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The Best 401k for Young Adults

How to get the best 401k for young adults

What’s the fastest way for most of us to get rich? By investing as much as we can as early as we can into a 401k. As a reader asks, though, what’s the best 401k for young adults? A Traditional 401k or a Roth 401k?

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Meet our young adult, Carter

After listening to Queer Money™  episode 61, “5 Steps to Prepare for Financial Emergencies in Your Sleep,” Carter from Ohio emailed us a question. Carter wants to know, as a young gay man, which type of 401k offered to him by his employer is best? Should he invest in a Traditional 401K or a Roth 401K?

There’s no blanket answer to this question. So, after we received Carter’s question, we asked him a few questions ourselves. Carter’s 27 years old and graduated college a few years ago. His current income is $43,000 a year and he has student loan debt financed at 3.5%.

Carter has an emergency savings account set up per our instructions in Queer Money™  episode 61. He’s currently saving $40 a month in that emergency savings account and will have $500 in emergency savings by next July.

What’s the difference between a Traditional vs. a Roth 401k?

A Roth 401K is an employer-sponsored retirement account in which you contribute after-tax dollars and the money you invest in that account grows tax-free. Withdrawals from this account are, also, tax-free.

A Traditional 401k is an employer-sponsored retirement account in which you contribute pre-tax dollars that grow tax sheltered. Withdrawals from a Traditional 401k are, unlike with a Roth 401k, taxed as ordinary income upon withdrawal.

The annual contribution limit for both Traditional and Roth 401ks is the lower of 100% of your income or $18,000 for 2018. Additional contributions of up to $6,000 can be made into either type of account if you’re currently over 50 years old.

Calculate your retirement income with this simple calculator

What’s the best 401k for young adults like Carter?

As with most things in life, it depends. Ultimately Cater and all of us who invest in a 401k (or a 403b for government employees) is, do I want to pay my taxes now or when I’m retired? You ultimately want to pay the least amount of taxes possible. Will that be when you’re younger or when you’re older? Will taxes be the same, higher or lower than they are today?

No one can answer these questions with total certainty. Therefore, some professionals recommend hedging your bets and investing in both a Traditional and a Roth 401k. Investing a portion in both reduces your risk of incorrectly guessing which way taxes will go by the time you retire and still let you benefit today from the benefits of investing into a 401k.

To hear our best recommendation for the best 401k for a young adult such as Carter, listen to this episode of Queer Money™ .

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