{"id":604,"date":"2021-04-26T12:05:00","date_gmt":"2021-04-26T12:05:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/why-the-traditional-401k-is-almost-definitely-better-option-if-youre-single\/"},"modified":"2025-09-03T20:25:55","modified_gmt":"2025-09-03T20:25:55","slug":"why-the-traditional-401k-is-almost-definitely-better-option-if-youre-single","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/why-the-traditional-401k-is-almost-definitely-better-option-if-youre-single\/","title":{"rendered":"Why the Traditional 401(k) is Almost Definitely the Better Option if You\u2019re Single"},"content":{"rendered":"

\"\"\/<\/p>\n

\n

I had an interesting revelation the other day while reflecting on the way I set up my 401(k) at 22. <\/p>\n

Making $52,000 per year, my taxable income capped out at the 12% bracket ($52,000 minus the standard deduction), so I opted for the Roth 401(k). <\/p>\n

The \u201crevelation\u201d part came in when I started to flesh out the actual drawdown reality <\/em>of the account as an almost-married person:<\/p>\n

Wait,<\/em> I thought, I contribute to this 401(k) right now while I\u2019m in the \u201csingle\u201d tax brackets, but when we start to use it later, we\u2019ll be in the \u201cmarried filing jointly\u201d tax brackets. <\/em><\/p>\n

If you\u2019re like, \u201cYeah, so?,\u201d think about the general advice that we give young people when instructing them how to decide between Roth and Traditional 401(k) contributions:<\/p>\n

\u201cDo you think you\u2019ll make more now, or do you think you\u2019ll make more later?\u201d<\/p>\n

In other words, do you think your tax rate is higher right now, or do you think it\u2019ll be higher later? <\/p>\n

Since most of us are optimists, we think, \u2018Well, of course<\/em> my tax rate will be higher later! I\u2019m on one, strong upward trajectory, baby. All gas, no brakes.\u201d<\/p>\n

The flaw, of course, is that this line of thinking implies that it\u2019ll be your future career income <\/em>that\u2019ll determine your tax rate in retirement, and not the amount that you\u2019re actually using<\/em>. The reality? The money you sock away in your 401(k) will be taxed as if it, itself, is income<\/strong>, as you use it in retirement. (Here\u2019s another post about why I switched my 401(k) from Roth to Traditional that may lend a little more color here<\/a>.)<\/p>\n

The other important thing to remember about how your 401(k) contributions are taxed if you choose \u201cRoth\u201d is known as the last dollar principle. <\/strong>Your contributions are taxed based on your marginal tax rate, vs. the way your income itself is taxed (which starts at the \u201cbottom\u201d of the brackets and goes up). In other words, you\u2019ll pay your marginal tax rate on your contributions (the highest <\/em>rate you pay), but when you actually USE the money later, you\u2019ll pay for it as if it\u2019s income \u2014 some will be taxed at 10%, some at 12%, so on and so forth. <\/p>\n

Keep that in mind for later. <\/p>\n

So why does being single or married matter?<\/h2>\n

The equation I would always do in my head was this:<\/p>\n

\u201cWell, I\u2019m<\/strong> making $60,000 now. Do I think we\u2019ll<\/strong> want to use more than $60,000 later? Yeah! There\u2019s two of us. Maybe I should just pay the taxes now so we can use more than $60,000 later and pay less.\u201d<\/p>\n

The flaw in this logic might be obvious now:<\/p>\n

It\u2019s not apples to apples. Your tax rate that determines how much you pay in taxes on your salary now<\/em> as a single person is in a less forgiving \u201cbracket\u201d system than the tax rate that\u2019ll determine what you and<\/em> your spouse pay to use it later. <\/p>\n

Let\u2019s do an example<\/p>\n

Let\u2019s pretend I make $60,000<\/strong> per year. <\/p>\n

My marginal tax rate is 22%, which means if I max out my 401(k) and opt for Roth, I\u2019ll pay about $4,290 in taxes on that income. Assuming the tax brackets will stay more or less the same when adjusted for inflation over the next few years, let\u2019s say I want to withdraw $80,000<\/strong> of my 401(k) per year in retirement.<\/p>\n

I might look at that and think, \u201cWell, $80,000 > $60,000 \u2013 I\u2019m better off paying the taxes now on $60,000 so I don\u2019t have to pay the 22% tax rate on $80,000 of \u2018income\u2019 later.\u201d<\/p>\n

That sounds<\/em> like it makes sense, but the logic underlying that sentiment is wrong. <\/p>\n

Let\u2019s add the spouse into the picture. Here comes the bride, bitch!<\/p>\n

So at some unspecified future retirement date, it\u2019s time to start drawing down on the 401(k). <\/p>\n

If I opted for that Roth 401(k), that means I paid $4,290 in tax on each annual $19,500 contribution, right? <\/p>\n

