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rated:
Hi All,

I work for a company that offers both Traditional and Roth 401k for the employees.

I have always been contributing to Traditional 401k so far. Have 520K in Traditional 401k and am 46 years old now. I am thinking if it is a good idea to put in Roth 401K for few years now if paying taxes now is not an issue?

Thanks all in advance.

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rated:
seethalu said:   Hi All,

I work for a company that offers both Traditional and Roth 401k for the employees.

I have always been contributing to Traditional 401k so far. Have 520K in Traditional 401k and am 46 years old now. I am thinking if it is a good idea to put in Roth 401K for few years now if paying taxes now is not an issue?

Thanks all in advance.



This has been discussed ad infinitum on FW.  In my opinion the simplest bottom line is:

If you think you'll be in a higher bracket at retirement (or if you think taxes will increase in general), then YES, pay taxes now.  Go for the Roth 401K.

If you think you'll be in lower bracket at retirement (or if you think taxes will decrease ingeneral), then NO, don't pay the taxes now.  Go for the traditional 401K.

If you'd like to hedge your bets, do both.

rated:
Depends

rated:
phisher4 said:   If you'd like to hedge your bets, do both.
 

  
And FWIW, your company match always goes into the traditional, pre-tax bucket. So you automatically hedge by contributing to Roth and receiving the match as traditional.

rated:
My wife's employer offers a Roth 401k but it has some goofy withdrawal restrictions. So we avoided it.

Can you / do you contribute to a Roth IRA?

rated:
if you are in the 25% or higher tax bracket including state, it is usually a better idea to use traditional.

rated:
Looking4morecents said:   My wife's employer offers a Roth 401k but it has some goofy withdrawal restrictions.
 

  
Can you elaborate? I thought goofiness in 401(k)s was pretty much eliminated through regulation, so I'm curious what they've come up with.
 

rated:
doveroftke said:   
Looking4morecents said:   My wife's employer offers a Roth 401k but it has some goofy withdrawal restrictions.
  
Can you elaborate? I thought goofiness in 401(k)s was pretty much eliminated through regulation, so I'm curious what they've come up with.

  I've seen plans with class B shares, that have a back-end sales charge. The administrators at those companies should be fired.

rated:
if you max out you can put more in a roth 401k than a regular.

rated:
umcsom said:   if you max out you can put more in a roth 401k than a regular.
  Please elaborate.  The contribution limit for both traditional 401(k) tax deferred and Roth 401(k) is the same amount. 

rated:
seawolf21 said:   
umcsom said:   if you max out you can put more in a roth 401k than a regular.
  Please elaborate.  The contribution limit for both traditional 401(k) tax deferred and Roth 401(k) is the same amount. 

18k post tax is more than 18k pre tax.

rated:
For most people with a decent salary, the traditional 401k is the way to go. (Defer taxes now while they are high)

rated:
doveroftke said:   
Looking4morecents said:   My wife's employer offers a Roth 401k but it has some goofy withdrawal restrictions.
  
Can you elaborate? I thought goofiness in 401(k)s was pretty much eliminated through regulation, so I'm curious what they've come up with.

  Let me start by saying this is a TSP account.
~~If you retire at 56 and begin taking TSP withdrawals, your Roth withdrawals will have the portion of them that represents earnings taxed until you reach 59 1/2. You are absolutely correct that TSP withdrawals be “proportional”, meaning that anything you take from the TSP will be taken out of both Traditional and Roth balances based on the percentage of your total TSP balance that they both represent. One option available to you is that of not accessing your TSP until 59 1/2, taking income from other sources like taxable accounts until you reach 59 1/2.

Source, http://www.fedsmith.com/2015/04/21/penalties-for-withdrawing-fro...

rated:
I am in the same situation where my company provides traditional 401K and Roth 401K. I was contributing to both and found that 18K is the maximum you can put away combined.
I THINK (and would love somebody else to chime in) you can put away 18K into 401K AND 5K to Roth IRA (if you have a separate accounts). This would make more sense to me and I will probably be looking into doing this separately. Can anyone confirm this?

Despite what you do the key is to contribute enough to 401K so that you take advantage of company's match.

rated:
WiseScorpioGirl said:   I am in the same situation where my company provides traditional 401K and Roth 401K. I was contributing to both and found that 18K is the maximum you can put away combined.
I THINK (and would love somebody else to chime in) you can put away 18K into 401K AND 5K to Roth IRA (if you have a separate accounts). This would make more sense to me and I will probably be looking into doing this separately. Can anyone confirm this?

