Hello,
I currently max out a Roth IRA. I will have a pension as well after retirement. My current employer does not offer a 401k match, but they do offer a 401k. Should I also put money into an unmatched 401k, or start putting extra money in a brokerage account?
Thanks!

The advantage of a 401k is that you won't have to pay taxes on any returns until you start withdrawing money.

you can rely on your pension, but unless the government (Gov retirement) can keep printing money for you its wise to look out for yourself.  not sure how it works with a Roth but I don't see a way you can loose putting pretax dollars away.  I maxed everything as much as allowed

Same as an IRA in that regard.

Tough question.  Does your employer offer a Roth 401k option, or is it pre-Tax only?

The benefit of brokerage is long term capital gains are *currently* taxed at a lower rate than ordinary income (and could be zero).  There is no guarantee it will always be that way, but it is now.

The benefit of a pre-tax, tax-deferred 401k, is that you lower your taxable income now, to allow you to pay less in taxes, and potentially save more.  It is also nice to have this "bucket" to hold bond funds in a balanced allocation, so you are not paying taxes as income on dividends.

The benefit of a Roth 401k option is just more money growing tax free, depending on how much time you have until planned retirement age.

The right mix of these, will depend on your tax bracket now, your planned tax bracket in retirement, and your planned taxable income during retirement (how close you might be to increased Medicare premiums, etc.  It is complicated.  But I'd always want SOME tax deferred bucket, to keep equities in Roth and Bond/Fixed income allocation in tax deferred to limit tax liabilities on income while growing it.

Backdoor Roth.  Roth>401k

A little more info. I have about 20 years left before retirement. My employer offers a 401k with no Roth I believe. I will double check tomorrow morning.

20 years is a long time.  If there is a Roth401k option I'd go for that.  If not, I'd split money between pretax 401k and Brokerage to have access to both buckets.

20 years is a long time.  A lot also depends on your situation - what age you plan to retire at, married, does the wife work, what your state tax situation is, how much your pension will be, is the pension reliable(many companies have gone bankrupt and their pensions vanish), and many other factors.

Given your timeframe and that it sounds like you aren’t living paycheck to paycheck, I would at least contribute a small amount.  $200/month will be over $100k in 20 years even with below average market returns.  If you do get matching then contribute at least enough to get all the matching.

The advantage of a 401K is that the money you put into it isn't taxed until you pull it out. It's pre-tax money, so you have more money to invest and grow. In theory, you'll be in a lower tax bracket when you do actually pull it out.

20 years, what an enviable postion to be in especially with you asking the right questions!!!


If I am in your shoes:

1)Maxxing the ROTH IRA in S&P500 index funds
2) Maxxing 401k in index funds
         Yes preferably in a ROTH401k but if they have a standard 401k, heck yes!

3) stick to the plan for 20 years
4) profit

In 20 years, you could be worth $2m-$3m easily.

The biggest 401k advantage is that most plans have some fund matching, so you get free money up front.  If you get 50% matching that's a lot more money than then 10-15% in taxes the average person will avoid.

Regarding the tax implications, it depends on what your tax situation is now and what you expect your tax situation to be when you are taking money out of your 401k.  Income taxes are at historically low levels right now, so a prudent plan would anticipate higher taxes 20 years in the future.

The TCJA tax cuts expire at the end of 2025, so there is a big income tax increase on the horizon.  Given the .gov spending and ballooning debt over the last couple years it seems foolish to think congress will pass a law to stop that tax increase.

OP: saving is never a bad idea, but some ways of saving for retirement are better/worse than others depending on the specifics of your situation that we don't know.

FPNI

What is your current Fed tax bracket?  If it is over 24%, then a pretax 401k may be good. If it is 24% or lower and you have a Roth option or Mega Backdoor Roth option in your plan, you might want to go that route.

If you have a pension and also Social Security, you really don’t want a large pre-tax balance. Having a pre-tax balance may be a good idea if you plan to retire early, or if you want to delay your SS as late as possible. In those instances (assuming you retired after 59.5), the pre-tax account could be a good account you draw down before SS kicks in.

Pensions are counted as income in retirement. This will eat up some of your lower tax brackets. Pre-tax 401k withdrawals are income that would be layered on top of the pension for tax purposes. So this means if your pension is using up your 10%, 12%, and maybe up to the 22% bracket you 401k withdrawals will start being taxed above that rate. It also means more of your SS will be taxed, which will skyrocket your overall tax rate till you hit the 85% max. Then you have to think about your filling status in retirement. If you are married and one of you dies you have now just moved into the single filing bracket but your income may not drop all the much. So taxes will now be even higher. Then you have RMDs and IRMAA which can make things even worse.

