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Wouldn't it make more sense to contribute to a ROTH 401(K)? - Page 2

post #16 of 19
what are peoples' thoughts on this:

Sure it's great to put money away for saving, but while you're only making $60k a year, you're not able to touch money that you need... especially if you're planning on making a career and making a lot more as you get older. Does the $5k you put away at the age of 22 matter to you when you're 30 and making a lot more, how about when you're 60? Yet the $5k at 22 is a good amount that you'll most likely need to live off of. Is it worth deferring money when you actually need it?
post #17 of 19
Quote:
Originally Posted by Tony Romo View Post
what are peoples' thoughts on this: Sure it's great to put money away for saving, but while you're only making $60k a year, you're not able to touch money that you need... especially if you're planning on making a career and making a lot more as you get older. Does the $5k you put away at the age of 22 matter to you when you're 30 and making a lot more, how about when you're 60? Yet the $5k at 22 is a good amount that you'll most likely need to live off of. Is it worth deferring money when you actually need it?
Huh? If you are making 60k out of college with no debt...there shouldn't be an issue with not being able to touch money that you "need". I've got a lot of teammates who went to phd programs and make half that until they are 30 who are doing just fine (but don't have fancy retirement portfolios). 5k a year (or really probably more like 10k if you are maxing an IRA and getting all of your employer match in the 401k) in your early 20s is *far* better than being able to throw 5k in an account when you are 35 (the magic of compounding interest yada yada...). A 22 year old making 60k should be able to lock this much money away for the future while still spending lots of money on stupid fun shit
post #18 of 19
Quote:
Originally Posted by Tony Romo View Post
what are peoples' thoughts on this:

Sure it's great to put money away for saving, but while you're only making $60k a year, you're not able to touch money that you need... especially if you're planning on making a career and making a lot more as you get older. Does the $5k you put away at the age of 22 matter to you when you're 30 and making a lot more, how about when you're 60? Yet the $5k at 22 is a good amount that you'll most likely need to live off of. Is it worth deferring money when you actually need it?

I'd say the counter argument to that is compound interest. If your employer matches (as the OP's does), and you contribute $5K per year and average a 7.5% return, you're looking at $122,298 in 401(k) balance. If you continue to contribute $5K a year through your 30's, you'd have a balance of $390K when you're 40. If you only started contributing at age 30, to 'catch up' you'd need to contribute $12K per year, AND your employer would have to match all $12K (which would be a pretty big match).
post #19 of 19
it's a tricky question because no one knows what will happen in the future. We could have higher tax rates, tax structure may change (VAT vs progressive), there may be taxes on wealth, etc. As a result, I use different vehicles to spread my bets. If your family has some money, you may want to look at their allocation throughout different vehicles (tax free, tax deferred, and taxable) and use that to inform your allocation. For example if your family has all their retirement assets in the old 401k, well you might want to beef up the tax free assets (i.e., contribute to roth). If you are looking solely at retirement funds, you have a choice between tax deferred and tax free (roth) vehicles. To be hedged completely, have both at 50% allocation for each (in the long term). There are lots of caveats though - because your income will likely change with respect to time, as well as your tax circumstances. If you are currently working in a low tax area and anticipate moving to a high tax area later, it's a no brainer to contribute to the roth while you are in that low tax area. If you are making less money now so you are in a lower tax bracket, it may make more sense to contribute to roth now. Most people expect to make more money as time progresses - since our current tax brackets are progressive, you are better off contributing to tax deferred 401k when you are making more money (since the write-off helps more). Just some thoughts to consider - not organized, but should help you out.
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