That’s a great idea to switch over your contributions from a Roth 401(k) to a Traditional 401(k) in order to help pay off your wife’s student loans faster. This means that the after-tax 401(k) essentially becomes equal to the Roth 401(k)/IRA. If your employer's plan allows it, you may even be able to split your contributions between the two types of accounts. Beware the pro-rata rule. Consistently making Mega Backdoor Roth contributions would have an enormous impact on a young person pursing FIRE! September 6, 2020 September 6, 2020 me In this article, I will discuss why Roth 401k contributions (or Roth 403b or Roth 457) are a better tax optimized strategy than traditional pre-tax 401k (403b or 457) contributions especially if the marginal tax bracket is 22% and less. The central difference between a Roth 401(k) and traditional 401(k) is the tax treatment of your contributions. When you invest in a traditional 401(k), you put in pre-tax dollars, so the more you contribute, the lower your taxable income. Our little office does a 3% match, and I’ve had people work there … 401k is a retirement investment account which you and your company can contribute to. You might even want to have BOTH! This means FREE MONEY! Roth: Roth IRAs do not have a mandatory distribution or withdrawal at any age. 2. Below are examples using a compounding interest formula, the way your money grows in a stock market. Surprising Conclusions. Second, there are tax benefits. The main difference between a Roth 401(k) and … [+] traditional 401(k) is the tax treatment of your contributions. 6d 0. The Roth convention allows you to defer your compensation tax-free, as a … Generally when you convert a traditional IRA to a Roth IRA you pay income taxes on the amount converted, because most people send pre-tax money to a traditional IRA. I'm not a FIRE guy but for me personally, I can see myself waking up one day with 5-6 million in the the traditional and then just calling it quits and retiring/or part time and living a more simplistic life style. PoF@physicianonfire.com. Traditional IRA with pre-tax money and Roth conversions. FIRE Goal: 35 years old with $1.5M NW. Max Traditional IRA. Roth 401k vs 401k: Is Roth 401k better than Traditional Pre-tax 401k? Roth … Kim@Eyesonthedollar says. With a Roth IRA, you save after-tax dollars and your money grows tax-free. If you instead put it into a Roth 401(k), the amount of after-tax money in the retirement account is the full $19,500. Conversions & Recharacterizations Traditional to Roth. But the “Traditional 401k vs. Roth 401k” question is a legitimate one, and one advisors are increasingly likely to deal with in those meetings. If early retirement is the goal it seems that using traditional 401k save taxes now, performing a Roth conversion ladder once retired (minimize taxes later and allow access to money earlier), and tax gain harvesting (essentially free step up in basis later) would make a lot more sense than a roth option now. January 29, 2017 at 1:13 pm . I would disagree with the assertion that the Roth v. traditional is the same in the end. I’ve also heard in the long run the calculation for traditional vs. roth is exactly the same in the end? Reply. Investors make … It appears that the traditional 401k would make sense with my income if I FIRE at 35 and do a Roth Conversion. You … 3. Both have contribution limits of $19,000 for 2019, or $25,000 if you're 50 or over. Not a good plan! Robo-Advisors vs. Discount Brokers; Retirement. For example, with a traditional 401(k), you’ll not only have to pay income taxes on the money you take out, but Uncle Sam is also going to take another 10% on top of that. For most, especially those seeking FIRE, a Traditional 401k makes more sense than a Roth 401k. There are a few surprising conclusions here. However, as we will see in the following questions, the contribution limit to the after-tax 401(k) is much higher than that of the Roth 401(k)/IRA. There are 2 different types of 401k account: Roth and Traditional 401k – each gives you different benefits. 4. Traditional: $5,000 invested once in the stock market where it grows at an average of 7% a year for 30 years. $3M in a 401K does not equal $3M in a Roth IRA. Doctors’ eyes glaze over when talking about this but the distinction is critical. Known as a Roth conversation, it is the taking all or part of the balance of an existing traditional IRA and moving it into a Roth IRA. The traditional, pre-tax, convention allows you to save a portion of your compensation tax-deferred, meaning you don’t have to pay current taxes on the amounts deferred into your retirement plan. The good news is that when it comes to a traditional vs. a Roth 401(k), you don't necessarily have to make an all-or-nothing choice. Essentially the same calculation as with the Roth 401(k). Individual retirement accounts (IRAs) are a key part of most retirement savings plans. The reason backdoor Roth has not been a hot topic in FIRE ... backdoor Roth explained in just a few steps. Then you would be withdrawing $16k from traditional, $16k from taxable, and $8k from Roth. The Beginner’s Guide To Saving For Retirement; How Much Do You Need To Have Saved For Retirement; How Much Should You Contribute To Your 401(K) How To Optimize Your 401(K) How To Roll Over Your 401(K) Roth IRA Or Traditional IRA; IRA vs. 401(K) Reviews. ROTH IRA VS 401K // Pros & cons of each, and how to choose one over the other. I know the consensus is traditional 401k contributions while in max earning/top marginal rate years. At an average of 7 % a year for 30 years a IRA... 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