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Roth or traditional 401k

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  • Roth or traditional 401k

    I am 31 years old and 3 years out of residency as a general pediatrician making $230k/year. Since starting with my current employer I have been contributing 8% of my salary to a Roth 401k with the addition of 5% of my salary to "after tax" payments made and rolled into my Roth 401k (which I believe is the "Mega Backdoor Roth" method). My employer is also matching an additional 6%. I currently have about $100k in my Roth 401k with the following sources (56% Roth 401k, 23% Employer match, 21% Roth-conversions).

    I understand that given I may be in my 'peak earning years', a traditional 401k would provide the best tax break. However it seems that reason alone in deciding Roth vs Traditional 401k does not take into account that the main benefit of the Roth 401k is the growth is tax-free for 30+ years which I anticipate to be a large amount since I am still early in my career. Also given the limits on contributions you are able to make each year, isn't every dollar I put into the Roth actually better since it won't be taxed again? Am I thinking of this incorrectly and should I actually be making traditional 401k contributions? Thanks for any advice.

  • #2
    This is a very complicated topic, due facts, circumstances, unknowable future returns and marginal tax rates, personal choice, etc...

    When subject to the same marginal tax rate at contribution and withdrawal, the math shows there is no difference in outcome between traditional and Roth contributions and withdrawals.

    In most cases, if your marginal tax rate at contribution is < your marginal tax rate at withdrawal. It is better to make traditional contributions. This can be further advanced by doing tax efficient Roth conversions before Medicare and especially before the onset of RMDs.

    It is true that Roth deferrals are higher effective contributions. However, in your circumstances you can use the tax savings from traditional deferrals to make larger Mega Backdoor Roths.

    There is no right or wrong answer. Just your informed personal choice.

    Personally, I always utilized the following prioritization subject to my savings rate:
    1. Maximize traditional employee deferrals up to the employer match
    2. Maximize HSA contributions if available
    3. Maximize Traditional employee deferrals to the limit
    4. Maximize Backdoor Roth
    5. Maximize Mega Backdoor Roth if available
    3 & 4 can be reversed and/or some of 3 modified to Roth deferrals to maintain a 20% - 25% minimum Roth contributions.

    Note: I also recommend the 20% - 25% Roth minimum if multiple 401a, 401k, 403b, 457b plans. There can be such a thing a too much in tax-deferred balances.

    People often don't appreciate the value of tax-free income in retirement to manage your AGI and various MAGIs.

    Nevermind the value of having tax efficient taxable accounts.

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    • #3
      I used to use a roth 401K as an attending in my 30's as well. I know that there have been blog posts/articles about the math behind it. I think that if you put the money that you save in taxes by investing in a traditional 401k into a taxable investment account for retirement, you will come out ahead with a traditional 401K. If you are like most 30 year olds and will spend the money you save in taxes with a traditional 401K on lifestyle creep, you are probably better off in a roth. I really like the idea of 30+ years of tax free growth.

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      • #4
        The way I read part of your post you made it seem like some of the Roth money is from your employer match. That isn’t possible if that’s what you wrote. Employer contributions are always tax-deferred

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        • #5
          Yes, the employer portion is tax-deferred. The remainder of my 401 is Roth (either directly or rolled-over).

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