Roth 401K - 1/15/13 | TigerDroppings.com
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LSU6262
LSU Fan
Member since Jun 2008
2402 posts

Roth 401K

my company offers this as well as a traditional 401k

would this be a good idea?


Siderophore
LSU Fan
Member since Nov 2010
3335 posts

re: Roth 401K
You get the best of both worlds IMO, and I would do it in a heartbeat.

Keep in mind however that you don't get the same liquidity as you would in a personal Roth (nothing stops you from opening your own Roth though).

And that employer matching receives tax deferred treatment as if it were a regular 401k
This post was edited on 1/15 at 11:35 am


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PhillyTide
Alabama Fan
The One Who Knocks
Member since Oct 2011
226 posts

re: Roth 401K
There is no way to say for sure. It all depends on how you are taxed at retirement.

What is your top tax bracket now?

If you are being taxed at 39% now, I would stick with a traditional 401(k). If you are more like 15%, then the Roth might be a better bet.



Siderophore
LSU Fan
Member since Nov 2010
3335 posts

re: Roth 401K
I lot of people say that, but I don't buy that.

Unless I'm off on my math, there is NO reasonable circumstance where it is advantagatous to put into a tax deferred plan if you are more than 10 years from retirement/pulling from that account. You will pass the tax hit, and then you have completely tax free growth.

And the longer after that tipping point mark you can let that money sit, the rapidly more powerful the Roth becomes.


PhillyTide
Alabama Fan
The One Who Knocks
Member since Oct 2011
226 posts

re: Roth 401K
quote:

You will pass the tax hit, and then you have completely tax free growth.


Not saying you are wrong, just saying you can't know for sure, and it depends on your situation.

Some want to switch to a VAT tax. I could see that happening in 20-30 years.

Getting a guaranteed 40% return right now is pretty powerful too. But like I said, if your taxes are relatively low today, then the Roth is probably a good bet.


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Siderophore
LSU Fan
Member since Nov 2010
3335 posts

re: Roth 401K
Another way of thinking about it:

Let's say you are putting 10k a year, with 25 years to go to retirement.

Assuming tax rates stay the same, at your 39%, that comes out to 97500 more in taxes over the period if you put it in a Roth over a traditional IRA. 97,500 and you are done tax wise.

Assuming the standard growth of the stock market, and subtracting average inflation to normalize these numbers, you have 581,500 in your account.

Pulling from that for a term of 25 years, and factoring in both withdrawals and a highly conservative bond centric approach, you are looking at an additional 394,996 in earnings, for a total tax payout of 146,474 in 2012 dollars.

And dear Lord, do you really take in the difference if you don't go 100% bonds for the entirety of your retirement.


Siderophore
LSU Fan
Member since Nov 2010
3335 posts

re: Roth 401K
Granted, I am not assuming a VAT.

But I feel that it's VERY safe assumption that we will never do away with federal income taxes, with VAT/sales taxes being in addition to them.

Still a risk, but a very safe one IMO


BestBanker
LSU Fan
stuck in a moment
Member since Nov 2011
3859 posts

re: Roth 401K
As in the Roth IRA thread, I certainly hope you do not do this for a living.



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foshizzle
LSU Fan
Washington DC metro
Member since Mar 2008
31425 posts

re: Roth 401K
quote:

Unless I'm off on my math


You are, sorry.

It's true that increased time should lead to increased dollar returns, but that doesn't matter. The rate matters, and the rate is the same on both ends.

Suppose you are in the 25% tax bracket and you have $1000 to contribute today. If you contribute to a Roth, you only get to put in $750, whereas if you contribute to the regular 401 you can put in the full $1000 - that's $750 plus $250.

However long you have the account before you pull it out, you are earning whatever return you get - call it "r". So in a regular 401 your finally tally is (750+250) times r = 1000r, but if you'd used a Roth instead you'd have 750r.

If you are still in the same bracket, now you get to pay 25% tax in the regular withdrawal. What's 25% of 1000r? 250r. So you're right back to square one.

Notice this is true no matter how many years are involved. The only variable here is whether you pay the same tax rate.


GoCrazyAuburn
Auburn Fan
Staring up at Vulcan's ass
Member since Feb 2010
16966 posts

re: Roth 401K
quote:

foshizzle



Ding ding.


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NC_Tigah
LSU Fan
Member since Sep 2003
57093 posts
Online

re: Roth 401K
quote:

foshizzle
Another quality post


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igoringa
LSU Fan
Tejas
Member since Jun 2007
10075 posts

re: Roth 401K
Foshizzle dominates the math.

I would add though if you are a maxer-outer, Roth will allow you to shelter more (16.5k after tax as opposed to 16.5k pretax).


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jso0003
Auburn Fan
Birmingham/Atlanta
Member since Jun 2009
5168 posts

re: Roth 401K
I think you're best to split it between Roth and tax deferred acct.

I do 401k up to the match, and then max an independent Roth.

No need to go all in on one.


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Siderophore
LSU Fan
Member since Nov 2010
3335 posts

re: Roth 401K
Hmmmm.

Yes, from that perspective you are correct.

My problem was that I looked at contributions and tax separately. My math works out in scenarios of high disposable income, but not in most practical settings.

Thank you for explaining to me.

Posts like this are why you are one of the posters I make a point of reading when I see you chime in on a thread.


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