Despite what you do the key is to contribute enough to 401K so that you take advantage of company's match.

  I think you may be confusing Roth 401k with IRA.  Two separate things.  401k and IRA can each be either roth or traditional.

You're allowed a combined limit of 18k into 401k(or 403b) Traditional and Roth.  And you're also allowed $5500/person limit into an IRA account, which can also be traditional or roth.

rated:
WiseScorpioGirl said:   I THINK (and would love somebody else to chime in) you can put away 18K into 401K AND 5K to Roth IRA (if you have a separate accounts).
 

  
Looks like you're using last year's numbers for the IRA, but yes, you can save in both types of accounts. They are independent of each other (except for a few income phase-out rules that don't apply to most people).

You can save up to $18k per year in 401(k) accounts and $5.5k per year in IRA accounts per person in whichever combination of Roth or traditional you choose.

rated:
Bend3r said:   
WiseScorpioGirl said:   I am in the same situation where my company provides traditional 401K and Roth 401K. I was contributing to both and found that 18K is the maximum you can put away combined.
I THINK (and would love somebody else to chime in) you can put away 18K into 401K AND 5K to Roth IRA (if you have a separate accounts). This would make more sense to me and I will probably be looking into doing this separately. Can anyone confirm this?

Despite what you do the key is to contribute enough to 401K so that you take advantage of company's match.

  I think you may be confusing Roth 401k with IRA.  Two separate things.  401k and IRA can each be either roth or traditional.

You're allowed a combined limit of 18k into 401k(or 403b) Traditional and Roth.  And you're also allowed $5500/person limit into an IRA account, which can also be traditional or roth.

  Yes sorry I have Traditional 401K AND ROTH 401K which are capped at 18K.  So if i were to put 18K into 401K, can I have a separate Roth IRA account and put away 5500 in addition to 18K?

rated:
the 401k and the ira are separate, yes you can contribute to both.

the 401k deductions must occur by Dec 31 from your paycheck.  The IRA contribution must occur between Jan 1 and the April 15th/ tax due date for the year.  (This means you can make two years' contributions to an IRA at the same time if you are making the contributions between Jan and April.  The custodian has you indicate which year the contribution is for).

rated:
dukerau said:   
seawolf21 said:   
umcsom said:   if you max out you can put more in a roth 401k than a regular.
  Please elaborate.  The contribution limit for both traditional 401(k) tax deferred and Roth 401(k) is the same amount. 

18k post tax is more than 18k pre tax.

  This.  and if you look at the numbers it can be significantly more depending on your tax rate.  Others will say that in your high income tax years is the time to be traditional.  You should be able to put close to 30k pretax away in a roth at high income tax rates.
Traditional
18k pretax at 4% annual for 30 years is approx 58,xxx. pretax
Roth
30*.6=18
18k aftertax at 4% annual for 30 years is approx 58,xxx taxes paid.

Funny thing though is this
30k pretax at 4% annual for 30 years is approx 97,xxx pretax
97*.6= 58,xxx
However you are not being compensated for unknown tax risk.  I have a very strong feeling taxes aren't going down anytime soon.  But I would have bet on interest rates rising by now too.  My tax bracket will most likely not change in retirement if all money is pretax.

The key is just to save as much as you can and you will be fine.
 

rated:
would never choose to pay 30-40% taxes on my income now when i don't t have to. i expect to be in a lower average tax bracket in retirement so traditional is clearly the way for me to go.

rated:
I agree, psychtobe, but there's a real risk that tax laws and rates will change by the time of withdrawals so that they'll be taxed more than the would be if you were in retirement now. I'll be surprised if it gets to 30-40%, but I think the gap will shrink and the Roth offers some flexibility that traditional does not. So I've been directing a small part of my 401k to Roth (and also maxing out Roth IRA contributions).

I don't stress about it much - umcsom's last line has the important point. Anyone paying attention to how we direct our maxed out tax-advantaged savings is probably going to be in great shape for retirement.

rated:
doveroftke said:   Looks like you're using last year's numbers for the IRA, but yes, you can save in both types of accounts. They are independent of each other (except for a few income phase-out rules that don't apply to most people).

You can save up to $18k per year in 401(k) accounts and $5.5k per year in IRA accounts per person in whichever combination of Roth or traditional you choose.

