Traditional versus Roth 401(k)s

[jazz lady]

Just looking for pros/cons and more explanation to what a Roth 401(k) is and why I would want to invest in it. I understand the Roth 401(k) combines features of a traditional 401(k) with those of a Roth IRA, but I really don't know about the advantages/disadvantages over a traditional 401(k).

TIA!

 

[mizteresa1965]

Just looking for pros/cons and more explanation to what a Roth 401(k) is and why I would want to invest in it. I understand the Roth 401(k) combines features of a traditional 401(k) with those of a Roth IRA, but I really don't know about the advantages/disadvantages over a traditional 401(k).

TIA!

Roth IRA contributions are NOT tax deductable. Traditional IRA contributions ARE.

 

[Christy]

Roth IRA contributions are NOT tax deductable. Traditional IRA contributions ARE.

Yes, but since the tax has already been paid in the beginning for a Roth IRA, you will not be taxed again when you cash it out.

I'm no expert, but I've been told that a combination is a good thing, since if you use both in conjunction for retirement purposes, in the end it is the better deal. I believe a Roth IRA can't be considered as "income" when it comes to tax purposes for a retiree, so if you're wanting to live the good lifestyle, but for tax purposes stay in a lower tax bracket, you would use a combination of your regular IRA (which is taxed as income when it is dispersed) and your Roth. So you could in reality have say an actual income of $75K that you are pulling out from both, but if say $50K comes from your Roth IRA, and $25K comes from your standard (tax deferred) IRA, your income for the year is only considered to be $25K and you are taxed accordingly. (in a lower bracket than if you were to pull out a full $75K from the standard IRA). The thing to remember is your 401K or regular IRA is merely tax DEFERRED, not tax free.

Does that make any sense?

 

[jazz lady]

Does that make any sense?

Yes, it does and thanks. I'm just looking at ways at keeping the taxman at bay and this in a option that is becoming available to me.

 

[tater]

Does that make any sense?

No, but I LOVE your av.

 

[czygvtwkr]

Roth's rule if you plan on taking out a large sum of money at once to buy a RV, beach house, etc and they are also avantageous if your fund has made a ton of money. Roths are also good if you dont make a whole lot and are in a lower tax bracket where the tax deduction wouldn't get you that much to begin with.

I have a regular 401k but put 4k in a Roth IRA every year so I can have some play money in 35 years incase I want to withdraw a #### load at once.

 

[jazz lady]

Roth's rule if you plan on taking out a large sum of money at once to buy a RV, beach house, etc and they are also avantageous if your fund has made a ton of money. Roths are also good if you dont make a whole lot and are in a lower tax bracket where the tax deduction wouldn't get you that much to begin with.

I have a regular 401k but put 4k in a Roth IRA every year so I can have some play money in 35 years incase I want to withdraw a #### load at once.

Thanks, but I think I'm talking about a different animal here. A Roth 401(k), not an IRA, is a hybrid between a traditional 401(k) and a Roth IRA. I did some research and found the following:

http://finance.yahoo.com/retirement/article/101812/A_New_Way_to_Save_The_Roth_401k

Starting in January 2006, employers will be able to offer their employees a Roth 401(k), which combines the tax-free withdrawal aspect of a Roth and the higher contribution level of a 401(k).

More than 14 million American households have opened Roth IRAs since they were first offered in 1998. Tax-free and no mandatory withdrawals helped feed interest in these retirement savings accounts. The only complaints in the past seven years have been that many high-income people cannot participate in the savings plans and those who can may only contribute $4,000 per year.

But those who don't qualify for Roths, or who want to save more, may soon get satisfaction. Starting in January, employers will be able to offer their employees a retirement savings plan that combines the 401(k) and Roth IRA. The Roth 401(k) will offer the same contribution amounts as traditional 401(k)s, but will grow tax-free and eanrings won't be subject to income taxes when withdrawn in retirement.

Roth 401(k)'s are fairly new and not widely available. I guess I need to research it further to see if it fits in with my financial planning for the future.