I also have a pension plan at work. I’ve been working hard for the last several years to lower my pre-tax accounts by doing Roth conversions. In the end it isn’t just how much you have, but how much you keep that is important.

Thanks everyone for the replies! The pension is coming from state government. I plan to retire at 52, along with a LEO supplement that will equate to 100% until I reach 62.  Current status is filing married and we are in the upper 3/4 24% tax bracket.
Thanks again.

I wouldn’t recommend a pre-tax 401k. Especially if you get SS when you retire. You will loose a lot to taxes.

Check to see if your plan offers Roth options. Also what investment options does your plan have?

If no Roth options, and only poor investment options, I’d suggest a brokerage account.

Based on the info you have provided you are 32, married, taxable income of $320-360k(the top 1/4 of the 24% married bracket), and will have a significant pension starting at 52 when you quit working?  
If you live in NC you are also paying 5% state income tax.

If that is accurate then you are paying a very high 5-figure amount in federal income taxes and likely over $100k in total taxes and I would strongly recommend you look at ways to reduce your tax burden.

You should be able to max your 401k and not even notice the difference, I would start there.  $23k annual 401k contribution will save you around $7k/year in income taxes alone.  

Additionally, you say you max your roth, but also imply that your income is above the limit for roth contributions.  

That’s not correct, sorry I looked at the wrong bracket for married filing jointly. We are in the 22% bracket!

So $165-$190k - same things apply but maybe it's infeasible to max multiple 401k and roths.

Does the wife's roth get the max contribution every year?  If not I would definitely contribute to it also.  
You can't go wrong contributing a token pre-tax 401k amount - $200/month will be $100k in 20 years even with a poorly performing stock market.  

With a pension you really need to consider your tax burden after retirement.  With a pension, social security, and RMDs it's very easy to have more taxable income in retirement than you need, forcing you to pay more taxes than necessary.  
Assuming you're still married, this can become a very big deal once one spouse dies(because the remaining spouse now has to file as single).  

I never thought about it from that perspective either. Both of our IRAs are currently being maxed out. The RMD would only really play a part at death for a Roth IRA correct? As long as we don’t have to draw from it during retirement.

If an IRA is not depleted, it must take RMD's. 72 is the age and wouldn't be suprised if it's before that for us Gen-Xers when we arrive.

Crazy ass thing, when you die, your heirs even have to pay the RMD's on the account. Wild.

One play is to tap the IRA and pay taxes on it before the RMD's kick in while letting the post-tax accounts grow.

Attached File

Do they offer a roth 401k? If so, choose that, if not, traditional is fine. I would max it out, nothing wrong with not having a match, you are lowering your taxable income and allowing it to grow tax deferred.

Roth has no RMD while you are still alive. Pre tax does. The .gov wants their tax money. They really want that account to grow big before they get their tax money. For pre-tax you get a tax break on the “seed”. The gov gets tax revenue from the fruit bounty your seed generated.

Both Roth and Trad IRA have RMD distribution rules for heirs not considered “qualified”. The qualified is a short list like a spouse or disabled child. Pretty much everyone else has to empty the account in 10 years.

Another reason why pre-tax sucks. It can cause your heirs to be in higher tax brackets when they have only 10 years to empty the accounts.

Roth IRA has no rmd for you.  Inheritance planning to minimize taxes is a whole separate game that depends on lots of factors that will change over the years.  
The rmd is based on account balance and your age - Bigger balance and older makes your rmd bigger because Uncle Sam wants his tax money.

You can do pre tax 401k now to save the tax bill, then down the road in years where your income is lower you can do roth conversions.  But that requires a plan to maximize your tax savings.

True except for the part about having lower income in retirement.

Even at 52 he is expecting 100% of pre-retirement income. SS will be on top of that which sounds like he is starting at 62.

That is the “problem” with pensions. It’s also affect those who save a lot into trad accounts like 401k and IRA. Your retirement income doesn’t actually go down in a lot of cases.

He didn't share if his wife works and, if she does work, when she plans to stop working.  
A plan could include roth conversions after the wife retires but before SS starting because they would be in the lowest tax bracket.  

Just an illustration of how important it is to incorporate timing into your retirement plans.

