Should I increase my monthly percentage into my Roth 401(k) for the remainder of the year?
I've recently maxed out my Roth IRA at $5,500 for my 2018 contributions. I also contribute 6 percent with a 4 percent company match into my Roth 401(k). I am conflicted as to whether or not I should increase my monthly percentage into my Roth 401(k) for the remainder of the year. Alternatively, should I save the additional after-tax cash in a high interest savings account as a cushion to contribute and max out my 2019 Roth IRA contributions?
When you can max out Roth 401k, it’s equivalent to enhance your future Roth IRA as all Roth 401k can be directly rolled over to the Roth IRA. Unless you’re an early Roth IRA contributor, I’d say go and max out this year’s $18,500 Roth 401k. Meanwhile, reviewing your budget to see if there’s any opportunity to save extra for 2019 Roth IRA.
I’m very pleased to see your dedication for saving, so I only have one extra tip to offer, which is to save up your emergency fund. It should be 12 months of living expenses for a single, or 6 months for a married couple. Once you have that extra cushion for contingencies, you are financially disciplined to stick to your saving plans and weather through any volatile stock market. Cheers!
It's impossible to appropriately answer your question without more information:
1. Your current tax bracket
2. Your age
3. Your expected retirement date
4. Your expected tax bracket(s), state and federal, on that date
5. Your marital status, spouse's age
6. If married, both your incomes, retirement contributions and balances.
Since these are tax-advantaged contributions and accounts, wouldn't the highest priority be to figure out which options provide the best tax benefits? Despite the fact that we're in some of the lowest tax brackets in history, and, that tax rates will have to go way up in 2026 what if you retire into a lower tax bracket than you're in now? You will have permanently taxed your retirement savings at a higher rate than you would have paid in retirement.
It would be well worth your while to hire an hourly fee planner to test different scenarios for you using software like RightCapital or RetirementAnalyzer. I suspect the recommended strategy will be a combination of pre-tax and after-tax contributions along with a brokerage account. Your questions cannot be answered yes or no!
Contributing to a Roth 401K is a wonderful way to save for retirement. We are seeing an increasing number of retirees with large traditional 401K and IRA accounts. The goal is always to have retirement accounts large enough to help support your retirement, but when you "win that game" by carefully contributing and growing a large account, suddenly you can find yourself in a surprsingly high tax bracket in retirement due to the required distribution calculations.
This is all to say that the beauty of your Roth 401K and Roth IRA is that you will be able to better fund your retirement without owing any taxes at all. So I encourage you to make additional contributions now to your Roth 401K. If next year, you find you don't have the resources to fully fund a Roth IRA, you already put savings to work today in the Roth 401K. The value of saving early and compounding your return will make it a worthwhile decision.
There's certainly nothing wrong with putting more money aside in retirement accounts such as a Roth 401(k). If you have the means to increase your conributions for the rest of the year, while stockpiling cash in a high yield savings accounts until next year to max out your 2019 Roth IRA contributions, certainly do so.
Reasons you may consider investing in a taxable account or holding cash would be to satisfy shorter-term goals such as a home downpayment.
Great job on being so diligent and thorough in saving for your non-working years!
The general rule surrounding saving for retirement states every employee should save roughly between 10-15% of your income for retirement if you plan to retire at the normal age(roughly 65.) If however, you want to stop working early, that range bumps up to about 20-25% of your pay.
Here are two different choices:
- If you plan on doing everything possible to retire early, by all means go ahead and max out your Roth 401k and start saving for the 2019 Roth IRA contributions.
- If you plan on retiring at a normal age, you're doing everything you need to already. I would open a brokerage account and start saving/investing in that vehicle. You can contribute as much as you want, take out as much as you want and you'll just pay capital gains tax.
Hope this helps!