 

[tater]

blah blah 401k blah - I'm banking on that one lucky scratch-off to get me set for my retirement

 

[jazz lady]

blah blah 401k blah - I'm banking on that one lucky scratch-off to get me set for my retirement

Get out of this thread. It's going to make your head explode.

 

[tater]

Get out of this thread. It's going to make your head explode.

I'll get out of this thread if you rephrase that.
Someone might get the wrong idea, silly

Oh, and.... that's two threads in a row you smacked me dammit, I'm gonna bruise

 

[jazz lady]

I'll get out of this thread if you rephrase that.
Someone might get the wrong idea, silly

Believe me, I phrased it especially FOR you.

Oh, and.... that's two threads in a row you smacked me dammit, I'm gonna bruise

:girlyman:

 

[AK-74me]

I don't think there are many people who are aware of the new ROTH 401k plan yet. I was talking about it at work and everyone is screaming you mean IRA.

 

[jazz lady]

I don't think there are many people who are aware of the new ROTH 401k plan yet. I was talking about it at work and everyone is screaming you mean IRA.

Exactly. It's only about a year old and not many companies are offering it yet. It's definitely a 401(k), NOT an IRA. I'll just keep researching it to see if it is worth my while.

 

[itsbob]

I'd still look more at the advantages/ disadvantages or Roth over Traditional 401(k)..

Tax exemptions at the beginning v. taxed at the beginning

 

[FromTexas]

If you have maxed tax deferred, then start using a Roth next.

If you plan on your retirement income being in a higher tax bracket than your income now, then use Roth first. (i.e. you work for moderate to lower wages but have been investing since early 20s, you just expect that the welfare state is going to greatly increase and your taxes are going to go through the roof, you expect to inherit a lot of wealth by retirement and increase your income base accordingly, or a dozen other scenarios)

 

[Dutch6]

Looks like the Roth 401k is good for only those that are high income employees. That's you Jazzy!

 

[FromTexas]

Looks like the Roth 401k is good for only those that are high income employees. That's you Jazzy!

Not necessarily. At least for the IRA version. Some people will make enough to lose the full deduction on a regular IRA, and they may not have a 401K type plan to invest in. Those folks should just not bother with the decreased deduction and go for completely tax free earnings (that includes the amount you gained all those years inside the Roth) since their monthly income will typically be higher than that of those who must pay taxes on their monthly IRA payout (the traditional IRA will typically have more money in it, but the tax greatly reduces its monthly spendable amount - it really only has more if you count all things equal [i.e. someone who has $5k to invest each year in either reduces the Roth investment by the amount taxed up front each year]).

There is no income limit on the tax reduction/deferral for a 401K up to the IRS contribution limits right now. So, I would assume the Roth 401K becomes a tool mostly for those who have maxed their regular tax deferral investments or expect to pay a much higher tax rate in retirement.

 

[jazz lady]

Looks like the Roth 401k is good for only those that are high income employees. That's you Jazzy!

:shrug:

 

[jazz lady]

Not necessarily. At least for the IRA version. Some people will make enough to lose the full deduction on a regular IRA, and they may not have a 401K type plan to invest in. Those folks should just not bother with the decreased deduction and go for completely tax free earnings (that includes the amount you gained all those years inside the Roth) since their monthly income will typically be higher than that of those who must pay taxes on their monthly IRA payout (the traditional IRA will typically have more money in it, but the tax greatly reduces its monthly spendable amount - it really only has more if you count all things equal [i.e. someone who has $5k to invest each year in either reduces the Roth investment by the amount taxed up front each year]).

There is no income limit on the tax reduction/deferral for a 401K up to the IRS contribution limits right now. So, I would assume the Roth 401K becomes a tool mostly for those who have maxed their regular tax deferral investments or expect to pay a much higher tax rate in retirement.

That is what I'm trying to figure out - which way to go and is it worth it for me. I think I need a financial advisor.

 

[itsbob]

That is what I'm trying to figure out - which way to go and is it worth it for me

I think I need a financial advisor.

Ask how much, and how they get paid, you can decide for yourself if it's worth it.

If you are talking about a Roth 401(k) won't your company have someone available to talk to? (for free)