Just to clarify this statement, if you are covered by a retirement plan at work, single taxpayers can only fully deduct their traditional IRA contributions if their MAGI is $61,000 or less (the deduction is fully phased out at $71,000); married filing jointly can only fully deduct their traditional IRA contributions if their MAGI is $98,000 or less (the deduction is fully phased out at $118,000). These are the 2015 figures: https://www.irs.gov/retirement-plans/2015-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

Single taxpayers may not make full Roth IRA contributions if their MAGI is equal to or greater than $117,000; married filing jointly may not make full Roth IRA contributions if their MAGI is equal to or greater than $184,000. These are the 2016 figures: https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2016

If you are above the Roth IRA income limits, you may still be able to contribute to a Roth IRA through a "backdoor Roth IRA." If people don't know what it is, they need to google for it and plenty of detailed articles will come up.
  

rated:
SlimTim said:   I agree, psychtobe, but there's a real risk that tax laws and rates will change by the time of withdrawals so that they'll be taxed more than the would be if you were in retirement now. I'll be surprised if it gets to 30-40%, but I think the gap will shrink and the Roth offers some flexibility that traditional does not. So I've been directing a small part of my 401k to Roth (and also maxing out Roth IRA contributions).

I don't stress about it much - umcsom's last line has the important point. Anyone paying attention to how we direct our maxed out tax-advantaged savings is probably going to be in great shape for retirement.

The tax reform risk is actually far greater for Roth accounts, as you are paying today's tax rates, which for upper income taxpayers have gotten to be quite high, based on the promise that the distributions will be tax free. That promise can easily be tinkered with, by instituting, for instance, a value added tax, etc...

Sure, traditional retirement accounts are susceptible to future tax increases, but not prepaying taxes now gives you tremendous flexibility down the road. Also remember that depending on the sources of your retirement income, even if tax rates increase and you retire in a very high tax bracket, you can still come out ahead with a traditional account. Your traditional retirement contributions come off the top, so your up front tax savings are equal to your marginal tax rate. When you retire, your distributions will be filling in the lower tax brackets first, such that even if the top tax bracket ends up being higher for you, your overall effective tax can still easily end up being much lower.

In other words, suppose that you are currently in the 39.6% tax bracket and expect it to increase to 50%. Suppose that you expect to have enough taxable income in retirement to remain in the highest tax bracket. With a traditional contribution, you are saving 39.6% on that entire amount. When you retire, however, some of the distributions will be at 0%, 10%, 15%, 25%, etc... (or whatever those numbers will be at that time). Sure, in this example, a portion of your distribution will be taxed at 50%, but for a lot of people in this example the overall effective tax rate would still end up being far lower than the 39.6% that they saved on their contributions, so they'd come out ahead.

rated:
What geo has written is extremely important and misunderstood by a majority of investors who think Roths are better.

You have to compare your current MARGINAL tax rate with your future AVERAGE tax rate, or at least take into account the different rates at which your withdrawals could be taxed, taking into account all sources of income (taxable investments throwing off dividends and capital gains, rental income, income from part time work, traditional retireent account witthdrawals, etc). Saying your marginal tax rate in the future could be higher is NOT, by istelf, a sufficient argument in favor of a Roth.

Furthermore, most investors have low income years during which they could preferentially convert pretax to Roth accounts. These situations include periods of illness/disability, unemployment, one parent staying home with the kids, or early retirement. These periods provide an excellent opportunity to convert pretax to Roths at lower tax rates.

We contribute about $75k per year to pretax accounts and wish it could be more; we have no qualms whatsoever about putting that amount into pretax accounts and no worries that later we will pay a higher tax rate on those earnings. Our taxes now are 35% and would apply across every dollar we chose to contribute to a Roth; in the future, particularly during an early retirement before SS and RMDs kick in at 70.5, I expect to have many low income years during which I will convert those traditional accounts to Roths, at very favorable tax rates.

rated:
psychtobe said:   What geo has written is extremely important and misunderstood by a majority of investors who think Roths are better.

You have to compare your current MARGINAL tax rate with your future AVERAGE tax rate...

Thirded. This article helps illustrate why we are comparing current marginal with future average tax rates.

