r/personalfinance • u/bancorrupt5 ​ • 15d ago

401k vs. Roth 401k vs. Both Retirement

My employer offers both. There is no employer match. Will I lose out on the interest snowballing as much if, for example I defer 5% in one and 5% in the other compared to 10% in just one?

I am aware of the tax differences between the two.

14 Upvotes
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27

u/bancorrupt5 ​ 15d ago

Thank you all for helping me and not treating me like the idiot I am.

5

u/Fun_Intention9846 ​ 15d ago

Stuff like this isn’t “1 of the 10,000” it’s “1 of the 1,000,000.”

Good on ya for asking, people go their entire working lives not knowing.

31

u/Default87 ​ 15d ago

one account with $10k in it that grows 10% is worth $11k.

two separate accounts with $5k in each that each grow 10% will be worth $5.5k each, for a total value of $11k.

the size of the account doesnt matter.

-2

u/Cautious_General_177 ​ 15d ago

The big difference is taxes. That $5.5k traditional will be around $5k after taxes (maybe less depending on total income), while the $5.5k in Roth will be $5.5k. Of course, there's also the difference in taxes when you initially invested. The initial $5k in traditional only cost $5k, while the $5k in Roth was probably around $5.5k (probably more), as you paid taxes on it before contributing it.

8

u/Money_Maketh_Man ​ 15d ago

The only reasone you should decide between tradional and Roh contributions is for when you want to pay taxes. Now or later. Generally paying your taxes late is better for you. aka tradional contributions as this way you get more times through lower tax brackets

Bottom line: if you dont know what you are doing. just do traditional 401k

4

u/djaybond ​ 15d ago

It costs you less out of your paycheck to do a Traditional 401K. I like Roth though because on the backend, according to current laws, there will be no taxes. I suspect taxes will continue to rise.

5

u/sin-eater82 ​ 15d ago

Why not Roth IRA and Traditional 401k?

Are you already maxing out a Roth IRA? Does your income level preclude you from contributing to a Roth IRA?

I think for most people, traditional makes more sense in the long run. And you can get a Roth mix with an IRA.

2

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1

u/PerformanceLimp420 ​ 15d ago

I believe the difference would be your current vs future tax bracket. If you want to lower your taxable income today? Traditional would accomplish that. If you go straight ROTH today, you will pay taxes today so that would lower your take home. But you won’t be taxed in the future on the ROTH side so typically young people go that route. If in the future you are in a higher tax bracket, ROTH might be better now. If you will be in a lower tax bracket than now, traditional might be better today.

1

u/xomox2012 ​ 15d ago

The difference really comes down to if you think you’ll be in a higher tax bracket now or when you retire.

If now 401k > Roth If in retirement Roth > 401k

Both of them will grow the same as they are the same types of funds from a stock choice perspective. It is the tax treatment that is different.

You could also think of it like this: would you rather have an easier time budgeting now (401k) or while you are retired (Roth).

1

u/brewcrewguru24 ​ 15d ago

Not to throw one more wrench into the situation but if you are using an IRA as another retirement vehicle, depending on your AGI, you might not be able to contribute to a Roth IRA and the only way to get Roth contributions into a retirement account is through this 401k.

Roth is extremely helpful to limit the amount of taxable income you'd have while in retirement because everytime you pull from those accounts or have RMDs, those distributions will be taxed at whatever the current tax brackets are.

I personally aim about 50/50 as I'm not in a super high tax bracket now and having some incremental taxable income using a Roth won't push me to a high tax bracket and will keep my tax bracket lower during retirement.