September 11, 2014

When provided the choice between a traditional 401(k) and a Roth 401(k), what should be your primary consideration? Why?

2 thoughts on “September 11, 2014”

  1. Garrett Haag says:

    The thing to consider with both of these is when you want to be paying your income taxes, for the Roth do you want to pay your taxes up frount because you will be making more money down the road or for a traditional do you want to pay the taxes when you take the money out because you are making a large amount of income and you want the tax break now. You want to pay the least amount of taxes you can for your investments so knowing what your cut off line for income is important, it varies on the person so there is no perfect number but some consider around 75k is when you go from a Roth to a traditional, the growth of your job is also something to consider.

  2. Mike Finley says:

    That was a very well thought out answer, Garrett. Well done! Let’s review. Do you want to pay tax now or later on your investments? If you think your taxes will be higher when you access the money then you will want to pay taxes now and that means going with the Roth. If you think your taxes will be higher now, then you will want to go with the traditional and pay taxes later.

    Always consider federal and state income taxes when making this decision. You also have to be a bit of a psychic since you are trying to predict your future tax situation. That means this is not a perfect science. The $75,000 is not a bad number to go by. Under that, go with the Roth. Over that, go with the traditional.

    The key here is to think the matter through before deciding on the matter if both options are provided to you. You could also do a bit of both if you are unsure. Onward!

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