Wife is employed with the same pension plan with the exception of the LEO supplement. Y’all have great information, do y'all recommend any books, podcasts, or individuals to follow to become more knowledgeable?

A couple YouTube channels:

Safeguard wealth management

The money guy


Forums:
Bogleheads.org

https://www.youtube.com/@MoneyGuyShow

https://www.amazon.com/The-Simple-Path-to-Wealth-audiobook/dp/B0725RFDPY

https://www.amazon.com/Bogleheads-Guide-Investing-Second/dp/B07VGDSDPB

https://retirementplanningeducation.com/podcast
https://retirementplanningeducation.com/facebook-group

Good on you for planning ahead at a relatively young age.

Keep doing the Roth IRA as long as you can.  I can't contribute to an IRA, traditional or Roth.  Seems the .gov is offended if you leave the cave, kill something, and drag it back to the cave.

Definitely contribute to the 401k, it reduces tax liability.  My effective tax rate is 23%, so every $1 I put in a 401k saves me $0.23 in taxes.  You could also look at it as my 401k contributions have an instant 23% return - ain't nothing legal gonna match that year after year.  2023 was an awesome year for equities.  2022 was not, and so on through the years.

Read up on Roth conversions for when you retire (roll your 401k into an IRA, convert $ to Roth IRA up to the top of the 12% bracket, etc.)

Bogleheads.org is a useful site with a wiki and forum.

Why not backdoor?

Because I would like to avoid paying more taxes at a 23% effective tax rate and I do not have any after tax IRA contributions I could recharacterize.

I intend to do some Roth conversions once I retire or go part time (end of 2025 or end of next week, my thoughts vary :)).  Based on current tax rates and laws, my effective tax bracket in retirement will be ~ 14%.

Any thoughts on doing things differently?

No, not with retirement that soon.  However, I'd still go for backdoor Roth contributions while you have earned income.  This stuffs $8,000 per year (assuming age 50 or over) into a Roth IRA, and allows for tax free growth to grow for a while before you might need access to the funds.  Now, this assumes you don't have any pre-tax IRA's, or the pro-rata rule effectively blocks this strategy.

A W2 working stiff doesn't have a lot of options, once you cover 401k elective deferral, Mega Backdoor Roth (if offered), Roth IRA (if income eligible), Backdoor Roth IRA (if not blocked by pro-rata rule), and HSA (if on a HDHCP).  Beyond that, it is just stuff it away in taxable brokerage and shoot for long term capital gains.

So this is a tough one but here are some thoughts for you to consider:

401K topics:

1.  A pre-tax 401k contribution will give you immediate tax savings today but subject you to what ever your marginal rate you'll be in in 20 years.  This is a great unknown.
2.  A 401k is ERISA protected so it is safe from creditors and predators.  Meaning it is judgement-proof and can only be taken by the courts for back taxes, child or spousal support or a divorce settlement.  
3.  One downside to a 401k is the fees.  The fees will always be much much higher than you investing the money yourself.  Typical 401k fees can run as high as 1% of your invested capital.
4.  One nice feature of an employer sponsored 401k is the money is taken out of your check thereby eliminating your ability to spend it on another AR.
5.  Due to the Secure Act, your beneficiary has basically three options at your passing:  Take the money all at once and pay the tax,  spread the money out over 10 years and pay the tax each year, wait ten years then take the money and pay the tax.  


Invest on your own topics:

1.  All invested capital is subject to judgement in case you are sued.
2.  Any dividends, interest, long or short term capital gains will taxed at your marginal or capital gains tax rate each year.
3.  If you hold the security for a year or more you will qualify for capital gains tax treatment on dividends so that's a plus at your bracket. (15% vs. 22%)
4.  When you die, your heirs get what's called step-up in basis and avoid all capital gains taxes as the asset is newly valued on your date of death.  Please note you may still owe state or federal estate/inheritance tax depending on where you live and the size of your estate.

So there is no easy answer for you.  My question you is do you like to manage your money?  Is this something that is of interest to you?  Do you have the financial discipline not to buy the next AR and instead contribute to your brokerage account each and every paycheck without fail?  If so, the invest on your own may make sense.  On the other hand if you are in a profession or occupation that highly litigious, having ERISA protection for your money may be worth it.

I wish you good luck in your journey.  

Pension? Assuming that it will be $50,000 or more in today's money I would see if there is a ROTH 401K option.