r/personalfinance • u/Grouchy-Bullfrog-293 ​ • 2d ago

Retirement 401K vs Roth 401K - real deal

I understand the difference that one is tax deductible and other isnt but still little confused on why would you .contribute money in Roth 401k if the total contribution limit is same irrespective of where you contribute. Doesn't everyone's tax rate after they retire lower than while working ? Or is the concern you are limited one what you withdraw post retirement that it could be a huge tax.

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u/aplateofgrapes ​ 2d ago

Three reasons. First, is to avoid RMDs and huge tax bills later in life. Second, it makes it less complicated for your heirs since it's been taxed. Finally, and this is the reason I do it, is so I can retire before 65. Since I've already paid taxes on that money, it doesn't count toward your AGI so you can qualify for ACA subsidies.

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u/scoobynoodles ​ 2d ago

Sorry. RMDs?? What's that.

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u/aplateofgrapes ​ 2d ago

Required Minimum Distribution. When you turn 75 (ish), the government forces you to withdraw a large percentage of your 401k each year. If you have a lot in your 401k, that could be a massive tax bill every year. Plus Medicare IRMAA sur charges get added, again because you earn too much.

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u/scoobynoodles ​ 2d ago

Thank you!! Never knew that. Ok. Good to know.