Traditional 401k vs Roth401k

Please note that I probably really need a 401K book for dummies. I have 401k at my job. I only do 3% yet they match up to 6% ( and no I have not taken advantage of it...yet. I know, I know, it's free money. I have just learned that my employer also offers Roth401K which I was told is a better option by some people. I called the financial company today with a lot of questions. I guess my concern with going to 6% is the bigger chunk that will be taken out of my check even though I know it's for my own good but I don't want to struggle either. Aside from that, I read that if you're opening the Roth late in life, you need to be sure you'll be able to have it for five years before starting to take distributions in order to reap the tax benefits. Well, I'm 58 so is it even a good idea to switch now? I was told I could do 3% for the traditional and 3% for the Roth401K or I could do the 6% totally with what I have or change to the Roth401K. If anyone has any feedback please use little words.

Nutcracker Nutcracker
Dec '21

I don't really see an advantage to a Roth 401K in your situation. You are better off with the tax savings now if that would allow you to contribute 6%, which you should find a way to do if at all possible.

Dec '21

If 6% would make things tight for you financially, go for 4 or 5%. Every little bit socked away for your retirement will help.
Also, if you're looking to talk to someone for advice, Robyn at Edward Jones is very helpful to me. She explains stuff so that I can understand.

Lonesome Dove Lonesome Dove
Dec '21

There are so many factors here. Being 58 are you going to file for SS at 62 or FRA of 66 or so, or even later? You pay taxes on any contribution to a Roth now where a regular 401K is removed from your pay before taxes which lowers your tax on earnngs now. With a Roth you can withdraw at retirement paying no taxes on the distribution which may be worth considering if your income in retirement is higher. The 401K can sit there until you are 70 1/2 before they make you take a distribution but it is taxed whenever you take it.So you have to decide what your retirement will look like and when to help you with the decision.

Another important piece of information is to know what other retirement streams you may have. For example, any other 401K funds already saved, pension information, etc.

Retirement is a big puzzle, and knowing what all the pieces are will help you solve it.

Dec '21

Contact a Certified Financial Planner

Expect to pay for the time you spent with them. By doing so they are working for you and not for themselves. Have them look at your complete financial plan of all revenues and savings you have. I did this when I was 40 and retired at 58 and was living the life before Covid hit!

Not In NJ Anymore Not In NJ Anymore
Dec '21

Being @58, you're answer is simpler than all those 401k, IRA, Roth books/articles and/or CFPs & advisors to me - since all that advice is based on those who HAVE TIME [at least more than 5 to 10 to 15+ years] to make those decision... to move the needle end up with a Larger piece of pie at the end.

So, in my opinion, assuming your going to 'retire' or 'minimize your work' at 62 [since you can't earn more than $18,960 or have to pay some of your SocSec$ deducted back], and know you can pull your money out of your 401k once >59 1/2 without penalty, the easiest is to:
1) CONTINUE with your 3% contribution (as you said is the max you wish to contribute)
2) DON'T bother start with a ROTH IRA (due to its 5yr rule & contribute with after tax dollars that you definitely know will take "a bigger chunk taken out of [your] check"
3) AND try steer away from all those "Better" 401k retirement schemes or delaying taking your Social Security till your FRA or 70.

Live life with the numbers you have and enjoy it! Chasing "lotto" dreams later in life winds up costing more out of you than adding years or more happiness in the end.

Do the 6% IRA. It is pre-tax so it will not be 3%, less than that. Regarding Roth, you can do this on your own unless they match? And it looks like if they offered a Super Roth that would be too much for you anyway. You can always do a Roth on your own with after tax dollars.

Some people started calling it a Roth IRA but it sounds like your company allows you to contribute up to a certain amount in either Pre-tax or Roth 401k contributions and that they will match up to 6% (Is it dollar for dollar or a % up to 6%). Presuming they will match regardless of the type of contribution (pre or Roth). With that said:

1 - Contribute what you can even if it's not the full 6% going up to 4% or 5% could really help but calculate what 6% would look like. 6% Pre-tax may not be as a big a chunk as you think and anything you can invest and earn on will help.

2 - 5 year rule for Roth contributions - I'm not familiar with that so not sure if it impacts you. Who's the 401k's administrator? They may be able to explain rules around that although they likely won't give you advice.

Good luck.

bonv25 bonv25
Dec '21

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