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12-27-2005, 03:29 PM
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#1 |
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Registered User
Join Date: Dec 2005
Posts: 34
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Roth 401k vs regular 401k
As you may know some companies can implement a roth 401k starting in january. This is not a roth IRA. It is a company roth 401k. My company has this option. My question is what would be better in my situation. Pros and cons? I will be 30 in a month. My company matches 100% up to 4% in the regular 401k. I put in 6%, so i am putting in the 4% for company match and 2% with out. I have heard that if you are in my age bracket the roth 401k is a better idea. What does anybody think? If i switched it from the regular to the roth i realize i would lose the tax advantage, but in the roth when i take it out it will be a tax free withdrawl. The company would still match the 4% in the roth. I just don't know which would be better in the long run. I can also split it up and put 3% in both for example. Any suggestions or help would be much appreciated.
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12-27-2005, 09:02 PM
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#2 |
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Registered User
Join Date: May 2005
Location: Chicago, IL
Posts: 54
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If the maximum you can afford to contribute is 6% of your salary, I would suggest that you contribute 4% to the traditional 401K to get your full company match, and then contribute the rest to a Roth 401K to get alternate tax advantages. Your employer CAN NOT match funds in the Roth 401K, so make sure to contribute your the entire amount that your employer will match to the pre-tax plan.
Do you have a Roth IRA? If you do not, I think your best plan would be to decide if your 401K investment choices meet your needs. If they don't, it might be wiser to take the $ above your 4%, and put it into an IRA where you can choose the most beneficial investments. If you do have one and are maxing it out, its up to you to decide whether any additional tax advantaged funds need to be "tax deferred" or "tax free". If you think you will be in a higher tax bracket when you retire, put in the Roth 401K, if you think you will be in a lower tax bracket, invest in the traditoinal 401K account. Keep in mind that putting $ in a Roth 401K will make that income taxable now...it will bite your paychecks a little more aggressively. You and I are of similar ages, and I am JEALOUS that your employer offers the Roth 401K benefit! If I had the opportunity, I would invest as such: 1) the full amount to my pre-tax 401K to get the maximum company match; 2) Roth IRA, 3) the remaining amount allowed under IRS rules for 401K contributions into the Roth 401K. |
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12-28-2005, 09:43 AM
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#3 |
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Registered User
Join Date: Dec 2005
Posts: 34
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Thanks JRW. I agree with what you said. I did do some reading and read that an employer can not match in a roth 401k. What determines the tax bracket when you retire? Is it your salary at the time of retirement. Wouldn't it be logical to think that taxes will go up and a person would be in a higher tax bracket. I don't have a roth ira but am looking into getting one. Since the company can't match a roth 401k it might make sense to look into saving up a little to get into the roth ira, to get more choices. Thanks alot.
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12-28-2005, 09:48 AM
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#4 |
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Registered User
Join Date: Dec 2005
Posts: 34
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If I had the opportunity, I would invest as such: 1) the full amount to my pre-tax 401K to get the maximum company match; 2) Roth IRA, 3) the remaining amount allowed under IRS rules for 401K contributions into the Roth 401K.[/QUOTE]
SO you are saying, put in 4% into my pre tax plan. Get into a roth IRA, and if i feel i can contribute extra money put it into the roth 401k |
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12-28-2005, 09:38 PM
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#5 |
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Registered User
Join Date: May 2005
Location: Chicago, IL
Posts: 54
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Skamin20--
Yes; invest the full amount in your regular 401K to get the maximum company match. Then invest in a Roth IRA...you have more investment choices in a Roth IRA so this, in my opinion, makes it a better choice over the Roth 401K where you will be limited to the plan offerings. If you can afford to max out your IRA, then move on to invest your remaining allowed amount in one of your 401K options. Again, the pro to investing a regular 401K "costs" you less because its taken out of your paycheck pretax...investing the same amount in a Roth 401K costs you more since you have to pay taxes on your earnings and then invest the net amount. Its up to you to decide how to hedge your tax exposure and to determine when you will be taxed higher--now or in retirement. Your tax bracket when you retire will be determined by the amount of earnings you have on your taxable investments and the amount of disbursements you take from your tax deferred accounts. I personally believe I will be in a higher tax bracket, but many people believe they will be in a lower tax bracket and plan on living on less income in retirement. Best of luck to you!~JRW |
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12-29-2005, 09:12 PM
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#6 |
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Registered User
Join Date: Dec 2004
Posts: 191
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Most people are in a lower tax bracket when they retire. Your income is likely to be the following in retirement:
1) social security (if it's even around when you reach 65) 2) capital gains (which you can control) 3) dividends and capital gains (which you will only incur in taxable accounts) That being said, a strategy that I use with a lot of clients in retirement is a Roth Conversion. I project their tax liability for the year and if they are a non-taxpayer (meaning their deductions are higher than their income), then I convert a portion (just enough so that they don't lose their non-taxpayer status) to a Roth IRA. It's the best of both worlds. I 100% believe you should be contributing to a Roth IRA (as long as you're within the income limitations) and continue to contribute your 6% (or higher if you can afford it) to your 401(k) |
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12-30-2005, 05:35 PM
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#7 |
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Registered User
Join Date: Oct 2001
Posts: 1,586
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Another advantage of a ROTH IRA or ROTH 401k occurrs in retirement.
