Help Allocate My 401(k)

[Dewey_Finn]

Thanks. I’ll have to think about that. For me, the only substantial fixed income I expect is Social Security.

[ThisUsernameIsForbidden]

@UTejas

In general, the suggested way to contribute is:

1. 401(k) until you hit the employer match.
2. Traditional or Roth IRA until you hit the contribution limits
3. 401(k) past the employer match until you hit the 401(k) contribution limit
4. Taxable account

So since your employer match is $0, skip directly to step 2. In an IRA you have more freedom to avoid fees and select the funds in whatever allocation you so choose.

As has been mentioned, a traditional IRA lets you avoid taxes now in order to pay taxes in retirement on your withdrawals. With a Roth, you’ll pay the taxes now in exchange for tax free growth and tax-free withdrawals later. There are some subtle points aside from that. One subtle point is that since you’ve already been taxed on the contributions to the Roth, so you can withdraw them at any point without penalty, whereas you have not been taxed on a traditional IRA’s contributions, so you have to pay taxes and a penalty if you try to withdraw them later. There are a few other points, as well. In general, if you are young a Roth will probably be better for you in the long run, but you should really check the numbers to be sure.

Good summary.

I imagine in some situations it may be better to invest in a Traditional before a Roth (not including the matching) due to different tax percentages. Let’s assume a situation where the retiree’s income is below that magic number where only 10% is taken out in taxes. When he’s younger, however, that income would have been taxed at 15%, if he had invested in a Roth. So we have a bit of math to do:

1. Invest 5500 per year now in a Traditional tax-free and 10% rate later.
2. Invest 5500 per year now in a Roth at 15% and no taxes later (on contributions).

I need to make a list of factors to figure out the present (future) worth for each of these, but I’m sure someone somewhere has done it.

[jasg]

The thing to remember about Roth vs Traditional IRA is the taxes on the growth.

Consider $5500 investments in each, that grows to $55,000 in retirement.

For traditional you might pay 10% tax on $55,000 during retirement.

For Roth you might pay 15% tax on $5500 while working, nothing in retirement on the $55,000.

[ThisUsernameIsForbidden]

@jasg

The thing to remember about Roth vs Traditional IRA is the taxes on the growth.

Consider $5500 investments in each, that grows to $55,000 in retirement.

For traditional you might pay 10% tax on $55,000 during retirement.

For Roth you might pay 15% tax on $5500 while working, nothing in retirement on the $55,000.

Roth seems like a no-brainer if there is no matching then, thanks.

[jasg]

Another aspect of a Roth is that some who are highly compensated can exceed the income limits.

However, there is a “Backdoor Roth” approach that can let them contribute.

[Bill_Door]

@ThisUsernameIsForbidden

Roth seems like a no-brainer if there is no matching then, thanks.

With those data, sure. But what if the tax on the $5,500 while you’re working is 28%, and you only manage to triple your investment to $16,500 instead of multiplying it by a factor of ten? A lot depends on the age of the investor. The younger you are, the more benefit to the Roth. You have more years for the tax free growth to accumulate, and you are probably in a lower tax bracket. Hell, I was fifty before the Roth was invented, so have minimal post-tax retirement funds, just what I get after I max out my 401k, and one year I set up an IRA and accidently ended up over the income limit. I converted that to a Roth via the “backdoor” workaround.