Since Devs change jobs every few years now: 401k or Roth?
my work is trying to get me to join their program but who knows how long Ill be there. Im old enough that its time do do something but not sure whats the best for the developer lifestyle.
If you get matching, contribute at least that much to your 401k. Then max out your IRA (greater freedom in investing). Then work on maxing out your 401k.
Many people point to the tax-free nature of these. Traditional 401k and Traditional IRA means you don't pay taxes now, but are taxed on the distributions in retirement (treated as income, not capital gains). Roth versions of both mean you pay taxes now on the contributions, but not in retirement on the distributions.
The (to me) much greater benefit of all four options is tax free growth. My Roth IRA is a standard brokerage account. Let's go through a scenario, two ways: invest in a standard brokerage, invest in any kind of 401k or IRA.
If you invest $10k in a standard brokerage, wait some time, and sell at $15k for a profit of $5k, you owe taxes (income if less than a year, capital gains if more than a year). Let's assume capital gains (15%), you only have $14,250 to reinvest ($750 paid in taxes). Every time you sell you lose a bit of your profit.
If you invest that same $10k in an IRA or 401k, make the same profit in the same time and sell (in the 401k you don't sell, but rather move to a different fund, concept is the same), you owe no taxes at that point. You have the full $15k to reinvest.
Losing 15% (or more if it's a short term investment) of all earnings seriously eats away at your retirement savings if the money is in a standard brokerage. Similarly, you lose some percentage of all dividends earned in a standard brokerage. So your 1-4% dividend yield is really more like .75-3% after taxes.
All things being equal, your money will grow faster in a 401k or IRA. If the intention is to leave the money alone (not spend it, but probably tweak investments) until age 60 or higher, invest in these accounts.
I can think of no good reason to ever roll a 401K to another employer instead of rolling it over to a usually much lower cost IRA.
The problem is that when you do one, you pay taxes pro rata on any pre-tax funds in your IRA. If your 401k is pre-tax dollars (most are), then if you convert a 401k to an IRA, you will start having to pay taxes every time you try to do a backdoor Roth.
Max out the 401K first before you think of anything else. Who cares if you change jobs frequently. You can always do a roll over into an IRA with providers such as Fidelity or Vanguard for free.
Just want to tack on for the OP (or anyone else): Look at the fees. The fees will destroy your retirement. Both the individual fund fees and the account management fees.
For example on my 401K provider they have funds with fees ranging from 0.19% (index fund) up to 0.58% (fully managed fund). You'd think that the fully managed funds outperform the index funds which makes the fees worthwhile, but actually the reverse is true (that the index funds have outperformed the managed funds historically).
If you don't manually select which funds to invest in they put a lot of your money into the more expensive funds.
If you have a fairly low AGI (thus low overall tax rate): Roth.
If you'll need to withdraw the principal before retirement: Roth (you can withdraw principal penalty free from a RothIRA).
If your tax rate will remain the same for withdraw as it does now, it doesn't really matter since the after tax value is the same whether you take out taxes now or later (i.e., tax_rate x (principal^gains) = (tax_rate x principal)^gains.
I would split 50/50 in this case to hedge against what and where tax rates/brackets might be in retirement.
Assuming the money you invest goes up in value, aren't you better off in this scenario with a 401k over a Roth so that you can make gains on the money that would go toward taxes? You still have to pay taxes on the principal and the gains but compared to paying taxes on the money immediately, you're in effect borrowing money from the government at 0% to gamble with and keeping a portion of the return.
(Similarly, the expression tax_rate x (principal^gains) = (tax_rate x principal)^gains isn't true (beyond not being the right expression)).
.7 * (100000^1.07) != (.7 * 100000)^1.07 (assuming paying 30% in taxes and making 7% gains)
(i.e., tax_rate x (principal^gains) = (tax_rate x principal)^gains.
Gains should be multiplied rather than an exponential factor here. (I think this expression was created because gains are calculated as roughly (1+rate)^(number years) but at this higher level it should just be multiplied by the tax rate and the principal.
