Roth 401(k)

[lswswein]

Hi Guys
I am researching the Roth 401k (not Roth IRA) which I can contribute to in 2008. I read about it and understand the tradeoffs between paying taxes now VS defering them to later. I am making an assumption that future tax rates will be the same as current tax rates(adj. for Inflation) (I understand this is a big IF). What do you thing about the 4 stages below (think of them as where one is in life)? Also I can allocate some % to Roth & rest to Trad. 401(k). Below is a just a cheatsheet to start the analysis - Am i on the right track with this. Also I get the same investment options in both

1. Young & Low income
- Your tax bracket is low - pay the taxes now;
- Roth 401k
2. Young & High income
- No kids & no house
- Your tax bracket is high - defer the taxes;
- Trad. 401k
3. Middle age & High income
- You have dependents; You own house - interest deductions;
- All the above already lowers your tax bracket;
- Once the kids leave and you paid off the mortgage, your tax bracket will be high
- Roth 401k
4. Middle/Old age & High income
- No kids & no interest deductions
- Tax bracket is high
- Traditional 401k

Am I on the right track here?
thanks
-h

[FinanceDude]

Originally Posted by lswswein

Hi Guys
I am researching the Roth 401k (not Roth IRA) which I can contribute to in 2008. I read about it and understand the tradeoffs between paying taxes now VS defering them to later. I am making an assumption that future tax rates will be the same as current tax rates(adj. for Inflation) (I understand this is a big IF). What do you thing about the 4 stages below (think of them as where one is in life)? Also I can allocate some % to Roth & rest to Trad. 401(k). Below is a just a cheatsheet to start the analysis - Am i on the right track with this. Also I get the same investment options in both

1. Young & Low income
- Your tax bracket is low - pay the taxes now;
- Roth 401k
2. Young & High income
- No kids & no house
- Your tax bracket is high - defer the taxes;
- Trad. 401k
3. Middle age & High income
- You have dependents; You own house - interest deductions;
- All the above already lowers your tax bracket;
- Once the kids leave and you paid off the mortgage, your tax bracket will be high
- Roth 401k
4. Middle/Old age & High income
- No kids & no interest deductions
- Tax bracket is high
- Traditional 401k

Am I on the right track here?
thanks
-h

I would assume future taxes would be HIGHER, since we are at the lowest overall tax rates maybe in the histiry of the USA...........

How old are you??

[lswswein]

age - 30; I agree the possibility of tax rates going up is high but right now I don't take any deductions so I can use the tax break that I get by lowering my AGI

-h

[jIMOh]

company matches are pre-tax always.

[BigBob]

I took a little different approach this year, as I went through the same drill. My income after the standard deduction and exemptions are figured to cross over the 15% tax bracket. In rough numbers in my case(MF Jointly), if the threshhold for the 15% bracket is 63,700 and standard deduction(in my case, home is owned free and clear) is 10,300 and exemptions amount to 19,800 (4 kids), then 63,700+10,300+19,800=93,800
If I make 95,000, then I take 95,000-93,800=1,200 and put that in the 401k. This, in effect, drops me into the 15% tax bracket. Any amounts beyond that I put into the Roth 401k.
YMMV, but hope this helps you look at it in maybe a more objective way.