which one do you guys prefer? I’m 26, in 25% tax bracket, and get a company match up to 5%. Currently doing the Roth option.
Go for the full match at least. It is really up to you which plan you choose. If you think taxes will be higher upon redemption, then go with the Roth. If you think taxes will be less, then go with the traditional. Retirement planning now has a tax diversification aspect now.
You should never put less than the company matches into your 401K. I max out my 401K and maxed the Roth IRA until i wasnt eligible. I dont think there is a correct answer as to which one will benefit you the most. While 401Ks are great in that they lower current taxable income, the distributions count against you when collecting social security. So if you are very conservative and responsible, and have socked away lots into your 401K, when you retire, I’m fairly confident you lose some of the social security benefits, because your income (distributions) are too high. I am fairly confident that Roth IRA is exempt from this. You are also talking about 40 years down the road, so who knows what the hell will happen. I would advise to put no less than 5% into the 401K. Try to take advantage of the roth IRA before you are legally unable to.
Basically, Roth is always better unless A) Your current tax bracket is substantially higher than you expect your retirement tax bracket to be (i.e. you’re earning a LOT more now than you’d be living on in retirement), B) You’re close enough to retirement that today’s tax break on the traditional IRA has more value than the tax-free-ness of the Roth’s withdrawal. The laws may have changed, but there is an earnings limit to when you can put things away in a Roth but not an earnings limit to the traditional (though your tax break might disappear if you are in AMT territory, not sure). So if you are expecting your income to rise, you may at some point need to open a traditional IRA because the Roth is not an available option.
The thing I’m thinking about though is that my company match would be higher if I do the traditional. Because the company matches my after tax contribution with the Roth but would match my before tax contribution with the Traditional.
Sounds like time to break out an excel spreadsheet (or you can solve analytically if you aren’t lazy like me).
If you’re 26 and you are able (eg. income is low enough) you want the Roth. Make sure you are still contributing on an after-tax basis enough to get the full company match. Also FYI, company match will be non-Roth.
Ceteris Paribus, Roth vs. Traditional, is all based on the assumed tax rate when you retire. I go with a Roth because I know what the tax rates are now. Who knows what tax rates will be in 36 years. We could have a string of Obama’s in office and tax rates will be 50+ percent. Of course, this could murder your returns and lower your standard of living in retirement.
mkgref Wrote: ------------------------------------------------------- > If you’re 26 and you are able (eg. income is low > enough) you want the Roth. Make sure you are > still contributing on an after-tax basis enough to > get the full company match. > > Also FYI, company match will be non-Roth. I think my company might be fucking this up then. So the company needs to figure out what my contribution would have been to a Traditional and then match that amount correct? They are currently matching the amount that goes into my Roth 401k which is after tax.
I’m not sure about a Roth 401k, if that’s the same as a Roth IRA or not, but it is true that there are annual contribution limits to the Roth IRA. So if you earn, say 50k, and your contribute 5%, that is $2500. Then your company contributes 5% match, which is another $2500. Total contribution is $5000. That’s the max (I think) you can contribute for 2008 anyway. If you earn more than that, say 100k, you can contribute 5% or $5000 to the IRA. Now you’ve used up your contribution allowance. If the company matches 5%, it can only go into a traditional retirement account, or nowhere at all. So MKgref has a good point I overlooked.
I say go with ROTH there is a higher chance of coming out ahead with ROTH than traditional
FYI, lots of discussions about this topic earlier, dating at least back to this: http://www.analystforum.com/phorums/read.php?1,644280
When you are young, you should go with Roth. The longer your investment, the larger sum amount of appreciation you receive, the larger tax you will need to pay if the appreciation is taxable.
Start a side business and open up a Solo 401K along with your employers 401k. Of course your side business needs to be profitable to make contributions.