I think an advantage of a Roth is that you don't have to pay tax on the money you earn via investing. For example, if your money in a Roth doubles then you only need to pay tax on the half of it that was there when you added money to the fund. Whereas for a traditional 401k you pay tax on money as it comes out which includes money earned via the investment.
When you say 'Roth', do you mean Roth 401K or Roth IRA? This is what had me confused the entire part of a year - Roth IRA vs Roth 401k.
>If you'll need to withdraw the principal before retirement: Roth (you can withdraw principal penalty free from a RothIRA).
I'm not the original commenter but in regards to the advantages and situations mentioned, they apply to both Roth IRAs and Roth 401k's.
Although, check your company's plans as to when you can take early distributions. If you can't unless you retire or leave the company then "If you'll need to withdraw the principal before retirement: Roth (you can withdraw principal penalty free from a RothIRA)." might be moot. I know with my companies plan I don't believe I can even withdraw my Roth 401k contributions without quitting or retiring. With most Roth plans you are allowed to withdraw your contributions tax and penalty free, but you won't be able to "re-add" above and beyond the yearly annual contribution limits, which is why you shouldn't withdraw them.
With a Roth IRA, you can contribute up to $5,500 (depending on your income -- it phases out from $118,000 -- 133,000). You might be too rich to make use of it. You're taxed on that money now but not when you withdraw.
Indecisive? do both.
You still have another month to contribute to your 2016 Roth IRA, so if you have the money available, you should do that. (And if you don't have available money, you should probably just stick to a 401k since it's automatically withdrawn from your paycheck).
If your employer goes out of business it can be difficult (read involves the dept of labor) to get access to your money.
The reasoning for this order is that any company match is free money that you are leaving the table if you don't contribute. However, many 401ks have limited investment options, restrict you to a particular bank, and involve added paperwork when moving jobs. That is why Roth/IRAs come next. However, those have fairly low limits at $5,500 per year. Therefore if you are planning to save more you should take advantage of the tax breaks of a 401k before investing retirement savings in a traditional brokerage account.
Edit: https://en.wikipedia.org/wiki/Roth_401(k)
Edit 2: With my employer, I can elect my contributions to go into a Roth 401k instead of the regular 401k. They still do a company match, however their funds I believe have to go into the 401k plan and they need to do some extra math to determine the correct match amount due to how taxes affect the amounts.
Edit 3: Because most HNer's have high incomes, it might make more sense to contribute to a regular 401k and reduce your taxable income today. If you plan on saving lots of money and remaining in the same or going up in tax bracket in the future then Roth 401k might make more sense. The question is, do you think, generally, taxes and tax brackets will go up, down, or stay the same and how much money do you plan or hope to withdraw from your accounts in retirement?
Edit 4: I split my and my employer contributions about 50/50 between regular 401k and Roth 401k.
And like the others said, if you have an employer match, definitely max that part out.
Echoing other comments - at a bare minimum max out your employer match, it's free money!
I did some back-of-the-envelope calculations yesterday. As a single adult (non-dependent), if you were to max a Traditional IRA, Traditional 401(k), you could make up to around $70-75k in gross income, and still be able to qualify for the Saver's Credit. Your AGI after contributions, standard deduction, personal exemption, and deductions for things like medical insurance premiums, could reduce your total income to $37k or lower. You'd then get 10% of your contributions, up to $2000, back as a credit. At ~$37k AGI, your tax burden is approximately $5k, with the credit, it's approximately $3k (numbers crunched on excel on another computer, these are estimates from memory).
If you're married the max AGI to qualify for 2017 is $62k. Looking at my tax forms from early on in my mid career, I definitely could've swung that if I'd been married and sometimes did (but wasn't married so no credit), and at the start of my career I could have hit that $37k AGI by making additional retirement contributions, had I known about it.
https://www.kitces.com/blog/understanding-the-mechanics-of-t...
The attractiveness of a traditional IRA only increases as your marginal tax rate does.
From here on out, every time you change jobs, request a 401k rollover into your Vanguard IRA. This way, you'll only ever have two retirement accounts to deal with, rather than one for each job.