Also, it is a bit of a head fake to say that you can contribute more with a Roth 401k than a Traditional 401k. After all, you can do Traditional 401k now, then convert to Roth 401k later (if your employer allows it). And the tax payment would be coming from a source outside of a tax-advantaged account. So, the Traditional 401k gives you more flexibility, to recognize/pay income tax when you want to, without compromising how much you can ultimately end up loading into a tax-advantaged account. I am in accord with the 25%+ marginal rate --> Traditional 401k approach.

After all, your IRA is probably going to be Roth (because if you have access to a 401k and also make >61k single or 98k married, you are losing some deductibility and might as well as do Roth IRA).  So you do have some diversification with a Traditional 401k + Roth IRA approach.

rated:
psychtobe said:   What geo has written is extremely important and misunderstood by a majority of investors who think Roths are better.

You have to compare your current MARGINAL tax rate with your future AVERAGE tax rate, or at least take into account the different rates at which your withdrawals could be taxed, taking into account all sources of income (taxable investments throwing off dividends and capital gains, rental income, income from part time work, traditional retireent account witthdrawals, etc). Saying your marginal tax rate in the future could be higher is NOT, by istelf, a sufficient argument in favor of a Roth.

  Wrong.  The average in the future is irrelevant, it's the Marginal in the future that matters.  This is because if you had traditional withdrawals, they would all occur at the marginal rate, after other income fills the lower brackets (if there is other income filling the other brackets).  It's an error to look at Average rate because the withdrawals from the traditional will 100% be at the marginal rate or higher if it fills the marginal rate's bracket and goes into one or more higher brackets as well.

The traditional retirement withdrawals fit the very definition of "marginal income", and that's why it makes sense to look at "marginal tax rate" on this "marginal income".

rated:
No, you said it yourself but missed the implication.

As soon as a withdrawal causes taxable income to cross into a higher marginal bracket, the average tax rate just fell below the marginal tax rate. Thus the average is more relevant than the marginal, and is lower, or at least not higher.

Only in the simplest case where someone's 401k withdrawals do NOT cause taxable income to cross marginal tax thresholds does your statement hold true.

rated:
psychtobe said:   No, you said it yourself but missed the implication.

As soon as a withdrawal causes taxable income to cross into a higher marginal bracket, the average tax rate just fell below the marginal tax rate. Thus the average is more relevant than the marginal, and is lower, or at least not higher.

Only in the simplest case where someone's 401k withdrawals do NOT cause taxable income to cross marginal tax thresholds does your statement hold true.

  No, you missed it.  The withdrawal doesn't affect tax on the other income in that tax year.  The average rate on total income is irrelevant.  What's relevant is the marginal additional income tax paid if you have a traditional withdrawal.  Which all occurs at the marginal rate (highest rate(s), can be higher than expected marginal rate at retirement before including the traditional withdrawal. )

Example: (throwing in arbitrary numbers)
$50k regular income, $10k tax, 25% marginal rate.  20% average tax rate.

add $25k traditional withdrawal-> end up with $50k regular income, $75k total income,  at least $16250 tax (assuming the traditional doesn't push into an even higher tax bracket).   Difference from $16250 and $10000 is $6250.  $6250/$25k is 25%.  Average tax rate 21.67%.

Alternately, that extra traditional withdrawal might partially fall into the marginal rate of 25% and partially fall into 28%.  In that case the average rate paid on the traditional will be 26.5%, which is higher than the "expected marginal rate at retirement" of 25%.  But, in no case will it be lower than the marginal rate before the additions.

The average tax rate is irrelevant, because the traditional withdrawal is a marginal increase on income. Tax on all the other income stays the same, the difference in taxes is all figured at the marginal rates or higher...

Obviously when people refer to the "expected rate at retirement" they are referring to the marginal rate before the traditional withdrawal, because you haven't decided whether to do traditional or roth when doing the calculation -- That's what is trying to be decided.

rated:
its possible you're confusing things by interpreting "expected marginal rate at retirement" to mean "expected marginal rate at retirement AFTER including traditional withdrawals", but that's incorrect.  The statement is referring to "marginal rate of income at retirement before potentially adding more traditional withdrawals".   The reason that obviously wouldn't work is because then the "expected marginal rate" would be different if you decided to add to roth vs add to traditional.

