Hypothetical Question: Age - 29 Annual Salary - $109,000 Annual Contribution % - 12% Company Matches 100% of first 6% of salary. Options: A) Continue to put all annual contributions into 401K B) Divert some of the annual contributions into the ROTH 401K C) Put all annual contributions into ROTH 401K Which one of the above options is the best? Please, explain in detail why whichever option you pick is the best. Thanks!
Not an answer, another question. Are you sure you’ll be able to contribute 12% to traditional 401K? As an HCE, the amount of your contribution is dependent upon the participation of non-HCE’s in your firm.
Isn’t there a dollar limit on how much you can put in a Roth? $5000 maybe.
C if you think you will be in a higher tax bracket when you retire… which you most likely will be.
Answer B. Its tax diversification. You may or may not be in a higher/lower tax bracket at retirement. Do check as to not violate your limits.
There is no way our generation (24-35) is retiring without the tax laws on IRAs changing. Social security will be near bankrupt by the time we reach retirement age so the government will have to enact some type of rate reduction on traditional IRA distributions to enable people to retire. If not, we will all be working until we die. I am betting that the tax rate on IRA distributions will reduce drastically by the time we retire while our income tax rates will skyrocket. Hence, I am not rushing to convert to a ROTH.
m saving all my money in a ditch in the backyard
Your employer match will be traditional pretax, even if you choose roth, so factor that into any asset location planning. I’d say go for all Roth, since tax rates will go up throughout your working years, and your bracket will increase to the point that tax diversification becomes very expensive for you.
Posted by: thommo77 There is no way our generation (24-35) is retiring without the tax laws on IRAs changing. Social security will be near bankrupt by the time we reach retirement age so the government will have to enact some type of rate reduction on traditional IRA distributions to enable people to retire. If not, we will all be working until we die. I am betting that the tax rate on IRA distributions will reduce drastically by the time we retire while our income tax rates will skyrocket. Hence, I am not rushing to convert to a ROTH. ****************************VS****************************** Posted by: dlpicket Your employer match will be traditional pretax, even if you choose roth, so factor that into any asset location planning. I’d say go for all Roth, since tax rates will go up throughout your working years, and your bracket will increase to the point that tax diversification becomes very expensive for you. ********************************************************** Seems the two of you are on the opposite sides of this debate. Both made sense…, which just made it tougher to know which of the best options is the best option!!
I’ve struggled with this one myself. If you take legislation risk out of the picture, for the scenario that you proposed, since the investment time horizon is so long (assume until age 70 1/2 which is when you have to make mandatory traditional IRA withdrawals), the answer is the Roth 401k. I would say the only exception would be if you told me you are in the highest tax bracket now and you will definitely be in the lowest tax bracket when you retire. This being said, I’ve resisted putting a larger portion of my assets in the Roth 401k because I believe, like others here, that the tax laws will change. I do not trust our U.S. legislators will allow the full tax exemption on the gains on Roth distributions when they realize that levying this tax will help alleviate the massive debts that they ran up. By the time I retire in 30 years or so, I think the Roth will be shown to be a big scam. Therefore, I also agree with the tax diversification choice, a little in the traditional 401k, and a little in the Roth.
sterling76 Wrote: ------------------------------------------------------- > This being said, I’ve resisted putting a larger > portion of my assets in the Roth 401k because I > believe, like others here, that the tax laws will > change. I do not trust our U.S. legislators will > allow the full tax exemption on the gains on Roth > distributions when they realize that levying this > tax will help alleviate the massive debts that > they ran up. By the time I retire in 30 years or > so, I think the Roth will be shown to be a big > scam. Therefore, I also agree with the tax > diversification choice, a little in the > traditional 401k, and a little in the Roth. +1 Never trust Unlce Sam
Why would you put money into a Roth 401(k)? You get the tax break in a regular 401(k) up front. With a Roth 401(k), you have to pay the tax up front. $1 today is much more valuable than $1 in the distant future. Even if you don’t object to the Roth pre-payment of tax, I still think the Roth 401(k) is dumb. Why not use a Roth IRA instead? At least an IRA allows you to invest in anything you want. A 401(k) limits you to a small handful of choices, most of which are mediocre. A 401(k) won’t let you buy individual stocks, ETFs, etc. and excludes many major asset classes. Some don’t even offer a money market fund for the bears.
There was an article about this topic on yahoo recently. http://finance.yahoo.com/focus-retirement/article/107549/new-ways-to-shelter-your-retirement.html?mod=fidelity-readytoretire
Just to be clear, there’s a traditional and Roth version of both IRAs and 401(k)s. If you contribute near the the maximum limit ($16,500 in 2009) into your 401(k), you can can contribute more of your income into the Roth than a traditional. This is because the limit is the same regardless of the account type, so more of your income will receive preferential tax treatment in a Roth. In your example, this would only make a difference if you actually contributed $13,080 to the Roth, instead of $13,080 * (your effective tax rate). Now you get into a decision over what your projected tax bracket will be, and what the tax laws may change to. IMO, if you assume that the government will decide to tax Roth distributions at some given tax rate, it’s reasonable to assume that the income tax rates in general will be much higher as well. Especially considering our current tax rates are at historic lows. Regardless of the decision you choose, I would suggest using an IRA of any type, since you have more options regarding your investment options. Roth IRAs also have no minimum distribution requirements, and you are actually free to withdraw your principal at anytime penalty-free.
But the employer will match 100% of the first 6% contribution into the Regular 401K or ROTH 401K as opposed to contributing into a Traditional or ROTH IRA which they won’t match. Isn’t a ROTH 401K better than a Traditional or Roth IRA since the ROTH 401K has the benefit of matched contributions by the employer? Why will someone choose a Traditional or ROTH IRA over a ROTH 401K? I agree that you have more choices with Traditional or ROTH IRA than you’ll with ROTH 401K…, but shouldn’t the benefit of matched contributions in the ROTH 401K make it more attractive? Is it reasonable to assume that tax rates will be higher in the future as opposed to lower? Say in 30 years? If tax rates will be higher, then it’s better to put your money into a Roth 401K, if it’ll be lower in 30 yrs, then it’s better to put it in a Traditional or Roth IRA.
imo a Roth is a good hedge. If tax rates go up, you’ve made a wise decision. If tax rates go down, you may have paid out more than you had to – but hell, tax rates are down so who cares? When the only “bad” outcome is that your income tax rates may be reduced, I think you know which one you want to focus on! Roth 401k all the way.
If I were in your shoes, I’d choose C. Thirty years of compounding will leave you with a pretty nice tax FREE source of income in retirement. I’m assuming the Roth 401K will be treated the same as its IRA brother (probably can roll together when you leave said company)…but the ROTH vehicle allows you to pass the assets to your heirs and they too get tax free distributions (only stipulation is they have mandatory distributions). I am just waiting for 2010 to convert all the traditional type investments I have to a Roth structure. Yes the tax nut will hurt, but just imagine the size it should be able to grow to and the amount of tax free distributions you can take in retirment.