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401k or Roth 401k?
Old 07-22-2008, 03:41 PM   #1
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401k or Roth 401k?

I just completed my second day at my new job. I found out today that the company also offers a Roth 401k.

I know there has been some discussion about this but I have been out of the loop since a Roth 401k was beyond me until now.

Which should I choose? I assume the Roth version.

My spouse and I currently each have the following...

401k
Roth Ira
Rollover IRA

My 401k is currently sitting with my former employer right now. I am hoping to retire in 9-11 years around when I turn 50.

Thoughts? Thanks.
JD
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Old 07-22-2008, 04:01 PM   #2
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My wife doesn't have a Roth 401k option, so we max out her traditional 401k.

I have a choice of both so I'm maxing out my Roth 401k. Regardless of tax law changes in the future, I'm assuming that a Roth will still get preferential tax treatment in some fashion as taxes have already been paid on the money. So, we're trying to hedge our bets with regard to a withdrawal strategy.

On the other hand, if you're on the edge of a tax rate where a pre-tax contribution might keep you out of the next band, then that's worth considering.

On the other other hand, we're in a rather low tax period right now so it might be worth paying the taxes now even if that means a higher tax bracket so you don't have to pay taxes on the withdrawals later at a higher rate (if rates do increase between now and then)
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Old 07-22-2008, 04:09 PM   #3
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Doesn't seem like an easy decision in your case. You are getting close to retirement, and may be paying your highest marginal tax rate right now. That might favor the traditional 401k.

I think you would want to withdraw from the Roth last to maximize the tax-free earnings. You can probably delay quite a while with the 401k and IRA available to tap initially.

Try a quick spreadsheet and see how it looks. If it is close you might want to just keep diversified between tax-free and tax-deferred.
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Old 07-23-2008, 08:33 AM   #4
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I played around with spreadsheets for a bit, and it really turned out that if your tax rate is higher now than in retirement, you're better off with a traditional 401k.

In my particular case, it isn't even close: current income is well into six figures (28% marginal rate). Projected retirement income needed is $60,000. Of that, even if 75% comes from tax-deferred sources that count as income (rest in after-tax savings), then that's around $45k of tax-deferred income. Married, filing jointly, that's under $30k of taxable income after standard deductions. Taxes would have to go WAY up for that $30k to be taxed more highly than 28%.

But I suppose if someone is paying taxes at the 28% level and estimates that under current tax rates they'd be paying a marginal 25% in retirement, a bet that tax rates will go up might make a Roth 401k a better bet.
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