What's meant when it's said "If your marginal rate is higher at retirement, then roth is better" is "if your marginal rate before any potential added traditional withdrawal is higher at retirement, then adding to roth is better" As pointed out above, it's also not "none or all", you can repeat the excersize in stages after deciding it makes sense to add $X amount to traditional.

rated:
To the extent I want to engage you any longer, I'll just say I disagree with your interpretation of what the average investor is doing. You say they are obviously thinking of their tax rate before 401k withdrawals. I don't think that is the case. The average investor doesn't think about things in that level of detail. The point is most investors have no substantial income other than SS taxed at low rates, and their 401k withdrawals, which will therefore be taxed at initially low rates around 10-15%, and then at progressively higher rates as they climb the marginal brackets. As a result the average tax rate of their 401k withdrawals will be below the last marginal tax rate of their last dollar withdrawn.

Regardless, good luck to you.

rated:
psychtobe said:   if you are in the 25% or higher tax bracket including state, it is usually a better idea to use traditional.
+1
I currently live in a state with 6% state income tax, but plan to retire in neighboring state with 0% state income tax.  Traditional for me.

rated:
phisher4 said:   
seethalu said:   Hi All,

I work for a company that offers both Traditional and Roth 401k for the employees.

I have always been contributing to Traditional 401k so far. Have 520K in Traditional 401k and am 46 years old now. I am thinking if it is a good idea to put in Roth 401K for few years now if paying taxes now is not an issue?

Thanks all in advance.



This has been discussed ad infinitum on FW.  In my opinion the simplest bottom line is:

If you think you'll be in a higher bracket at retirement (or if you think taxes will increase in general), then YES, pay taxes now.  Go for the Roth 401K.

If you think you'll be in lower bracket at retirement (or if you think taxes will decrease ingeneral), then NO, don't pay the taxes now.  Go for the traditional 401K.

If you'd like to hedge your bets, do both.


What should PA residents do?  Traditional 401k contributions are not state-tax deductible.  Traditional 401k withdrawals aren't (currently) taxed.  My guess is: Go Roth - don't lose a deduction today and won't be taxed in any state at withdrawal + possibility that Traditional withdrawals are taxed in the future.

rated:
We are in the 28% Tax Bracket.

When my wife retires before I do, I think we will probably drop to the 25% bracket, unless I get some very stellar job.

With that said, I'm hedging my bet both ways. I contribute a total of 21% of my pay to 401K and my company matches 4%. The breakdown is: 12% Roth Contribution, 9% Traditional + 4% Employer Match into Traditional. Overall, that comes out to 12% Roth 401K Contributions + 13% Traditional when counting employer contribution. So nearly a 50/50 split between Traditional & Roth within my 401K.

I have my wife's 401K contributions set up almost identically: 10% Roth + 5% Traditional + 4% Company Match (Traditional). Total Breakdown, Including Employer Contribution: 10% Roth + 9% Traditional. Again, nearly a 50/50 split.

Again, I *think* we will be in a lower tax bracket when my wife retires, but let me tell you what, I'll never turn down tax free money in retirement.

rated:
cslovacek said:   We are in the 28% Tax Bracket.

When my wife retires before I do, I think we will probably drop to the 25% bracket, unless I get some very stellar job.

With that said, I'm hedging my bet both ways. I contribute a total of 21% of my pay to 401K and my company matches 4%. The breakdown is: 12% Roth Contribution, 9% Traditional + 4% Employer Match into Traditional. Overall, that comes out to 12% Roth 401K Contributions + 13% Traditional when counting employer contribution. So nearly a 50/50 split between Traditional & Roth within my 401K.

I have my wife's 401K contributions set up almost identically: 10% Roth + 5% Traditional + 4% Company Match (Traditional). Total Breakdown, Including Employer Contribution: 10% Roth + 9% Traditional. Again, nearly a 50/50 split.

Again, I *think* we will be in a lower tax bracket when my wife retires, but let me tell you what, I'll never turn down tax free money in retirement.

  As I've previously posted, in general, people have been rather appropriately conditioned to expect tremendous benefits from diversification. So, whenever this term gets thrown in, I always hear the same exact pro diversification arguments regardless of the context. Unlike the diversification that we advise people to adopt in the stock market, there are plenty of situations out there where it is simply inappropriate to "diversify." If you are considering a medical treatment with a 51% success rate and another one with a 49% success rate, you would not "diversify" by mixing up the treatments and would always go with the 51% one. If you are considering getting married, unless you have an open marriage, the key to happiness probably does not lie in proposing to "diversify" your relationship by spending 60% of your time with your favorite wife and 40% of the time with one that's still quite good but not exactly your favorite. I can go on and on. Yes, all these analogies are very far from perfect and all of them are vulnerable to various arguments. To be sure, I am not trying to equate splitting up money between Traditional and Roth account to an open marriage. The point is that extrapolating the same diversification arguments to various situations often does not work and that timing certain decisions instead of diversifying between them is sometimes the most optimal strategy.

