Traditional 401k vs. Roth 401k

[myhousekey]

I was reading about the Roth 401k and I must admit I'm a little confused. Can someone explain me the pro's and con's of the Roth 401k vs the traditional 401k? Are all companies that offer a traditional 401k going to offer a Roth 401k?

 

http://moneycentral.msn.com/content/Retire...ngs/P139175.asp

[Big John]

There are those here who can explain better, but in a nutshell:

 

A Traditional 401k is withweld pre-tax and that amount and all gains are tax exempt until you withdrawl from it.

 

A Roth 401k is withheld after taxes. Those taxes are the only taxes paid on it and all future gains on that are tax exempt.

 

You need to check with individual companies to see what they offer.

 

A traditional IRA is usually better, but there are exceptions due to indidual circumstances where a Roth is preferrable. The experts will explain this better.

Edited January 28, 2006 by Big John

[TDFFFreak]

There are those here who can explain better, but in a nutshell:

 

A Traditional 401k is withweld pre-tax and that amount and all gains are tax exempt until you withdrawl from it.

 

A Roth 401k is withheld after taxes.  Those taxes are the only taxes paid on it and all future gains on that are tax exempt.

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These are really the main things you need to know about the IRA. I highly suggest going for the Roth IRA assuming you household income (if married) is 160k or lower. You cannot invest in a Roth if you are above that income number. I'm not sure what it is if you are filing single, but I think it's somewhere around 110k. Someone else can clarify that fact.

[J.J.]

A financial guy kind of explained this to me a bunch of years ago. Basically said, the advantage of the Roth is that you don't get dinged as hard by Uncle Sam since you are paying the taxes up front. And quite frankly, I would rather pay the taxes now while I'm earning a decent living instead of worrying about how much the gumment is going to take when I'm an old bastage and really need it. That being said, I'm definately not a finance guy, so it would probably be good to sit down with a financial guy to figure out what is best for your situation.

 

My suggestion is Roth.

[Yukon Cornelius]

david lee is the only way to go.... hes the one that started those yah know

[Puddy]

david lee is the only way to go.... hes the one that started those yah know

 

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[yo mama]

As a rule of thumb, you generally don't even consider contributing to a Roth IRA until you max out your annual contributions to a regular 401k. You'll end up with more dollars invested over any given time by doing so.

 

However, since Roth IRAs are not taxed when you take money out, if you have some extra after-tax paycheck-type money laying around at the end of the year, its a super place to stash it for long term, highly appriciable investments.

Edited January 28, 2006 by yo mama

[Puddy]

As a rule of thumb, you generally don't even consider contributing to a Roth IRA until you max out your annual contributions to a regular 401k.  You'll end up with more dollars invested over any given time by doing so. 

 

However, since Roth IRAs are not taxed when you take money out, if you have some extra after-tax paycheck-type money laying around at the end of the year, its a super place to stash it long term in investments that are highly appreciable.

 

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But he's talking about that new fangled Roth 401k, not IRA. Doesn't that make a difference

[yo mama]

But he's talking about that new fangled Roth 401k, not IRA.  Doesn't that make a difference

 

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If that's the topic (Roth 401ks) then disregard my previous post.

[Puddy]

As a rule of thumb, you generally don't even consider contributing to a Roth IRA until you max out your annual contributions to a regular 401k.  You'll end up with more dollars invested over any given time by doing so. 

 

 

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Hmmm. First time I heard it that way. I can understand contributing enough in your 401k to definitely get the maximum employer match, but after that, don't we run to the traditional v. Roth calculator to determine the best path?

[geeteebee]

Roth 401k's are brand new. They are just like regular 401k's except that you contribute after tax $. Just as Roth IRA's are to regualr IRA's, Roth 401k's are to regular 401k's.

 

They are targeted to young employees that are in a low tax bracket and will be contributing low taxed $ into the account, will let it grow tax free, and then will withdraw it upon retirement when they are in a higher tax bracket.

 

I don't think Roth 401k's are going to be all that useful.

 

The annual limit ($15,000 of 2006, I think) is a combined limit. Most employers have not adopted Roth 401k's yet but if yours has, then you need to weigh if you think you are in a higher tax bracket now or when you retire.

[yo mama]

Hmmm.  First time I heard it that way.  I can understand contributing enough in your 401k to definitely get the maximum employer match, but after that, don't we run to the traditional v. Roth calculator to determine the best path?

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Because if the money you are going to invest would be in a very high tax brackett today, you'd rather defer tax until later on in life when you aren't working and the highest effective rate applicable to you is lower than what you would have paid today. In the mean time, you're larger pre-tax investment should grow in value faster than the after-tax investment in a Roth IRA, especially if what you are invested in offers elements such as compounding interest or dividend reinvestment.

 

Plus, while the Roth offers tax-certainty upon withdrawl (which is a plus assuming your investments do well) investments that tank offer you no capital loss deductions. You've effectively paid taxes for losses you now cannot use.

 

Puddy, drop some knowledge on me. Am I am missing something here?

Edited January 28, 2006 by yo mama

[Puddy]

Because if the money you are going to invest would be in a very high tax brackett today, you'd rather defer tax until later on in life when you aren't working and the highest effective rate applicable to you is lower than what you would have paid today.  In the mean time, you're larger pre-tax investment should grow in value faster than the after-tax investment in a Roth IRA, especially if what you are invested in offers elements such as compounding interest or dividend reinvestment. 

 

Plus, while the Roth offers tax-certainty upon withdrawl (which is a plus assuming your investments do well) investments that tank offer you no capital loss deductions.  You've effectively paid taxes for losses you now cannot use.

 

Puddy, drop some knowledge on me.  Am I am missing something here?

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You nailed it as usual. My only point was after you maximize the free money from your employer, utilize the many calculators available to you. Most of the time, the answer will be what you just outlined. Not everyone will match that description however. Some folks may not be in a higher tax bracket currently than they will when they can use the funds. Not the majority, but some.

 

For the record, the odds on me battling you on tax strategies are about the same as me trying to write a better waiver wire column.