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Benefits of a Roth 401K vs a Traditional 401K?
Posted on 11/16/15 at 8:22 pm
Posted on 11/16/15 at 8:22 pm
Starting in 2016, my company is offering the option of a Roth 401K. I currently contribute to the traditional 401K. What would be the main benefits of switching over to the Roth style?
7
Posted on 11/16/15 at 8:23 pm to TigerTatorTots
Not paying taxes on it later, but that is really a discussion of your current tax bracket versus the expected one at retirement.
Posted on 11/16/15 at 8:24 pm to TigerTatorTots
Same as a Roth IRA I believe. You contribute post tax dollars and the gains aren't taxed in the future.
Posted on 11/16/15 at 8:31 pm to GoldenD
Got it...I just need to decide if I think I will be in a higher tax bracket now vs retirement. I would think now since I won't have income coming in when I retire
Posted on 11/16/15 at 8:46 pm to TigerTatorTots
Your income when you retire will be what you pull from your 401K and other investments
Posted on 11/16/15 at 8:47 pm to Croacka
Makes sense 
Posted on 11/16/15 at 9:23 pm to TigerTatorTots
Is the company going to offer you the same match on the Roth? Some do. Some don't.
All things equal, most advisors suggest a (not necessarily equal) balance between the two. As well as not knowing your income at retirement, you also have no way of knowing what the tax rates will be then. Having balanced contributions gives you the option of mixing tax free income with the taxable upon retirement. And right now, the traditional 401 contributions will be lowering your taxable income.
All things equal, most advisors suggest a (not necessarily equal) balance between the two. As well as not knowing your income at retirement, you also have no way of knowing what the tax rates will be then. Having balanced contributions gives you the option of mixing tax free income with the taxable upon retirement. And right now, the traditional 401 contributions will be lowering your taxable income.
Posted on 11/16/15 at 9:29 pm to TigerTatorTots
It's a way to hedge your bets, to have some in a traditional and some in a Roth. In addition to the tax deferral differences, Roths don't have RMDs.
Also, someone noted checking on the match provisions. If a company does match Roth deferrals, note that the match will still be in a traditional account, even if your deferral is a Roth. The only way around this, and I don't know of any companies doing this, would be for the company to tax the Roth match, essentially phantom income. I would not do this.
But if you are trying to split your total match plus deferrals in a certain percentage, keep that in mind.
Also, someone noted checking on the match provisions. If a company does match Roth deferrals, note that the match will still be in a traditional account, even if your deferral is a Roth. The only way around this, and I don't know of any companies doing this, would be for the company to tax the Roth match, essentially phantom income. I would not do this.
But if you are trying to split your total match plus deferrals in a certain percentage, keep that in mind.
Posted on 11/16/15 at 9:29 pm to TigerTatorTots
Pay taxes now (Roth) or later (Traditional)
Or perhaps pay them now and later with the Roth. That's the problem, we don't know. If you have a company match that portion will go to a traditional 401k allocation regardless of which option you elect your contributions , so at least you will be diversified somewhat.
Or perhaps pay them now and later with the Roth. That's the problem, we don't know. If you have a company match that portion will go to a traditional 401k allocation regardless of which option you elect your contributions , so at least you will be diversified somewhat.
Posted on 11/16/15 at 11:19 pm to TigerTatorTots
For myself, I've stuck with the traditional 401k. The 401k deduction combined with my mortgage interest deduction reduces my income taxes a considerable amount.
The thing is who knows what income rates, tax laws, etc will be in 20-30 years.
The thing is who knows what income rates, tax laws, etc will be in 20-30 years.
Posted on 11/17/15 at 8:37 am to gpburdell
Right now I'm contributing 55% of my 401k contributions to traditional 401k, and about 45% of my 401k contributions to a Roth 401k. So a little over half and half. I'm 29 and single now and making pretty good money, and I'd like to think I'll be in higher bracket come retirement, but this is an easy way to play both hands
At least I think it is
At least I think it is
Posted on 11/17/15 at 8:43 am to TigerTatorTots
besides taxes, access to the capitol with a Roth is a benefit. You can pull out money you invested in a Roth (not the earnings) any time without penalties.
Posted on 11/17/15 at 9:10 am to fillmoregandt
quote:
and I'd like to think I'll be in higher bracket come retirement, but this is an easy way to play both hands
Tax brackets are at relative lows over the last decade. Given our deficit issues, it's reasonable to expect that at least on the higher end, they will go up.
But who knows for sure.
Posted on 11/17/15 at 10:31 am to TigerTatorTots
quote:
Got it...I just need to decide if I think I will be in a higher tax bracket now vs retirement. I would think now since I won't have income coming in when I retire
Also keep in mind we don't know what tax rates will be 5, 10, 15, etc. years out.
Posted on 11/17/15 at 10:36 am to jeepfreak
quote:
Also keep in mind we don't know what tax rates will be 5, 10, 15, etc. years out.
And I'm sure there go down over that time
Posted on 11/17/15 at 2:08 pm to fillmoregandt
The other advantage of the Roth is tax you can contribute more on a net basis if you can afford to.
$18,000 in pretax contributions is not equal to $18,000 in Roth contributions.
$18,000 in pretax contributions is not equal to $18,000 in Roth contributions.
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