As we have extensively discussed in other threads, blindly splitting up your retirement funds between Roth and Traditional accounts can often be costly and wasteful. Instead, analyzing each individual situation and then strategically allocating your retirement funds to maximize the benefits of account types tends to be a far more advantageous approach.

rated:
geo123 said:   
cslovacek said:   We are in the 28% Tax Bracket.

When my wife retires before I do, I think we will probably drop to the 25% bracket, unless I get some very stellar job.

With that said, I'm hedging my bet both ways. I contribute a total of 21% of my pay to 401K and my company matches 4%. The breakdown is: 12% Roth Contribution, 9% Traditional + 4% Employer Match into Traditional. Overall, that comes out to 12% Roth 401K Contributions + 13% Traditional when counting employer contribution. So nearly a 50/50 split between Traditional & Roth within my 401K.

I have my wife's 401K contributions set up almost identically: 10% Roth + 5% Traditional + 4% Company Match (Traditional). Total Breakdown, Including Employer Contribution: 10% Roth + 9% Traditional. Again, nearly a 50/50 split.

Again, I *think* we will be in a lower tax bracket when my wife retires, but let me tell you what, I'll never turn down tax free money in retirement.

  As I've previously posted, in general, people have been rather appropriately conditioned to expect tremendous benefits from diversification. So, whenever this term gets thrown in, I always hear the same exact pro diversification arguments regardless of the context. Unlike the diversification that we advise people to adopt in the stock market, there are plenty of situations out there where it is simply inappropriate to "diversify." If you are considering a medical treatment with a 51% success rate and another one with a 49% success rate, you would not "diversify" by mixing up the treatments and would always go with the 51% one. If you are considering getting married, unless you have an open marriage, the key to happiness probably does not lie in proposing to "diversify" your relationship by spending 60% of your time with your favorite wife and 40% of the time with one that's still quite good but not exactly your favorite. I can go on and on. Yes, all these analogies are very far from perfect and all of them are vulnerable to various arguments. To be sure, I am not trying to equate splitting up money between Traditional and Roth account to an open marriage. The point is that extrapolating the same diversification arguments to various situations often does not work and that timing certain decisions instead of diversifying between them is sometimes the most optimal strategy.

As we have extensively discussed in other threads, blindly splitting up your retirement funds between Roth and Traditional accounts can often be costly and wasteful. Instead, analyzing each individual situation and then strategically allocating your retirement funds to maximize the benefits of account types tends to be a far more advantageous approach.

  

Yes, but no one knows A. What tax bracket they will fall in when they quit working and B. What the tax brackets will even be at the time of retirement.    Your response generally makes sense, but in the case of us, diversifying this way makes the most sense.   

If you are in a low tax bracket (say 15%), it makes absolute sense to contribute on a Roth basis to 401K and IRAs.   If you are at the top bracket, it would be most advantageous to contribute on a Pre-Tax basis.   We are right in the middle and because it could ultimately swing one way or the other, contributing to both makes the most sense.

If I could predict future tax brackets and our tax bracket when my wife retires, I could make a 100% right choice when it comes to Pre-Tax vs Roth --- but I can't and thus diversifying in this case is the prudent thing to do. 
 

rated:
One thing I never see in the articles on this topic is the ability to gather more effective value in Roth than traditional.  If you've maxed out the $18k all pre-tax, then you can't defer more.  The same $18k limit applies to Roth, so you're effectively putting away more for retirement in a qualified plan by using Roth.  As noted above, this assumes the same marginal tax rates in retirement and during the working years.

This is quite powerful -- accumulate $1M in traditional vs. $1M in Roth and you have a lot more purchasing power with Roth.  Yeah, you paid the taxes up front, but it certainly beats $18k in a traditional 401(k), and a bunch of after-tax investments in a traditional brokerage account that are subject to taxes. 

Of course, if you don't expect to have much other taxable income in retirement, don't over do the Roth, but some combination of pre-tax and Roth may make sense for most people...

rated:
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