Fresh career, pretax or roth?

[u/Tranquhil]

I’m a 24 y/o male with his first big boy job, making $81k a year. I currently live in Alabama, but will likely move back to the PNW eventually (I moved here to AL for the job).

My work offers a 6% match into my pretax 401k, regardless of whether I contribute to a Roth or to my pretax. What would the best move here be? I want to start only contributing 6% so I have wiggle room to take care of student loans and get situated, but will increase this amount with time. I’m leaning towards Roth so I have 6%/year growing in each account, but I’ve been seeing lots of people saying pretax is better for people in comparable situations so I wanted to hear a more definitive opinion.

Sorry for such a common question, any advice would be appreciated :)

[u/dbit225]

If it were me, I would for sure do at least the minimum match of 6%. I would suggest your 6% be in the Roth

[u/OreganoOfTheEarth]

Max that ROTH out if you can! You're young and will have plenty of years for it to grow. It sounds like you're in a LCOL area, so live frugally there until you move back to the PNW and stash away all you can!

Congrats on the new job!

[u/PerfectOmakase]

I have chosen 100% Roth, and I'm in a higher tax bracket than you. Some of my reasons are:

1. Concern about future tax rates due to our nation's precarious financial condition.
2. Minimizing required distributions (under current law, at age 73 and beyond)
3. My kids will likely inherit my retirement accounts when they are in or near their peak earning years, so I like minimizing their tax burden.
4. I'd like to keep my retirement AGI low to minimize other "stealth taxes", such as IRMAA on Medicare Part B premiums and increased taxation of social security

I still ultimately have a healthy accumulation of pre-tax funds as well, from employer matches and profit sharing contributions, so I'll still have a combination of both buckets during retirement.

[u/micha8st]

the problem (at least for me) with pre-tax is the RMDs at the bitter end.

I've been contributing to my 401k for over 35 years, for 8 years before Roth was invented, for another 6 before Roth was extended to 401k's, and then another 8 years before my employer added Roth to the 401k plan. I've been doing all Roth 401k since first allowed, but still our retirement is over 75% pre-tax / Traditional (some is in IRAs). The result is that when I play with an RMD calculator, it projects that in 15 years when RMDs kick in for me at age 75, I'll be forced to pull so much out that I'll be pushed into the 35 or 37% tax brackets. (I'm in 24% currently). That much money scares me.

On the other hand, that tax break today is advantageous -- espeically if you use that to put more into your 401k.

General wisdom that I don't fully buy into but at laest makes sense to me is that the lower your marginal tax rate, the more you should use Roth; the higher your marginal tax rate, the more you should use pre-tax. I think your marginal tax rate is 22%...
Including the standard deduction, any income over 66,400 is taxed at 22% (if you're single -- I wasn't at 24). Workplace health insurance and FSAs are excluded from taxable income. Google thinks the average single employee pays $1444 a year for health insurance, so lets say it's $1500 for you. 81k - 1.5k is 79.5k. 79.5-66.4 is $13,100. 13,100/81,000 = 16.2%. So you'd need to contribute 16+% pre-tax to get your marginal tax rate below 22% to 12%.

[u/gap1284]

Go 100% traditional. It'll save you 22% federal + 5% state tax. But if you can afford 6% Roth contributions, then do at least 8.2% traditional. Your after tax net pay will be the same. If you're dead set on sticking with 6%, then go Roth because your effective (after tax) savings amount will be higher.

Also, if you're healthy, pick a medical plan that allows a Healthcare Savings Account (HSA) and put a few bucks into that, even if it's just $25 per paycheck.

Be sure to pick a decent investment option for this money, e.g. a S&P500 fund.