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Quick Roth vs 401k question
Old 12-18-2007, 10:19 PM   #1
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Quick Roth vs 401k question

Hello all,

My questions is how is a Roth IRA better than a 401k? Giving certain circumstances I believe that the 401k would be better (unless I'm missing something fundamental, and I most likely am). People always use the same amount when comparing them, when in reality you can save more in the 401k than you can with the Roth IRA to have the same hit in your take home pay. The certain circumstances are that you don't plan on changing tax brackets, and that the tax brakets don't change a whole lot (not counting on this one). Here's an exsample.

assumptions, in the 15% tax braket.

850 in the Roth IRA, or I could put 1000 in the 401k.
if they both grow at the same rate I'll be able to withdrawl on the 401k with my standard deductable/plus lower tax makeup, thus making the actual taxes I pay on the 401k less than the 15% I would have paid meaning more money for me in the long run over the Roth.

I've done the math many time's with different amounts and brakets and I come up with the same results.

What variable am I missing?

Thanks,

P.S.
Don't be too hard on me, this is my first post.
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Old 12-18-2007, 11:26 PM   #2
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I think its usually not an either-or proposition. If you have access to the Roth 401k it is better for the reasons you cited (larger contributions, no income limit, company match possibly). The only downside I could think of is maybe your plan admin provides lousy investment choices for the 401k.
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Old 12-18-2007, 11:34 PM   #3
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I have access to a Roth 401k (only 10% max per my employer), but my question is more pertaining to a 401k vs a regular Roth IRA. This is just a regular question not realy pertaining to my circumstances.

Right now I'm contributing 20% to my 401k and 10% (my limit) to my Roth IRA, I'll soon start maxing out my Roth IRA contrabutions after I pay down my current debt (I only just stared really saving for retirement at the pace I would like). Age 32.
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Old 12-19-2007, 03:31 AM   #4
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401K
advantages
-before tax money for more $ for compounding
-higher contribution limits/year
-no income limit
-possible company match
disadvantages
-minimum required distributions at age 701/2
-ordinary income tax on withdrawl

Roth IRA
advantages
-no minimum required distribution
-no tax on withdrawl
disadvantages
-after tax contributions so less $ for compounding
-lower contribution limits/year
-income limits to qualify

I reccomend maximum contributions to both the 401L and Roth IRA and other savings in taxable accounts.
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Old 12-19-2007, 12:44 PM   #5
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Quote:
Originally Posted by Lanky View Post
Hello all,

My questions is how is a Roth IRA better than a 401k? Giving certain circumstances I believe that the 401k would be better (unless I'm missing something fundamental, and I most likely am). People always use the same amount when comparing them, when in reality you can save more in the 401k than you can with the Roth IRA to have the same hit in your take home pay. The certain circumstances are that you don't plan on changing tax brackets, and that the tax brakets don't change a whole lot (not counting on this one). Here's an exsample.

assumptions, in the 15% tax braket.

850 in the Roth IRA, or I could put 1000 in the 401k.
if they both grow at the same rate I'll be able to withdrawl on the 401k with my standard deductable/plus lower tax makeup, thus making the actual taxes I pay on the 401k less than the 15% I would have paid meaning more money for me in the long run over the Roth.

I've done the math many time's with different amounts and brakets and I come up with the same results.

What variable am I missing?

Thanks,

P.S.
Don't be too hard on me, this is my first post.
If $850 Roth or $1000 401k was my decision, I would choose the Roth.

Because:
1) withdraws in retirement would be tax free
2) I assume my income was low (small deposit), so The Roth+SS is a good retirement plan which avoids taxing of SS benefits. In addition low income=low tax rate now.
3) There are no minimum required distributions.

What I am losing- I will be paying slightly more in taxes on the $850/year I invest, but the amount of taxes being paid ($150) is not worth calculating other possibilities. $150 over a year is $12 or $13 each month, not even a consideration.

If my income was higher, it's possible the tax deduction from the 401k made me change my mind.

I currently have about 25% of my retirement assets in a Roth and 75% in a 401k. My goal for ER is about 1/3 taxable, 50% Roth and 1/6 401k, but that is a pipe dream right now.
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Old 12-19-2007, 01:51 PM   #6
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Quote:
Originally Posted by Lanky View Post

The certain circumstances are that you don't plan on changing tax brackets, and that the tax brakets don't change a whole lot (not counting on this one). Here's an exsample.

assumptions, in the 15% tax braket.
Planning on not changing tax brackets and reality of what tax bracket you are in after retirement are often different. In the past, it use to be preached you will be in a lower tax bracket in retirement, therefore you should defer payment of any tax until later. Reality - if you are relatively young (lower tax bracket - 15%) your income (and tax bracket will rise with age) and you live below your means (save/invest well), you will most likely be in a higher tax bracket upon retirement.

Pay taxes now when they are relatively cheap.
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Old 12-19-2007, 02:23 PM   #7
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Roth401

It may be better to contribute to the 401k to lower your agi (tax rate) to make you ELIGIBLE for the roth..depending on your income level. so that you can do both..
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Old 12-19-2007, 04:47 PM   #8
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Originally Posted by livefree05 View Post
It may be better to contribute to the 401k to lower your agi (tax rate) to make you ELIGIBLE for the roth..depending on your income level. so that you can do both..

I was wondering about this particular issue. I couldn't find it confirmed anywhere outright though during my brief search (though it seemed logical to me). Only reason I care is down the road, this could be the difference between being able to contribute to a Roth and not...
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