| So first things. Just like there are traditional and Roth IRAs. there are traditional and roth 401ks. Same standards apply, traditional 401ks are pre-tax and you pay income tax on withdrawals, roth 401ks are post tax and you wont pay tax on withdrawals. Traditional 401ks can easily be rolled over into traditional 401k (but you most likely wont want to do this, as I'll get to later) and Roth 401k's can easily be rolled over into Roth IRAs (no harm in this unless the 401k custodian has some really good funds available to you). An important thing to understand about a traditional vs roth calculation is that when you put money into a traditional 401k/IRA you save at your marginal rate (vs putting the same money into a Roth). i.e. if your federal rate is 28% and your state rate is around 10% (say you live in NYC or CA), you save 38%. In retirement, while you would be paying taxes on the withdrawal, the taxes will be spread through every bracket, not just your highest hence its very likely that its going to be less than 38% in total taxes even if tax rates go up in the future. Further, you can have a significant level of control over your future taxes as can move to a state that has no taxes in retirement, a flexibility that you might not have during employment. If you're single and make over 133K you are ineligible for the Roth in a normal manner. There's a good chance as a software engineer you'll reach this level at some point. This is where the "back door" roth contribution comes in and why I would reccomend not rolling over a traditional 401k into an IRA There is no income limit on contributing to a traditional IRA (though there are limits to the "pre-tax benefit", but that and there's no income limit to convert a traditional IRA into a Roth, you just have to pay taxes on what you haven't paid taxes on already (i.e. either the pre-tax benefit you got or the growth since you put it in). This is a free way for those with higher incomes to gain the benefits of roth contributions (especially as those who are ineligible to contribute to a Roth are already paying taxes on their traditional contribution. But this also goes to why you probably don't want to convert your traditional 401k into a traditional IRA at a later date. It will prevent you from benefiting from this backdoor contribution mechanism. So with this said, for me, my 401K is traditional and my main IRA is roth. I keep one traditional IRA opened to do the backdoor, but as soon as the contribution clears it is immediately converted into my roth. This is a lot to take in and its good that you are thinking about these things today. |