This article applies whether you have a 401k, 403(b), 457, TSP etc.  Part of the decision comes down to your household tax situation both now and what it may be in the future.  

Access to 401k

If you have a 401k then you automatically have access to the traditional option.  That is the default option. The roth option is becoming more popular in employer retirement plans.

 

Traditional and Roth 401k Similarities  

  1. Both are types of workplace retirement accounts with the same contribution amounts.  As of 2019 you can contribute up to $19,000. Add another $6,000 if you are 50 or older.  The amount is combined so whether you choose only roth or you choose both.
  2. Both options provide you the ability to receive a match.  The match doesn’t count towards the amount you can contribute up to (i.e. 19,000).  Therefore, if you are under 50, contribute up to the max and your employer matches you with another $6,000 that would give you $25,000 for the year.  The matching money from the employer goes to the traditional amount regardless of what you are contributing to.
  3. The same investment options that you have available to you would apply for both

 

Traditional and Roth 401k Differences

How much should I Invest in my 401k?

At least up to the matching money the company is offering.  That is free money!  After that it depends on your family/individual situation.  Do you have high interest rate debt (i.e 6% or higher), are you investing money outside in a Roth IRA, and/or is your significant other contributing money?  

As a household I would be investing a minimum of 10% with the goal of getting to at least 20%.  With the understanding that depending on what you are doing now this isn’t going to just happen overnight.  When you get a raise increase the amount.  Track your spending and see where your spending too much and invest the difference.  Small incremental changes over time will make a BIG impact over the long-term! Where to find that “extra money”.

Contribute to a Roth or Traditional 401k or can I do both?

Contributing to roth and/or traditional comes down to looking at your tax situation.  Both now and trying as best as we can to project what our tax situation may look like in the future.  A general rule of thumb I use is if you are in the 12% marginal tax bracket or below go roth. If you are in the 22% or above go traditional.  If you are on the border of having a little taxed at 22% may do both.

 

Another way to look at it is:  

Single person – $55,000 and under go Roth.  Over $70,000 go Traditional.  In between those two may consider a little of each.  

Married Filing Jointly – $110,000 and under go Roth.  Over $140,000 go Traditional.  In between may consider a little bit of both depending on how much you are both contributing.

 

 

Again this is a rule of thumb and individual circumstances can change things.  

 

In the example, this person is being taxed a portion at 22%.  By contributing to the traditional option you would reduce the taxes at the 22% dollar for dollar.  Contribute $5,000 then only $3,325 is taxed at 22%. Contribute $8,325 then nothing is taxed at 22%.  Then the rest I would put in the Roth bucket.

 

Example: A single person makes $60,000.  Makes no contributions to retirement account.

$12,200 (standard deduction) is not taxed 0%

$9,700 is taxed at 10%

$29,775 is taxed at 12%

$8,325 is taxed at 22%

12,200 + 9,700 + 29,775 + 8,325 = 60,000 gross pay

Total taxes paid = $970 + $3,573 + $1,831.50 = $6,374.50

 

Same Example Except this person contributes $12,000 (20% of gross income)

*about $8,325 goes to traditional and rest goes to roth

$12,200 (standard deduction) is not taxed 0%

$9,700 is taxed at 10%

$29,775 is taxed at 12%

$0 taxed at  22%

Total taxes paid = $970 + $3,573 = $4,543 ($1,831.50 less by contributing to Traditional)

 

*Make sure to take into account any credits you may have for example have a child(ren) in the home would slightly change the situation.