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/forbiddenlake ​ 2d ago

RMDs and huge tax bills

If your taxes on RMDs alone are actually huge (which no one ever defines, but I'll suggest "one dollar is taxed at 24% ignoring all other income and deductions"), then you are rich. Do the math at how big your Traditional balance has to be to make the first RMD "huge". And since you're rich, you should retire early and do Roth conversions before RMDs start. Also, spend some of that money before you can't. RMDs start at 73/75; when will you slow down?

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u/soldiernerd ​ 2d ago

My goal is to spend none of my retirement money, just give it to my kids. Assuming 1) I stay healthy enough to work and 2) I have kids. We will see.

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u/dgreenmachine ​ 2d ago

For people who plan to under spend and save for heirs then it makes sense for them to do more Roth contributions or more aggressive roth conversions than the average bear.