So let\u2019s say I\u2019m drawing down $80,000 of \u201cincome\u201d in wedded bliss. Remember, in order to use your Traditional 401(k), you have to convert <\/em>the funds to Roth (that\u2019s just fancy IRS speak for \u201cpay taxes on it\u201d). Those Roth conversions are taxed like earned income, not capital gains, so we have to use \u201creal\u201d tax brackets, not the more forgiving capital gains tax brackets. tiny violin interlude<\/strong><\/p>\n

In order for me to have contributed <\/em>a full $80,000 during my work years, paying my marginal 22% tax rate on each contribution, I would\u2019ve paid roughly (taxes on $19,500 * 4 in the 22% tax bracket =) $17,160 in taxes. <\/p>\n

But think about it:<\/p>\n

Now I\u2019m married. A married couple filing jointly <\/em>only pays a marginal tax rate of 12%<\/strong> on $80,000, not 22% (like a single person would have to pay on $80,000).<\/p>\n

That means you paid, as a single person contributing <\/em>to the 401(k), 22%<\/strong> on your contributions, or roughly $17,000 on $80,000 of \u201cincome.\u201d <\/p>\n

But if you had used the Traditional 401(k) and contributed $19,500 (tax-deferred) to withdraw later as a married couple, you\u2019d only pay a 12% marginal tax rate on that income as a married person, which is an effective tax of $6,229<\/strong> (takes into account the standard deduction for married filing jointly). That\u2019s an effective tax rate of 7%<\/strong>, compared to 22%.<\/p>\n

This is something to be especially conscious of in the \u201csingle contribution\u201d period to your 401(k)<\/h2>\n

Of course, if you\u2019re already married, it is <\/em>apples to apples. The tax rates that apply to your 401(k) contributions now while married filing jointly are the same ones (assuming they don\u2019t change) that\u2019ll apply to your drawdown later, so there\u2019s really no need to get creative \u2014 but remember, the \u201clast dollar\u201d principle still applies. Your contributions are taxed at your marginal tax rate, while your withdrawals are taxed like income from the \u201cbottom-up,\u201d which will almost definitely lead to a lower effective tax rate. I tend to think the Traditional 401(k) is still the better move since there are proven strategies to access the money tax-free based on current tax code<\/a>, but I digress. <\/p>\n

But if you\u2019re making single contributions now and anticipate being married in the future, the pendulum might swing even more favorably in the direction of Traditional \u2013 since the tax rates that would be applied to \u201cRoth\u201d contributions (in order to contribute post-tax money) are higher for singles than married filing jointly. <\/p>\n

As a general rule of thumb, I think Roth contributions make sense if you\u2019re in the 12% income bracket. Once you get into the 22% bracket and beyond, I tend to air on the side of, \u201cWe\u2019ll figure out how to get it out tax-free later, because I don\u2019t feel like paying 22% on this upfront,\u201d especially<\/em> if you\u2019re single. <\/p>\n

To put it in perspective, a married<\/strong> couple would have to be using (read: spending) $106,150<\/strong> of their 401(k) money or more per year in order to pay a marginal rate of 22% on their Traditional 401(k) withdrawals (the standard deduction still applies, so you\u2019d have to subtract $25,100 from the total amount withdrawn to get the actual taxable amount, and the married couple isn\u2019t in the 22% bracket until they hit $81,051 of taxable<\/em> income). Compare that to the fact that a single<\/strong> person begins paying 22% on their 401(k) contributions as soon as they make more than $53,076<\/strong>. <\/p>\n

In conclusion<\/h2>\n

For unmarried women (especially the high earners), I\u2019d say the Traditional 401(k) is likely to be more advantageous if you intend to get married later. <\/p>\n

The bottom line is that you\u2019re using married filing jointly tax rates to your advantage during your drawdown, while skirting those pesky \u201csingle\u201d taxes by using a pre-tax account in your single earning years.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

I had an interesting revelation the other day while reflecting on the way I set up my 401(k) at 22. Making $52,000 per year, my taxable income capped out at the 12% bracket ($52,000 minus the standard deduction), so I opted for the Roth 401(k). The \u201crevelation\u201d part came in when I started to flesh […]<\/p>\n","protected":false},"author":178814,"featured_media":2432,"comment_status":"closed","ping_status":"open","sticky":false,"template":"si-template-single-post-401-k-s-and-iras.php","format":"standard","meta":{"footnotes":""},"categories":[35],"tags":[47,41],"class_list":["post-604","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-and-taxes","tag-401ks-and-iras","tag-relationships-and-family"],"yoast_head":"\nWhy the Traditional 401(k) is Almost Definitely the Better Option if You\u2019re Single - Money with Katie<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/moneywithkatie.com\/why-the-traditional-401k-is-almost-definitely-better-option-if-youre-single\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why the Traditional 401(k) is Almost Definitely the Better Option if You\u2019re Single - Money with Katie\" \/>\n<meta property=\"og:description\" content=\"I had an interesting revelation the other day while reflecting on the way I set up my 401(k) at 22. 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