Anyone know anything about this? I was talking to one of my advisors about my ever changing situation earlier today and he informed me there will be what is known as a ROTH 401k available next year. All of the benefits of both a typical ROTH IRA and a 401k put together with no caps on contributions based on income(which for me is a big plus) - though he mentioned there will be some fees to get things started, after that it will be a piece of cake. He also mentioned that as long as I stay under $90k/year in non-capital gains income(or I get married and make combined under $150k or what ever it is) I can still contribute to a standard ROTH IRA. Seems to be a great way to save a LOT of money tax free, I know some of you guys stay right on top of this stuff and was curious about what your thoughts would be. I am planning on sitting down with my advisors in early 06 to discuss the details with them, but I like to know the answers to the questions I ask before I ask them

 

I heard of this...let us know what happens! I'd love to convert my 401k to a ROTH401k.

It's great for people who plan to be in a higher tax bracket later in life

 

Hmmm... Scrib is my investment/retirement fund hero, but he's been overworked lately (and hasn't been posting as much). He would probably know about it.

You just reminded me that I have to set up a meeting with my adviser...

 

http://www.roth401k.com/

 

But will companies offer it? Would love to be in it considering I am still young but not sure if my company will offer that. Sounds like it would require a large switch for them and others

 

From what I've heard you use after-tax dollars to contribute, but withdraw it tax-free. So it's not like you can avoid taxes all together? Right?

 

That's what I am trying to figure out, I suspect its after tax dollars but there are no caps on it, which is great for someone like myself.

Regardless of my income I can contribute as much as I want and have my companies match it, if I so desire... This is really exciting either way!

 

Thanks for the link when I have more time I'll have to read it carefully.

 

Well, time to bump this sucker up. The place I work at is now offering the Roth 401K.

If Mr Roth and Ms 401K had a baby, it'd be the Roth 401K.

401K contribution limit.
Roth contribution "style". I.e. post tax dollars in, tax free dollars out.

Note by '401K contribution limit': You can have a 401k AND a roth 401K account.
But your total contributions for both cannot exceed the standard 401K amount ($15500 for 2007).

So the real question is: Are you going to be in a higher tax bracket when you retire than you are now? Tough Call.

I guess the answer is 'probably'

 

im balacing it out, and putting money in both roth 401k and regular 401k, figure you can hedge your bet that way

 

My company is offering it this year as well. Here is my take on it. I don't see how it makes sense to roth do the Roth 401k over a traditional.

Let's say you make 50k/year. The estimation is that when you retire you will need around 70-80% of your current income (obviously it will be based on the future value of a dollar - ie. you would be talking about larger basis saying 50k today is like 100k in 30 years). For the sake of easy explanation, let's just use today's value for my explanation.

50k * 80% = 40k, so you will need 40k. So you save your money and when you retire you start taking out 40k a year...you would either be in the same tax bracket or a lower one....so it makes more sense to just be paying taxes later (conventional 401k). Future dollar value and actual tax bracket $ range, doesn't matter, since they both should increase at the same rate of inflation. Therefore, if you make 50k and are taxed at 25%, because you fall in the range or 40-75k, and in 30 years, that 50k is worth 100k (inflation) and you are still taxed at 25%, because the range has increased to 80-150k.

So from the way I see things, the only way you would be better off using Roth 401k is if you know you are going to be taking out more $$ per year then you currently make, or you can predict that the government is going to increase the 25% tax bracket to 50%.


What does everyone else think?

 

That's a great theory, however income taxes are very low right now and chances are slim they will stay that way for long - so by paying taxes now you know your getting a good value, the future is uncertain as to what will happen.

 

What historical data can you point me to that shows how income taxes have changed over time? Why are they low?

Because if you tax rate is the same now as it is in the future...picking one method over the other doesn't have any benefits (except that you might make more $$ by being able to purchase more shares of a mutual fund early on/at a low price.

 

But if you do after-tax now, you're paying tax based on what you make now... meaning you're paying more tax on the money.

I'd rather pay taxes when I retire and my annual income is like half what it is now. That equals more money in my pocket in the end since I'll be in a lower tax bracket when I start withdrawing...

