compounding interest question 401k?
I am debating if its better to do 5% roth or just do traditional and do more like 8% or more. I only ask because of the compound and taxes difference, which is better in long run? my manager said he is doing traditional at 10% he said it will grow faster and that he doesn't mind getting 30% of it cut at retirement because the compounding made it grow so big. I know with the Roth the earned interest is yours to keep. let me know your experience and knowledge. Thanks
- StephenWeinsteinLv 72 months ago
It depends on what the tax rates will be when you are taking out the money (after you retire), so you can't really be sure. If you are choosing between putting 5% into a Roth or 8% or more into traditional, and you're definitely going to keep it in until you're at least 60, then I would say the traditional is better, because you'll be putting 60% more into it, and I don't think your tax rate when you're retired will be high enough to offset that. But if you might take out early, like age 50, then go with the Roth, because the penalties aren't as bad.
- A HunchLv 72 months ago
Your manager has no clue how compounding "interest" works. There isn't even "interest" associated with either of these. It's compounding investments.
You need to look at your income and the current benefit of reducing your taxable income:
- If your current income is $16000, your income taxes are basically nothing so putting it into a traditional 401K saves you nothing now and costs you in the future.
- But if your income is $120,000, you contribute 8%, that will save you $2400 (effective fed state tax rate = 25%) in taxes this year; if your effective tax rate is less than 25% when you pull the money out = it's not traditional is not a bad choice.
- Anonymous2 months ago
5% nor 8% is guaranteed and I don't understand the context of what you are talking about.
- Anonymous2 months ago
Your manager is an idiot and Roth is the best free lunch you're ever going to get.
Unless you plan to be poor in retirement, pay the tax now and enjoy a tax-free retirement.
Pre-tax retirement accounts are subject to required minimum distributions based on your life expectancy. So even if you don't NEED to withdraw the money, you are REQUIRED to - which means a bigger tax bill than you might otherwise incur.
And those required minimum distributions may also increase your medicare premiums because medicare premiums are based on taxable income. Invest in Roth accounts and your taxable income is ZERO even if you have millions.
And there are HUGE estate planning benefits to Roth accounts too. That is if you plan to die with money and hope to have some to leave to someone else.
You can put up to $19,500 per year into your Roth 401k and you should take advantage of every nickel you can afford to put in there.
Start now while you're young. If you understand the time/value of investing you know that how much you do NOW will have a far bigger positive impact on your wealth building than what you do when you're 35 or 45 or 55.