ROTH 401K....not sure which side to invest in...?

Hello Folks,

I just started with a new company and they offer a ROTH401k instead of the standard 401k. Normally I would know what to do with my 401k, in terms of the percentage to invest which is usually 10% and which funds to choose.

I am stumpbed with how the ROTH401k works.........I know that I can either take part of my contributions that are pre taxed and stick it in the 401k side........and then take the rest and have it taxed and stick it in the ROTH side........at a maximum of up to 15,500 for this year.....because a ROTH401k limit is set to the limits of the 401k as opposed to the regular ROTH IRA which I think is 5,000........at first it seemed like a no brainer.........oh well take most of my money and flood the ROTH with as much as I can......having it taxed now...........and knowing I will not need any of the money for atleast 25 years..........I can bank on it growing........especially since the market is low..........and not have to pay anymore taxes on my earnings.........because that money was already taxed...

Is this a good plan to follow? Should I just go for the gusto and be taxed now and earn as much as I can knowing I can contribute 10,500 more a year in my ROTH 401k than the standard ROTH and not pay taxes on any money I earn during retirement?

Does anyone have any thoughts or opinions on the ROTH 401k?

I make about 95k a year and will be investing 10% my company does not match until I have been working for them for atleast a year, but considering the market conditions.........I wanted to continue to put money aside for my future..........and buy cheap.........and for the long haul. I currently have about 5k now in my old 401k account and was going to open a seperate ROTH but now I get to kill 2 birds with one stone..........most experts including Warren Buffet is saying to continue to buy now...........so.....my thoughts are Id get way more for my money in the long run if I just put it all in the ROTH bucket within the ROTH 401k......

91k- single or married?
if single the regular 401k up to a point will be better for you.

The goal (if single) will be to get taxable income into the 25% tax bracket (below $82250).

You have a standard deduction (single) of $5450 and a single exemption of $3500. 91,000-5450-3500=82050. 82050 is less than $82250, so put the first $1000 into 401k PRE tax and put the rest in post tax (giving you a small cushion). 1000/91000=2% (rounded 1.1% up) and put remaining 8% into Roth. This saves you 3% on every additional dollar earned (28% bracket vs 25% bracket).

If you are married, the numbers look like this. 91k gross income. $67900 is cap of 15% bracket. 10900 is std deduction and $3500 for two exemptions (self and spouse). 91000-10900-3500-3500=73100. Put 6k into regular 401k and 4k into Roth. The 6k drops the 73100 to 67100. 6k is 7% of contribution and then I would put 4% into Roth (the 6% pre tax should allow you to save close to 11% of income without much change in take home from 10% going into Roth post tax).

If you itemize deductions or claim other adjustments these calculations change considerably. The goal is to use 401k to lower tax bracket enough that Roth is taxed low and withdrawn high.

Jim_Ohio,

Good analysis...

Savon77,
When the company does start to match your 401k contributions, that match will be in the form of pre-tax contributions.

As for your older 401k, move that to an IRA. A ROTH IRA would be good.

Hey guys!

thank u so much for taking the time to respond.

Well I am single and I really want to stash as much money away as I possibly can to take full advantage of my age 31yrs, and the market....I do not plan on touching this money at all for 20-25 years.....and so it looks like I would be taking the first option....

I am confused a bit though....If I normally invest 10% then essentially what you are saying is to place 1% into the 401k and the other 9% into the ROTH 401k?

forgive my slowness....lol I was told the contrary by an investments guy to put all my money into the 401k because I would be in a lower tax bracket when I retire.....which makes sense....but it makes more sense now to pay taxes up front and then earn as much as I can and not have to pay for any of my earnings later on.....right???

I actually make 95000 a yr and I am single and I am investing 10%

so 95,000-5,450 -3,500 = 86,500

I would need to invest $4,250 into my 401k to bring my taxable income to $82,250 and then I could invest $4,750 into my ROTH 401k which would bring my total yearly investment to $9500...

This makes total sense to me first bring down my tax bracket so Id be taxed less money then put money into the ROTH 401k at a lower tax bracket....ahhh the tricky ways to get around taxes.....

any other advice...I plan on investing in indexes for my large caps but my small and mid caps there are no indexes so I am going more for the expense ratio and how its performed....although I know past performance doesnt dictate future earnings.....

did I do the math correctly....?

Thank you for the advice...anything else you can throw in would be greatly appreciatted.......

Kind Regards

Savonn

Jim_Ohio's advice is excellent.

However, if 2010 comes along and you feel that you didn't make the right choice with the Qualified Plan, as it stands now, you can rollover your Traditional IRA to a ROTH. I assume, but tell me if I am incorrect, that if you have a 401K you can roll to IRA then to ROTH.

In this year there are also no earnings limitations placed on the ROTH contribution, therefore if your salary increases and you do not qualify for the ROTH, in this year you can rollover/contribute regardless of your salary. Only downside is that any untaxed income/gains will be taxed over the years 2011 and 2012.

http://www.money-zine.com/Financial-Planning/Retirement/2010-Roth-IRA-Conversions/

(Not the best link...but the quickest to find)

A proper balance between qualified and non-qualified retirement income is best. I personally prefer to gear many of my wealthier clients towards tax-free retirement income preparing them to take advantage of 2010 ROTH provisions and by using Variable Life Insurance Policies. These people typically have a need for lowering their tax brackets in retirement because they already have plenty of taxable retirement income. Additionally, it is fair to project that taxes will continue to increase considering the cost to maintain Social Security for baby boomers, the upcoming health insurance reforms, and the socialization of corporate losses.

As long as you are taking advantage of one or more of the tax sheltered investment vehicles like IRAs, 401Ks, Variable Universal Life, and Annuities you are doing a swell job of managing your money. The more you keep from Uncle Sam, the more is left for you and your family to enjoy.


Kenneth Besada
Insurance/Financial Services
EMAIL: Kbesada@FarmersAgent.com