Traditional vs. Roth 401(k): Which Is Better for Retirement?

If you went all-in on a Roth 401(k) instead of maxing out your traditional 401(k), would you be better off?

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Timestamps
0:00 - Traditional vs. Roth 401(k)
1:23 - Beginnings of the Roth 401(k)
1:54 - Our assumptions
2:44 - Living expenses assumptions
3:38 - Current retirement savings
4:07 - Projected savings at retirement
4:56 - Expected income in retirement
6:47 - Tax rates make a difference
7:53 - Monte Carlo analysis results
8:29 - Traditional vs. Roth: deciding factors

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--- About Patrick King CFP® ---
Patrick King is a fee-only financial advisor in Atlanta and the Founder of Prana Wealth. Over his career, Patrick has helped CEOs, all-star athletes, Grammy-winning artists, and many others build their wealth, retire sooner, and create a legacy. Patrick enjoys yoga, mountain biking, golf, travel photography, and Clemson football.

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[johnfranklin]

There's another tax not mentioned for Catch up Cathy. 85% of Social Security is taxed for those receiving over $44, 000+ a year from a 401K or other non-Social Security sources. Roth distributions are not considered income, so Rachel Roth would also forego that tax expense as further increase the gap between her and Catch up Cathy.

[editorcj]

Do both, max the 401k and the Roth IRA. Then pull enough to fill the 12% tax bracket from the 401k and use the Roth for any extra you want.

[ClementRusso]

Choosing a Roth IRA is advantageous as it uses after-tax funds and allows tax-free growth. When I retired, I had $3M million saved, and I won't be taxed on my withdrawals.

[JosephineGaule]

My plan at this time is to continue my 401k contribution and match but mostly to stuff the hell out of my annuity while investing in long term stocks with my FA Olivia Rene Reyes who works hard to make sure the Wall St. casino goes the way my fantasies envision haha. I feel that etf is king, especially b/c I am retiring to South America so I’ll need all the dividends I can get. So I'll let the casino accounts; Roth, 401k, etc do their thing for many years and move them to safe ground when they top out. Already close to a million thanks to my fa. Goodluck to me!

State taxes: Does it make sense if working in a income tax state to use Traditional and pay no state income tax on contributions, then retire in a no income tax state and pay no state income tax on withdrawals?

[ericp]

Really helpful video, thank you! Couple of things to point out: 4:30 Roth 401k employer match is taxable, that initial $350, 000 is also taxable. So that $1, 536, 090 Rachael Roth is not 100% tax free as indicated at 5:51.

[mjmdiver]

But you included the state tax rate in Cathy's and you didn't include the added state tax in the ROTH savings (plus the fact that she may have been in a different tax bracket at that time so her pre-ROTH taxes may have been at a higher rate), so they aren't really the same comparison... You have to run the numbers completely out... for each side, at both the deposite and the withdrawal points to have a better understanding of this.

For example, if you are in a high state tax location now, but may be in a lower state tax region when you retire, even if you intend to have the same income from your investments, you will likely be better off not in the ROTH. If you expect to have moved to a lower income tax state and also have lower income, you will almost certainly be better off to not be in a ROTH.

The cavieat to this is that if you have a high income and will have a high withdrawal, you will pay more tax on SS when you retire, but that is taxed at a lower rate anyway, (85% above $44K for married). However, if you have that much income in a retirement account, it my have been impossible to accomplish that without haing a substantial amount in social security anyway. So even if 100% of your money is in ROTH (which would have been hard to do unless you converted it all over at some point), you will have income and you wil have also had a high enough tax burden that ROTH becomes hard to justify.

ROTH makes perfect sense for a low earner early in their career and if you are in a low tax state or a combination of both, but mid or late career when you are earning considerably more and are in the 22-24% tax brackets, I think it is much less sensible for moost people.

[___g]

Something that changed at the end of 2022 with Secure 2.0 is that Roth contributions to retirement accounts are no longer subject to required minimum distributions (RMDs) like their traditional/tax-deferred accounts.

Tax-deferred is great, lower the taxable income now and live below your means later to save even more, but Uncle Sam is still going to force you to take withdrawals and tax you on those forced withdrawals should you be so lucky to get to that age.

[waltzwalter]

A Financial Planner told me Saving at least 15% of your income in a 401(k) can help ensure that you have enough money to retire comfortably. How can one take advantage of compound interest and potentially grow your retirement savings/net-worth to about $3M over time?

[ryanwilliams]

As a soon-to-be retiree, keeping my 401k on track after a bumpy 2022 is a high goal. I've read about investors generating up to $250k ROI in this present sinking market; any suggestions for increasing my ROI before retirement would be greatly appreciated.

[vandrex]

So If I was told so many years back then that I would be able to live in my fully owned house at 37 years with my wife at 33 years alongside a combined net worth of over $1.5M in assets and savings with no debts. I may disagree heavily.

It wasn't easy sometime back, when I had 2 kids in school and had a lot of debts to settle.

This lifestyle that made us retire so early is only possible through efficient saving and key passive income processes.

[bob.weaver]

One thought is to buy the dip and then wait to break even, another thought is: Will buying low during a recession work if I'm retiring in the next 3years, I'm no way near prepared for retirement and I just need strategies to scale up to atleast 2million by the time I'm set to retire

[penntuckeybackwoods]

I started my Roth when I was 40 I turned 60 last year maybe some would not agree with this but I cashed it out bought myself a nice cabin in the mountains so when I sell my home I can retire their the nice part was I paid zero taxes on it I also have a teamster pension plus the cash from my home social security at 67 a Roth was the best investment I ever maid

[scotters]

To me the simplicity & flexibilty of a Roth is unmatched in retirement..
In terms of Traditional many things are income limit based in retirement..go over & you pay more..or pay more in taxes or this is reduced or cut off etc..
That aspect is not mentioned the cost of that.
Roths don't count.

[TheQUBANQT]

I’m hedging my bets. I have a Roth 401k & split it down the middle I also max out my HSA. Taxes are finicky things & my magic 8 ball is stuck on “maybe” anytime I ask it a retirement question 😂. Great video.

[cassandragonzalez]

Thank you for producing a video with a single person. There are many of us that don't have spouses or dual incomes. I am at this point right now trying to decide if I should slowly over the next 10 years convert my IRA to a ROTH IRA. I have a company 401k that I contribute up to the match. But I also have 2 IRAs from former jobs and an HSA account I'm trying to build. Thank you again!

[gildardomagallon]

Taxes are really the deciding factor. Are your taxes high at the moment? Will they be higher or lower when you are withdrawing money? Thing is if you only withdraw the minimum required meaning you don't need the retirement account money its better to do traditional. Never pay taxes because you're pretty much never using the money.

[MyWasteOfTime]

The biggest thing to look for, have a diversified portfolio that reduces or eliminates taxes on Social Security! If you have both ROTH and a Traditional IRA you can leverage the account you need to stay in X tax bracket!

[arlenestanton]

Very clever to have 2 women with somewhat non-traditional vocation, a welder and a doctor! I must also add wealth.

[ocjmmhr]

Is this a fair comparison? We assumed that Roth Rachel had $350, 000 in a ROTH account and Catch-up Cathy had $350, 000 in a 401 account, but really Cathy would’ve had a much larger account if she was using pre-tax dollars the whole time. At least I think so…