 

Here's a rough ballpark:

Use an online calculator to estimate how much you expect to have in your
retirement accounts when you retire. Now take a pot shot on how long
you want that to last. Let's say, 30 years.

Let's say you'll have 1.5 million in your accounts.
So you're talking 50K/year income. Add on social security.
I believe that adds another 10K/year. So you are talking 60K.

So in this scenario, if you are making < 60K a year, roth 401K is the way to go.
If you are making > 60K a year, 401K is probably better.

Certainly when you first start adding money, roth 401K is better.
As your salary goes up, it's not so obvious.

Comments?

 

Makes sense and pretty much goes along with what I said.... makes more sense for most people to just do a 401k since, in theory, you should be making more when working then when retired.

Oh and at social security. I don't think I've ever factored that in to any of my retirement calculations

 

So Junior you agree with me? Making my analysis correct/me not crazy?

Sure I can see that if you just start out your 1st job making 30k/year and there is room for advancement/you know in 2 years you will be making at least double if not more, then it makes sense to put your initial contributions into the Roth 401k because once you go from 30k to 60k, you will be in a higher tax bracket.

.....but that has never been the case for me. My current tax bracket is 25% after all my pre-tax deductions (insurances, fsa, pre-tax 401k), and I know that I will be in that bracket for a while in my current position (with my deducations and the % I contribute pre-tax. If I see myself thinking I'll need more the 75k a year when I retire (or will have it to take), maybe I'll start leaning towards Roth.

 

I don't know how important marginal tax rates are compared to average tax rates, but ours have been a lot higher in the past, and were up around 90% at one point in the 50's.

http://www.econlib.org/library/enc/M...lTaxRates.html

So going by this, taxes are pretty low now.

 

Yup... I agree!!

We make much more now then we will when we're retired... so I'd rather be taxed then at a lower rate when I withdraw instead of being taxed now at our current rate. I think our current bracket is 28% after deductions. Not 100% sure, but I'm almost positive our deductions bring us down into that level. I'll find out soon once our taxes are done

 

x 2

If your paying after tax now, all the interest accumulated is tax free, which is a MUCH larger amount(in particular for those under 30). With taxes being "low" now, its a safe bet to pay the tax now on the smaller amount then it is to wait to pay on the larger amount at what probably will be a much higher rate of tax.

I think it really depends how much wealth you plan on building and what other potential tax problems/concerns you can expect looking into the future. Starting as young as I did, with the amount I did and compounded by what I will be making in a few years; the savings will be substantial by paying the taxes now... or at least that's what every CFP I've ever talked to tells me

 

Yes its a "crap shoot" in regards to what will happen, but the advisors I work with are pretty convinced that tax rates will go up and in the not so distant future and will continue to do so. I pay them for their input, so when they give it I listen, with 8 years history so far they have never led me down the wrong path.

There are so many coulda, woulda, shoulda's with investing you could mind fuck it all day and night and still probably not find the "best" possible way. The important thing is that you are saving and doing it in a wise fashion, in particular those who are young, the mistakes, while they will cost more dollar wise in the future, are less important because (i)the market will have such a long time to level out the peaks and valleys and (ii)the sum of money will just plain be larger. Even the best in the world, Warren Buffet included have made mistakes, sticking with it and being smart pays off it just takes time and those moves will offset small mistakes made in the begining.

 

I've had a 401k since I was 17... so I started young as well. But the tax you pay is based on your salary. So back then it would have been advantagous for me to contribute to a 401k after tax had it been available, since my tax rate was much, much lower.

But now, that doesn't make sense. Let's say I'm in the 28% tax bracket now after deductions. But, when I retire, my salary will be lower... let's say 25% bracket at that time.

I'd rather pay taxes based on a 25% tax bracket when I'm retired then a 28% tax bracket now.

Unless I'm completely thinking of this the wrong way (plus, I have both Roth IRA's and standard 401ks... so I"m covered either way)...

 

That totally depends on how early you start.
I started early, and am quite confident I will make more later than I do now.

