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Hello and welcome to The Statement, Mytour's fresh weekly personal finance newsletter. I'm Alicia Adamczyk, Mytour's money writer, and each Wednesday, I'll tackle the most crucial financial topics of the week while answering your questions about managing your financial life.
This week, I'm focusing on shifting your perspective. I've written about creating an 'intimidation list,' embarking on a 'depth year,' and the advantages of full-time employees calculating their hourly wages—all of which encourage reevaluating certain behaviors and habits.
At first, changing your perspective might not seem related to money, but there are significant financial implications. The most obvious one is calculating your hourly wage—it encourages you to think about how you spend your time and energy, rather than just focusing on whether you can 'afford' something based on the current balance in your bank account.
The intimidation list and depth year, however, are more complex. They ask you to reflect on your life, your desires, and the reasons why you might not be pursuing certain things. Is there a job you’re interested in but don’t feel qualified for? Is there a hobby you’ve abandoned? Why? And what would it take to change your mind?
My depth year is focused on catching up on books I've set aside and honing the skills I already have, rather than stressing over what I haven't mastered yet. As for my intimidation list, it involves taking on a few challenges I'm unsure about, but I'm determined to give them a try regardless.
Reader Question: Should I contribute to a 401(k) or a Roth 401(k)?
Ari asks:
If your workplace offers both a 401(k) and a Roth 401(k), how do you decide which to choose? Should your decision be based on your total salary? Or should you factor in your entire household income?
Just like a Roth IRA, when considering a Roth 401(k), your income and age are the key factors. Roth accounts tend to be more beneficial for those in lower income brackets (typically at the start of your career), as you invest after-tax money, which then grows without being taxed. In contrast, with a traditional 401(k), you contribute before-tax money, meaning you'll have to pay taxes when you withdraw funds in retirement.
When you choose a Roth, you're effectively 'locking in' your current tax rate, assuming it will be lower than what it will be in retirement. This means that when you withdraw the money later, you won’t owe taxes, whereas with a traditional 401(k), you'll have to pay taxes upon withdrawal.
Both tax strategies offer advantages in different situations. However, if you're younger, a Roth might be the more advantageous choice. Howard Pressman, a Certified Financial Planner from Virginia, advises, 'If you're in a lower tax bracket, opt for the Roth. A current tax deduction won’t benefit you as much, so why not take advantage of tax-free growth?'
As we've discussed previously, tax rates are currently among the lowest they've ever been (and are unlikely to drop much further), which makes paying today's tax rate more sensible than risking a higher one in the future. This makes a Roth a better option, though it does mean you won’t get an immediate tax deduction.
Diversification is key.
Another factor to consider is how much of your savings is in tax-deferred accounts like traditional IRAs and 401(k)s. If you're over 50, it's a good idea to diversify your savings before retirement so that you can access both taxable and tax-free sources of income.
Regardless of which option you choose, employer contributions will always be made pre-tax, explains Samuel Boyd, a Certified Financial Planner based in Washington D.C. 'If you're unable to predict your tax situation now compared to the future, contributing to a Roth 401(k) while receiving a traditional 401(k) match will at least provide you with tax diversification,' says Boyd.
This is one way to achieve diversification. Another strategy would be to allocate your catch-up contributions (workers over 50 can contribute an additional $6,000 to a traditional or Roth 401(k) this year) to after-tax accounts, suggests Marguerita M. Cheng, a CFP from Maryland. 'Tax diversification is essential for clients,' she advises.
It's also important to remember that too much money in tax-deferred retirement accounts can lead to hefty Required Minimum Distributions (RMDs) at age 70½, which may push you into a higher tax bracket in retirement—just when you need it the least.
On the other hand, Roth assets are not subject to RMDs. 'The great thing about the Roth 401(k) is that you can contribute nearly three to four times as much as you can to a Roth IRA, making it a fantastic option for accumulating that kind of savings and reducing the amount of mandatory income at age 70½,' says Wes Brown, a CFP from Tennessee. While Roth IRAs have a contribution limit of $6,000 this year, you can contribute up to $19,000 to a Roth 401(k) (or $7,000 and $25,000 if you're over 50).
Both types of accounts are valuable components of a well-rounded retirement strategy. If you're young or already have significant tax-deferred savings, the Roth is likely the better choice.
Weekly Recap
Here are a few other stories from the past week that you might find interesting:
The best advice I've received about asking for a raise: Embrace the discomfort—it will pay off in the end.
Using credit card points for travel rewards: Where you'll get the most 'bang for your buck.'
Why you should still check your credit report even if it's frozen: Scammers can still get to open lines of credit, even with a freeze in place.
Can you have too much diversification in your assets?: Probably not, but it’s worth thinking about whether it's really necessary.
How to get compensation for cancelled European flights: It’s simpler than you think!
Managing work stress: Just reply to the email, already.
No statistic will help you outsmart the market: Relax and enjoy the ride.
When investing now might not be the best idea: When your financial foundation isn't solid yet.
Protect yourself when using a drive-up ATM: Always cover the PIN pad to avoid fraud!
That’s all for this week! If you have a question or topic you’d like me to address, feel free to email me at [email protected]. For more articles, visit Two Cents.
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