And due to how most accounts have a flat [annual] fee, you'll likely pay less in fees.
https://www.bogleheads.org/wiki/Main_Page
https://www.bogleheads.org/forum/index.php
It's filled with the type of thoughtful, over-analytical people that I think the readership of Hacker News would appreciate.
Start immediately! At the very least, max out the "match" as that is free money. Look into all the details and conditions of the program.
Your instincts to get this figured out ASAP now are spot on.
> Look into all the details and conditions of the program.
Either way, you're not _losing_ money, even if there's a delay in getting the match.
And IANAL and don't feel like looking it up but IIRC from last time I did it, I thought it was near universal, or legally required even, to be allowed to rollover any 401k into an IRA once you are no longer employed. Do you have a source or personal details on that? This is a major point.
The important thing is nobody with access to a 401k should delay looking into it by more than a pay period, as they are likely throwing away free money every pay period that goes by and they don't even look into the details.
I have found the arc of a job to be:
1. I accept an offer I like based on the environment, the pay, and the ability to learn new things.
2. During the first year or two, I'm learning new things about the company, the industry, the software they are using, and a technology that I've been wanting to learn.
3. Usually as I'm learning my market value is out of sync with the menial raises I'm getting, the company doesn't see a need to keep up to date and the technology becomes out of date, so the world is leaving me behind.
4. I start looking at job opportunities, see what I need to learn to be competitive and start preparing for my next job. This is ususlly a 3-6 month process.
5. I start calling recruiters and move to my next job, making significant more and start over at step 1 until you are at the top of your pay for your market without having to be promoted above what you like doing.
This usual happens within 2-3 years. I might stick around for 3 just to get completed vested.
Traditional 401ks can easily be rolled over into traditional 401k (but you most likely wont want to do this, as I'll get to later) and Roth 401k's can easily be rolled over into Roth IRAs (no harm in this unless the 401k custodian has some really good funds available to you).
An important thing to understand about a traditional vs roth calculation is that when you put money into a traditional 401k/IRA you save at your marginal rate (vs putting the same money into a Roth). i.e. if your federal rate is 28% and your state rate is around 10% (say you live in NYC or CA), you save 38%. In retirement, while you would be paying taxes on the withdrawal, the taxes will be spread through every bracket, not just your highest hence its very likely that its going to be less than 38% in total taxes even if tax rates go up in the future. Further, you can have a significant level of control over your future taxes as can move to a state that has no taxes in retirement, a flexibility that you might not have during employment.
If you're single and make over 133K you are ineligible for the Roth in a normal manner. There's a good chance as a software engineer you'll reach this level at some point. This is where the "back door" roth contribution comes in and why I would reccomend not rolling over a traditional 401k into an IRA
There is no income limit on contributing to a traditional IRA (though there are limits to the "pre-tax benefit", but that and there's no income limit to convert a traditional IRA into a Roth, you just have to pay taxes on what you haven't paid taxes on already (i.e. either the pre-tax benefit you got or the growth since you put it in). This is a free way for those with higher incomes to gain the benefits of roth contributions (especially as those who are ineligible to contribute to a Roth are already paying taxes on their traditional contribution. But this also goes to why you probably don't want to convert your traditional 401k into a traditional IRA at a later date. It will prevent you from benefiting from this backdoor contribution mechanism.
So with this said, for me, my 401K is traditional and my main IRA is roth. I keep one traditional IRA opened to do the backdoor, but as soon as the contribution clears it is immediately converted into my roth.
This is a lot to take in and its good that you are thinking about these things today.
Employer: Traditional 401k (pre tax), Roth 401k (after tax)
Personal: Traditional IRA (pre tax), Roth IRA (after tax)
These are tax designations, not investment types.
Roth means after tax dollars (more money up front). Traditional is pre tax dollars (you get pay more later). Both grow tax free, but with the traditional withdrawals count as income so they are taxed according to that tax year.
401k has a contribution limit is $18k / year. IRA has a contribution limit of $5500 / year.
$23.5k / year total right now for somebody under 55.
