Roth 401K, worth it?

[Deleted]

My job offers a Roth 401K but haven't been contributing to it (been with the company 2 years and was elligible for retirement contributions last June).

I currently contribute 25% to my 401K, would it be worth it to:
- switch my contributions to the Roth 401K (might need to reduce percentage)
- split between the Roth 401K and the traditional 401k?

What would you do?

[azphx1972]

It really depends on your age, current and future tax brackets, and of course any changes in tax law. You can try playing with this calculator to see if you agree with the results:

scrs.schwab.com/tools/schwab_roth_401k_calc.htm

[Deleted]

Mar 25, 2011 21:17:42 GMT -5 azphx1972 said:

It really depends on your age, current and future tax brackets, and of course any changes in tax law. You can try playing with this calculator to see if you agree with the results:

scrs.schwab.com/tools/schwab_roth_401k_calc.htm

Thanks but that calculator estimate that I would be contributing the same percentage/amount to a Roth 401K as I am with a 401K.

If I want to come home with the same paycheck (after retirement contributions and health insurance) I would probably need to decrease the amount I contribute to a Roth 401K.

How does 25% pretax translate into after tax dollars and how it affects future retirement would be the calculator I need.

[schildi]

It's mainly a question about your tax bracket now vs. during retirement. Definitely not easy to answer. I have a feeling my tax bracket will be lower during retirement, or I even get the money (or part of it) out completely tax free, so I go for the regular 401(k) right now. We do max two Roth IRA's besides maxing my regular 401(k) though.
If you feel your taxes will be higher during retirement, go the Roth route. Not sure? Do a mix if that's an option.

[azphx1972]

Another option I've considered is that once I quit working (hopefully well before full retirement age), I'd roll my 401k into a traditional IRA, and then slowly convert chunks of it into a ROTH IRA in such a way that I pay little to no taxes. I'm not sure how feasible that will be, but it's something I've thought about.

[Deleted]

Thanks guys! The reason I have kept contributing to the traditional 401K since last June is because we also have a ROTH for each of us and as income grows (and so does savings) we intend to contribute more to our taxable accounts. So we thought we were covered
- 401K - check
- ROTH IRA - check
- Taxable accounts - check.

Now all we are missing are the rental homes

[schildi]

cawiau, you'll also need to make sure that you are contributing enough every year to reach your goal. "Just having" the accounts is not enough ....

[Deleted]

Mar 25, 2011 23:52:03 GMT -5 schildi said:

cawiau, you'll also need to make sure that you are contributing enough every year to reach your goal. "Just having" the accounts is not enough ....

Thanks schildi and we are contributing to them... not as much as I would have like but I think enough for now to reach our "minimum" savings goals.

[robbase]

with a Roth 401 K you will NEVER pay tax on the compound interest, with a regular 401 K you will eventually pay tax on the compound interest

[runewell]

The compound interest is a red herring!!!!
Suppose you are in the 15% tax bracket and have $1,000. You can pay the 15% now and let it compound, or let it compound and pay the 15%. Sure it looks like a bigger number at the end, but either way you are just paying 15%.
If you gain 10% over 10 years, your money will compound by a factor of 2.594.
Pay taxes now. $1,000 x 0.85 = $850 x 2.594 = $2,205.
Pay taxes later. $1,000 x 2.594 = $2,594 x 0.85 = $2,205.
It makes no difference whether you pay the tax on $1,000 now or $2,205 later, comes out the same.

[runewell]

Personally, I think if you are in the 15% tax bracket (which I will still be for a few more years) I think a Roth makes good sense. I don't see taxes going lower than 15%, and if they stay the same you break even.
The next tax bracket is considerably higher, right, maybe 25%? In this case you'd have to sit down and envision your future tax rate. Are you going to have a lot of money and be in a higher tax bracket or just getting by in a lower tax bracket (if there is one)

[Deleted]

Combined we make 93K, so currently in the 25% tax bracket I believe

[schildi]

Mar 26, 2011 10:54:49 GMT -5 @robbase said:

with a Roth 401 K you will NEVER pay tax on the compound interest, with a regular 401 K you will eventually pay tax on the compound interest

The good part about the regular 401(k) is that for some (maybe many) there is a chance to never pay any tax on some of the money. Like when you retire early, you may be able to convert some of the money to a Roth IRA in low income years.
Cawiau, with you being in the 25% bracket, I personally would favor the regular 401(k) over the Roth, but that's just my opinion.

[phil5185]

with a Roth 401 K you will NEVER pay tax on the compound interest, with a regular 401 K you will eventually pay tax on the compound interest

rob, it doesn't work that way. Say I have $100k in an IRA. I could leave it until it grows to $500,000 and then pay tax on the $500k (leaving me with a net of about $375,000).
Or, I could pay $25,000 in tax today (from another fund) and let the $100,000 grow to $500k tax free. But I've lost the $125,000 that the $25,000 would have grown to if I had retained it.

[robbase]

Phil what time horizons are you using? IMO, if you start early, when you weigh the compound interest component a roth 401K is much better due to tax free compound interest (most people don't just pop $100 K into an IRA or Roth or whatever...

most people build it over time like between $2K to $5k a year at a time, which would be much smaller tax bites). yes you will get a small tax bite initially by using a Roth 401k vs. a "regular" 401 K, but if you have adecent time horizon the power of compound interest and taking that out tax free over compensates any initial tax consequences and what theoretically investing the tax consequences would have given you

[DVM gone riding]

I contribute 5% to the 401k +3% match and then try to max out a Roth on my own, you might consider that kind of option as it gives you a lot more options to invest in. Eventually (since i think it is your goal) you could max both the 401k AND the Roth until you and your wife make to much.