If you start as soon as you can, max out your roth and 401k, and get
say, a 10% average return (which is what I've been getting), then you're talking
a cool 8 or 9 million in the bank. That doesn't even include employer match.

 

^ I'm self employed and have been since Jan. 2006. No more employer match for me. Plus, while we have been building the businesses we have been bad about contributing.

But yeah, I see where you're coming from b/c we are on track to have about 6 million in the bank as well. Problem is... who knows how far that money will go when I'm actually retirement age!

 

Okay so I just read that page...

"In the United States the concept of marginal tax rates is most familiar as tax brackets. Rapid inflation in the seventies pushed many skilled working couples up into the 50 percent tax bracket (then the highest rate on labor income). That did not mean that all of their income was taxed at a 50 percent rate. Instead, the first ten thousand dollars or so might be taxed at a 12 percent rate, the next ten thousand at a higher rate, and so on. Once the 50 percent bracket was reached, though, the federal government really did expect to collect half of any additional earnings. Average federal income taxes—taxes divided by income—have rarely been much more than 25 percent even for the superrich, even when (in the fifties) marginal tax brackets rose as high as 90 percent. By keeping average taxes the same, while reducing marginal tax rates, it is possible to encourage people to earn and report more income. This is a "revenue neutral" tax reform, like the one in 1986. "

So what that means to me is that the actual average dollar amount paid and the average actual % paid in taxes hasn't really changed at all. (while I might be in the 25% tax bracket, in total I don't pay 25% in taxes because for the lower bracket amounts I pay whatever that % is)

And this article gives no indication of actual tax amounts going up.

 

Exactly...how much will it be worth in 'real income' in the future? No want to predict something that is so far off. I'm glad to see this discussion here about this.

There is another related thought which I've spoken to friends about. All of us here are projecting that when we retire 20, 30, 40+ years from now we will all have millions to live off of. I don't know about you, but I don't know anyone who is retired or soon will be that has saved that much for retirement. Maybe they have a paid off house and a few hundred thousand in the bank, but that is nothing close to 3+ million and a paid off house like we are projecting for ourselves. So no matter what, we should all be better off then our ancestors; at least those who are currently saving will be.
Another thing is if you were retiring 10+ years ago, there were a lot more companies that gave you pension and other benefits....that rarely exists these days. You didn't have to worry as much about saving yourself or how to invest it. Nowadays, you need to save by yourself, put it in a mutual fund or whatever...there is a lot more money in the stock market, and no one knows what's going to happen...it's all a big gamble. You kind of get the feeling that the only people who will defintely be okay are those who are handling (taking) your money (ie. it's all a scam).

 

Also, don't forget that there is a mandatory 401k withdrawal, of roughly 3% per year. If you expect 6 million in the bank, you're talking 180K per year in retirement income. Another thing to consider when you compare now-income versus then-income.

As far 'how far that money will go' - the other poster is right. Do you NEED millions of dollars in order to have a happy retirement? Of course not, few people do. You can get by with any amount of money, if you save enough pennies, and have the support of your children, and are willing to postpone retirement.

The more money you have, the less you will depend on your family as you
get older. Ideally you do not burden them at all once you get older.
I don't know about you, but many of my friends have to support their parents.
I don't want to have to rely on that later in life.

Even better than that, have enough money to do whatever you want at the
same time! When I retire I totally intend to travel the world! But I need money
to do it. I have been saving a decent amount for a while, though, so I should do alright.

 

Exactly. However, given the stats that just came out, most won't: The average
american saved a whopping -1 percent of their income last year. Yes, that's
right, NEGATIVE one percent.

So not only are people not saving, they're chewing up what savings they previously had. Way to go, people.

 

Like I posted earlier... we have both traditional 401ks and Roth IRAs... so we have both angles covered. Being self-employed takes the employer factor out of the equation, so we just do a little bit of both.



Agreed. Definitely don't need it. But wouldn't be a bad problem to have! My parents are retired on a combined income of about $60k/year... but with no debt except monthly utilities (which isn't bad), they're living pretty comfortably.