If you make enough / spend little enough that you can put the maximum dollars under the shelter, my suggestion is to go Roth 401k and Roth IRA or backdoor IRA. Over a 30 year period, the additional dollars under Roth will make up for most tax percentage differences, so it's a decent bet. Roth is the best way to max dollars under the tax shelter, and the tax shelter is hugely profitable. Also, if you go Roth, your retirement balance will be the real balance, not some fake number that is still subject to unknown future taxation.
If you can't max the dollars, then it doesn't matter as much if you pick Roth or Traditional. Yes, you have to make a call about what tax rates will be now vs. in the future, but how much money you put into the account and if you stay steady with low cost investments will matter more. So I wouldn't focus on the tax issue. I'd focus on how you earn enough / spend less to be able to max both contributions so that the tax issue matters less than the opportunity cost of having investments outside the tax shelter.
If your employer doesn't offer a retirement plan, you can usually write off a traditional IRA contribution on your taxes. However, I'd recommend you do a Roth IRA instead or avoid this writeoff so that you can do the back door roth mentioned in the next paragraph.
If you make too much for a Roth IRA, you can do a back door roth ira.
Get a tax guy for this. It can get complicated the IRS is a headache. It's worth it to pay for a tax guy.
Do this by funding a traditional IRA then converting it to a roth IRA. The conversion has no income limit - that's why this is legally possible. This gets more complicated if you have traditional IRA money, because they don't let you pick which dollars you're converting. The cleanest way is to convert all of the money at once, but you will have a big tax bill if you do this, so you need the cash saved up OUTSIDE the account. If you pay the taxes with money from the account, there's no point doing it. When you convert it, it's counted as income -- you have to pay the taxes at your current tax rate, and that may bump you into a higher tax bracket, so you might not want to convert it all at once to avoid those higher taxes. If you know you're going to live in a lower tax state soon, it is probably wise to wait until you fall under the tax laws of that state to do the conversion... but remember ,this is most valuable while you're young, so when I say wait, I mean 2 years, not 20. It can be a hairy calculation. The taxes you pay are, in effect, shoving more money under the tax free growth umbrella.
Most 401ks offer mediocre to bad investment options. This sucks, but contribute anyway b/c the tax shelter is fabulous, and later you'll roll the money over into an IRA where you can pick good stuff. I suggest go an indexing route like Betterment.
Allright, so those are the tax mechanics. But they don't matter if you don't actually save the money, and saving the money is highly dependent on your emotions and habits.
- Do you have habits that are coping mechanism connected to spending? - Are you surrounded by people in BMWs who make you feel poor? - Do you regularly read about investing and spend time planning your investing? - Do you have a plan for career advancement? - Do you have mentors for career advancement? - Do you keep a monthly budget and check your spending against your plans? - Do you know your retirement date?
I'm asking all these things because they are more important than the (theoretical) mechanics of the money. Engineers love to believe a spreadsheet showing how their 30 year 4% mortgage is hedged well against their predicted 8% portfolio to make them an extra $150k over 30 years, but the truth is that Americans suck at saving and generally don't save, so the hedge never happens and the spreadsheet was a waste of time. Also, maintaining the mortgage can put enough pressure on someone that they keep the paycheck instead of starting a business, so he earned a fraction of what he would have if he'd tried a startup. The decision to lower financial risk to start a company has a hard-to-calculate gain. We tend to avoid it and instead focus on things we can calculate.
If you spend some time reading about personal finance and psych, you can learn how to be a happier person while spending less, and this will matter more for your retirement than 401k vs. IRA and Traditional vs Roth.
I recommend you invest some time and money in some good books / audio books. They will pay themselves back 1000X, literally.
1. Dave Ramsey's Total Money Makeover 2. The Millionaire Nextdoor (and the Millionaire Mind sometime later) 3. The Little Book of Common Sense Investing 4. http://www.mrmoneymustache.com/ 5. http://earlyretirementextreme.com/ 6. Predictably Irrational 7. The Power of Habit
Of course, tax sheltered retirement accounts aren't the only option planning for the future. But they are a decent insurance plan. As you read more about personal finance, you'll see some of the other options for your savings (education, business), and you'll have to make a call about how you want to spread your risk. good luck.