traditional 401k is $22,500 and I already contributed that, I can't contribute more, right? Are you saying don't invest the max to your traditional 401k? I don't understand where this is coming from

@MoneywithKatie Год назад

Hi Shelley! You can invest the difference in what you save every year (i.e., if you're in the 22% bracket and you invest $22,500, you'll save $4,950 on your taxes) and put that into a taxable brokerage account or a Roth IRA! I hope this helps. :)

@markstone6263 5 месяцев назад

what about RMDs from a traditional 401k pushing you into a higher tax bracket and causing you to pay more taxes on SS income?

@keithmachado-pp6fv 3 месяца назад

I prefer a brokerage account to a Roth, where I can harvest tax losses, defer tax gains, and where my heirs get a step up in basis and don’t have to liquidate the account in 10 years.

@brettlowery9661 Год назад

What about doing the roth 401k and still maxing our your roth IRA each year?

@MoneywithKatie Год назад

You may find yourself a little too Roth-heavy later in life (not a big problem, of course); but for most without other income in retirement and high incomes in their career, *some* pre-tax typically nets a favorable outcome. But I think if you're maxing out both anyway...more power to you, friend!

@cstuartdc 8 месяцев назад

I’m not as nerdy as you and the other financial planning wonks here (although sometimes I go off on nerd tangents). I really wrestle with this because combined my wife and I make 300K a year. So a Roth IRA isn’t an option. We could get an HSA though at each of our places of employment and stuff money there. Or we could just stuff money from the tax savings into a muni bond fund. In the end I think it comes down to a non financial factors for me mainly - life is fragile. I could be dead before age 59.5. Why pay taxes now? Taxes deferred is taxes saved and time bought IMHO. We chose the Traditional. So thanks for letting us know going against the Dave Ramsey grain has some math behind it.

@jroark101 4 месяца назад

What’s the easiest way to see how much I saved in taxes going the trad route so I can makes I invest that amount?

@MoneywithKatie 4 месяца назад

Multiple your 401(k) contributions by your tax bracket! So if you contribute the max at $23,000 and you're in the 22% bracket, you'd save $5,060!

@jroark101 4 месяца назад

@@MoneywithKatie thank you

@ryanfrank2 3 месяца назад

Does this remain an advantage if you can contribute to a Roth IRA in addition to a Roth 401k?

@MoneywithKatie 3 месяца назад

Nope because you wouldn't have the additional tax savings from the Traditional to invest into the Roth IRA!

@rickygarcia6441 10 месяцев назад

Can you please elaborate as to how Roth 401k contributions are going to get taxed from the top down?

@ImaAHol 6 месяцев назад

By choosing traditional it knocks the contribution amount from the top so by electing to do Roth instead you are essentially paying your highest tax rate

@xXxCh0n1cxXx Год назад

Good video and advice for those whose life situation allows them to invest the difference

@MoneywithKatie Год назад

Thanks, Nephi! I hope you enjoyed. :)

@rolandosouffrain7957 Год назад

This video made my head hurt. Who really invests that othe money and if you make 50k a yr plus this money u already at a high bracket. Too much think and ifs for this strategy. In 30 yrs all I know is I'm not paying any taxes with my Roth 401k and my Roth ira and all the propertys I own in my self directed Roth IRA. Lol. 🤯

@gregoryellis324 Год назад

You completely ignored that anybody who follows your strategy will likely end up in a much higher tax bracket in retirement with RMDs that force them to pay much higher taxes overall.

@MoneywithKatie Год назад

I dig into this in the full episode! It's actually quite difficult for high earners' withdrawals in retirement to eclipse their incomes, unless they work for an extraordinarily long time - we have a workaround for avoiding RMDs as well. You may enjoy the full podcast episode.

@realtalkpersonalfinance4872 Год назад

We cover this in episode 35 on the Real Talk Personal Finance podcast. Cheers!

@TravelingTheWorld1993 Год назад

Katie , great episode. I am investing in the Roth 401K now. Because my state and federal tax rate combined is 19%. We do not know what the tax is going to be in the future. But with the national debt keep climbing , the government only choice is going to be raising taxes.

@brijeshkukreja7411 Год назад

Why not do all the 3? 50% Traditional 401k, 50% Roth 401K and 100% ROTH IRA every year

@nicomyth Месяц назад

And a regular brokerage account (long term capital gains) for a small portion. Once you remove money from a retirement account in retirement, you can't put it back. A brokerage account with some savings can give you some flexibility, especially if you think you may retire early.

