Comments on: Calculating the Tax Difference Between Traditional 401k and Roth 401k

By: Hump Day Happy Links « Happy Money Medium

Hump Day Happy Links « Happy Money Medium — Wed, 22 Jul 2009 18:05:54 +0000

[...] up, Kevin at the No Debt Plan talks about whether to use your company’s traditional 401k or switch to a Roth 401k (as many companies are starting to offer this options). I personally am in the process of switching [...]

By: CLB

CLB — Wed, 22 Jul 2009 15:37:40 +0000

Thanks for the post on my question! It seems that there is a lot of unanswered questions about what retirement will look like. I like the idea of hedging my bets and am thinking to aim for 401K/Roth mix. Ideally, I’d throw as much in as allowed, but for now I’ll just toss in as much as I can to both.

By: Personal Finance QuickHits | Prime Time Money

Personal Finance QuickHits | Prime Time Money — Mon, 20 Jul 2009 15:55:39 +0000

[...] Financial Intimacy in Your Marriage The Best 529 College Savings Plans Taxes: Traditional 401k vs Roth 401k 5 Easy and Cheap Home Repairs that will Save you Money Help Deal with Medical Expenses Pay Off [...]

By: Lin Lo

Lin Lo — Mon, 20 Jul 2009 03:52:43 +0000

Here is another consideration. In retirement, you will be drawing Social Security income also. The applicable tax bracket is determined by adding together all income sources…pension, SS, dividends, interest, capital gains, withdrawals from tax-deferred retirement accounts, etc. That total is used to determine how much of your SS is taxable…up to 85%, I think. However, withdrawals from a Roth are not included in that total, so would reduce or eliminate the taxes due on the SS portion of retirement income.

Also, consider what happens when a tax-deferred IRA is inherited by your kids. They will have to pay the taxes due at THEIR tax rate, not yours.

I vote for the ROTH.

By: Rich Smart

Rich Smart — Mon, 20 Jul 2009 01:30:56 +0000

Two nice thing about the solo 401k plan that the people at the Solo-k Retirement Group brought to my attention are that if you are a W-2 employee for someone else and have your own side business:
1. The clock starts ticking on the Roth 5 year holding requirement with your first Roth contribution so if you make pretax deferrals because of the immediate tax benefits make at least one Roth contribution so the 5 year clock begins. Then stop the Roth and continue with the Pre tax deferrals. The Roth clock keeps on ticking.
2. The total contribution limit of Section 415 ($49,000) in 2009 is a plan limit not an individual limit like the $16,500. deferral . So if your employer gives you a profit sharing contribution of $25,000 , your side business can give you a profit sharing contribution of 20% of your net income up to $245,000. This is an additional $49,000.
So your total benefit would be $16,500 in deferrals, $25,000 in W-2 profit sharing and $49,000 in your side business profit sharing. for a total in excess of $90,000.
Then consider the tax savings on the reduced net income from your side business after reducing your income by the $49,000 profit sharing contribution you make to yourself
It was a no brainer for me

By: Roger

Roger — Sun, 19 Jul 2009 23:14:02 +0000

Interesting stuff. I actually ran some calculations of my own to determine whether taking out money on a yearly basis rather than all at once would make a difference in the conclusion. I tried withdrawing $20,000 a year from the Roth and a tax adjusted amount from the traditional account under the tax rates listed (and a few higher ones, to boot). Under both the Roth plan and the Traditional account at 25% marginal tax, the accounts for last for 12 years. With lower tax rates, the traditional accounts lasted longer; at higher rates, the traditional account did less well (even an increase to 26% caused the traditional account to last only 11 years).

If you withdraw a significantly large amount of money, you seem to get the same sort of results: Roth accounts and Traditional accounts come out about even, assuming constant tax rates; but Roth accounts come out ahead if tax rates rise. However, if you withdraw a small enough amount of money that your portfolio gains more than make up the difference (that is, if your account total increases each year, even including the withdraw amounts), then the traditional account ends up being more valuable when you finally kick the bucket.

Now of course, it’s far from conclusive, given the many other issues you have to juggle when comparing the types of accounts. For example, you have to consider marginal versus average tax rates, since your contributions to a traditional 401(k)/IRA will come from the last dollars of your income whereas your withdraws may make up a larger proportion of your income. Trying to figure out exactly how to minimize your taxes can be hard, even assuming tax rates stay the same.

By: Finance Nerd

Finance Nerd — Sun, 19 Jul 2009 20:20:12 +0000

NDP said “I absolutely agree with this, but it is hard to know where the tax brackets are going.

It’s not hard at all, they are clearly going up. Marginal rates are at historic lows, Obama has plans to raise rates in the future, and the bailout and stimulus money has to be paid back. There is only one direction for future tax rates, and that is up.

By: Stephanie PTY

Stephanie PTY — Sun, 19 Jul 2009 16:20:33 +0000

This is definitely a topic of interest to me right now! We just found out that my boyfriend’s new job is offering both Roth and Traditional 403(b)s. I explained the difference to him (although I still have a lot to look up before I’m sure I know all the implications of the Roth 403(b)), but I’m still wondering which is the better way to go.

On the one hand, I agree with you that tax rates are probably going to go up. Your ideas and conclusions about it match mine very closely! So that Roth sounds good from that perspective.

On the other hand, this is his first job out of school, and a Traditional 403(b) is going to put more money into his takehome pay, because of the tax break, than a Roth. I know he has some solid savings goals and that now is a time when he’ll need some start-up money to kickstart his life, and, well, to buy furniture and stuff for his apartment!

From the looks of it, it seems like he’s actually allowed to open both (assuming his total contribution for both is under the federal limit, of course), so my thinking at this point is that it would be better to start with a Traditional one, and maybe in a few years open up the Roth and switch contributions to that. (Maybe time it at the same time as a raise, so that he doesn’t notice a difference in takehome pay – it would be like investing the raise!)

So, no solid conclusions yet, but he has a few weeks before he starts work and it’s time to turn in the paperwork. I would love to hear other people’s thoughts on this!