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Roth 401k vs Traditional 401k
Old 01-08-2007, 10:44 AM   #1
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Roth 401k vs Traditional 401k

Hi,

My employer has begun offering a Roth 401k option for this year. Everyone around here seems to think that it's a great idea, but I'm not so sure. Can someone check my math and make sure I'm not being silly?

A little background first: my wife and I both work; we both contribute the federal maximum to our (traditional for the moment) 401k, and also the max to our Roth IRAs. We also have extra income that is invested in after-tax accounts. If we switched to Roth 401k's, then the extra taxes would reduce that after-tax investment by quite a bit.

I'm 28, she's 30, but given our savings amounts I doubt we'll we working much past 40.

The main argument for the Roth 401k is that tax rates are likely to go up. But every analysis I've seen makes the (naive in my opinion) assumption that tax rates are flat. For instance, they'll say "The $100,000 in your 401k would be taxed at 30%, leaving you with $70,000". But that's far from true. Even with raised tax rates, then first $x,000 per year is tax-free, then the next $x,000 is at a relatively low rate (probably less than 30% I'm guessing). It's only the "last" dollars that get the worst tax rate.

My concern is that by switching to a Roth 401k, I'd be paying top-bracket taxes now to avoid bottom-bracket taxes later. I've been unable to find a online calculator that doesn't make assumptions I'm uncomfortable with, so I haven't been able to weigh my options well.
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Re: Roth 401k vs Traditional 401k
Old 01-08-2007, 10:49 AM   #2
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Re: Roth 401k vs Traditional 401k

Like you, I'd rather do thetraditoional 401k. A bird in the hand, and all that. Also, once you are retired, it is a LOT easier to control your taxable income from year to year, so you should be able to game the tax code far more easily.
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Re: Roth 401k vs Traditional 401k
Old 01-08-2007, 11:03 AM   #3
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Re: Roth 401k vs Traditional 401k

You may want to have both. It's tax diversification for starters. But you may be able to fill up the lower tax brackets with the traditional 401k or IRA withdrawals and then suppliment tax-free with the Roth 401k.
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Re: Roth 401k vs Traditional 401k
Old 01-08-2007, 12:25 PM   #4
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Re: Roth 401k vs Traditional 401k

LOL! has thought a lot about the issue. You might look at this thread of his: http://early-retirement.org/forums/i...?topic=11064.0
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