ROth 401

[Sue]

My compary is offering a ROth 401 plan starting in January 2007. I am wodering whether contributing to this plan would be a good idea.

Although both DH and I have Roths, we are no longer able to contribute because our income is too high. Currently we contribute the minimum to our 401 to get the company match and save the remainder of our disposable money in taxable accounts. Our plan is to retire in about 3 years when my DH is 60.

I realize that we will be in a lower tax bracket when we retire, but we pay taxes on the money we put into our taxable accounts and their earnings. If some of this money was squirreled away in the Roth 401, we could let it grow for many years and then avoid taxes when it was withdrawn.

Does this make good sense?

[Martha]

My employer is also now offering a Roth option in the 401k plan. We also are not eligible for Roth IRAs. Our tax rate is mighty high. I can't seem to stomach paying even more taxes for a Roth contribution so I am continuing to max the traditional 401k contribution. My thought is that once our tax rate goes down and I am not employed anymore, we can rollover the 401k into an IRA and then consider whether to do Roth conversions at that time.

[MasterBlaster]

Originally Posted by Sue

My compary is offering a ROth 401 plan starting in January 2007. I am wodering whether contributing to this plan would be a good idea.

Although both DH and I have Roths, we are no longer able to contribute because our income is too high. Currently we contribute the minimum to our 401 to get the company match and save the remainder of our disposable money in taxable accounts. Our plan is to retire in about 3 years when my DH is 60.

I realize that we will be in a lower tax bracket when we retire, but we pay taxes on the money we put into our taxable accounts and their earnings. If some of this money was squirreled away in the Roth 401, we could let it grow for many years and then avoid taxes when it was withdrawn.

Does this make good sense?

If your tax bracket is lower in retirement than during your working years, you'd be better off to invest the money in a traditional tax deductible 401k. That way you get the tax break when you work. Take that money from the tax break and invest it in something that will produce long term capital gains.

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[azanon]

Roth IRA >>>> taxable accounts. Its a no-brainer. Max your 401(K).

[Martha]

Originally Posted by MasterBlaster

If your tax bracket is lower in retirement than during your working years, you'd be better off to invest the money in a traditional IRA. That way you get the tax break when you work. Take that money from the tax break and invest it in something that will produce long term capital gains.

You mean in pretax 401k contributions, not in a traditional IRA, don't you?

[d]

if you're confident that your future tax bracket will be less than your current tax braket, then you should fund your traditional 401. but the Roth 401 would seem preferable to non-sheltered savings.

[MasterBlaster]

Originally Posted by Martha

You mean in pretax 401k contributions, not in a traditional IRA, don't you?

Yes you are correct. I'll correct my post

[New Thinking]

I have posted before, but I will mention it again..Everyone thinks that their tax bracket will go down in retirement, but this is often not the case..This is because you pay tax on your IRA income and it forces the taxation of your SS income..Marginal rates are scheduled to thus exceed 50% on your IRA withdrawals..And the SS thresholds are not indexed for inflation. If you pay the tax now, your Roth income is tax-free and your SS income can remain tax-free...This is rarely, if ever mentioned in the "Should I Roth" discussion. It gets worse when you die and your spouse is now in an individual tax bracket. Many will say, "but so much can change over time"...True, but if it stays the same and IF TAX RATES GO UP...You will wish you had paid the piper now and Rothed...You also won't be forced to take RMDs..