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Fund Roth 401k or Roth IRA first?
Posted on 1/12/25 at 3:02 am
Posted on 1/12/25 at 3:02 am
This post was edited on 2/9/25 at 2:46 am
5
Posted on 1/12/25 at 8:10 am to Kraut Dawg
Roth. Give it the most time to grow tax free that you can.
Posted on 1/12/25 at 8:53 am to Kraut Dawg
quote:
in a very general view, is it more beneficial to fully fund one first before the other?
Not really, most would say invest the Roth IRA first, obviously after getting the matching in your 401k. Just for the diversification outside of your employer plan.
Usually your IRA is through someone like Fidelity or Schwab, which gives you more flexibility on funds etc.
Outside of that there is not a whole lot of differences except in early withdrawals, which they are some slight differences that favor the Roth IRA again.
But in your scenario where you are maxing both, not sure this is anything I would be too concerned about and the differences are so minor I would just do what it is easiest.
This post was edited on 1/12/25 at 8:54 am
Posted on 1/12/25 at 9:04 am to Kraut Dawg
Get employer match first.
Google “Money Guy order of operations” and should provide clarity for 90% of folks.
Google “Money Guy order of operations” and should provide clarity for 90% of folks.
Posted on 1/12/25 at 9:57 am to Kraut Dawg
Since you are 50 and you already have seven figures, I would suggest you consider the possibility of early retirement.
Rule of 55 come into play. Rule of 55 affects only the money you have in your employers 401K, not IRA, and then only the employer you leave when you are 55, not an old 401K, but it allows you to get your money penalty free at age 55.
Consider that if you withdraw at 55 there well be no taxes on Roth contributions, but withdrawing the growth would be taxed until you are 59.5
Consider that Roth might not be your best choice depending on how much of your current balance is Roth and how much is deferred. It makes no sense to pay 24% Federal tax now to avoid 12% Federal tax in retirement. Figure out what tax rate you are likely to have in retirement based on the best data you have and decide whether you need more Roth or Deferred assets.
Consider that you can withdraw contributions to a Roth IRA penalty free before age 59.5 but cannot from a 40`K except under the Rule of 55. You can withdraw Roth IRA conversions after they have been in the Roth for 5 years. Many rules on this, so look it up, but you might want to convert some IRA assets to Roth assets if you need to build some assets to draw on in some of these "tweener years".
Stocks build wealth. Cash doesn't.
Rule of 55 come into play. Rule of 55 affects only the money you have in your employers 401K, not IRA, and then only the employer you leave when you are 55, not an old 401K, but it allows you to get your money penalty free at age 55.
Consider that if you withdraw at 55 there well be no taxes on Roth contributions, but withdrawing the growth would be taxed until you are 59.5
Consider that Roth might not be your best choice depending on how much of your current balance is Roth and how much is deferred. It makes no sense to pay 24% Federal tax now to avoid 12% Federal tax in retirement. Figure out what tax rate you are likely to have in retirement based on the best data you have and decide whether you need more Roth or Deferred assets.
Consider that you can withdraw contributions to a Roth IRA penalty free before age 59.5 but cannot from a 40`K except under the Rule of 55. You can withdraw Roth IRA conversions after they have been in the Roth for 5 years. Many rules on this, so look it up, but you might want to convert some IRA assets to Roth assets if you need to build some assets to draw on in some of these "tweener years".
Stocks build wealth. Cash doesn't.
Posted on 1/12/25 at 9:48 pm to CharlesUFarley
If you have the funds, put in only the minimum to get corporate matching then max out roth for both 1r1 and 401k.
In ten years, the monies you have paid taxes on over the next 10 yrs will grow and grow tax free and you will be better off for it, especially if you don't take them out at 60.
In ten years, the monies you have paid taxes on over the next 10 yrs will grow and grow tax free and you will be better off for it, especially if you don't take them out at 60.
Posted on 1/12/25 at 11:00 pm to CharlesUFarley
This post was edited on 2/9/25 at 2:46 am
Posted on 1/13/25 at 8:04 am to Kraut Dawg
I would always do IRA first (after getting match in 401k) because my IRA does better as it has better investment options.
Posted on 1/13/25 at 2:01 pm to CharlesUFarley
quote:
It makes no sense to pay 24% Federal tax now to avoid 12% Federal tax in retirement.
How do I sign up for that program?
Posted on 1/13/25 at 3:14 pm to theRealJesseD
quote:
How do I sign up for that program?
You live in a lower tax bracket. It is pretty easy.
Posted on 1/13/25 at 5:36 pm to theRealJesseD
quote:
How do I sign up for that program?
If you are married filling jointly, under current tax rates, the 12% tax bracket goes to $96,950 and the standard deduction is about $30K. This means that you would have to have $126K in combined income before you'd pay more than 12% federal.
You'd probably need $3 million in tax deferred assets to get there without SS, maybe only $1.5 million with SS, so you have to look at your combined income in retirement. You also have no idea what the tax rates will be then, but it's reasonable to believe the bottom rates will be very similar to today.
That's why it might be worthwhile to maximize the traditional IRA until you get close to that. The Roth has additional advantages that go beyond just the tax savings, but for most people, they are paying 22%+ taxes now to save 12% taxes later.
For me, at least, about 80% traditional/20% Roth seems better, so you get some of the flexibility of the Roth but the tax advantages of the traditional, if that aligns with your tax situation. The OP mentioned kids, so he might have additional considerations.
Posted on 1/13/25 at 6:20 pm to CharlesUFarley
quote:
but for most people, they are paying 22%+ taxes now to save 12% taxes later.
Yeah too many people think Roth 401k is automatically better without understanding the math.
Lets even say a Roth 401k is better for someone because they will have a higher effective tax rate in retirement vs their marginal rate today.
There is still an advantage by doing traditional 401k now then start yearly Roth conversions once retired. Though you would need other funds to live on the first 5 years until the first conversion can be withdrawn.
Posted on 1/13/25 at 7:44 pm to CharlesUFarley
Charles thank you for the great reply. I was being facetious, but more towards my skepticism that tax rates will be this low in the future (in my case - 25 years until I reach current RMD age)
Posted on 1/15/25 at 8:56 am to KWL85
Just noticed the downvotes. Why?
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