a question on roth 401k's...

[spongebob]

just found out our company is now offering this. weve had a regular 401k already.

do i understand this right so far.

in the roth account, your contributions are after tax but the gains are non-taxable during the distribution.

and your contibution to both accounts still cant exceed the maximum 15k/yr.

sounds great, you get taxed along the way and make gains and in the end its all yours.

seems like i would wanna contribute most of my money to the roth instead of the non roth account. any reason not to?

 

[sawastea]

The Roth 401(k) plan is a hybrid retirement plan that possess the characteristics of the 401(k) and the Roth IRA. They allow employees to treat part or all their own contribution amount, which is the amount deducted from their paychecks, as a Roth contribution, meaning it will receive practically the same tax treatment as that of an ordinary Roth IRA. This also means that the amount treated as a Roth will no longer result in a federal tax deduction as contributions to traditional 401(k) plan does, but the growth of this part and its subsequent withdrawal is not subject to income tax expenses the way traditional plans are. In short, if you have two plans, one a traditional 401(k) and the other a Roth 401(k) with the same amount of money in both, the Roth 401(k) plan will be of greater value since the income taxes imposed on withdrawals from the traditional 401(k) greatly reduce its overall value. The choice is similar to the decision made between making a Roth IRA contribution or a deductible traditional IRA contribution.

http://www.investmentadvisor.com/issues/2005_7/columns/5274-1.html

 

[ZKaudio]

it's kinda a choice of... when am I going to be in a lower tax bracket... now or then. I generally recommend maxing out roth contribution.

 

[spongebob]

yea that is my thoughts. im leaning towards something like a 75/25 with 75% going into the roth.

the way im looking at is, can i make more tax free gains in the year off the roth vs. how much did i lower my taxes with the pre tax 401k..

if i were to put the max, 15k, in pre tax i affectively lowered my taxable income. but it will not neccesarily put me into a lower tax bracket.

not only will i make tax free gains off my contribution but i make tax free gains off of the company's contribution.

i just dont see any reason why i wouldnt max out the roth and forget about the traditional 401k.

or am i missing something here.

thanks for the replies.

 

[ZKaudio]

I use tax software (lacerte or cch) to do analysis like this... pretty easy to calculate total tax based on each scenario.

 

[spongebob]

yea that is my thoughts. im leaning towards something like a 75/25 with 75% going into the roth.

the way im looking at is, can i make more tax free gains in the year off the roth vs. how much did i lower my taxes with the pre tax 401k..

if i were to put the max, 15k, in pre tax i affectively lowered my taxable income. but it will not neccesarily put me into a lower tax bracket.

not only will i make tax free gains off my contribution but i make tax free gains off of the company's contribution.

i just dont see any reason why i wouldnt max out the roth and forget about the traditional 401k.

or am i missing something here.

thanks for the replies.

ok correction.

with roth 401k's the company's match does not go into it, it goes into the traditional 401k.

and the roth 401k's due to expire in 2010 if not renewed by our lawmakers.

my guess is it will be renewed, but....

 

[ZKaudio]

yeah, obviously max out employee contributions first

 

[spongebob]

yeah, obviously max out employee contributions first

well the way its setup is, i can contribute to either 401k, as long as i contribute at least 7% to one of them, either one, the company will match up to 7%, but it goes into the traditional 401k, not into the roth.

 

[ZKaudio]

^you're stoked then... 7% of your own to the roth, then 7% from the company deffered... sweet.