@davegalloway4160 4 месяца назад

your assumptions in the video don't include taxes on SS and RMD's

@christinab9133 Год назад

❤❤❤

@traveltirement Год назад

Great analysis and well presented! Like most financial topics, the devil is in the details. 😄

@MoneywithKatie Год назад

Thank you so much! And it sure is in the details - it all adds up!

@jeffvanderhagen8018 Год назад

Is Traditional still better if you don't invest the tax savings elsewhere, like into a Roth?

@MoneywithKatie Год назад

We talk about this in the full episode, but you may be better off with Roth if you're not investing the tax savings!

@Random-yq1wu 11 месяцев назад

Its a mistake not owning any Roth Its a mistake not owning any Traditional

@michaelmayo-vb5fl Год назад

Id avoid all the taxes lol but the retirement plan for that isint ideal 😂😂

@keithmachado-pp6fv 4 месяца назад

Great video. A few issues that could reduce the benefit 1. The extra $500k in the account from tax savings could add some tax which would lessen the savings. 2. More SS could be taxed with traditional vs Roth. 3. If IRA balances are much higher than your example, RMDs could cause IRMAA surcharges. With that said, I agree with the general premise here. One more item is that $1 paid in tax today is worth more than $1 paid in tax many years down the road due to the time value of money, further bolstering your point.

@Thetruth66399 Год назад

How can such a young person bank on quitting one day

@justinshearer8180 Год назад

Roth is way better are you even calculating all the growth that is not being taxed imagine putting in 100K over 20 years and now your portfolio is a million dollars any traditional you are paying taxes on that $900,000 gain or as the Roth none

@tgc789 Год назад

Ya this video has all sorts of omissions to make traditional seem better

@MoneywithKatie Год назад

I would recommend listening to the full episode, as we address your question - the element you're missing is that your Traditional withdrawals are taxed at your effective tax rate, while your Roth contributions are taxed at your marginal rate. In retirement while you're drawing down your pre-tax contributions, you're paying a *much lower effective tax rate* on the money, which is more than offset by the bonus account you accrued by investing your tax savings from the pre-tax contributions. In every bracket with the exception of 12%, you came out net-ahead by making pre-tax contributions to the 401(k) and investing the tax savings somewhere else. Here's the full deep dive if you're interested: podcasts.apple.com/us/podcast/the-money-with-katie-show/id1589146097?i=1000614264275

@tgc789 Год назад

@@MoneywithKatie I think the issue here, and I may have missed it in the actual video is I think you are talking FIRE. I can't see a situation where Roth wouldn't come out ahead with a long time horizon

@tgc789 Год назад

@@MoneywithKatie quick clarification if you can, when you say top marginal rate what happens if I contribute 22500 and are just above the 24%. Wouldn't most of the Roth contribution be 22%

@als2cents679 5 месяцев назад

Your entire argument is based on the fact that you will invest the taxes into a Roth IRA, but what if I could max out both even when doing both Roth?

@brettbly4571 3 дня назад

Unfortunately this video is nonsense. If tax rate s stay the same your total money is the exact same whether Roth or regular 401k. She is double counting the "reinvest the tax savings" which leads to erroneous conclusions. The bottom up v top down tax stuff is also nonsense,ordinary income is ordinary income. It's not like standard is capital gains and Roth is ordinary income or anything.

@charmcrypto824 4 месяца назад

Big shoutout to this video for dropping some serious knowledge on retirement accounts. Traditional 401(k) for the win! And speaking of leveling up your financial game, My Digital Money is making crypto IRAs the new wave. Making retirement planning cool again, one crypto investment at a time!

@StevenBrener Год назад

I thought that if you invest in a 401K you can't also invest in an IRA, like the Roth IRA you were mentioning to invest the tax savings into.

@Random-yq1wu 11 месяцев назад

You can invest in both

@6gsd453 Месяц назад

This was the most confusing BullShit ever!

@IWI-s7c 4 месяца назад

Sorry, but your analysis is incorrect and flawed. It all comes down to this simple reason - you're not making an apples to apples comparison. You're using marginal rates in your initial calculation, but then switching to effective rates later on. Marginal rates will ALWAYS be higher than your effective rate. For a true comparison, you need use marginal rates only.