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Roth 401K Explanation
Posted on 6/19/13 at 8:56 am
Posted on 6/19/13 at 8:56 am
Does this mean I have a Roth 401K? This concept is very confusing to me. I understand that it's better than a traditional 401k because I'm young and will be in a higher tax bracket when I begin to withdraw. What I don't understand is what it means to pay taxes on it now? Are my taxes higher now than they would be if I wasn't contributing?
2
Posted on 6/19/13 at 9:07 am to LETSGEAUX2
The money you put in the traditional 401k is not taxed. The Roth is taxed at current rates along with your other income.
You can put a max of $5500 this year into the Roth. It's not "better" necessarily than a traditional IRA If it's better for you personally is up for debate esp since it looks like your company matches some or all if your contributions to your 401K.
Do you know what they match?
You can put a max of $5500 this year into the Roth. It's not "better" necessarily than a traditional IRA If it's better for you personally is up for debate esp since it looks like your company matches some or all if your contributions to your 401K.
Do you know what they match?
This post was edited on 6/19/13 at 9:10 am
Posted on 6/19/13 at 9:12 am to dewster
Yes, my company matches $1 for $1 up to 6%.
Are you saying that when my pay check comes in, I am getting extra tax taken out due to my contributing?
Are you saying that when my pay check comes in, I am getting extra tax taken out due to my contributing?
Posted on 6/19/13 at 9:16 am to LETSGEAUX2
No. You are just contributing to your Roth out of your taxed income. You can withdraw it for retirement tax free (unlike your 401K) since it is taxed today.
I'd contribute at least what your company matches before you consider Roth. Always put in what they match if you do nothing else.
You have to weigh how important that little advantage in compounded interest your untaxed contributions earn over time to determine your best mix.
I'd contribute at least what your company matches before you consider Roth. Always put in what they match if you do nothing else.
You have to weigh how important that little advantage in compounded interest your untaxed contributions earn over time to determine your best mix.
This post was edited on 6/19/13 at 9:19 am
Posted on 6/19/13 at 9:17 am to dewster
quote:
The money you put in the traditional 401k is not taxed. The Roth is taxed at current rates along with your other income.
You can put a max of $5500 this year into the Roth. It's not "better" necessarily than a traditional IRA If it's better for you personally is up for debate esp since it looks like your company matches some or all if your contributions to your 401K.
Do you know what they match?
It's a Roth 401K, he can contribute $17.5k in post-tax dollars, not $5.5k. The employer contributions are pre-tax, ie he will owe taxes on that portion when withdrawals are made in the future.
Posted on 6/19/13 at 9:20 am to tirebiter
Ah...you are right. I didn't catch that from his screen shot.
This post was edited on 6/19/13 at 9:24 am
Posted on 6/19/13 at 9:58 am to tirebiter
So it works the same as a Roth IRA tax wise? Just has a higher limit and can get an employer contribution?
Posted on 6/19/13 at 10:39 am to jimbeam
Yes, but I have never seen an employer match as post-tax. If you are in a lower tax bracket, ie up to 25% contributing more to the Roth can make sense and you can split employee contributions into Roth 401k/traditional 401k up to the 17.5k limit if that helps current year tax scenario. If you retire and are in a 25% bracket it is the same to have $1M in traditional vs $750k Roth, or you can contribute less to Roth to have the same relative amount of higher traditional on a current basis. Can be better to take advantage of Roth when younger or lower earning/tax years vs traditional.
Posted on 6/19/13 at 10:57 am to LETSGEAUX2
quote:
What I don't understand is what it means to pay taxes on it now? Are my taxes higher now than they would be if I wasn't contributing?
It just means your contributions are providing you no tax benefits today - they are counted for purposes of calculating your tax rate. Your taxes are the same whether you made ROTH contributions or not.
Posted on 6/19/13 at 10:59 am to LETSGEAUX2
quote:
Yes, my company matches $1 for $1 up to 6%.
Are you saying that when my pay check comes in, I am getting extra tax taken out due to my contributing?
No, but what they're matching is likely going to be traditional IRA funds - in that, they will be subject to taxation when you withdraw, because you're not paying taxes on them now. However, the plans vary so much, I would check with your HR or 401K people to confirm that.
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