Traditional versus Roth 401(k)s

[FromTexas]

Jazz,

1) Are you already contributing tax deferred to traditional 401k now? If so, are you just going to move the amount you are contributing to the Roth 401k if you switch or is it going to be a new amount?

2) Are you happy with your tax situation now? (i.e. Is your take home pay fine by you right now and you don't have what you would consider as a high tax bill each year?)

 

[jazz lady]

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

Oh, I will. I am VERY careful with my money.

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

I'm sure they will. I'm just ramping up so I can ask the right questions when the time comes.

 

[jazz lady]

Jazz,

1) Are you already contributing tax deferred to traditional 401k now? If so, are you just going to move the amount you are contributing to the Roth 401k if you switch or is it going to be a new amount?

Yes, I am contributing to the traditional 401(k) now and this would be a new amount.

2) Are you happy with your tax situation now? (i.e. Is your take home pay fine by you right now and you don't have what you would consider as a high tax bill each year?)

My tax situation is changing, so I need to take a hard look at my finances to make sure the amount of taxes I owe doesn't suddenly jump and I suddenly need to send the IRS a big sum next year.

 

[czygvtwkr]

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



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.

I know, but what I am saying is your earnings will be tax free and you wont have to pay taxes when you withdraw.

 

[FromTexas]

Yes, I am contributing to the traditional 401(k) now and this would be a new amount.


My tax situation is changing, so I need to take a hard look at my finances to make sure the amount of taxes I owe doesn't suddenly jump and I suddenly need to send the IRS a big sum next year.

Step 1: Figure out how much take home pay you want. You can use the paycheck calculator at www.paycheckcity.com to get pretty close to what you will have based on what dependents you claim and what you take out of your check.

I suggest starting with a check you have and entering it to see if it comes close to that. Usually any discrepancies can be fixed or come within a small range by playing with the tax settings on the insurance premiums and other stuff you take out of your check (some things aren't taxed the way people always think - life insurance isn't pre-tax for instance; some health benefits are paid after tax but not usually).

Once you get that setup, your first thing to do is make yourself happy with your tax situation since that seems to be what is driving this. Play with your dependents. If you are already zero'd, then start with reducing your taxable income. Go in order from dependents to reducing taxable income.

Now, if you used software this year for your taxes, go use it to predict your taxes for next year by resaving your base input and modifying to match what your options you got from paycheck city should be. Yes, taxes will be under slightly different rules next year, but it will let you know if you are in the ballpark. Don't forget to account for the fact any changes you make probably won't start before the end of the 1st Quarter (to be conservative).

Once you are happy with your current tax situation, then you can move to being happy about your future tax situation. The future isn't predictable but today is. You are already taking care of yourself by investing, building your assets through your home, and working which provides other tangibles for your retirement. You will be fine if you keep that up. So, whether you get tax free income in retirement or not based on how you feel your tax rates and payout will be in retirement is less relevant than reducing your stress level now and providing you the security of knowing what these years will bring.

Once you get all that settled, if you still have money to contribute or are maxed on tax deferred, then start looking at your Roth to increase your income in retirement.

 

[jazz lady]

Thanks for the information, FT. I will definitely do that.

And I got my state refund today.

One other question. I have several 401(k)s as the result of working for various companies over the years. Should I look at consolidating them?

 

[FromTexas]

Thanks for the information, FT. I will definitely do that.

And I got my state refund today.

One other question. I have several 401(k)s as the result of working for various companies over the years. Should I look at consolidating them?

Yes, you should... as long as you plan on working for this company for at least another 18-24 months. Pay a lot of attention to the timelines and instructions for rolling over money. Most places will make the check directly to your new 401k, but if not, there can be some other pitfalls to watch for such as 20% withholds. Also, if you don't deposit the money with the new 401k in the right amount of time, it is no longer a rollover and you will be taxed. Just get full instructions from all parties involved (every 401k company), read through it, and then do it.

 

[jazz lady]

Yes, you should... as long as you plan on working for this company for at least another 18-24 months. Pay a lot of attention to the timelines and instructions for rolling over money. Most places will make the check directly to your new 401k, but if not, there can be some other pitfalls to watch for such as 20% withholds. Also, if you don't deposit the money with the new 401k in the right amount of time, it is no longer a rollover and you will be taxed. Just get full instructions from all parties involved (every 401k company), read through it, and then do it.

Thanks again. I figured I probably should but have just never gotten around to it. I will definitely investigate the possible ramifications and penalties for each one carefully be sure I don't lose money before I try to do a rollover.

 

[FromTexas]

Thanks again. I figured I probably should but have just never gotten around to it. I will definitely investigate the possible ramifications and penalties for each one carefully be sure I don't lose money before I try to do a rollover.

When you finally retire, it is also usually a good idea to move all the money from your 401K into a personal retirement vehicle if you can. You can roll it over into a SEP, IRA, or other. This allows you to pick and choose what you want invested for your retirement instead of the typical 401K offering of lumping it all into an annuity. A good financial advisor/investment planner will take care of all the work for you at that point and provide you multiple options that suit your financial objectives. Also, if you ever do go for a financial advisor, shop them. Call a few of them, give them the details of your finances that they will have to plan, and tell them you are interviewing them and a few others. Listen to each of them and go with where you feel comfortable after doing research on their company seperately.

IMHO you are more likely to get a good representative from Edward Jones, AG Edwards, or Charles Schwab. Also IMHO you are less likely to get a good representative from Merril Lynch, Morgan Stanley, and some of the other bigger houses. I consider a good rep one who is conservative and puts your goals first. Merril is near the bottom that scale. In fact, Merril dropped many services for their clients that invest under $50k and gives accounts under a million to their low hacks. You will get personal service from the ones I listed and they aren't about increasing their companys margin. Edward Jones is private which means no trying to satisfy stock (investor) growth.

 

[FromTexas]

Which brings up something else... If your money is already in a tax deferred or tax free (Roth) vehicle, there is extremely little reason for putting it in an annuity.

The only reasons for doing so are:
1) You aren't worried about leavin any (or that much [annuity options include usually leaving a set amount behind if you want]) of that money behind and you are so anal that you will go crazy if you don't have an exact amount of known income every month for the rest of your life.

2) Your family history is complete with people who live long lives compared to the actuarial tables and you aren't worried about leaving any or that much of this particular money behind. So, if you plan to live past 90 based on family history, you can bet that you will receive more from the annuity than they took in because the pay for life.