Distributions from a ROTH account will not impact the taxability of your SS benefit. Distributions from a tax deferred Traditional IRA or Traditional 401k may cause more of your SS benefit to be subject to income tax. |
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01-04-2007, 03:16 PM
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#8 | |
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Registered User
Join Date: Jan 2007
Posts: 1
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Your employer CAN match your Roth 401k
From the irs website
Quote:
http://www.irs.gov/retirement/artic...=152956,00.html |
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01-08-2007, 11:04 PM
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#9 |
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Registered User
Join Date: Dec 2006
Posts: 6
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My company just went through this and there seems to be a lot of unnecessary confusion which occurred at my company as well.
The match will always go into the "regular" 401k. You can invest 100% of your money into the Roth and then the company will put the match into the Regular. There should be no need to make part of your contribution into Roth and part into Regular. |
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01-09-2007, 07:57 PM
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#10 |
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Registered User
Join Date: Jan 2007
Posts: 50
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Question to those with a Roth 401k
So I have a question for those that are fortunate enough to have a roth 401k.
When you pledge a % of your income, is that a pretax % or post tax %? For instance, if you're making 100,000 (for mathematic simplicity), and you pledge 10%... Does it run 10,000$ through the tax gauntlet, spitting out (for arguments sake) $5,000 into the roth? Or does it instead take 10% of your pretax income, the full 10k, and put that into a roth? I'm curious how it all works.... ======= I think the reason a 401k match is pre-tax is probably because the company wants to take advantage of the tax writeoff? I imagine it goes down as an expense on their income statements? |
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01-09-2007, 09:20 PM
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#11 |
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Registered User
Join Date: Oct 2001
Posts: 1,586
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CuseHokie,
The tax we pay is not a contribution to the ROTH 401k. If we want $10,000 going to the ROTH then the tax would be in addition to that amount. I would imagine that this will be an administration thing, and some plans will take the tax out of our contribution, and some plans will not, Plan specific. If the employer put his contribution into the ROTH account, the contribution would need to have income tax paid as the money went in. Who wants to pay that tax? The employee that receives the benefit of the ROTH 401k? Or the employer? Most likely the matching contribution would wind up in block 1 of your W-2, increasing your tax bill. |
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01-10-2007, 10:40 AM
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#12 |
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Registered User
Join Date: Jan 2007
Posts: 50
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Hmm...
I'm not sure that answered my question. I guess I'm thinking from the standpoint of maxing out a company's match. Say a company matches 5% of your contributions. And say your salary is 100,000$. Would I need to put in $5,000 after tax to get the full match? If so, that's a lousy deal. I'd likely just stick with $5,000 pretax... Reason being? If my match is pretax anyways, its much easier to reach $5000 pretax than it is $5000 after tax. Do you see what I'm asking?? |
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01-10-2007, 12:58 PM
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#13 |
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Registered User
Join Date: Jun 2006
Location: various
Posts: 251
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I see what you're asking, and your proposed scenario is correct.
If you max the employer match, you're getting the same $ amount either way, just as a % of how much your paycheck goes down is different. Yes, it's easier to save $5K pre-tax than post-tax, but you are the one that's reaping the benefit on the other end by contributing to the Roth 401K. I know this is a hypothetical situation, but I would hope that you'd be able to save at least up to your employer's match, either pre-or post tax. |
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01-10-2007, 03:34 PM
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#14 |
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Registered User
Join Date: Jan 2007
Posts: 50
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Well, if you have a certain income level and you are able to do the full $4,000 to a roth-ira, it may be less likely that you'd do the money post-tax since it'd essentially require more income.
If you were ineligible for a roth-ira, I'd likely just do it all into a roth then. |
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02-05-2007, 10:58 AM
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#15 |
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Registered User
Join Date: Nov 2006
Posts: 28
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Here another scenario. If you had the money to max out the 401K and the roth IRA, would it be better for you to invest half your money into the traditional 401K and the other half into Roth401K (15 or more years investment)? When you retire, you then can take out from both the Roth401K and the traditional 401K which will be a lower income bracket than if you were withdrawing from the traditional 401K alone. I find that putting half and half in the 401K doesn't impact my tax as much now.
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