TODAY ON REASONED REFLECTIONS:

• Personal finance articles 💰;

• A great sign-up bonus on one of the best travel cards;

• Roth 401(k) versus Traditional 401(k);

• Quote of the Reflection.

Personal Finance Articles 💰

Time for a bit of R&R

• Debt + Stuff = Happiness? Wrong!

  My Take - Keeping up with the Joneses is a sure-fire way to end up in lots of debt and with stuff you didn’t really want to begin with.

• Things to remember the next time you are buying a new car

  My Take - Buying a new car is one of the largest purchases you might make (especially with current interest rates). I think it makes sense to try and negotiate the purchase of the new car separately from your trade-in value.

• Forced savings sets you up for future success

  My Take - Automating your savings/investments is one of the best ways to build wealth. The next step is to forget about it and let that dollar-cost averaging work for you.

• How to get to a $1M net worth

  My Take - Let your money work for you in the stock market and find a brokerage firm that has low fees.

• Avoid this mistake when rolling over your 401(k)

  My Take - As someone who is in the process of rolling over a 401(k) to an IRA, this is good information to know. Once that money hits, I’m going to get it invested right away so my money is working for me.

Increased Bonus on my Favorite Travel Card

Ready to take your travel game to the next level? One of my go-to travel credit cards just got even sweeter! Right now, they’re offering a welcome bonus worth up to $1,050—that’s 60,000 bonus points (a $750 value when booked through their travel portal) after spending $4,000 in the first three months, plus up to $300 in travel statement credits within your first year. Don’t miss out—grab this deal while it lasts!

Reflection No. 6: Roth 401(k) or Traditional 401(k)

I - Issue: Which is better: a Roth 401(k) or a traditional 401(k)?

R - Rule: A Roth 401(k) allows after-tax contributions, meaning you pay taxes now, and withdrawals in retirement are tax-free. A traditional 401(k), governed by Section 401(k) of the Internal Revenue Code, allows pre-tax contributions, meaning you get a tax break now, but you’ll pay taxes when you withdraw in retirement.

A - Analysis: Deciding between a Roth 401(k) and a traditional 401(k) is a big decision; the critical difference is when you want to pay taxes—now or later. With a traditional 401(k), you contribute pre-tax dollars. For example, if you earn $60,000 and contribute $5,000 to your traditional 401(k), you’ll only pay taxes on $55,000. This immediate tax break can be a big perk, especially if you’re in a higher tax bracket. However, when you start withdrawing in retirement, you’ll pay ordinary income taxes on the contributions you made and any growth.

In contrast, you contribute post-tax dollars with a Roth 401(k). Using the same example, if you earn $60,000 and contribute $5,000 to a Roth 401(k), you’ll still pay taxes on the entire $60,000 this year. The major advantage? When you retire and start withdrawing money, your contributions and all of the growth are tax-free, which can be incredibly beneficial if you expect to be in a higher tax bracket in retirement. The flexibility of tax-free withdrawals in retirement gives you more control over your income in your later years.

Here’s a twist: any contributions your employer makes go into your traditional 401(k), regardless of whether you contribute to a Roth or traditional account. That’s because employer contributions are tax-deductible for the employer, so any money your employer contributes to your retirement will sit in a traditional 401(k). You’ll pay taxes on those funds when you retire, even if your contributions went into a Roth. So, you may end up with traditional and Roth 401(k) funds.

What if you’ve built up a sizable amount in a traditional 401(k) and later decide you want those tax-free benefits? You can roll over traditional 401(k) funds into a Roth 401(k) or a Roth IRA, but you’ll need to pay taxes on the amount you convert at the time of the rollover. This strategy, known as a Roth conversion, can make sense if you expect your tax bracket to increase in the future or if you want to reduce taxable income in retirement. Be mindful of the tax hit during the year you make the conversion, as it could temporarily push you into a higher bracket.

Regarding withdrawals, there are significant differences between the two accounts. For traditional 401(k)s, the IRS requires you to start taking Required Minimum Distributions (RMDs) at age 73, whether you need the money or not. Uncle Sam wants his share at some point! These RMDs are taxed as ordinary income, which can complicate your tax situation in retirement. With Roth 401(k)s, you also face RMDs, but there’s a workaround—roll your Roth 401(k) funds into a Roth IRA before you turn 73. Roth IRAs have no RMDs, allowing your money to continue growing tax-free for as long as you like, which can be a significant advantage if you don’t need to draw on those funds immediately.

So, which is better? It depends on your current tax situation and your expectations for the future. If you’re in a higher tax bracket now and expect to drop to a lower one in retirement, the traditional 401(k) might be the better choice. You can take the tax break today when it’s worth more. However, if you’re young or expect your tax bracket to increase over time, the Roth 401(k) allows you to lock in tax-free withdrawals when it matters most.

C - Conclusion: The decision between a Roth 401(k) and a traditional 401(k) hinges on your current and future tax brackets. If you prefer tax-free income in retirement and expect to be in a higher tax bracket later, the Roth 401(k) may be the more prudent choice. However, if you want immediate tax relief and expect a lower tax bracket in retirement, a traditional 401(k) could serve you better.

Time to Reflect…

As you plan for retirement, choosing between a Roth 401(k) and a traditional 401(k) can shape your financial future in powerful ways. The key is understanding your current tax situation and making an educated guess about where you’ll be. While no one has a crystal ball, you can still make an informed decision that aligns with your long-term goals. Whichever path you choose, the important thing is that you’re taking steps today to ensure a more secure and comfortable tomorrow. Make your retirement work for you.

Quote of the Reflection

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