I'm a new IB analyst currently figuring out how I should set up my 401(k). Fortunately, I have no student loans or other debt and live modestly so I'm planning to max out contributions. At the moment, I plan on spending my career in finance and probably retiring in my 50s or 60s. Should I contribute to a traditional 401(k), a Roth 401(k), or split my contributions between both? I know there are reasonable arguments on both sides but would love to get some more opinions.
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This is what someone told me when I graduated a few years ago and it’s served me well: 1st priority, traditional 401k up to the max your employer matches. after that, max a Roth IRA (if you’re eligible) to take advantage of tax free gains, and after that, max your 401k. the rest should go into a brokerage account once you’ve saved ~1-2 months of expenses to keep in your checking.
Thanks that makes a lot of sense. The Roth IRA income limit is $140k though so I don't know if I'll be eligible (depends on bonus) but even if I am it would only be for like a year? Any thoughts on Roth 401(k)?
Look into a backdoor Roth, more complicated but there is no income limit
I use the Roth 401(k) option. It allows you to pay taxes up front while they're historically low and in return you'll get compounded tax-free growth for the next 30-40 years. Assuming taxes will eventually go up and you will progress in your career, I think Roth 401(k)'s are a great way to save for retirement.
^ this except you probably want a 6 months emergency fund
Do the roth 100%. Don't do traditionals. Roth IRAs are much more tax efficient. Even if you've passed the 140k (or whatever it is currently) limit, you can do a backdoor roth instead of the traditional. Look up backdoor roths on vanguard, they have a few insightful articles. So, max out the roth (backdoor or not if you're eligible) with investing the 401k match, then if you'd like to keep investing, invest in the 401k, granted you have flexibility in your investment options. This is different for each firm, but generally it's a good idea to keep contributing to the 401k after roth.
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