Roth 401k vs Traditional 401k

keldon · 01-08-2007, 11:44 AM

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.

brewer12345 · 01-08-2007, 11:49 AM

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.

Animorph · 01-08-2007, 12:03 PM

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.

**Martha** · 01-08-2007, 01:25 PM

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

01-08-2007, 11:44 AM	#1
keldon Confused about dryer sheets Join Date: Jan 2006 Posts: 1	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.

01-08-2007, 11:49 AM	#2
brewer12345 Give me a museum and I'll fill it. (Picasso) Give me a forum ... Join Date: Mar 2003 Posts: 9,251	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. __________________ “When you realize that you are one of the rare few who observe moral principles in their relationships with others, there is a temptation to sink into amorality, not out of conviction or pleasure but simply to avoid further pain, because there is no greater suffering than being an angel in hell, whereas a devil feels at home wherever he goes.” – Martin Page, How I Became Stupid

01-08-2007, 12:03 PM	#3
Animorph Recycles dryer sheets Join Date: Jul 2005 Posts: 234	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.

01-08-2007, 01:25 PM	#4
Martha Administrator Join Date: Feb 2004 Location: minnesota Posts: 9,864	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 __________________ . Do not rely on the information provided--my posts are not to be taken as legal advice. Needless to say you must consult with your legal representative. I am not responsible for errors. If I offended you with cya I apologize. If I did not, I tried.

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