Ok Hornfans... I did a quick search on Horn Depot and didn't find much info on this topic. My company offers both the regular 401K and the Roth 401K and I want to learn more about the pros and cons. Should I pick one vs the other, or use a combination of the two? I've had a regular 401K for about 8 years so there is a nice chunk of change in there. Maybe a Roth 401K will help me diversify the tax risk? But I guess it will also hurt the take home pay some. What impact does either decision have on my tax bracket? Oh too many questions, let's start a thread about it.
I've been curious about it, too. My company doesn't offer it but I think they will soon. How far away are you from retirement? From what I understand, the farther away you are, the better it is. It works like the Roth IRA but has the same limits and restrictions of a 401K. (I think.) I'd generally try to keep equal amounts in both just to mitigate your tax liabilty. Good topic, though.
I'm 30+ years from retirement. And yes, Roth 401K and 401K both have the same $15K limit. The company match is the same for both.
So, both your and the company's contributions to a Roth 401(k) are after-tax? Never taxed again? That's a sweet deal, if so.
Traditional 401k = pre tax contributions, taxed upon withdrawal Roth 401k & Traditional Roth IRA = after tax contributions, no tax upon withdrawal. Obviously, the first test is max out any and all matching programs your company offers, even if you can't afford it. This is free money, and you'd probably be a fool not to. After that, the next question for you is, are you going to be in a higher or lower tax bracket when you begin your withdrawal (assuming the tax rates remain the same), than you are when you contribute? The answer to this question will reveal which option is better. Remember that when you're in your mid to late 50's (or whenever you decide to begin taking money out), you will probably be approaching retirement, your house will probably be paid off, and your kids will probably be supporting themselves. Of course, everyone's situation is different, but the tax bracket issue I mentioned is the real variable. A lot of young savvy investors I know sing the praises of anything Roth (especially since its lifetime may be limited), but I have not seen any evidence other than the tax bracket test which makes me feel one is better than the other.
You need to be careful on some of the things being said. You have a combined maximum of $15,500 for your deferrals between the two accounts. The Roth is only non-taxable for your contribs is they are left in the plan for the specified amount of time. What I am not sure is the taxation on the employers contribution. In a normal K plan you pay no taxes on their contrib until you have paid to you. In the case of Roth you pay taxes on your current contrib and get the benefit on no tax on your contribs and gain. Don't recall how taxation on employer contrib works. Someone has to pay that tax and it might be you pay tax on that at point of distribution. Big hold up on these being in more plans in the IRS did not make clear certain payment rules and proceeds. For example, if you have a traditional 401(k), take a loan, and default on the loan you owe taxes and penalty. In a Roth you have already been taxed so do you get hit twice? Big benefit is there are no income limits like Roth IRA and it is well worth asking HR your questions
My firm has the Roth 401k as well. You company matches generally go into a traditional 401k account (IE taxed on withdrawal) even when your contributions go to the Roth 401k. I'm 32, and no longer qualify to make Roth IRA contributions. So, I'm doing a traditional IRA and Roth 401k, with company matching into traditional 401k. That should put me, if I max them out at about 60% of retirement contributions in Roth accounts and 40% in traditional (assuming I fully vest). I've run the numbers and at my age, it definitely makes sense to do the Roth as much as possible. It hurts though. I changed companies this summer and got a 17% raise on my base salary. However, since my old 401k contributions were traditional and hence pre-tax and the new ones are post-tax, it nearly wiped out my salary increase! If you can afford to do it and are young enough to make the numbers make sense, then go for it. If you aren't sure if the numbers make sense, talk to a financial adviser (Not just a broker or insurance salesman). If you have any accounts at Fidelity, they will run all sorts of numbers for you for free. Not sure if they are the best, but they can at least give you a pretty good idea of the options. Ohh, and the time the assets have to be in the account is generally 5 years before you get the full tax benefit.
What I heard the ideal was is to get a traditional 401k, as long as you think you'd be able to slowly stop working... for example, working less and less to reduce your income and lowering the tax bracket where you are... if you think you'll be in a much higher tax bracket at retirement than now, then Roth is the way to go... But I'm no expert... thats just what I heard.
I also don't think you can do a roth if you make more than a certain amount per year; I wanna say $75k, not sure though.
Our company will be adding the Roth feature to our 401(k) plan for 2008. The main attractions for us doing so are that there are no income limitations to participate (unlike a Roth IRA), and also the Pension Protection Act of 2006 gave some permanence past 2010 for allowing the Roth feature. Guess I'll soon find out if it will be an administrative headache, but hopefully won't be too bad.
Roth IRA income limits for this year are: Single : $95k for full contribution, phasing out at $110k. Married: $150k for full contribution, phasing out at $160k. I would expect that they will extend the Roth 401k past 2010. In case they don't though, and even better reason to max out as much as you can before then. There's also an interesting loophole in the current tax law (may have been closed, but I haven't seen it), where starting in 2010, they are eliminating the income qualification on Roth IRA conversions. So you could could roll your traditional IRA or 401k (to IRA first) to a Roth IRA, regardless of your income (still have to pay conversion taxes though). The way it is written though, it essentially allows a person that doesn't qualify to make a Roth IRA contribution to make a traditional IRA contribution, then convert it over to a Roth IRA! (Though there is some confusion on whether or not you would have to wait until the next tax year or not). So essentially, you can make a Roth IRA contribution at any income level. I would expect that that loophole will be closed, if they haven't already though.
Incorrect, you pay taxes on the entire amount that you role over. So if you contribute $4k and it is worth $5k in 2010, you pay taxes on the $5k if you roll it to a Roth IRA.