Plus, that number may be lower since I'd like to semi-retire within the next 5-8 years which would mean our deductions would decrease a bit as well. Who knows what will happen... all I know is we're doing what we can to make sure we're set regardless...

 

Ya, but the age at which you have to start taking money out is 70.5... So you need to consider what you're gonna do between retirement and 70.5. And at 180K a crack on the withdraw, you should really consider ways to shelter your money without paying taxes.. Donations and taking care of your children (fully funding 529s and proving custodial accounts) are two good ways.

 

^ We have other investments to hold us over until we can start withdrawing our 401k. No way in hell I'm waiting until 70 to start enjoying our money

Plus, we don't have kids and right now, none are on the radar...

Last, I plan on retiring in the Bahamas. So we're looking to buy something there within the next 5 years and establish residency. That way when we retire, no taxes (or at least very minimal).

.

 

That's a very smart idea, I am planning on doing the same deal in Morocco when I'm your age, and possibly(depends on the direction of the country over the next decade) going through the process to expat. Not only to save taxes, but to live in a place that has similar goals I do.

 

I thought of another thing with regards to 401k vs Roth 401k.

There is a salary limit in order to do Roth. ($95K for 2006)
When you do regular 401k, it reduces your reported income.

If you are maxing everything out, and you are close to the limits,
switching from 401k to roth 401k may drop you out of Roth contribution eligibility.

This is a bigger concern if you stick your money in roth extremely early
(like say, jan 2007 for the 2007 tax year), and then find out later that you went
past the limit. You have to file over-contribution forms.

 

There is no salary limit to contribute to a Roth 401k, only Roth IRA.

 

Right, that was a bit vague, let's try that again:

There is a salary limit in order to do Roth IRA. ($95K for 2006)
When you do regular 401k, it reduces your reported income.

If you are maxing everything out, and you are close to the limits,
switching from 401k to roth 401k may drop you out of Roth IRA contribution eligibility.

This is a bigger concern if you stick your money in roth IRA extremely early
(like say, jan 2007 for the 2007 tax year), and then find out later that you went
past the limit. You have to file over-contribution forms.

 

I understand what he is saying, and it might need some more clarification:
If you currently have a high salary, and you contribute to a normal 401k, which lowers your taxable income enough that you are able to, and currently do contribute to a ROTH IRA....

if you swtich to ROTH 401k, that means your taxable income will increase, probably disqualifing you from beign able to contribute to a ROTH IRA.

 

http://money.cnn.com/2007/10/05/pf/r...ion=2007100908

just came across this article recently and never even heard about it.. will have to come back and reread this thread... but just wanted to share...

 

My ...

<---professional tax accountant
<---getting $2K credit for wife being in grad school = 'low' tax rate
<---doing Roth IRA right now.


good article, Kam

 

Let me just correct some numbers that people have been floating around that are not up to date/ accurate.

Roth IRA Qualifications
Contribution amount is limited if modified adjusted gross income (MAGI) is between:
-$99,000 and $114,000 for individual returns
-$156,000 and $166,000 for joint filers
Cannot contribute if MAGI exceeds limits.

Traditional IRAs have deductability limits that are different than the Roth and I will not list those as it is not important to this current discussion.

Making a max contribution to a Roth IRA makes a lot of sense because there are more benefits to a Roth than there are to a Traditional IRA or even a 401k. For example, no required minimum distributions (RMD) and Roth IRAs are better for estate tax purposes. Roth IRAs allow penalty free withdraws for buying first house, education expenses, and medical expenses. RMDs can considerably effect a tax situation, especially if there is a substantial amount of money built up.

My two cents on the tax level question is that taxes will go up. Think about it, we currently have a huge baby boomer generation that is slowly beginning to retire and as more and more retire they will contribute less and less to the tax base. Those baby boomers will continue to demand the services that they have always demanded while contributing less and less to the tax base. Last time I checked the government didn't have another way to raise (substantial) money other than taxes. So go-go tax rates! If you doubt that theory think about how social security is currently funded/paid out...that obviously can't last with a small working group than retirees.

So fully fund a Roth while you still can and reap the benefits when you make withdraws.