[codegeek]

It's a no-brainer really. Start the 401K asap. It will only help you. Roth is good as an additional option but regular 401K has lot of benefits including higher contribution amounts, employer matching benefit (if any) and why pay a higher tax now than when you will retire since your tax rate will most likely be lower in retirement. By contributing to a 401K, you reduce your taxable income for the year as well as an added benefit.

Max out the 401K first before you think of anything else. Who cares if you change jobs frequently. You can always do a roll over into an IRA with providers such as Fidelity or Vanguard for free.

[Someone1234]

This is great advice.

Just want to tack on for the OP (or anyone else): Look at the fees. The fees will destroy your retirement. Both the individual fund fees and the account management fees.

For example on my 401K provider they have funds with fees ranging from 0.19% (index fund) up to 0.58% (fully managed fund). You'd think that the fully managed funds outperform the index funds which makes the fees worthwhile, but actually the reverse is true (that the index funds have outperformed the managed funds historically).

If you don't manually select which funds to invest in they put a lot of your money into the more expensive funds.

[codegeek]

Yep another great point. There was another thread about funds question yesterday and I said the same thing. Almost all "managed" funds offered in retirement plans don't even beat S&P 500. So you are probably better off putting most of the contribution in an index fund and just enjoy the "meager" S&P 500 returns. The expense ratio etc. are so much lower for these index funds.

[wakkaflokka]

I just yesterday realized the difference between a Roth 401k and a Roth IRA... because I hadn't been contributing to my Roth 401k assuming it had the same Roth IRA income limit. But it doesn't. Oops. Would you recommend a traditional 401K or Roth 401k? I always assumed that if you weren't going to reinvest the immediate tax savings from a traditional IRA, then a Roth 401k is the way to go.

[mywittyname]

If you're a high income earner with low deductions: 401k.

If you have a fairly low AGI (thus low overall tax rate): Roth.

If you'll need to withdraw the principal before retirement: Roth (you can withdraw principal penalty free from a RothIRA).

If your tax rate will remain the same for withdraw as it does now, it doesn't really matter since the after tax value is the same whether you take out taxes now or later (i.e., tax_rate x (principal^gains) = (tax_rate x principal)^gains.

[jaredsohn]

>If your tax rate will remain the same for withdraw as it does now, it doesn't really matter since the after tax value is the same whether you take out taxes now or later (i.e., tax_rate x (principal^gains) = (tax_rate x principal)^gains.

Assuming the money you invest goes up in value, aren't you better off in this scenario with a 401k over a Roth so that you can make gains on the money that would go toward taxes? You still have to pay taxes on the principal and the gains but compared to paying taxes on the money immediately, you're in effect borrowing money from the government at 0% to gamble with and keeping a portion of the return.

(Similarly, the expression tax_rate x (principal^gains) = (tax_rate x principal)^gains isn't true (beyond not being the right expression)).

.7 * (100000^1.07) != (.7 * 100000)^1.07 (assuming paying 30% in taxes and making 7% gains)

[berberous]

When people say it's the same, they are assuming you are investing the tax savings from using a traditional 401k. In other words, you could invest $10,000 in a Roth 401K, or $10,000 + ($10,000 * marginal tax rate) in a Traditional 401k. Then the numbers work.

[jaredsohn]

Another difference I just thought of (which may have been what I was originally thinking of but I said it wrong.)

I think an advantage of a Roth is that you don't have to pay tax on the money you earn via investing. For example, if your money in a Roth doubles then you only need to pay tax on the half of it that was there when you added money to the fund. Whereas for a traditional 401k you pay tax on money as it comes out which includes money earned via the investment.

[jaredsohn]

I made my prior (incorrect) analysis based on the math from this expression, despite saying the expression was wrong:

(i.e., tax_rate x (principal^gains) = (tax_rate x principal)^gains.

Gains should be multiplied rather than an exponential factor here. (I think this expression was created because gains are calculated as roughly (1+rate)^(number years) but at this higher level it should just be multiplied by the tax rate and the principal.

[jrs235]

> If your tax rate will remain the same for withdraw as it does now, it doesn't really matter since the after tax value is the same whether you take out taxes now or later (i.e., tax_rate x (principal^gains) = (tax_rate x principal)^gains.

I would split 50/50 in this case to hedge against what and where tax rates/brackets might be in retirement.

[wakkaflokka]

Not to sound stupid, but I have the option for a 401k Traditional vs 401K Roth.

When you say 'Roth', do you mean Roth 401K or Roth IRA? This is what had me confused the entire part of a year - Roth IRA vs Roth 401k.

[jrs235]

>If you have a fairly low AGI (thus low overall tax rate): Roth.

>If you'll need to withdraw the principal before retirement: Roth (you can withdraw principal penalty free from a RothIRA).

I'm not the original commenter but in regards to the advantages and situations mentioned, they apply to both Roth IRAs and Roth 401k's.

Although, check your company's plans as to when you can take early distributions. If you can't unless you retire or leave the company then "If you'll need to withdraw the principal before retirement: Roth (you can withdraw principal penalty free from a RothIRA)." might be moot. I know with my companies plan I don't believe I can even withdraw my Roth 401k contributions without quitting or retiring. With most Roth plans you are allowed to withdraw your contributions tax and penalty free, but you won't be able to "re-add" above and beyond the yearly annual contribution limits, which is why you shouldn't withdraw them.